Returned Income Accepted Without Variation Under Section 148 Cannot Be Penalized As Under-Reported Income

By | October 14, 2026
0 Comment
Returned Income Accepted Without Variation Under Section 148 Cannot Be Penalized As Under-Reported Income

Issue

  1. Whether Section 270A creates an irrebuttable presumption of under-reporting when a return of income is filed for the first time in response to a notice under Section 148.
  2. Whether income voluntarily declared by an assessee and accepted in full by the Assessing Officer (AO) without any addition or disallowance can be treated as “under-reported income” for levying penalty under Section 270A, especially when the delay in filing was due to statutory audit and an undisposed Section 119(2)(b) application.

Facts

  • Assessee Profile & Assessment Year: The assessee is a Government company, and the matter pertains to Assessment Year 2019–20.
  • Delay in Filing Original Return: The assessee could not file its return of income under Section 139(1) within the due date because its financial statements could not be finalized due to delays in the statutory audit process.
  • Condonation Application: The assessee applied to the PCIT under Section 119(2)(b) for permission/condonation to file the return and sent reminders, but the application was never disposed of on record.
  • Initiation of Reassessment: The Assessing Officer issued notices under Section 148A and Section 148 to reopen the assessment.
  • Compliance & Tax Payment: In response to the Section 148 notice, the assessee filed its return declaring a total income of approximately ₹2.81 crores and paid the applicable tax along with interest.
  • Assessment at Returned Income: The AO completed the assessment by accepting the returned income in full without making any additions, disallowances, or variations.
  • Levy of Penalty: On the same day, the AO initiated penalty proceedings under Section 270A and levied a penalty of about ₹39.06 lakhs (50% of tax of ~₹78.11 lakhs), treating the returned income as under-reported income solely because the return was furnished for the first time in response to the Section 148 notice.

Decision

  • No Irrebuttable Presumption: In favor of Assessee. Section 270A(2) does not create an irrebuttable presumption; statutory triggers mark merely the beginning of an inquiry rather than its final conclusion.
  • Unvaried Returned Income Excluded: In favor of Assessee. Where the entire assessed income is what the assessee itself declared and the AO accepted without any variation, such income cannot be treated as “under-reported income” for the purpose of Section 270A.
  • Improper Exercise of Discretion: In favor of Assessee. Given that the delay was traceable to a statutory audit process and an undisposed Section 119(2)(b) condonation application, and that taxes were substantially covered by TDS causing no loss to the Revenue, discretion under Section 270A(1) should not have been exercised against the assessee.
  • Penalty Quashed: In favor of Assessee. The levy of penalty under Section 270A was set aside and deleted.

Key Takeaways

  • Accepted Returned Income Is Not Under-Reported: When a return filed in response to a Section 148 notice is accepted in toto without any addition or disallowance, the returned income cannot be penalized as under-reported income under Section 270A.
  • Rebuttable Statutory Triggers: Statutory triggers listed under Section 270A(2) initiate an inquiry rather than establishing absolute liability for tax under-reporting.
  • Reasonable Cause Mitigates Penalty: Delays caused by mandatory statutory audit procedures and unacted administrative condonation applications demonstrate bona fide intent, negativing penal liability.
IN THE ITAT JAIPUR BENCH ‘SMC’
Rajasthan Urban Drinking Water Sewerage and Infrastructure Corporation Ltd.
v.
ACIT
T.R. Senthil Kumar, Judicial Member
and Prakash, Accountant Member
ITA No. 654 (JPR) OF 2026
[Assessment year 2019-20]
SEPTEMBER  16, 2026
Tarun Agrawal, CA for the Appellant. Ms. Aarti Rawat, Addl. CIT for the Respondent.
ORDER
Prakash, Accountant Member. – This appeal by the Assessee is directed against the order of the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter referred to as “the learned CIT(A)”] dated 05.01.2026 passed under section 250 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”), arising out of the penalty order dated 14.08.2024 passed by the Assessing Officer (hereinafter referred to as “the AO”) under section 270A of the Act for the assessment year 2019-20.
2. The grounds of appeal raised by the Assessee before us in the memorandum of appeal in Form No. 36 read as under:
“1 . The learned CIT(A) has erred in law as well as in facts in confirming the penalty of 39,05,763 levied by the Ld Assessing Officer under section 270A of the Income tax Act, 1961, without even recording any such evidence that proves malafide on the part of the appellant being a Government Company.
2. The learned CIT(A) erred in law as well as in facts in holding that the income declared in the income tax return filed in response to notice under section 148 constitutes under reported income u/s 270A(2)(b) r.w.s 270A(3)(i)(b), despite of the fact that the same returned income was accepted in full and no addition was made in the assessment order passed under section 147 of the Income tax Act, 1961.
3. The learned CIT(A) erred in law as well as in facts in confirming the levy of penalty under section 270A, only on the basis that the appellant has not filed the income tax return under section 139(1), ignoring the fact that the appellant has no malicious intention as the due taxes on the income were already paid and the appellant had already applied before the same Department for condonation of delay in filing the income tax return.
4. That the penalty order passed under section 270A is arbitrary, unjustified, bad in law, and liable to be quashed.
5. The Appellant craves to add, alter, OR modify any ground before OR during the time of hearing.”
3. Briefly stated, the facts of the case are that the assessee is a company wholly owned by the State of Rajasthan and its entities, functioning as a State level nodal agency for the welfare and infrastructure schemes of the Government of India and the Government of Rajasthan. Its accounts are audited by the statutory auditors appointed by the Comptroller and Auditor General of India. For the year under consideration it did not furnish its return of income under section 139(1) of the Act, its explanation from the outset being that the financial statements could not be finalised in time on account of the delay in that audit. On completion of the audit it applied to the learned Principal Commissioner of Income Tax, Jaipur II under section 119(2)(b) of the Act for permission to file the return, and sent reminders. Nothing on the record shows that the application was ever disposed of.
4. The AO issued a notice under section 148A of the Act and a notice under section 148 of the Act. In response, the assessee furnished its return on 26.04.2023 declaring a total income of Rs 2,80,78,820 and paid the tax with interest. The assessment was completed under section 147 read with section 144B of the Act on 20.02.2024 at the returned income, without any addition or disallowance. While concluding the assessment, the AO recorded at page 5 of the assessment order as under:
“All the submissions have carefully been perused and considered. Documents submitted by the assessee are tallied with the information. It appeared that the information on the basis of which notice u/s 148 was issued are incorporated in the ITR filed in response to notice u/s 148, and therefore, no further addition has been made.”
5. Penalty proceedings under section 270A of the Act were initiated on the same day. Show cause notices dated 20.02.2024 and 08.04.2024 were issued, and the assessee replied on 16.04.2024 stating that there was neither any addition nor any concealment, and that the demand arose only from a mismatch in Form No. 26AS and the computation of interest under sections 234A, 234B and 234C of the Act. The AO rejected the explanation and, by the penalty order dated 14.08.2024, levied a penalty of Rs 39,05,763, being 50 per cent of the tax of Rs 78,11,527 computed on the returned income treated as under reported income. The operative finding in paragraph 3.5 of the penalty order reads as under:
“In the instant case, for the year under consideration return is first time filed in response to notice u/s 148 of the Income tax Act and assessed income is greater than the maximum amount not chargeable to tax and hence assessee’s assessed income is under-reported income within the meaning of section 270A(3)(i)(b)(B) of the Income tax Act. Hence, assesse has failed to furnish a bona fide explanation to show cause notice u/s 270A of the Income tax Act, 1961.”
6. The learned CIT(A) dismissed the appeal by the impugned order dated 05.01.2026, holding in paragraph 5.3 thereof as under:
“As per the clear provisions of section 270A(2)(b) read with section 270A(3)(i)(b), where no return of income is furnished under section 139 and the return is filed for the first time under section 148, and the assessed income exceeds the maximum amount not chargeable to tax, the same squarely falls within the definition of “under-reported income”. The section operates automatically on fulfillment of statutory conditions and does not require any addition or concealment to be established separately.”
7. The pleas relating to the audit and to the pending application under section 119(2)(b) of the Act were rejected in paragraph 5.4 of the impugned order, which concludes that “the plea of absence of malafide intention or loss of revenue is also not relevant in view of the specific provisions of section 270A, which are distinct from the earlier penalty regime and are based on objective criteria”.
8. Before us, the learned Authorised Representative (hereinafter referred to as “the learned AR”) submitted that the entire amount on which the penalty has been computed is the income which the assessee itself declared and on which it paid the tax with interest, and that not a rupee was added by the AO. He submitted that the assessee, being a Government company, could not finalise its return until the audit by the auditors appointed by the Comptroller and Auditor General of India was complete, that it had applied under section 119(2)(b) of the Act and sent reminders, and that it had no independent means of filing the return once the statutory time had expired. He further submitted that the tax stood substantially covered by tax deducted at source, so that no loss was caused to the Revenue, and that the case falls within the exclusion in section 270A(6)(a) of the Act. Reliance was placed on Ishit Kamleshbhai Sheth v. ITO [IT Appeal No. 753 (Ahd) of 2025, dated 25-7-2025], Archana Achyut Sail v. ITO  (Mumbai – Trib.)/(ITA No. 5277 & 5278/Mum/2024), Giral Lignite Power Ltd. v. ACIT [ITA No. 1388 (JP) of 2018] and on the judgement of the Hon’ble Supreme Court in T. Ashok Pai. v. CIT , Bangalore [2007] 210 CTR 259/292 ITR   (SC), rendered in Civil Appeal No. 2747 of 2007.
9. The learned Departmental Representative (hereinafter referred to as “the learned DR”) supported the orders of the authorities below and submitted that the conditions in clause (b) of sub-section (2) of section 270A of the Act are admittedly satisfied, since the return was furnished for the first time under section 148 of the Act and the assessed income is greater than the maximum amount not chargeable to tax, and that once those conditions are satisfied the levy follows on objective criteria without any need to establish concealment or malafide.
10. We have heard the rival contentions, perused the material on record and considered the decisions relied upon. The facts are not in dispute. The assessee did not file its return under section 139(1) of the Act; it filed the return within 28 days of the notice under section 148 of the Act; the assessment was framed at the returned figure without any addition; and the tax with interest was paid. The sole basis of the penalty is that the return was furnished for the first time under section 148 of the Act.
11. The relevant parts of section 270A of the Act read as under:
“(1) The Assessing Officer or the Commissioner (Appeals) or the Principal Commissioner or Commissioner may, during the course of any proceedings under this Act, direct that any person who has under-reported his income shall be liable to pay a penalty in addition to tax, if any, on the under-reported income.
(2) A person shall be considered to have under-reported his income, if —
… (b) the income assessed is greater than the maximum amount not chargeable to tax, where no return of income has been furnished or where return has been furnished for the first time under section 148; .
(6) The under-reported income, for the purposes of this section, shall not include the following, namely: —
(a) the amount of income in respect of which the assessee offers an explanation and the Assessing Officer or the Commissioner (Appeals) or the Commissioner or the Principal Commissioner, as the case may be, is satisfied that the explanation is bona fide and the assessee has disclosed all the material facts to substantiate the explanation offered;
12. The words “or where return has been furnished for the first time under section 148” were inserted in clause (b) of sub-section (2), and in subclause (b) of clause (i) of sub-section (3), with effect from 01.04.2017. To that limited extent the learned CIT(A) is right that the trigger in clause (b) of sub-section (2) stands attracted on the admitted facts. But the enquiry does not end there, and it is here that the impugned order falls into error. Sub-section (2) only says when a person “shall be considered to have under-reported his income”, and sub-section (3) only prescribes how the amount is computed. Sub-section (6) then commands that the under reported income “shall not include” the amount in respect of which the assessee offers an explanation found to be bona fide and in respect of which all material facts have been disclosed. Sub-section (1), in turn, uses the word “may” and not “shall”. Read as a whole, section 270A of the Act does not create an irrebuttable presumption; the trigger in sub-section (2) is the beginning of the enquiry and not the end of it.
13. Judged on that footing, the finding that the plea of absence of malafide is “not relevant” cannot be sustained. Bona fides are not an equitable consideration imported from the earlier regime; they are written into clause (a) of sub-section (6) of section 270A of the Act itself. Once the assessee offered an explanation, the AO was bound to record a finding on whether it was bona fide and whether all material facts had been disclosed. He did not do so. All that paragraph 3.5 of the penalty order says, after reciting the trigger, is that the assessee “has failed to furnish a bona fide explanation”, which is a conclusion without a reason. The learned CIT(A), instead of correcting that omission, held bona fides to be irrelevant, which is contrary to the express language of the provision.
14. On the material before us the explanation of the assessee is bona fide and all material facts stand disclosed. That explanation has been consistent from the stage of the proceedings under section 148A of the Act and has never been found to be false. The application under section 119(2)(b) of the Act was not disposed of, leaving the assessee without any means of putting its income on record until the notice under section 148 of the Act was issued, and it then filed the return within 28 days. Every figure in that return was verified by the AO against the information available with the Department and was found to tally. The tax was paid with interest and was substantially covered by tax deducted at source. On these facts it cannot be held that the assessee withheld anything from the Revenue.
15. The position of a Government company whose compliance is delayed by the audit conducted at the instance of the Comptroller and Auditor General of India has been considered by the Coordinate Bench of this Tribunal in Giral Lignite Power Ltd. (supra) order dated 18.03.2019, where it was held in paragraph 7 as under:
“… wherein the Co-ordinate Bench has held that where there is a delay in completion of statutory audit, there exist a reasonable cause for the delay in completion of tax audit and issuance of tax audit report. The ratio of the said decision equally applies in the instant case as the accounts of the assessee company are subject to statutory audit.”
16. That decision arose under section 271B of the Act and the statutory setting is different. It is of assistance, however, on the narrower question whether the delay of a Government company traceable to the audit process is a genuine constraint, and the Coordinate Bench held that it is.
17. On the precise question before us, that is, a penalty under section 270A of the Act where the first return is furnished under section 148 of the Act and is accepted without any variation, the Coordinate Bench at Ahmedabad in Ishit Kamleshbhai Sheth (supra), order dated 25.07.2025, held in paragraph 12 as under:
“In our opinion penalty under section 270A cannot be imposed mechanically merely because the assessee filed the return of income in response to a notice under section 148. The timing of filing, in itself, is not determinative. What is crucial is whether there is any concealment, misreporting, or deliberate nondisclosure of income . Failure to file a return under section 139(1), by itself, does not constitute “under-reporting” within the meaning of section 270A(2)(b), unless it is shown that the income offered later was suppressed or misrepresented. The provision must be applied with regard to substance over form.”
18. We respectfully follow Ishit Kamleshbhai Sheth (supra) and Archana Achyut Sail (supra), which are directly on section 270A of the Act and which cover the issue before us. Nothing has been placed before the Bench to show that these orders, or the order of this Bench in Giral Lignite Power Ltd. (supra), have been reversed, overruled or stayed by any higher forum, nor has the learned DR brought to our notice any decision taking a contrary view on facts such as these.
19. The learned AR relied on T. Ashok Pai (supra), where the Hon’ble Supreme Court observed that:
“Concealment of income andfurnishing of inaccurate particulars carry different connotations. Concealment refers to a deliberate act on the part of the assessee. A mere omission or negligence would not constitute a deliberate act of suppressioveri or suggestiofalsi.”
20. Though the above judgement was rendered under section 271(1)(c) of the Act, which has since been replaced by section 270A of the Act for assessment years commencing on or after 01.04.2017, it is nevertheless of assistance on a point that survives the change of regime, namely that a penalty of this description is not a mechanical consequence of a default but a consequence of the character of the default. That principle is carried forward in clause (a) of sub-section (6) of section 270A of the Act and in the discretion conferred by the word “may” in sub-section (1). Read in that manner, T. Ashok Pai (supra) supports the assessee, and nothing has been placed before us to show that it has been overruled.
21. Considering the matter cumulatively, we hold that the amount of Rs 2,80,78,820 could not have been treated as under reported income for the purpose of section 270A of the Act. The explanation of the assessee is bona fide, all material facts stand disclosed, and the amount is therefore excluded by clause (a) of sub-section (6) of that section. Even otherwise, where the whole of the income brought to tax is the income the assessee itself declared and the AO accepted without variation, where the tax stood paid and was substantially covered by tax deducted at source so that no loss was caused to the Revenue, and where the delay is traceable to a statutory audit process and to an application under section 119(2)(b) of the Act that was never disposed of, the discretion conferred by subsection (1) of section 270A of the Act ought not to have been exercised against the assessee. The penalty of Rs 39,05,763 is accordingly deleted.
22. Therefore, grounds No. 1 to 4 are allowed, and Ground No. 5, being general, requires no adjudication.
23. In the result, the appeal filed by the Assessee is allowed.
■