Appellate authority cannot convert misreporting penalty

Appellate authority cannot convert misreporting penalty to under-reporting penalty when misreporting charge fails.

Issue

Whether penalty for under-reporting in consequence of misreporting under Section 270A(8)/270A(9) can be sustained when none of the specific limb conditions under sub-section (9) are satisfied.
Whether an appellate authority can convert or substitute a failed penalty charge of “misreporting” (levied at 200%) into a new charge of “ordinary under-reporting” under Section 270A(7) (levied at 50%).

Facts

Assessment & Discrepancy: For AY 2020-21, the assessee’s reassessment determined total income at approximately Rs. 1.25 crores compared to the returned income of about Rs. 87.67 lakhs, resulting in an addition of about Rs. 36.98 lakhs on account of omitted salary, interest, and rent.
Penalty Imposition: The Assessing Officer (AO) initiated and imposed penalty specifically for “under-reporting in consequence of misreporting” under Section 270A(8) read with Section 270A(9), quantifying the penalty at 200% of tax on the under-reported income.
Absence of Under-Reporting Charge: The AO did not initiate or levy penalty for ordinary under-reporting at 50% under Section 270A(7).
Lack of Misreporting Ingredients: There was no allegation or evidence that the assessee produced false documents, furnished fabricated particulars, made false representations, created fictitious entries, or failed to record items in statutory books of account as per Section 270A(9).

Decision

Failure of Misreporting Charge: Since the Revenue failed to identify and establish any of the specific circumstances enumerated in Section 270A(9), the charge of misreporting failed completely. (In favour of assessee)
No Substitution by Appellate Authority: An appellate authority cannot substitute a failed misreporting charge with a new charge of ordinary under-reporting to construct a new penalty that the AO never levied. (In favour of assessee)
Impermissible Foundation Alteration: Converting the penalty from 200% to 50% under Section 270A(7) would amount to illegally curing the lack of satisfaction and altering the foundation of penalty proceedings after their conclusion. (In favour of assessee)

Key Takeaways

Distinct Statutory Charges: Under-reporting (Section 270A(7)) and misreporting (Section 270A(9)) are distinct, mutually exclusive penalty charges with separate statutory thresholds and rates (50% vs. 200%).
Specific Satisfaction Mandate: To sustain a penalty under Section 270A(9), the AO must specifically establish one of the sub-clauses (a) to (f) of sub-section (9); failure to do so invalidates the entire penalty notice.
No Conversion at Appellate Stage: Neither the appellate authority nor the tribunal has the jurisdiction to re-characterize a failed 200% misreporting penalty into a 50% under-reporting penalty to save the order from being quashed.

IN THE ITAT MUMBAI BENCH ‘F’

Vachan Singh

Deputy Commissioner of Income-tax

Amit Shukla, Judicial Member
and MAKARAND VASANT MAHADEOKAR, Accountant Member

IT Appeal No. 2587 (MUM) of 2026
[Assessment year 2020-21]

SEPTEMBER 16, 2026

Jagdish Shetty for the Appellant. Ravi Teja, Sr. DR for the Respondent.

ORDER

Amit Shukla, Judicial Member.- The aforesaid appeal has been filed by the assessee against the order dated 04.03.2026 passed by the learned Commissioner of Income-tax (Appeals), National Faceless Appeal Centre, under section 250 of the Income-tax Act, 1961, confirming the penalty of Rs.29,07,684 levied by the Assessing Officer under section 270A of the Act for the assessment year 2020-21. The penalty has been computed at 200% of the tax of Rs. 14,53,842 payable on the alleged under-reported income of Rs. 36,97,946, treating such under-reporting as having arisen in consequence of misreporting within the meaning of sections 270A(8) and 270A(9). Though the assessee has raised various grounds, the substantive grievance is that neither at the stage of initiation nor in the notice issued under section 274 read with section 270A, nor even in the final penalty order, did the Assessing Officer specify which of the distinct circumstances enumerated in clauses (a) to (f) of section 270A(9) was attracted, or record any finding demonstrating how the omission of the impugned receipts constituted misreporting as statutorily understood.

2. The relevant facts, as emanating from the record, are that the assessee is an individual who had filed his original return of income on 23.12.2020 declaring total income of Rs.87,67,260, which included salary received from Larsen & Toubro Limited. Subsequently, information was received by the Department that, during the financial year relevant to the assessment year under consideration, the assessee had also received salary from Mahagun (India) Private Limited and interest from certain bank accounts and fixed deposits which had not been offered to tax in the original return. Proceedings under section 147 were accordingly initiated and notice under section 148 was issued on 29.03.2024. Admittedly, the assessee did not file a return of income in response to the said notice; however, during the course of the reassessment proceedings, he furnished replies dated 15.08.2024, 09.12.2024 and 20.02.2025 explaining the nature of the receipts and the circumstances in which they had remained to be included in the original return.

3. The Assessing Officer, on verification of the material available on the Insight portal, Form No. 26AS, bank statements obtained under section 133(6) and the replies furnished by the assessee, made three additions. The first addition of Rs. 13,63,188 pertained to salary received from Mahagun (India) Private Limited; the second addition of Rs. 21,54,758 represented interest received from bank accounts and fixed deposits; and the third addition of Rs. 1,80,000 represented rental income received from one Shri D.B. Singh. Thus, the aggregate addition was Rs. 36,97,946 and the reassessment was completed under section 147 read with sections 144 and 144B vide order dated 10.03.2025, determining the total income at Rs. 1,24,65,206 as against the returned income of Rs.87,67,260.

4. Insofar as the salary received from Mahagun (India) Private Limited is concerned, the explanation of the assessee before the Assessing Officer was that he had remained in employment with the said company up to April 2019 and, being an engineer without specialised knowledge of income-tax return filing, his return had been prepared on the basis of Form No. 16 received from his current employer, namely, Larsen & Toubro Limited. Since Form No. 16 was allegedly not received from Mahagun (India) Private Limited, the corresponding salary remained to be included in the return. It was further pointed out that tax of Rs. 1,70,000 deducted by Mahagun from the said salary had also not been claimed in the original return, which, according to the assessee, demonstrated that the omission was not accompanied by any conscious attempt to obtain an inadmissible benefit or to evade the corresponding tax. As regards bank interest, the information initially referred to an amount of Rs. 42,76,735; however, after examination of the bank statements, Form No. 26AS, the information available on the Insight portal and the assessee’s explanation, the Assessing Officer himself found that the actual interest income was Rs. 21,54,758 and restricted the addition accordingly. The rental income of Rs. 1,80,000 was also accepted by the assessee during the reassessment proceedings. The assessee did not contest the taxability of these receipts and expressed his willingness to discharge the corresponding tax and interest. It was also stated during the penalty proceedings that tax and interest aggregating to Rs. 17,22,640 had been paid, subject to the rectification sought in respect of TDS and self-assessment tax credits.

5. While making the three additions, the Assessing Officer recorded an identical satisfaction in respect of each item, namely, that penalty proceedings under section 270A(9) were being initiated separately “for under-reporting of income which is in consequence of misreporting thereof.” Thereafter, a notice dated 10.03.2025 was issued under section 274 read with section 270A stating that, during the course of proceedings for the assessment year 2020-21, it appeared that the assessee had “under-reported income which is in consequence of misreporting thereof as per details given in the assessment order,” and the assessee was called upon to show cause why penalty under section 270A should not be imposed. Thus, the notice did indicate that the proposed action was for under-reporting alleged to have arisen in consequence of misreporting; however, it did not state whether the alleged misreporting was by way of misrepresentation or suppression of facts under clause (a), failure to record a receipt in the books of account under clause (e), or any of the other circumstances specified in clauses (b), (c), (d) and (f) of section 270A(9). The general reference in the notice to the assessment order did not take the matter any further, because the assessment order itself merely employed the expression “misreporting” without identifying the particular statutory clause or the factual conduct constituting such misreporting.

6. During the penalty proceedings, the assessee submitted that the receipts had remained to be included in the return on account of an inadvertent omission; that he had accepted the same during the reassessment proceedings; that no false document, fabricated entry or fictitious claim had been made; and that the material relating to salary and interest was already reflected in the tax-information system. He specifically objected that none of the ingredients of section 270A(9) had been identified or established. The Assessing Officer, however, rejected the explanation essentially for the reason that the income of Rs. 36,97,946 had neither been offered in the original return under section 139 nor in a return filed in response to notice under section 148 and that, had the assessment not been reopened, the said income would have escaped taxation. On this reasoning, the entire addition was characterised as under-reported income arising in consequence of misreporting, and penalty of Rs. 29,07,684, being 200% of the tax payable thereon, was imposed. Significantly, even in the final penalty order, after reproducing the provisions of section 270A(9), the Assessing Officer did not identify which particular clause was attracted or record any independent finding that the assessee had misrepresented or suppressed a fact, omitted a receipt from maintained books, made a false entry, claimed an unsubstantiated expenditure, or committed any other default enumerated therein.

7. The learned CIT(A) confirmed the penalty principally on the ground that substantial income from salary, bank interest and house property had not been offered in the original return; that the assessee had not substantiated the plea of inadvertence through documentary evidence; that the income was accepted only after the initiation of reassessment; and that, but for such proceedings, the income would have remained untaxed. The learned CIT(A) also observed that the assessment was framed ex parte under section 144. In this regard, it needs to be clarified that, though the assessment bears the statutory description of section 147 read with sections 144 and 144B on account of the assessee not having filed a return in response to section 148, the assessment order itself records and considers the replies dated 15.08.2024, 09.12.2024 and 20.02.2025. The explanation furnished by the assessee was, therefore, on record and was considered by the Assessing Officer. More importantly, the learned CIT(A), like the Assessing Officer, did not identify the applicable clause of section 270A(9) or explain how the material on record established its ingredients. The penalty was confirmed on the premise that omission of income from the return, followed by its detection in reassessment, was by itself sufficient to constitute misreporting.

8. We have heard the rival submissions and perused the assessment order, the notice issued under section 274 read with section 270A, the replies furnished by the assessee, the penalty order and the impugned appellate order. The issue which arises for our consideration is not whether the income assessed exceeded the income returned, because the difference of Rs. 36,97,946 is undisputed. The real issue is whether such difference could, without identification and establishment of any circumstance prescribed in section 270A(9), be treated as under-reported income arising in consequence of misreporting so as to attract the enhanced penalty of 200% under section 270A(8).

9. Section 270A embodies a calibrated statutory scheme. Sub-section (1) authorises the specified income-tax authorities to direct that a person who has under-reported his income shall be liable to penalty in addition to tax on the under-reported income. Sub-section (2) identifies the circumstances in which a person shall be considered to have under-reported his income, while sub-section (3) provides the manner of quantifying such income. Sub-section (6), inter alia, excludes an amount in respect of which the assessee offers a bona fide explanation, discloses all material facts to substantiate such explanation and the authority is satisfied therewith. Under sub-section (7), the penalty in an ordinary case of under-reporting is equal to 50% of the tax payable on the under-reported income. Sub-section (8), however, carves out an aggravated category and provides that where the under-reported income is in consequence of any misreporting thereof, the penalty shall be equal to 200% of the tax payable on such income. What constitutes “misreporting” for this purpose has not been left at large, but is exhaustively enumerated in sub-section (9), which reads as under:

“(9) The cases of misreporting of income referred to in sub-section (8) shall be the following, namely:—

(a) misrepresentation or suppression of facts;

(b) failure to record investments in the books of account;

(d) recording of any false entry in the books of account;

(e) failure to record any receipt in books of account having a bearing on total income; and

(f) failure to report any international transaction or any transaction deemed to be an international transaction or any specified domestic transaction, to which the provisions of Chapter X apply.”

10. The statutory distinction is thus manifest. Under-reporting and under-reporting in consequence of misreporting are not interchangeable expressions. The former attracts penalty at 50%, whereas the latter attracts the far more stringent consequence of penalty at 200%. Every case of misreporting would necessarily involve under-reporting, but every difference between the returned and assessed income does not, by that reason alone, become misreporting. For the enhanced consequence under sub-section (8) to ensue, the Assessing Officer must identify the particular conduct of the assessee and establish that it falls within one or more of the exhaustively enumerated circumstances in clauses (a) to (f) of sub-section (9). Any other construction would substantially obliterate the distinction deliberately maintained by Parliament and would render almost every omission detected in assessment or reassessment liable to the enhanced penalty of 200%.

11. This distinction has been authoritatively explained by the Hon’ble Delhi High Court in GE Capital US Holdings Inc. v. Deputy Commissioner of Income-tax (International Taxation) (Delhi)/2024 SCC OnLine Del 4233], wherein it was held that under-reporting and misreporting are viewed by the statute as separate and distinct misdemeanours. Their Lordships observed that where the assessment orders contain no finding indicative of any of the contingencies enumerated in clauses (a) to (f) of section 270A(9), and the Assessing Officer has not specified the transgression which could be brought within the ambit of that provision, penalty proceedings for misreporting cannot be mechanically commenced. The Court further emphasized that the notice must indicate the specific charge so that the person proceeded against is made aware of the precise allegation which he is required to meet. The same principle stands reinforced in Pr. CIT v. Jaina Marketing and Associates [ITA No. 500/2024, dated 23-9-2024], wherein the Hon’ble Delhi High Court declined to interfere with the order of the Tribunal deleting penalty under section 270A. The High Court specifically noticed the absence of reference to the particular limb which was sought to be invoked for the purpose of imposing penalty and reiterated that the failure to identify the transgression falling within section 270A(9) is fatal to the levy of penalty for misreporting. Similarly, in Prem Brothers Infrastructure LLP v. National Faceless Assessment Centre (Delhi), the Hon’ble Delhi High Court held that a bare reference to the word “misreporting,” without stating which limb of section 270A was attracted and how the ingredients of sub-section (9) stood satisfied, could not sustain the impugned action. Though the factual setting of that case related to a difference in the quantification of disallowance under section 14A, the governing principle is that the enhanced charge of misreporting must rest upon a specified statutory limb supported by a corresponding factual finding.

12. Tested on the aforesaid statutory scheme and judicial principles, the penalty imposed in the present case cannot be sustained. The Assessing Officer did state, both in the assessment order and in the notice, that the proposed penalty was for under-reporting in consequence of misreporting. Therefore, this is not a case where the assessee was altogether uninformed whether the proceedings concerned ordinary under-reporting or aggravated misreporting. The infirmity lies in the fact that the Assessing Officer stopped at the generic description of “misreporting” and did not identify its statutory species. Section 270A(9) contains six separate categories, each resting upon a distinct factual foundation. An assessee charged with misrepresentation or suppression of facts under clause (a) would have to meet a case materially different from one alleging failure to record a receipt in books under clause (e), recording of a false entry under clause (d), or claiming an expenditure without evidence under clause (c). A notice which merely repeats the expression employed in section 270A(8), without identifying the conduct alleged under sub-section (9), leaves the assessee to conjecture the precise accusation against him. The defect assumes still greater significance because the penalty is enhanced from 50% to 200%.

13. The omission is not confined to the notice. Neither the assessment order nor the final penalty order supplies the missing statutory and factual foundation. The penalty order reproduces section 270A(9) in its entirety but does not state which clause is attracted. Reproduction of the provision cannot take the place of a finding. The Assessing Officer’s reasoning is confined to the fact that the income was absent from the original return, no return was furnished in response to section 148 and the income would otherwise have escaped taxation. These facts may establish the existence of income which was not originally returned and may, therefore, furnish the foundation for under-reporting; but they do not, without something further, establish misrepresentation, suppression, a false entry, omission from books of account, or any other prescribed circumstance constituting misreporting. If the proposition that income would have escaped taxation but for reassessment were itself sufficient, every reassessment involving an addition would become a case of misreporting and the distinction between sub-sections (7) and (8) would become largely illusory.

14. We have also examined whether, notwithstanding the failure of the Assessing Officer to identify a particular clause, the facts can independently be regarded as establishing misrepresentation or suppression of facts under section 270A(9)(a). In our opinion, such a conclusion cannot be reached merely from the omission of receipts from the return. The statute does not use “suppression” as a loose synonym for every non inclusion of income. There must be a finding, supported by material, that the assessee misrepresented a relevant fact or suppressed it in a manner carrying the character of misreporting. In the present case, there is no allegation that the assessee produced a false document, furnished fabricated particulars, made a false representation during assessment, created a fictitious entry or advanced any knowingly false claim. The salary from Mahagun was subjected to TDS of Rs. 1,70,000, but the corresponding credit was also not claimed in the original return. While this circumstance does not by itself conclusively establish the assessee’s plea of inadvertence, it does lend contemporaneous support to the explanation that the salary and the related TDS were both left out. Likewise, the information concerning bank interest initially indicated Rs. 42,76,735, whereas, after verification of the bank accounts, Form No. 26AS and the assessee’s explanation, the Assessing Officer himself found the correct amount to be Rs. 21,54,758. The rental income was also accepted during reassessment. There is no independent material brought on record demonstrating any positive act of misrepresentation or conscious suppression beyond the foundational omission from the return.

15. Nor can the case be brought within section 270A(9)(e), which deals with failure to record a receipt in the books of account having a bearing on total income. There is no finding that the assessee maintained books of account in which the impugned salary, interest or rent was required to be, but was not, recorded. The omission of a receipt from the return of income is not, by itself, synonymous with failure to record it in books of account. More fundamentally, clause (e) was never invoked by the Assessing Officer. It would be impermissible at the appellate stage to reconstruct the penalty by supplying a statutory charge which the Assessing Officer himself neither formulated nor called upon the assessee to meet.

16. We are conscious that the assessee’s acceptance of the income was not made before initiation of the reassessment proceedings and, therefore, the disclosure cannot be characterised as one made prior to detection. The failure to file a return in response to notice under section 148 is also a relevant circumstance and the explanation of inadvertence cannot be accepted merely because it has been asserted. Nevertheless, the weakness or inadequacy of an explanation cannot relieve the Assessing Officer of the statutory obligation to establish the particular aggravated default for which penalty at 200% is sought to be imposed. Penalty proceedings are distinct from assessment proceedings, and the existence of an addition does not dispense with the requirement of bringing the assessee’s conduct within the precise statutory provision invoked. The assessee’s acceptance of the receipts, non-claim of the corresponding TDS on salary, cooperation by furnishing replies during reassessment and payment of consequential tax and interest are relevant surrounding circumstances; but our decision rests principally upon the failure of the Revenue to identify and establish any of the statutorily prescribed instances of misreporting.

17. The learned CIT(A) has not cured this foundational defect. The appellate order proceeds on the same reasoning that the income was substantial, was not included in the original return and would have remained untaxed in the absence of reassessment. These considerations explain the initiation of reassessment and may support the conclusion that income was omitted, but they do not answer the distinct statutory question whether such omission arose from misreporting within clauses (a) to (f) of section 270A(9). The learned CIT(A) has neither identified the applicable clause nor recorded any independent finding establishing its ingredients. Confirmation of the penalty on the ground that the assessee did not substantiate inadvertence through documentary evidence effectively shifts the entire burden without first requiring the Assessing Officer to define and establish the aggravated charge actually invoked.

18. We have also considered whether the penalty could be sustained at 50% by treating the case as one of ordinary under-reporting under section 270A(7). In our opinion, such a course would not be permissible in the present proceedings. The Assessing Officer consciously initiated and ultimately imposed penalty for under-reporting in consequence of misreporting and quantified it at 200% under section 270A(8). Ordinary under-reporting and misreporting are statutorily distinct charges carrying different consequences. Once the specific charge of misreporting fails for want of identification and establishment of any circumstance enumerated in sub-section (9), the appellate authority cannot substitute another charge and construct a new penalty which the Assessing Officer did not levy. Such conversion would amount to curing the absence of satisfaction and altering the foundation of the penalty proceedings after their conclusion.

19. The assessee’s alternative request for waiver under section 273A does not call for adjudication in the present appeal, since the power to reduce or waive penalty under that provision is statutorily vested in the Principal Commissioner or Commissioner, subject to satisfaction of the prescribed conditions. Likewise, the grievance regarding non-grant of TDS credit may be pursued independently through appropriate rectification or other remedy available in law. The unclaimed TDS has been considered herein only as one of the surrounding circumstances bearing upon the explanation offered by the assessee and not as an independent ground for deleting the penalty.

20. In the ultimate analysis, the material on record establishes that the income assessed exceeded the income originally returned and thus discloses an omission of taxable receipts. The penalty under appeal, however, has not been imposed for ordinary under-reporting under section 270A(7), but at 200% on the footing that the under-reporting was in consequence of misreporting. Throughout the assessment order, the notice and the final penalty order, the Assessing Officer has not identified the applicable clause of section 270A(9), nor has he recorded any finding demonstrating misrepresentation, suppression of facts, a false entry, failure to record receipts in maintained books of account or any other enumerated circumstance. The reasoning that the income would have escaped taxation but for reassessment establishes detection of the omission; it does not supply the further statutory ingredient necessary to constitute misreporting. The learned CIT(A) has confirmed the penalty on the same undifferentiated reasoning and has failed to appreciate the distinct statutory thresholds prescribed for under-reporting and misreporting. Accordingly, following the principles enunciated by the Hon’ble Delhi High Court in GE Capital US Holding Inc. (supra), Jaina Marketing and Associates (supra) and Prem Brothers Infrastructure LLP (supra), we hold that the penalty of Rs.29,07,684 levied under sections 270A(8) and 270A(9) is unsustainable. The Assessing Officer is directed to delete the same.

21. In the result, the appeal of the assessee is allowed.