Penalty Under Section 270A Unreasonable Where Income Subject To TDS Disclosed Under Section 148 Return

ORDER

Manjunatha G., Accountant Member.- This appeal filed by the assessee is directed against the order of the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre [in short “NFAC”], Delhi, dated 19.11.2025, pertaining to the assessment year 2018-19.

2. The brief facts of the case are that, as per the information received through the Insight Portal, it was found that the assessee had not filed the return of income for the A.Y. 2018-19, however, the assessee was involved in various financial transactions, including receipt of salary income after deduction of tax at source under section 192 of Income-tax Act, 1961 from M/s. Verizon Data Services India Private Limited and receipt of interest income from various companies after deduction of tax at source under section 194A of the Act. Since the assessee had not filed the return of income, the assessment was reopened by issuance of notice under section 148 of the Act, dated 04.04.2022. In response to the said notice, the assessee filed her return of income declaring total income of Rs.37,58,300/-.

3. The case was selected for scrutiny and, during the course of assessment proceedings, the A.O., by taking into account the return of income filed by the assessee and other information available on record, completed the assessment under section u/s 147 r.w.s.144B of the Act, vide order dated 26.03.2024 and determined the total income at Rs.38,03,034/- by, inter alia, making an addition of Rs.44,734/- towards interest received on savings bank account under the head “Income from Other Sources”. Simultaneously, penalty proceedings under section 270A of the Act were initiated for under-reporting of income which is in consequence of misreporting thereof.

4. During the penalty proceedings, a Show Cause Notice was served on the assessee and called upon the assessee to submit her explanation, if any as to why penalty under section 270A of the Act, shall not be levied for under-reporting of income which is in consequence of misreporting thereof. In response, the assessee submitted that she is a salaried employee in the private sector and derives income from salary on which tax has been deducted at source and remitted to the credit of the Government of India. She further submitted that she derives interest income on deposits on which tax has been deducted at source under section 194A of the Act. It was submitted that she could not file the return of income as she was employed outside India during the relevant point of time and was under the bona fide belief that her employer had filed her return of income. For the year under consideration, for the reasons best known to the company, the return of income was not filed. Since she was under the bona fide belief that the company had filed her return of income, she did not give attention to the filing of the return. However, immediately upon receipt of notice under section 148 of the Act, she filed the return of income disclosing true and correct particulars of her income, on which taxes had already been paid through TDS. Therefore, it cannot be said that it was a case of under-reporting of income which is in consequence of misreporting thereof. The A.O., after considering the submissions of the assessee, observed that though the assessee had taxable income, she had failed to file the return of income as required under section 139 of the Act. According to the A.O., the assessee chose not to file her return of income until the escapement of income was detected and notice under section 148 of the Act was issued. Since there was a difference between the assessed income and the income returned for the first time in response to notice under section 148 of the Act, the case fell within the provisions of section 270A(2)(b) of the Act, and therefore, it was a clear case of under-reporting of income which is in consequence of misreporting thereof, attracting penalty at 200% of the income sought to be evaded, and thus, levied a penalty of Rs.19,64,022/- u/s 270A(9) of the Act.

5. Aggrieved by the penalty order, the assessee preferred an appeal before the Ld. CIT(A) and challenged the levy of penalty on multiple grounds, including the applicability of section 270AA of the Act, and the subsequent rejection of the application filed by the assessee seeking immunity from penalty. The assessee also challenged the penalty on merits and claimed that it was not a case of under-reporting of income which is in consequence of misreporting thereof, as the entire income assessed by the A.O., except interest income of Rs.44,734/-, was subjected to TDS, which was duly covered by advance tax payment and therefore, even if the assessee had not filed the return of income under section 139(1) of the Act, the case cannot be considered for the purpose of levy of penalty under section 270A of the Act. The assessee further submitted that, she could not file the return of income due to a mistaken belief of facts, as she was under the bona fide belief that her employer had filed her returns of income in the earlier years and, for the reasons best known to the employer, the same was not filed for the year under consideration. Further, during the relevant point of time, she was employed outside India and, due to the said circumstances, she could not give attention to the filing of the return of income under section 139(1) of the Act. It was also submitted that these facts were duly explained to the A.O., but the A.O. ignored the explanation of the assessee and proceeded to levy penalty under section 270A(9) of the Act. The Ld. CIT(A), after considering the relevant facts of the case and the submissions of the assessee, observed that although the assessee had taxable income, she had failed to file the return of income. The Ld. CIT(A) further observed that had the case not been reopened under section 147 of the Act, the income of the assessee would have escaped assessment. Therefore, the A.O. had rightly concluded that it was a case of under-reporting of income which is in consequence of misreporting thereof, attracting penalty under section 270A(9) of the Act. Accordingly, the Ld. CIT(A) rejected the explanation of the assessee and upheld the penalty levied by the A.O.

6. Aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before the Tribunal.

7. The Ld. Counsel for the assessee, Shri P. Prasad, C.A. submitted that the Ld. CIT(A) erred in sustaining the penalty levied by the A.O. under section 270A(9) of the Act, even though the assessee had explained the reasons for not filing the original return of income under section 139(1) of the Act, and had also reported the true and correct income in the return of income filed in response to notice under section 148 of the Act. The Ld. Counsel for the assessee, referring to the facts of the case, submitted that the entire income of the assessee, except interest on savings bank account of Rs.44,734/-, was subjected to TDS and the same had been duly reported in the return of income filed in response to notice under section 148 of the Act. The A.O. accepted the income returned by the assessee and made an addition only to the extent of Rs.44,734/- towards interest on savings bank account, which the assessee had claimed as deduction under section 80TTA of the Act. It was further submitted that these facts were duly explained before the A.O. as well as the Ld. CIT(A) and claimed that the assessee was under the bona fide belief that her employer had filed the return of income on her behalf and, due to the said bona fide belief, she could not give attention to the filing of return of income. Therefore, the learned counsel for the assessee submitted that the A.O. as well as the Ld. CIT(A) erred in levying and sustaining the penalty under section 270A of the Act, and thus, the penalty levied by the A.O. should be deleted.

8. The Ld. Senior A.R. for the Revenue, Shri B. Laxmi Kanth, on the other hand, supporting the order of the Ld. CIT(A), submitted that it is a clear case of under-reporting of income which falls under section 270A(2)(b) of the Act, where the provisions provided for levy of penalty for under-reporting of income where the income assessed is greater than the income determined in the return of income furnished for the first time in response to notice issued under section 148 of the Act. The assessee could not substantiate the claim of bona fide for non-filing of return of income. Therefore, the A.O. has rightly held that it is a case of under-reporting of income which is in consequence of misreporting thereof, and levied penalty at 200% on the income sought to be evaded. The Ld. CIT(A), after considering the relevant facts, has rightly sustained the penalty levied by the A.O. Therefore, he submitted that the order of the Ld. CIT(A) should be upheld.

9. We have heard both parties, perused the material available on record and had gone through the orders of the authorities below. The provisions of section 270A provides for penalty for underreporting of income and misreporting of income. Further, section 270A(2) specifies the circumstances in which a person shall be considered to have under-reported income and section 270A(3) provides the manner of computation of the quantum of underreported income and, as per sub-section (3), in a case where the return has been furnished for the first time under section 148, the difference between the amount of income assessed and the maximum amount not chargeable to tax, in a case not covered under clause (a), shall be treated as under-reported income. In the ordinary case, the case of the assessee squarely falls u/s 270A(2)(b) r.w.s. 270A(3)(i)(b) of the Act, however, going by the explanation of the assessee for not filing the return of income u/s 139(1) and subsequent return of income filed by the assessee in response to notice u/s 148 disclosing entire income and also the income assessed by the A.O., in our considered view, the case of the assessee squarely falls under section 270A(6) of the Act, where it has been stated that under-reported income for the purpose of this section shall not include the amount of income in respect of which the assessee offers an explanation and the A.O. or the Ld. CIT(A), as the case may be, is satisfied that the explanation is bona fide and the assessee has furnished all the material facts to substantiate the explanation offered, because the entire income assessed by the A.O., except to the extent of Rs.44,734/-, is subject to TDS, being income derived from salary from a company on which tax has been deducted at source. Further, the interest income derived from deposits is also subject to TDS under section 194A of the Act. The only amount on which TDS was not deducted, and the assessee had not paid advance tax was the addition made by the A.O. towards interest on savings bank account. The explanation of the assessee is that the company was filing the returns of income of the employees in the earlier assessment years and, for the first time, for the reasons best known to them, they discontinued filing her return of income, which is the reason for not paying attention to the filing of the return of income as per law. Further, during the relevant point of time, she was employed outside India and, after coming back to India, the time for filing the return had expired and, due to this, she had not filed her regular return of income disclosing the income. If we go by the explanation of the assessee, coupled with the disclosure of the entire income, in our considered view, the explanation of the assessee is bona fide and the assessee has disclosed all the material facts to substantiate the explanation offered. Therefore, the case of the assessee falls under section 270A(6) of the Act and, thus, the A.O. ought not to have levied penalty under section 270A of the Act. But the Ld. CIT(A), without considering the relevant facts, simply upheld the penalty levied by the A.O. Thus, we set aside the order of the Ld. CIT(A) and direct the A.O. to delete the penalty levied under section 270A of the Act.

10. In the result, the appeal filed by the assessee is allowed.