Pranav B Prem

The Income Tax Appellate Tribunal, Hyderabad Bench has held that where a taxpayer has fully disclosed all material facts relating to a disallowance in the tax audit report and the failure to make a corresponding adjustment in the computation of income occurs due to a bona fide and inadvertent error, such a case falls within the exception provided under Section 270A(6) of the Income Tax Act. A Bench comprising Ravish Sood (Judicial Member) and Manjunatha G. (Accountant Member) ruled that in such circumstances the disallowance cannot be treated as under-reported income in consequence of misreporting and therefore penalty under Section 270A(9) is not sustainable.

Also Read: ITAT Quashes Assessment After Holding Section 143(2) Notice Issued By Officer Without Jurisdiction

The appeal before the Tribunal was filed by N.A.M. Expressway Limited challenging the order of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, which had upheld a penalty imposed by the Assessing Officer under Section 270A of the Income Tax Act for the assessment year 2018-19.

The assessee had filed its return of income declaring nil income and reporting a current year loss of ₹81.04 crore. During scrutiny assessment under Section 143(3), the Assessing Officer made a disallowance of ₹40.76 lakh towards labour cess under Section 43B of the Income Tax Act, on the ground that the amount had not been paid before the due date prescribed for filing the return of income. Consequently, the final assessed loss was determined at ₹80.63 crore.

The disallowance was made because the tax auditor had reported in Form 3CD that labour cess amounting to ₹40,76,414 had not been paid before the due date for filing the return. However, the assessee had failed to add back this amount while computing its total income in the return.

Following the assessment, the Assessing Officer initiated penalty proceedings under Section 270A of the Act for under-reporting of income in consequence of misreporting under Section 270A(9). In response, the assessee submitted that the failure to disallow the labour cess while computing income was merely an inadvertent error and not a deliberate attempt to misreport income.

The assessee accepted the disallowance made by the Assessing Officer and did not challenge the assessment order. Instead, it filed an application seeking immunity from penalty under Section 270AA of the Income Tax Act.

The Assessing Officer rejected the application for immunity on the ground that penalty proceedings had been initiated under Section 270A(9) for misreporting of income. The officer thereafter imposed a penalty of ₹25.19 lakh, which was equivalent to 200% of the tax payable on the under-reported income.

The assessee challenged the penalty before the Commissioner of Income Tax (Appeals), contending that the error was inadvertent and that all relevant details regarding labour cess had already been disclosed in the tax audit report. However, the CIT(A) rejected the explanation and upheld the penalty imposed by the Assessing Officer.

On further appeal, the Tribunal examined the facts and observed that there was no dispute regarding disclosure of all relevant details concerning labour cess. The Tribunal noted that the assessee had reported the amount in its tax audit report and the auditor had specifically quantified the disallowance in Form 3CD.

The Tribunal accepted the assessee’s explanation that the failure to make the disallowance in the computation of income was due to an inadvertent error while filing the return. The Bench observed that the explanation offered by the assessee appeared bona fide and acceptable in the light of the facts on record.

The Tribunal further noted that the disallowance was tax-neutral in nature. First, the addition only resulted in reduction of the current year’s loss and did not lead to any immediate tax liability. Second, upon payment of the labour cess in a subsequent year, the assessee would be entitled to claim deduction for the same amount, thereby restoring the original loss position declared in the return.

In these circumstances, the Tribunal held that the explanation of the assessee satisfied the requirements of Section 270A(6), which provides that under-reported income does not include amounts where the taxpayer offers a bona fide explanation and has disclosed all material facts relating to the issue.

Accordingly, the Tribunal held that the disallowance could not be treated as under-reported income arising from misreporting under Section 270A(9). The Bench therefore set aside the order of the CIT(A) and directed the Assessing Officer to delete the penalty of ₹25,19,222 imposed under Section 270A(9) of the Income Tax Act.

Also Read: Interest Disallowance U/S 36(1)(iii) Unsustainable Without Nexus Between Borrowings And Advances: ITAT Delhi

While addressing the assessee’s argument regarding immunity under Section 270AA, the Tribunal also clarified that immunity can be granted only in cases where penalty proceedings are not initiated for misreporting under Section 270A(9). Since the Assessing Officer had initiated penalty proceedings specifically under Section 270A(9), the Tribunal held that the assessee’s application for immunity had become infructuous and the Assessing Officer was not required to pass a separate order under Section 270AA(4). In view of these findings, the Tribunal allowed the appeal filed by the assessee and quashed the penalty imposed under Section 270A of the Income Tax Act.

Cause Title: N.A.M. Expressway Limited vs Deputy CIT

Case No: I.T.A.No.2044/Hyd/2025

Coram: Ravish Sood (Judicial Member) and Manjunatha G. (Accountant Member)