Underreporting Of Income Due To Re-Computation Of Disallowance By The AO, Does Not Amount To Misreporting Of Income: Delhi High Court

The Bench, consisting of Justices Manmohan and Manmeet Pritam Singh Arora, observed that the underreporting of income by the assessee was due to the increase in the disallowance made under Section 14A, which was voluntarily estimated by the assessee and later recalculated by the Assessing Officer on the basis of the same material.

The Court held that in some cases underreporting of income may result in misreporting of income, however, the underreporting allegedly done by the assessee would not amount to misreporting of income.

The revenue department levied a penalty on the assessee Prem Brothers Infrastructure LLP under Section 270A of the Income Tax Act, 1961 for misreporting of income. Against this, the assessee filed a writ petition before the Delhi High Court. The assessee also sought a direction to the revenue department to grant immunity to the assessee under Section 270AA from imposition of penalty and prosecution under Section 270A.

The assessee Prem Brothers Infrastructure submitted before the Delhi High Court that it had filed an application under Section 270AA of Income Tax Act seeking immunity from imposition of penalty and prosecution under Section 270A for misreporting of income. The assessee averred that the revenue department did not pass any independent order on the said application filed by the assessee and that it simply rejected the said application.

The revenue department contended that the assessee was not entitled to the benefit of immunity under Section 270AA. The revenue department averred that the assessee did not make the correct disallowance under Section 14A of the Income Tax Act, and thus the assessee not only underreported its income but also misreported its income. Therefore, the revenue department submitted that the Assessing Officer had rightly imposed the penalty under Section 270A and declined to grant immunity under Section 270AA.

The assessee submitted that it had made a disallowance under Section 14A of the Income Tax Act on the basis of its own estimation, which was enhanced by the revenue department.

The assessee contended that disallowance under Section 14A of the Income Tax Act does not fall in any limb of "misreporting" of income under Section 270A (9) of the Income Tax Act.

Section 270A (1) of the Income Tax Act provides that the specified income tax authorities may, during the course of any proceedings under the Income Tax Act, direct that any person who has underreported his income shall be liable to pay a penalty in addition to the tax, if any, on the underreported income.

Section 270A (8) provides that where the underreported income is in consequence of any misreporting, the penalty imposed on the assessee shall be equal to two hundred per cent of the amount of tax payable on the underreported income. Section 270A (9) enumerates the cases which shall constitute misreporting of income.

Section 270AA provides that the assessee may make an application to the Assessing Officer to grant him immunity from imposition of penalty under Section 270A of the Income Tax Act, if the assessee fulfils the specified conditions.

The High Court observed that the disallowance made by the assessee under Section 14A was recomputed by the Assessing Officer. The High Court noted that the revenue department passed an assessment order making additions to assessee's income only with respect to the said disallowance.

Thus, the Court noted that the underreporting of income by the assessee was due to the increase in the disallowance made under Section 14A, which was voluntarily estimated by the assessee and later recalculated by the Assessing Officer.

The Court ruled that there could be cases where underreporting of income may result in misreporting of income, however, the underreporting allegedly done by the assessee could not amount to misreporting of income.

The Court held that the assessee had furnished all the details of the transactions relating to disallowance under Section 14A, and that the Assessing Officer and the assessee had both used the same details for arriving at different amounts of disallowance under Section 14A. The Court thus ruled that this could not amount to misreporting of income.

The Court added that the order passed by the revenue department under Section 270A does not specify which limb of Section 270A is attracted. The Court ruled that the revenue department had failed to specify how the ingredients of Section 270A (9) of the Income Tax Act for misreporting of income were satisfied.

The Court ruled that by merely referring to the word "misreporting" of income in the penalty order, the revenue department's order rejecting assessee's application for immunity from imposition of penalty and prosecution was manifestly arbitrary.

The Court thus quashed the penalty order under Section 270A and directed the revenue department to grant immunity to the assessee under Section 270AA.

Case Title: Prem Brothers Infrastructure LLP. versus National Faceless Assessment Centre & Anr.

Citation: 2022 LiveLaw (Del) 568

Dated: 31.05.2022 (Delhi High Court)

Counsel for the Petitioner: Mr. Ved Kumar Jain

Counsel for the Respondent: Mr. Sanjay Kumar

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