ITAT Ahmedabad Deletes ₹4.42 Lakh Penalty For Misreporting Of Income Over PF, ESI Disallowance

The Income Tax Appellate Tribunal (ITAT), Ahmedabad, has deleted a ₹4.42 lakh penalty imposed on Nascent Info Technologies Pvt. Ltd. for misreporting of income.

It held that mere disallowance of employees' contributions towards Provident Fund (PF) and Employees' State Insurance (ESI) does not automatically constitute misreporting of income.

The bench of Vice-President Dr. B.R.R. Kumar and Judicial Member Sanjay Kumar observed that the Revenue must establish that the case falls within the specific categories of misreporting under Section 270A(9) of the Income Tax Act, 1961.

The provision specifies the circumstances in which under-reporting of income is treated as “misreporting of income” for the purpose of imposing a higher penalty.

The company had filed its return for Assessment Year 2017–18 declaring an income of ₹6.14 crore. During scrutiny assessment, the Assessing Officer disallowed employees' contributions towards Provident Fund (PF) and Employees' State Insurance (ESI) amounting to ₹7,16,611, determining the total income at ₹6.21 crore.

The Assessing Officer subsequently imposed a penalty of ₹4,42,866 under Section 270A, treating the disallowance as misreporting of income. The Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, upheld the penalty.

Before the Tribunal, the company challenged the penalty imposed on the disallowance.

The Tribunal relied on its coordinate bench's decision in Hiro Mulchand Tanwani v. ITO, which held that a mere disallowance of a claim does not automatically constitute misreporting under Section 270A. The Revenue must establish that the case falls within one of the categories specified under Section 270A(9).

Applying this principle, the Tribunal observed that the material on record did not establish that the company's case fell within any of the specified categories of misreporting. It held that the disallowance of employees' PF/ESI contributions, by itself, was insufficient to justify the penalty.

"In the present case, the penalty has been levied on account of the disallowance of employees' contribution towards PF and ESI. However, the material available on record does not establish that the assessee's case falls within any of the categories of misreporting specified under Section 270A(9) of the Act. The mere disallowance of the claim, by itself, is not sufficient to justify the levy of penalty for misreporting", the Court said.

Accordingly, the Tribunal set aside the order of the CIT(A) and deleted the penalty of ₹4,42,866.

It allowed the company's appeal without separately adjudicating the remaining grounds, which had become academic.

For Appellant: Shri Satyaprakash, Authorised Representative

For Respondent: Shri Kalpesh Rupavatia, Senior Departmental Representative