Madras High Court Quashes ₹13.48 Cr Misreporting Penalty On Ennore Tank Terminals For Vague Notice

The Madras High Court on 20 July set aside a penalty of over Rs. 13.48 crore imposed on Ennore Tank Terminals Private Limited, holding that the Income Tax Department cannot penalise a taxpayer for alleged misreporting of income unless it clearly informs the taxpayer of the basis for such allegation in the show cause notice.

Justice Senthilkumar Ramamoorthy held that proceedings for misreporting of income carry serious consequences, including a penalty of 200% of the tax payable on under-reported income and denial of statutory immunity.

He observed that the Department must clearly communicate the specific allegations to enable the taxpayer to effectively respond. He noted that “misreporting of income is a species of under-reporting, albeit misreporting is always accompanied by bad faith”.

The Income Tax Department imposed the penalty on Ennore Tank Terminals Private Limited for allegedly misreporting income for Assessment Year 2018-19.

The company challenged the penalty, arguing that although the Department reduced the deduction claimed under Section 80-IA during scrutiny assessment, the company's tax liability remained governed by the Minimum Alternate Tax (MAT) provisions under Section 115JB. It contended that the alleged under-reporting did not result in any additional tax liability. Further, that the Department wrongly treated the case as one of “misreporting” without identifying any act of misrepresentation or suppression of facts.

The Department defended the penalty, arguing that the company claimed deductions outside the scope of Section 80-IA and that such claims amounted to misreporting. It also contended that the company filed its application seeking immunity under Section 270AA beyond the prescribed time limit.

The Court examined Sections 270A and 270AA of the Income Tax Act and held that misreporting constitutes a specific category of under-reporting involving bad faith, including misrepresentation or suppression of facts. He observed:

“...there are two consequences to the characterisation of under-reporting as misreporting. The first consequence is that the penalty for misreporting shall be equal to 200% of the amount of tax payable on the under-reported income. The second consequence is that an application for immunity from the imposition of penalty is not maintainable.”

Relying on its earlier decision in Verizon Data Services India Private Limited v. Deputy Commissioner of Income Tax, the Bench held that the Department can initiate misreporting proceedings only when material indicates misrepresentation or other forms of bad faith.

It found that the first show cause notice merely stated that the company had under-reported income due to misreporting but did not disclose the particulars supporting the allegation. It noted that the subsequent notices did not refer to misreporting and that the final penalty order also failed to explain why the Department treated the case as involving misreporting. The Bench held:

“Unless the basis on which the assessee is called upon to show cause is indicated in the show cause notice, it is not possible for the assessee to respond meaningfully to the show cause notice and endeavour to avert the drastic consequences of misreporting.”

Further, the Bench also found that the Department incorrectly calculated the tax allegedly sought to be evaded. It observed that while the assessed income increased from about Rs. 16.30 crore to Rs. 19.47 crore after scrutiny, the Department appeared to have calculated the penalty on the entire assessed income instead of only the additional income determined during assessment.

Accordingly, the High Court set aside the penalty order and allowed the Income Tax Department to initiate fresh proceedings in accordance with law.

For the Petitioner: R. Sivaraman, Advocate

For the Respondent: B. Ramana Kumar, Senior Standing Counsel