Under-reporting of income due to AO’s recalculation of denial does not amount to misreporting of income: Delhi High Court

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The Delhi High Court ruled that where the under-declaration of income allegedly made by the assessee is due to the recalculation of the disallowance under section 14A of the Income Tax Act 1961 by the assessment officer, this would not constitute misrepresentation of income.

The Bench, made up of Judges Manmohan and Manmeet Pritam Singh Aroraobserved that the under-reporting of income by the assessee was due to the increased denial made under Section 14A, which was voluntarily estimated by the assessee and later recalculated by the assessment officer on the basis of the same elements.

The Court ruled that in some cases, under-reporting of income may result in misreporting of income, however, the under-reporting allegedly made by the assessee would not constitute misreporting of income.

The Department of Revenue imposed a penalty on assessee Prem Brothers Infrastructure LLP under Section 270A of the Income Tax Act 1961 for misrepresenting income. Against this, the assessee filed a writ petition in the Delhi High Court. The assessee also requested an instruction from the Department of Revenue to grant the assessee immunity under Section 270AA from the imposition of penalties and prosecution under Section 270A.

Assessed Prem Brothers Infrastructure said in the Delhi High Court that it had filed an application under Section 270AA of the Income Tax Act seeking immunity from the imposition of penalties and prosecution under Section 270A for misrepresentation of income. The assessee asserted that the revenue department did not issue an independent order on said application filed by the assessee and simply denied said application.

The Revenue Department argued that the assessee was not entitled to the benefit of immunity under Section 270AA. The Department of Revenue asserted that the assessee failed to make the correct disallowance under Section 14A of the Income Tax Act and therefore the assessee not only under-reported his income, but also misreported his income. Therefore, the Revenue Department argued that the Assessing Officer properly imposed the penalty under Section 270A and refused to grant immunity under Section 270AA.

The assessee argued that he had made a denial under Section 14A of the Income Tax Act based on his own estimate, which was improved by the Department of Revenue.

The assessee argued that the denial under Section 14A of the Income Tax Act does not fall within the “misrepresentation” of income under Section 270A(9) of the Act income tax.

Section 270A(1) of the Income Tax Act provides that specified revenue authorities may, in the course of any proceeding under the Income Tax Act, order that any person who has under -declared his income is liable to pay a penalty in addition to the tax, if any, on the under-declared income.

Section 270A(8) provides that where the underreported income is the consequence of misreporting, the penalty imposed on the assessee is two hundred percent of the amount of tax payable on the underreported income. -declared. Section 270A(9) lists the cases which constitute a false declaration of income.

Section 270AA provides that the person being assessed may apply to the assessment officer for immunity from the imposition of penalties under Section 270A of the Income Tax Act, if the assessed person meets the specified conditions.

The High Court observed that the rejection made by the assessee under Section 14A was recalculated by the assessment officer. The High Court noted that the Department of Revenue passed an assessment order making additions to the income of the assessee solely in respect of said refusal.

Thus, the Court noted that the under-reporting of income by the assessee was due to the increased denial made under Section 14A, which was voluntarily estimated by the assessee and subsequently recalculated by the assessee. assessment officer.

The Court ruled that there could be instances where under-reporting of income could lead to misreporting of income, however, the under-reporting allegedly made by the assessee could not amount to misreporting of income.

The Court found that the assessee had provided full details of the Section 14A denial transactions, and that both the appraising agent and assessee had used the same details to arrive at different amounts of refusal under Section 14A. The Court therefore ruled that this could not constitute a false declaration of income.

The Court added that the order passed by the Department of Revenue under Section 270A does not specify which branch of Section 270A is drawn to. The Court ruled that the Department of Revenue failed to specify how the ingredients of Section 270A(9) of the Income Tax Act for the misrepresentation of income were satisfied.

The Court held that by simply referring to the word “misrepresentation” of income in the penalty order, the Department of Finance’s order denying the assessee’s claim for immunity from the imposition of penalties and prosecution was manifestly arbitrary.

The Court therefore quashed the penalty order under Section 270A and ordered the Department of Finance to grant immunity to the person assessed under Section 270AA.

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

Dated: 31.05.2022 (Delhi High Court)

Counsel for the Applicant: Mr. Ved Kumar Jain

Counsel for the Respondent: Mr. Sanjay Kumar

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