The appeal was filed by the assessee against the order passed by the National Faceless Appeal Centre (NFAC), Delhi, arising from a penalty order imposed under Section 270A of the Income-tax Act, 1961 for Assessment Year 2018-19.

The assessee company was engaged in the development of roads on a Build-Operate-Transfer (BOT) basis in the State of Madhya Pradesh. During the relevant assessment year, the assessee claimed depreciation at the rate of 25% on “Right under Service Agreement” treating it as an intangible asset. The Assessing Officer, however, did not accept this claim and instead treated the project cost as eligible for amortisation.

While completing the assessment, the Assessing Officer recorded satisfaction for initiation of penalty proceedings under Section 270A on the ground of under-reporting of income. Accordingly, a show cause notice issued under Section 274 read with Section 270A specifically alleged under-reporting of income by the assessee.

However, in the final penalty order, the Assessing Officer invoked Section 270A(8) and imposed penalty on the footing that the assessee had under-reported income in consequence of misreporting, thereby levying penalty at the rate applicable to an aggravated default. The first appellate authority partly accepted the assessee’s contention by holding that misreporting was not established and directed that penalty be restricted to under-reporting under Section 270A(2), while sustaining the levy.

The Tribunal observed a clear and material inconsistency between the charge recorded in the assessment order, the allegation contained in the penalty notice, and sthe basis adopted in the penalty order.

The ITAT held that when penalty proceedings are initiated for a lesser charge of under-reporting, the Assessing Officer cannot subsequently impose penalty for the aggravated charge of misreporting. Such substitution of charge is impermissible and violates principles of natural justice.

The Tribunal further held that the first appellate authority does not have the power to cure a fundamentally defective penalty by altering the very basis of initiation of penalty proceedings. If the penalty is initiated on an incorrect or inconsistent charge, the entire proceedings stand vitiated. 
Accordingly, the ITAT allowed the appeal of the assessee and deleted the penalty in full.

Source Link- https://itat.gov.in/public/files/upload/1767174512-FgMB7t-1-TO.pdf

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