Facts of the Case

The assessee, Shri Shyam Construction Company, engaged in construction contract work and supply of building materials, filed its return of income for Assessment Years 2017-18 and 2018-19. During assessment proceedings for AY 2017-18, the Assessing Officer observed a fall in gross profit, absence of proper quantitative records, non-maintenance of stock registers, lack of site-wise work-in-progress details, and unverifiable expense vouchers. The Assessing Officer issued a show cause notice proposing rejection of books under Section 145(3). The assessee explained that maintenance of site-wise records was impractical considering the nature of its business. The Assessing Officer rejected the explanation and made a lump-sum disallowance of ₹5,00,000 towards unverifiable expenses. Additionally, interest expenditure of ₹1,27,420 was found to have been paid without deduction of tax at source, leading to disallowance of ₹38,226 under Section 40(a)(ia). Penalty proceedings under Section 270A were initiated for under-reporting of income and penalty of ₹1,70,537 was levied, being 50 percent of tax on total additions of ₹5,38,226. The CIT(A), NFAC confirmed the penalty. Similar facts existed for AY 2018-19, leading to identical penalty levy.

Issues Involved

Whether penalty under Section 270A is leviable where additions are made on estimated basis after rejection of books of account, whether such additions fall within the exclusion under Section 270A(6)(b), and whether disallowance under Section 40(a)(ia) constitutes under-reporting of income attracting penalty.

Petitioner’s Arguments

The assessee submitted that the additions were made purely on estimation and therefore penalty under Section 270A was not leviable. It was contended that the CIT(A) failed to consider submissions properly and passed a non-speaking order. The assessee did not dispute the quantum additions but argued that estimation-based additions should not lead to penalty for under-reporting of income.

Respondent’s Arguments

The Revenue contended that the assessed income exceeded the income processed under Section 143(1)(a), squarely attracting Section 270A(2)(a). It was argued that the exclusion under Section 270A(6)(b) applies only where accounts are found correct and complete but income cannot be properly deduced due to the method employed. In the present case, the Assessing Officer categorically recorded that the accounts were not correct and complete. Therefore, the exclusion did not apply and penalty was correctly levied.

Court Order / Findings

The ITAT Jaipur held that the assessee’s case clearly fell within the definition of under-reporting of income under Section 270A(2)(a), as the assessed income exceeded the income processed under Section 143(1)(a). The Tribunal analysed Section 270A(6)(b) and held that exclusion from penalty for estimated additions applies only where accounts are correct and complete to the satisfaction of the Assessing Officer. In the present case, the Assessing Officer explicitly recorded serious deficiencies in maintenance of books, quantitative records and vouchers, rendering the accounts unreliable. Consequently, the benefit of exclusion under Section 270A(6)(b) was not available. The Tribunal further noted that no arguments were advanced against levy of penalty on disallowance under Section 40(a)(ia). Accordingly, the Tribunal upheld the levy of penalty under Section 270A for both assessment years.

Important Clarification

The Tribunal clarified that estimation-based additions do not automatically escape penalty under Section 270A. The statutory exclusion applies only when accounts are otherwise correct and complete but income cannot be deduced due to the accounting method. Where books are found unreliable or incomplete, estimated additions constitute under-reported income attracting penalty. Disallowances under Section 40(a)(ia) also squarely fall within the ambit of under-reporting.

Final Outcome

Both appeals filed by the assessee for Assessment Years 2017-18 and 2018-19 were dismissed. The levy of penalty under Section 270A of the Income-tax Act for under-reporting of income was upheld in full.

Link to download order-https://www.mytaxexpert.co.in/uploads/1768993468_SHRISHYAMCONSTRUCTIONCOMPANYJAIPURVS.ITOWD11JAIPURJAIPUR.pdf

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