ITAT Hyderabad: No Penalty for Inadvertent Non-Disallowance When Tax Audit Report Fully Discloses Facts

March 04, 2026 : The Income Tax Appellate Tribunal (ITAT), Hyderabad Bench has held that penalty for misreporting of income under Section 270A(9) of the Income Tax Act cannot be imposed where the taxpayer has disclosed all relevant facts in the tax audit report and the failure to make a corresponding adjustment in the return of income occurred due to a bona fide and inadvertent error.

The Bench comprising Ravish Sood (Judicial Member) and Manjunatha G. (Accountant Member) allowed the appeal filed by N.A.M. Expressway Limited and deleted a penalty of ₹25.19 lakh imposed by the Assessing Officer.

The dispute arose for the assessment year 2018-19, where the assessee had filed its return declaring nil income and reported a current year loss of ₹81.04 crore. During scrutiny assessment under Section 143(3) of the Income Tax Act, the Assessing Officer disallowed ₹40.76 lakh towards labour cess under Section 43B, as the amount had not been paid before the due date for filing the return. This resulted in the assessed loss being reduced to ₹80.63 crore.

The disallowance stemmed from the tax audit report in Form 3CD, where the auditor had clearly reported that labour cess of ₹40,76,414 had not been paid within the prescribed time. However, while computing its income in the return, the assessee failed to add back this amount.

Following the assessment, the Assessing Officer initiated penalty proceedings under Section 270A for under-reporting of income in consequence of misreporting and imposed a penalty of ₹25,19,222, equivalent to 200% of the tax payable on the under-reported income. The officer also rejected the assessee’s application seeking immunity under Section 270AA, stating that immunity cannot be granted where penalty proceedings are initiated for misreporting under Section 270A(9).

The Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, upheld the penalty, observing that even a reduction of returned loss due to disallowance constitutes under-reported income.

On further appeal, the Tribunal examined the record and noted that there was no dispute regarding disclosure of all relevant details relating to labour cess. The amount had been clearly reported in the tax audit report and quantified by the auditor.

The Tribunal accepted the assessee’s explanation that the omission to disallow the labour cess in the computation of income occurred due to an inadvertent mistake while filing the return. It observed that the explanation appeared bona fide and supported by the record.

The Bench also noted that the disallowance was tax-neutral in nature. The addition merely reduced the current year’s loss and did not create any immediate tax liability. Further, once the labour cess is paid in a subsequent year, the assessee would be eligible to claim deduction, thereby restoring the loss position.

In these circumstances, the Tribunal held that the case falls within the exception under Section 270A(6), which excludes certain amounts from the scope of under-reported income where the taxpayer offers a bona fide explanation and has disclosed all material facts relating to the issue.

Accordingly, the Tribunal ruled that the disallowance could not be treated as under-reported income arising from misreporting under Section 270A(9). It set aside the order of the CIT(A) and directed the Assessing Officer to delete the penalty of ₹25,19,222 imposed under Section 270A of the Income Tax Act.

The Tribunal further clarified that immunity under Section 270AA is available only when penalty proceedings are not initiated for misreporting under Section 270A(9). Since the Assessing Officer had initiated penalty specifically under Section 270A(9), the assessee’s application for immunity had become infructuous, and the officer was not required to pass a separate order under Section 270AA(4).

Case Details:
Cause Title: N.A.M. Expressway Limited vs Deputy CIT
Case No: I.T.A. No. 2044/Hyd/2025
Assessment Year: 2018-19
Coram: Ravish Sood (Judicial Member) and Manjunatha G. (Accountant Member)
Decision Date: 04 March 2026