Overstating Deduction Under Chapter VI-A

Overstating Deduction Under Chapter VI-A Sanjeev Kumar Manchand Rajput, an individual deriving income from salary, filed his return of income for the

Overstating Deduction Under Chapter VI-A

Detailed Case Analysis: Sanjeev Kumar Manchand Rajput vs. Income Tax Officer (2023)
Court: Income Tax Appellate Tribunal, Pune
Judges: Inturi Rama Rao (Accountant Member) & Partha Sarathi Chaudhury (Judicial Member)
Date of Decision: July 13, 2023
Assessment Years: 2017-18 & 2018-19
Appellant: Sanjeev Kumar Manchand Rajput
Respondent: Income Tax Officer, Nashik

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Background

Sanjeev Kumar Manchand Rajput, an individual deriving income from salary, filed his return of income for the assessment years 2017-18 and 2018-19. Initially, he declared a total income of ₹4,22,340 after claiming deductions under Chapter VI-A of ₹2,35,000. However, a survey conducted under Section 133A of the Income Tax Act revealed discrepancies, leading to the reopening of his case under Section 148.

Penalty under s. 270A—Misreporting of income—Suppression of gross total income and excess claim of deductions under chapter VI-A—In asst. yr. 2017-18 assessee suppressed gross total income to the extent of Rs. 3,20,000 in spite of Form No. 16 issued by his employer showing higher and correct salary—He also overstated deduction under Chapter VI-A by Rs. 85,000—Similarly, in asst. yr. 2018-19, the gross total income as per original return was at Rs. 7,46,015 as against Rs. 9,26,047 in the return filed in response to notice under s. 148 and was thus misreported by Rs. 1,80,000—Chapter VI-A deduction was claimed at Rs. 3,55,000 in the original return as against Rs. 1,50,000 claimed in the later return—Assessee offered no explanation as to why the gross total income was understated causing misreporting of income in the original return in spite of Form No. 16 issued by the employer—Similarly there was no explanation given by the assessee as to why Chapter VI-A deductions were inflated—It is a clear case of misreporting of income as defined under s. 270A(9)—This is a fraud committed against the Department in order to evade tax—Therefore, NFAC has rightly upheld the levy of penalty by the AO @ 200 per cent for misreporting of income—McDowell & Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC), Dy. CIT vs. Pawan Kumar Malhotra (2010) 2 ITR 250 (Del)(Trib) and Friends Trading Co. vs. Union of India (Civil Appeal No. 5608 of 2011, dt. 23rd Sept., 2022) applied

Assessee having suppressed his gross total income by declaring salary lower than that recorded in Form No. 16 issued by his employer and overstated deductions under chapter VI-A, and offered no explanation therefore, it is a clear case of misreporting of income as defined under s. 270A(9) and, therefore, penalty under s. 270A is leviable @ 200 per cent.

Key Issues

1. Under-Reporting of Income: The assessee’s gross total income was found to be higher in the revised return filed in response to the notice under Section 148 compared to the original return.
   
   
2. Misreporting of Income: The assessee habitually claimed higher deductions under Chapter VI-A, leading to a lower taxable income.

Legal Provisions Involved

• Section 133A: Survey
• Section 148: Issue of notice where income has escaped assessment
• Section 270A: Penalty for under-reporting and misreporting of income
• Section 270AA: Immunity from penalty

Tribunal’s Findings

• The assessee’s revised return showed a higher gross total income by ₹3,20,000 compared to the original return.
• The assessee failed to provide a satisfactory explanation for the discrepancies between the original and revised returns.
• The Tribunal upheld the penalty under Section 270A for misreporting of income, noting that the assessee had a history of overstating deductions to claim refunds.

Penalty

• Under-Reporting: Attracts a penalty of 50% of the tax payable on under-reported income.
• Misreporting: Attracts a higher penalty of 200% of the tax payable on misreported income.

The Tribunal confirmed the penalty imposed by the Assessing Officer, rejecting the assessee’s request for immunity under Section 270AA.

Cases referred to

1. Badami (Deceased) by her LRs vs. Bhali (Civil Appeal No. 1723 of 2008, dt. 22nd May, 2012)
2. Sumati Dayal vs. CIT (1995) 125 CTR (SC) 124 : (1995) 214 ITR 801 (SC)

Order by Bench

1. These appeals preferred by the assessee emanates from the separate orders of National Faceless Appeal Centre (NFAC), Delhi, each dt. 26th April, 2023 for asst. yrs. 2017-18 and 2018-19 as per the grounds of appeal on record.
   
   
2. The common and solitary grievance of the assessee in both these appeals is the confirmation of levy of penalty under s. 270A of the Act.
   
   
3. We shall take up ITA No. 612/Pune/2023 as the lead case for illustration of facts and adjudication. It has been conceded by the parties herein that the facts and circumstances and the issues involved in both the years of appeal are absolutely identical and similar, therefore, these cases were heard together and were disposed of vide this consolidated order.
   
   
4. The relevant facts of the case are that assessee is an individual and derives income from salary, filed his return of income declaring total income of Rs. 4,22,340 after claiming deduction under Chapter VI-A of Rs. 2,35,000. Subsequently, a survey was conducted under s. 133A of the Act on the assessee's ITP, and on the basis of the information from Inv. wing, the case of the assessee was reopened by issue of notice under s. 148. In response thereto, assessee filed return on 3rd March, 2020 declaring total income of Rs. 8,27,340 wherein he claimed deduction of Rs. 1,50,000 under Chapter VI-A. In the assessment proceedings, the AO (AO) accepted the income of Rs. 8,27,340 filed in the return in response to notice under s. 148. The AO noted that in the original return filed on 27th June, 2017, the gross total income was declared at Rs. 6,57,341 while in the return dt. 3rd March, 2020, the gross total income was declared at Rs. 9,77,338 and thus higher by Rs. 3,20,000. Similarly, the deduction claimed under Chapter VI-A was reduced from Rs. 2,35,000 to Rs. 1,50,000. The AO accepted the income as per return filed in response to the notice under s. 148 and initiated penalty proceedings under s. 270A for under-reporting in consequence of misreporting of income. The assessee did not file any appeal against the quantum assessment and has accepted the assessment. The AO then took up the penalty proceedings and held that assessee had misreported his income of Rs. 4,05,000. During the penalty proceedings, assessee filed Form 8 requesting for grant of immunity under s. 270AA, which was rejected by the AO and levied penalty @ 200 per cent on misreporting of income.
   
   
5. Before the NFAC, detailed written submissions have been filed which is on record. That, after considering the submissions of the assessee and the assessment order, it was observed and held by the NFAC as follows :
   
   
• 5.2 In the asst. yr. 2017-18, the original return filed by the assessee declaring income of Rs. 4,22,340 comprising of gross total income of Rs. 6,57,341 and claiming deduction under Chapter VI-A of Rs. 2,35,000 was merely processed under s. 143(1) and refund issued to the assessee. Later it was revealed that the assessee has suppressed the gross total income itself to the extent of Rs. 3,20,000. This was in spite of the Form 16 issued by the employer showing a higher and correct salary. It is not known as to why and how the assessee could declare a salary lower than that recorded in Form 16. Similarly, the assessee has overstated the deduction under Chapter VI-A by Rs. 85,000, i.e. to say, claimed a deduction under Chapter VI-A of Rs. 2,35,000 against the correctly allowable Rs. 1,50,000. The details of such inflated claims were not revealed by the assessee in the present appeal proceedings. I specifically requested the assessee to explain the mechanics of these differences between the original return and that filed in response to notice under s. 148. However, the assessee has responded on 28th March, 2023 stating that he has nothing further to state in respect of the difference between the figures of gross total income and Chapter VI-A deduction between the original return and the later return. The facts on record thus indicate that admittedly the assessee has originally returned a lower gross total income and an inflated Chapter VI-A deduction, and has offered no explanation regarding the same."
  
  
• 5.3 Similarly, in the asst. yr. 2018-19, the gross total income as per original return is Rs. 7,46,015 as against Rs. 9,26,047 in the return filed in response to notice under s. 148, and is under-reported by Rs. 1,80,000. The Chapter VI-A deduction is claimed at Rs. 3,55,000 in the original return as against Rs. 1,50,000 claimed in the later return and is inflated by Rs. 1,55,000.
  
  
• 5.4 Sec. 270A(1) is the charging section for levy of penalty and s. 270A(2) lays down situations in which an assessee is considered to have under-reported his income. The case of the assessee for both assessment years would fall in s. 270A(2)(a) as the assessed income is higher than that as determined under s. 143(1)(a). The quantum of such under reported income is to be determined as per s. 270A(3)(i)(a) for both assessment years. There are certain exclusions from the definition of under reporting of income which is provided in s. 270A(6). Clauses (b) to (e) of s. 270A(6) obviously do not apply to the assessee and one has to examine cl (a) of s. 270A(6) whether the explanation offered by the assessee is bona fide and has disclosed all material facts to satisfy such explanation. As discussed earlier, the assessee has clearly offered no explanation whatsoever in respect of why and how the gross total income was under stated in the return in spite of Form 16 issued by the employer recording the correct salary. Similarly, there is no explanation whatsoever as to why and how the Chapter VI-A deduction was inflated. In fact, the assessee has answered my specific query stating that he has nothing more to explain. I am therefore of the view that the assessee has firstly offered no explanation at all and has not disclosed all material facts in regard to his explanation for under reporting of income. Merely blaming his tax consultant cannot confer immunity on the assessee as ultimately the assessee has certified his original return as true and correct, when he was in the knowledge that it was not so. I am therefore of the view that s. 270A(6) cannot rescue the assessee.
  
  
• 5.5 This is clearly a case of misreporting of income as defined in s. 270A(9), which is preceded by s. 270A(8) which begins with a non obstante clause. Secs. 270A(8) and (9) read as under :
• (8) Notwithstanding anything contained in sub-s. (6) or sub-s. (7), where under- reported income is in consequence of any misreporting thereof by any person, the penalty referred to in sub-s. (1) shall be equal to two hundred per cent of the amount of tax payable on under-reported income.
• (9) The cases of misreporting of income referred to in sub-s. (8) shall be the following, namely :
1. Misrepresentation or suppression of facts;
2. Failure to record investments in books of accounts'
3. Claim of expenditure not substantiated by evidence;
4. Recording of any false entry in the books of accounts;
5. Failure to record any receipt in books of account having a bearing on total income; and
6. It is evident that in cases of under-reporting of income as a consequence of misreporting thereof, s. 270A(8) and (9) would operate and a higher penalty is prescribed. Misreporting is defined in s. 270A(9) and the case of the assessee would fall under cl. (a) for suppressing the gross total income and under cl. (c) for claiming a higher deduction under Chapter VI-A not substantiated by any evidence. The assessee has evidently declared a lower salary than that reported by his employer in Form 16, and further has not disclosed the basis of such under reporting when specifically asked by me to do so. This action of the assessee would clearly be construed as misrepresentation or suppression of facts. Similarly, in case of the inflated claim under Chapter VI-A, the assessee has not revealed the basis on which a higher claim was made, in spite of being specifically requested by me. Based on the facts as discussed above, I am of the view that the assessee has clearly misreported his income as defined in s. 270A(9) and therefore the AO has correctly levied penalty @ 200 per cent as prescribed. The scheme of the section as evident from the language is that a mere under-reporting attracts penalty of 50 per cent with certain exclusions, while misreporting attracts a higher penalty of 200 per cent The legislature has intentionally distinguished between misreporting and under-reporting by providing specific definition of misreporting and exclusions to under-reporting. In my view by suppressing his gross total income in spite of Form 16 recording a higher and correct quantum, the assessee has misreported his GTI, and by inflating his Chapter VI-A deduction, the assessee has mis-reported income to the extent of inflation. These actions of the assessee would fall under cls. (a) and
   
   
6. We have analyzed the facts and circumstances, heard the submissions of the parties herein and have given considerable thought to the materials/documents on record.
   
   
• 6.1 In asst. yr. 2017-18, the original return filed by the assessee declaring income of Rs. 4,22,340 was processed under s. 143(1) of the Act and refund was issued to the assessee. Later, it was revealed that assessee has suppressed the gross total income itself to the extent of Rs. 3,20,000. This was in spite of Form 16 issued by the employer showing higher and correct salary. It is for reasons best known to the assessee why he had declared salary lower than that recorded in Form 16 and similarly had overstated the deduction under Chapter VI-A by Rs. 85,000, meaning thereby, claimed higher deduction under Chapter VI-A of Rs. 2,35,000 as against the correctly allowable maximum deduction of Rs. 1,50,000. These details of such inflated claims and the justifiable reasons thereof were not revealed by the assessee, even during the appellate proceedings before the NFAC. The assessee was specifically asked to explain the reasons for these differences between the original return filed and the return filed in response to notice under s. 148. But even before the NFAC, the assessee responded that he has nothing further to state in respect of difference between the figures of gross total income and Chapter VI-A deduction between the original return and the later return. Similarly, in asst. yr. 2018-19, the gross total income as per original return was at Rs. 7,46,015 as against Rs. 9,26,047 in the return filed in response to notice under s. 148 and was thus misreported by Rs. 1,80,000. The Chapter VI-A deduction was claimed at Rs. 3,55,000 in the original return as against Rs. 1,50,000 claimed in the later return and was inflated by Rs. 1,55,000. In this case, as evident from the order of the NFAC, assessee has offered no explanation as to why the gross total income was understated causing misreporting of income in the original return in spite of Form 16 issued by the employer, and similarly there was no explanation given by the assessee as to why Chapter VI-A deductions were inflated. That, as rightly observed by the NFAC for both these years, it was a clear case of misreporting of income as defined under s. 270A(9) of the Act, which is preceded by s. 270A(8) of the Act which begins with a non obstante clause. Secs. 270A(8) and (9) specifies that in case of under-reporting of income as a consequence of misreporting thereof, ss. 270A(8) and (9) would operate and a higher penalty is prescribed. As per the provisions of cls. (a) and (c) of s. 270A(9), the assessee has misreported his income. The scheme of the provisions provides that if it is a case of under-reporting, it attracts penalty of 50 per cent with certain exclusions, but if it is a case of misreporting, it attracts higher penalty of 200 per cent The assessee admittedly declared lower salary than that reported by his employer in Form 16 and further has not disclosed the basis for such misreporting. This is a clear case of misrepresentation or suppression of facts. Similarly, the assessee had inflated his claim of deduction under Chapter VI-A of the Act and again has not revealed the basis for which, such higher claim of deduction was made. In fact, the assessee specifically stated before the NFAC that he does not have any explanation for these discrepancies. In fact, as per records with the Department, the assessee is habitual for claiming fraudulently refund by increasing deduction and reducing his taxable income since asst. yr. 2016-17 onwards. Reference may be made to the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC) wherein the Hon'ble Supreme Court has held that "Tax planning may be legitimate provided it is within the framework of law, Colourable devices cannot be part of tax planning….". In the case of Dy. CIT vs. Pawan Kumar Malhotra (2010) 2 ITR 250 (Del)(Trib), it was observed that AO had come to a conclusion after meticulous enquiry as regards the purchases found by him as sham transaction treating the difference as undisclosed income and, therefore, the Revenue's appeal was allowed restoring the order of the AO. The Tribunal relying upon the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) and the case of Sumati Dayal vs. CIT (1995) 125 CTR (SC) 124 : (1995) 214 ITR 801 (SC) wherein the former case dealt with tax planning and not on sham transactions and in the later case, the inference was based upon test of human probabilities with the assessee's version on facts was unbelievable and hence, was to be discarded. In all these decisions, the judicial conclusion is clearly set out that where tax planning is permitted at the same time, the assessee is not allowed to resort to any sham transaction or colourable devices for avoiding and evading tax. One classic judicial example is the decision of the Hon'ble Supreme Court in the case of Friends Trading Co. vs. Union of India in Civil Appeal No. 5608 of 2011 vide order dt. 23rd Sept., 2022 held in the context of availment of alleged forged in capital DEPB under the Customs Act held that exemption benefit availed on such forged DEPB are void ab initio on the principle that fraud vitiates everything. The ratio of this decision squarely applies to the conduct of the present assessee before us as he had done fraud with the Revenue by misreporting his income in the return filed for evading tax. Further, the application of principle of fraud was considered by the Hon'ble Supreme Court in the case of Badami (Deceased) by her LRs vs. Bhali in Civil Appeal No. 1723 of 2008, dt. 22nd May, 2012 wherein the Hon'ble Supreme Court has held as follows :
  
  
• "20. In S.P. Chengalvaraya Naidu (dead) by L.Rs. vs. Jagannath (dead) by L.Rs. & Ors. AIR 1994 SC 853 this Court commenced the verdict with the following words : Fraud-avoids all judicial acts, ecclesiastical or temporal"" observed Chief Justice Edward Coke of England about three centuries ago. It is the settled proposition of law that a judgment or decree obtained by playing fraud on the Court is a nullity and non est in the eyes of law. Such a judgment/decree–by the first Court or by the highest Court–has to be treated as a nullity by every Court, whether superior or inferior. It can be challenged in any Court even in collateral proceedings."
  
  
• 21. In the said case it was clearly stated that the Courts of law are meant for imparting justice between the parties and one who comes to the Court, must come with clean hands. A person whose case is based on falsehood has no right to approach the Court. A litigant who approaches the Court, is bound to produce all the documents executed by him which are relevant to the litigation. If a vital document is withheld in order to gain advantage on the other side he would be guilty of playing fraud on Court as well as on the opposite party.
  
  
• 22. In Smt. Shrist Dhawan vs. M/s Shaw Brothers AIR 1992 SC 1555 it has been opined that fraud and collusion vitiate even the most solemn proceedings in any civilised system of jurisprudence. It has been defined as an act of trickery or deceit. The aforesaid principle has been reiterated in Roshan Deen vs. Preeti Lal AIR 2002 SC 33, Ram Preeti Yadav vs. U.P. Board of High School and Intermediate Education & Ors. (2003) 8 SCC 312 and Ram Chandra Singh vs. Savitri Devi & Ors. (2003) 8 SCC 319.
  
  
• 6.2 Reverting to the facts of the present case, here also, the assessee who has a history for habitually claiming fraudulent refund by increasing deductions and reducing his taxable income since asst. yr. 2016-17 onwards, could not justify why he has continuously misreported his income and what was the legal basis for such an action and no plausible legal explanations were submitted why such misreporting was done by the assessee. It is obvious that this is a fraud committed against the Department in order to evade tax. That, on examination in the light of aforestated judicial pronouncements and the facts and circumstances involved in the assessee's case, we hold that NFAC has rightly upheld the levy of penalty by the AO @ 200 per cent for misreporting of income as defined under s. 270A(9) of the Act. In view thereof, we do not find any infirmity with the findings of the NFAC which is upheld. Grounds of appeal in ITA No. 612/Pune/2023 for asst. yr. 2017- 18 stand dismissed.
  
  
7. In the result, appeal of the assessee in ITA No. 612/Pune/2023 for asst. yr. 2017-18 stands dismissed.
   
   
8. At the very outset, the parties herein had submitted that the facts and issues involved in both the years are absolutely identical and similar and, therefore, our decision in ITA No. 612/Pune/2023 for asst. yr. 2017-18 shall apply mutatis mutandis to ITA No. 613/Pune/2023 for asst. yr. 2018-19. The grounds of appeal in ITA No. 613/Pune/2023 for asst. yr. 2018-19 stands dismissed.
   
   
9. In the result, appeal of the assessee in ITA No. 613/Pune/2023 for asst. yr. 2018-19 stands dismissed.
   
   
10. In the combined result, both the appeals of the assessee are dismissed.