Income-tax penalty over ₹3.71 lakh political donation deduction: ITAT Ahmedabad deletes ₹2.31 lakh penalty

The Income Tax Appellate Tribunal (ITAT), Ahmedabad, has cancelled a ₹2.31 lakh penalty imposed on a taxpayer who had claimed a ₹3.71 lakh deduction for a political donation under Section 80GGC of the Income-tax Act. The tribunal held that merely disallowing a deduction does not automatically mean the taxpayer had under-reported or misreported income, particularly when the tax department had not specified the precise basis for imposing the penalty.

The ruling came in the case of Niket Maheshbhai Shah for assessment year 2019-20.

Why the income-tax department imposed the penalty

Shah had claimed a deduction of ₹3.71 lakh under Section 80GGC for a donation made through a recognised banking channel to Manav Adhikar National Party. He also had a certificate from the political party supporting the donation.

The assessment was subsequently reopened under Section 147 after a search involving the political party and statements recorded from its officials. The Assessing Officer disallowed Shah’s Section 80GGC claim.

Shah accepted the disallowance and paid the resulting tax demand, according to the tribunal order. He also sought immunity from penalty under Section 270AA, but the application was rejected on the ground that the income involved was misreported.

The Assessing Officer then imposed a ₹2,31,504 penalty under Section 270A, calculated at 200% of the tax, treating the case as under-reporting of income resulting from misreporting. The National Faceless Appeal Centre (NFAC) subsequently upheld the penalty.

Shah challenged the penalty before the Ahmedabad tribunal, arguing that he had made the donation through banking channels and had claimed the deduction in the belief that it was allowable. Accepting the tax department’s disallowance, he argued, did not mean that he had deliberately misreported his income.

ITAT says penalty order must specify the exact charge

The tribunal found that the Assessing Officer had examined the Section 80GGC deduction claimed by Shah. It held that the claim could not, by itself, be characterised as misreporting or under-reporting merely because the deduction was ultimately disallowed.

More importantly, the tribunal noted that the penalty order did not clearly identify the applicable limb of Section 270A or explain how the conditions for “misreporting” under Section 270A(9) were satisfied. The tribunal relied on the Delhi High Court’s 2022 ruling in Prem Brothers Infrastructure LLP, which held that simply using the word “misreporting” without specifying the applicable limb and explaining how Section 270A(9) was attracted could not sustain the penalty.

The tribunal also referred to the Rajasthan High Court’s decision in G R Infraprojects, where similar issues concerning the classification of under-reporting and misreporting under Section 270A were considered.

“Therefore, the penalty does not sustain,” the Ahmedabad tribunal held, allowing Shah’s appeal and deleting the ₹2.31 lakh penalty.

The ruling, however, should not be read as the tribunal approving Shah’s ₹3.71 lakh political donation deduction. The dispute before the Ahmedabad tribunal was specifically over the penalty. The taxpayer had already accepted the disallowance and paid the resulting tax demand.