Man earns Rs 30 lakh salary, doesn’t file ITR; Income Tax Dept slaps Rs 3.74 lakh penalty — what ITAT said

For salaried taxpayers, having tax deducted at source (TDS) does not by itself settle every income-tax compliance requirement. But what happens when a taxpayer fails to file a return, later discloses his entire income after receiving an Income Tax notice, and the department accepts that income without making any addition?

A recent Delhi Income Tax Appellate Tribunal (ITAT) ruling has drawn an important distinction between failure to file a return and “under-reporting of income” for the purpose of penalty under Section 270A of the Income Tax Act.

In the case of Pravesh Aggarwal vs CIT (Appeals), NFAC, Delhi, the taxpayer had not filed his return for assessment year (AY) 2019-20 despite having salary income of more than Rs 30 lakh. The case was later reopened by the Income Tax Department. Aggarwal filed a return declaring total income of Rs 30,22,900, and the Assessing Officer accepted the return without making any addition. Despite this, a penalty of Rs 3,74,072 was imposed for under-reporting of income.

The ITAT, however, deleted the penalty, holding that on the facts of the case, the taxpayer had not under-reported his income.

What happened in the case?

Aggarwal was employed during financial year 2018-19 and changed jobs during the year. According to his submission before the tribunal, he was unable to obtain the relevant documents, particularly Form 16 from both employers, before the due date for filing the return.

He also said he was under the impression that the TDS deducted by his employers had been correctly deposited and that his income had been properly reported. The TDS was reflected in his Form 26AS.

The Income Tax Department, however, had information showing that he had received salary income of more than ₹30 lakh but had not filed an ITR. His case was reopened under Section 147 after an order under Section 148A(d) dated April 19, 2023, followed by a notice under Section 148.

Aggarwal then filed his return declaring Rs 30.22 lakh income. The Assessing Officer issued further notices under Sections 143(2) and 142(1), sought details and ultimately accepted the returned income without any variation.

That could have ended the matter. But the AO separately initiated penalty proceedings under Section 270A.

Why was a Rs 3.74 lakh penalty imposed?

The AO treated the entire Rs 30.22 lakh declared in the return filed in response to the Section 148 notice as under-reported income because the taxpayer had not filed the original return under Section 139(1).

The resulting penalty was Rs 3,74,072, which the order says was 50% of the tax on the amount treated as under-reported.

Aggarwal challenged the penalty before the CIT(A), arguing that there was no concealed income because the income he eventually declared had been accepted by the department. The CIT(A), however, dismissed his appeal.

The matter then reached the ITAT.

What did the taxpayer argue?

Aggarwal told the tribunal that his failure to file the return was neither intentional nor aimed at evading tax. He pointed to the change of employment, his inability to obtain Form 16s in time and the fact that TDS was already reflected in Form 26AS.

He also pointed out that once he received the Section 148 notice, he complied, filed the return and disclosed the income. The reassessment subsequently accepted the return without any addition or adverse finding.

The Revenue, on the other hand, argued that had the Section 148 notice not been issued, the taxpayer would not have filed the return and the income would have escaped assessment.

Non-filing and under-reporting are not necessarily the same thing

This distinction became central to the ITAT’s decision.

Section 270A deals with penalties for under-reporting of income. The tribunal examined the relevant provisions and noted that under-reporting involves specific situations prescribed in the law. Section 270A(6)(a), among other things, excludes income where the taxpayer offers a bona fide explanation and discloses all material facts necessary to substantiate that explanation.

The tribunal then looked at what actually happened in Aggarwal’s case.

“Whatever income reported/declared by the Assessee has been accepted by the Department,” the tribunal observed. Therefore, it was not a case where the taxpayer had declared a lower amount than his actual income.

The ITAT also accepted the significance of the TDS information. The taxpayer was under a bona fide belief that the tax on his salary income had already been deducted by his employers and was appearing in Form 26AS. The department itself had access to that information.

What does the expert say?

Anita Basrur, Partner at Sudit K Parekh & Co. LLP, said mere non-filing of an ITR, by itself, does not automatically culminate into a penalty under Section 270A.

According to her, the law creates objective situations in which income is treated as under-reported. “Unlike erstwhile concealment provisions, mens rea is not to be proved,” she said.

Basrur also pointed to an important aspect of this case: the entire income appearing through TDS in Form 26AS was ultimately offered to tax.

“As all the income appearing in the 26AS has been offered to tax, the taxpayer has a good case and defence that no under reporting of income,” she said.

In this case, the final assessed income was the same as the income declared by the taxpayer. That, according to Basrur, strengthens the taxpayer’s position because there was no understatement of income after the return was filed.

“Penalty provisions are aimed at under-reporting of income, not merely procedural default,” she said.

Why Form 26AS mattered

The tribunal specifically noted that the salary income was reflected in Form 26AS and was therefore within the knowledge of the Income Tax Department. It found that, in the facts of this case, there was no misrepresentation or suppression of facts.

Basrur said this is one of the strongest aspects of the taxpayer’s defence. If the income is already available to the department through TDS records and the taxpayer subsequently offers the same income to tax, it becomes difficult to characterise the situation as an attempt to hide or disguise income.

There is another important point, however. Basrur said that even where additions are made, the taxpayer’s explanation, disclosure of material facts and the genuineness of that explanation cannot simply be ignored while considering penalty.

ITAT deletes the Rs 3.74 lakh penalty

After examining the facts and the provisions of Section 270A, the Delhi ITAT concluded that the taxpayer had not under-reported his income in the manner contemplated by the provision.

The tribunal noted that the assessed income under Section 148 was not greater than the income declared by the taxpayer. It also found that the taxpayer had a bona fide belief regarding the TDS already deducted and reflected in Form 26AS.

The tribunal therefore deleted the Rs 3,74,072 penalty and allowed the appeal.

What salaried taxpayers should take away

The ruling should not be read as saying that salaried taxpayers can skip filing their ITR merely because TDS has been deducted.

The case turned on its particular facts: the taxpayer subsequently disclosed the entire income, the income was accepted without any addition, the TDS was already reflected in Form 26AS and the tribunal found his explanation to be bona fide.

The broader lesson is that there is a distinction between a procedural failure to file a return and the specific statutory conditions required to impose a penalty for under-reporting of income.

For taxpayers who receive an Income Tax notice, the case also underlines the importance of responding, filing the required return and keeping documents such as Form 16, Form 26AS and other income records properly reconciled.

As Basrur puts it, where the entire income is ultimately disclosed and accepted without additions, “there was no under-statement of income.”

Disclaimer: This story is based on the facts and findings of the specific ITAT order and should not be interpreted as a general exemption from the requirement to file an ITR when applicable. Tax outcomes may vary depending on the facts and circumstances of each case.

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