The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) has held that the penalty under Section 270A of the Income Tax Act 1961 could not be levied for a bonafide mistake of mere change in the head of income while computing total income. The assessee,D.C. Polyester Limited herein belonged to D’ Decor Group engaged in the business of manufacture and sale of textile products. During the course of scrutiny proceedings, the Assessing Officer noticed that the assessee had offered rental income under the heading ‘income from house property’. The Assessing Officer noticed that the assessee had declared the rental income from very same property under the head ‘income from business’ in an earlier year, i.e., in A.Y. 2013-14. However, in the instant year, the assessee had declared rental income under the head ‘income from house property’ and also claimed various other expenses against its business income.

He further noticed that there was no business income during the year under consideration. The assessee submitted that it has reduced its business substantially and all the expenses claimed in the profit and loss accounts were related to the business only. It was submitted that the rental income was rightly offered under the head ‘income from house property’ during the year under consideration. In the alternative, the assessee submitted that it will not object to assessing rental income under the head ‘income from business’. Accordingly, the Assessing Officer assessed the rental income under the head ‘income from business’. It is pertinent to note that the assessee would be getting standard deduction u/s 24(a) of the Act towards repairs to the tune of 30% of rental income, if the same is offered under the head “Income from house property”.

If it was offered under the head “Income from business”, the above said standard deduction will not be available. He also took the view that the claim of statutory deduction as well as expenses in the Profit and Loss account under two different heads of income would amount to under reporting of income under section 270A of the Act. Accordingly, he levied a penalty under section 270A of the Income Tax Act.

The learned CIT(A) also confirmed the same. Ravikant Pathak, on behalf of the assessee submitted that the assessee did not under report any income and ultimately, the addition made by the Assessing Officer was related to statutory deduction. Accordingly, he contended that mere change in head of income would not result in under reporting of income. He further submitted that the above said mistake has occurred on account of mistake committed by the accountant and the Tribunal held that such kind of mistake cannot be considered as under-reporting of the income for levying penalty under section 270A of the Act. Mahita Nair,on behalf of the revenue submitted that the assessee had changed the head of income for offering rental income, even though the very same rental income was offered as business income in the earlier years.

She submitted that the assessee had claimed expenses in the Profit and loss account and the expenses relating to rental income had not been disallowed. She contended that it would amount to under reporting of income. The two-member Bench of B.R. Baskaran (Accountant Member) and Pavan Kumar Gadale (Judicial Member) noted that Section 270A of the Income Tax Act uses the expression “the Assessing Officer ‘may direct’ ‘. Hence there was merit in the contention of the assessee that levying of penalty was not automatic and discretion was given to the Assessing Officer not to initiate penalty proceedings under Section 270A of the Income Tax Act.

The Bench observed that the assessee had offered rental income under the head “Income from House Property”, but the assessing officer had assessed the same under the head “Income from business.” The standard deduction @ 30% allowable u/s 24(a) while computing income under the head Income from house property would not be available when it was assessed under the Income from business. Thus, it was not a case that the assessee has suppressed or under-reported any income. Bench allowed the appeal filed by the assessee and deleted the penalty.