Section 270A IT Act | Mere TDS Credit Mismatch Without Intent Constitutes Underreporting, Not Misreporting: ITAT Ahmedabad

The ITAT Ahmedabad has clarified a critical distinction between underreporting and misreporting of income under Section 270A of the Income Tax Act, holding that claiming TDS credit on income not fully disclosed in the return constitutes underreporting, not deliberate misreporting. This ruling provides essential guidance to taxpayers and assessing officers on the application of penalty provisions where discrepancies arise between Form 26AS and declared income.

Background & Facts

The Dispute

The appellant, Pravinbhai Narottamdas Patel, is an authorised dealer of Hero Motors Limited in Visnagar, Gujarat, engaged in the sale and service of two-wheelers. For Assessment Year 2023-24, he filed his income tax return on 26.09.2023 declaring total income of Rs. 1,32,99,350. The case was selected for scrutiny under the Computer Assisted Selection System (CASS) due to low net profit margins relative to revenue from operations.

Key Facts

• The assessee received commission of Rs. 15,36,252 from Hero Fincorp, with TDS deducted under Section 194H, as reflected in Form 26AS.
• However, he disclosed only Rs. 12,92,965 as commission income in his books, creating a difference of Rs. 2,43,287.
• He received insurance commission of Rs. 8,42,916 as per Form 26AS, but disclosed only Rs. 7,76,175, resulting in a difference of Rs. 66,741.
• The total unreported income identified by the Assessing Officer (AO) was Rs. 3,10,028.
• The AO added this amount to the assessee’s income and completed the assessment under Section 143(3) read with Section 144B on 19.03.2025, arriving at a total income of Rs. 1,36,09,380.
• The AO initiated penalty proceedings under Section 270A(9) for underreporting due to misreporting.
• A penalty of Rs. 2,22,474 was imposed on 19.09.2025 at 200% of the tax underreported.
• The assessee claimed that the Rs. 3,10,028 difference arose because bills for this amount were issued in the subsequent financial year (2024-25), and the TDS credit was claimed in the current year for administrative convenience.
• The assessee did not file an appeal against the assessment order but sought rectification of the subsequent year’s assessment to avoid double taxation, which was rejected.

Procedural History

• 26.09.2023: Assessee filed return for A.Y. 2023-24 declaring income of Rs. 1,32,99,350.
• 19.03.2025: Assessment completed under Section 143(3) r.w.s. 144B; income adjusted upward by Rs. 3,10,028.
• 19.09.2025: Penalty order issued under Section 270A for misreporting, imposing Rs. 2,22,474.
• 05.02.2026: CIT(A) dismissed the assessee’s appeal against the penalty order.
• 10.06.2026: Hearing held before ITAT Ahmedabad.
• 15.07.2026: ITAT pronounced order.

Relief Sought

The assessee sought deletion of the penalty of Rs. 2,22,474 imposed under Section 270A, arguing that there was no misreporting, only inadvertent underreporting, and that all facts were disclosed. He contended that his case fell within the exception under Section 270A(6)(a).

The Legal Issue

The central question was whether claiming full TDS credit on income not fully offered to tax constitutes misreporting of income under Section 270A, or merely underreporting, and whether the assessee’s explanation qualifies for the exception under Section 270A(6)(a).

Arguments Presented

For the Appellant

Shri Rushin Patel, the assessee’s authorized representative, argued that the discrepancy of Rs. 3,10,028 was not due to suppression or concealment. He explained that the bills for the commission and insurance income were issued in the next financial year (2024-25), and the TDS credit was claimed in the current year to avoid procedural delays. He emphasized that all details were visible in Form 26AS, and the assessee had not made any false entries or concealed investments. He relied on Section 270A(6)(a), which excludes penalty if the assessee discloses all material facts and the explanation is bona fide.

For the Respondent

Shri Santosh Kumar, the Department’s representative, contended that the assessee had admitted to the addition by not challenging the assessment order. He argued that claiming TDS credit on income not offered to tax is a clear violation of the matching principle under Rule 37BA(3) of the Income Tax Rules. He maintained that the assessee’s conduct amounted to misreporting because the income was deliberately not disclosed despite having the means to do so, and the penalty was rightly imposed.

The Court's Analysis

The ITAT examined the nature of the discrepancy between Form 26AS and the assessee’s return. It acknowledged that the assessee had not concealed the source of income - the commission and insurance receipts were fully reflected in Form 26AS, accessible to the department. The Tribunal noted that the assessee had not falsified books, concealed investments, or made false entries.

The Tribunal then turned to Rule 37BA(3) of the Income Tax Rules, 1962, which mandates that TDS credit must be claimed only in the assessment year for which the income is assessable. Where income is spread over multiple years, TDS credit must be apportioned proportionately.

"Thus, when the assessee had taken credit for the entire TDS amount, it was obligatory upon him to offer the entire commission/insurance commission for which TDS credit was taken, as income in the current year itself."

The Tribunal held that by claiming full TDS credit without offering the corresponding income, the assessee had underreported his income. However, the Tribunal distinguished this from misreporting as defined under Section 270A(1)(ii), which requires suppression of facts, failure to record investments, or false entries. Since the information was fully disclosed in Form 26AS and no fraudulent intent was established, the conduct fell squarely within underreporting.

The Tribunal further rejected the assessee’s claim under Section 270A(6)(a), noting that while facts were disclosed, the assessee failed to provide a reasonable explanation for claiming TDS credit on income not offered to tax. The explanation of administrative convenience was deemed insufficient to meet the standard of a bona fide explanation under the provision.

The Verdict

The appeal was partly allowed. The ITAT set aside the penalty order for misreporting under Section 270A and directed the Assessing Officer to modify the penalty to one for underreporting under Section 270A(1)(i), reducing the penalty rate from 200% to 50%. The penalty amount of Rs. 2,22,474 is to be recalculated at 50% of the tax underreported on Rs. 3,10,028. The order is to be implemented within 6 weeks.

What This Means For Similar Cases

TDS Credit Must Align with Income Disclosure

• Practitioners must ensure that TDS credit claimed in a return corresponds exactly to the income offered to tax in that year.
• Claiming full TDS credit on income to be declared in a subsequent year will attract penalty under Section 270A for underreporting, even if no concealment occurred.

Misreporting Requires Fraudulent Conduct

• Mere discrepancies between Form 26AS and return, where information is fully visible, do not constitute misreporting.
• To attract 200% penalty, the department must prove suppression, false entries, or failure to record investments - not just arithmetic mismatches.

Documentation Is Key

• Taxpayers should maintain contemporaneous records explaining timing differences between billing and income recognition.
• Where TDS credit is claimed in advance, a written explanation should be filed with the return to avoid adverse inference.

Procedural Strategy

• If an addition is made in one year, and the taxpayer intends to claim the same income in the next, a rectification request under Section 154 should be filed immediately to avoid penalty exposure.
• Appeals against assessment orders should not be waived, even if the taxpayer intends to claim credit later - failure to appeal may be construed as acquiescence.