Penalty for Under-Reporting, Appeal Delay and Revision Proceedings
M/s Alpha Fabrics Pvt Ltd filed its return for AY 2024-25 declaring income of Rs 50,00,000. In assessment under section 143(3), the Assessing Officer made an addition of Rs 12,00,000 under section 40A(3) for cash payments to a transporter, disallowed Rs 3,00,000 of depreciation on a car used by the director, and initiated penalty under section 270A. The assessment order and notice of demand were served on 10 January 2025. The company filed an appeal before the CIT(A) on 25 February 2025, stating that its director was hospitalised from 20 January to 15 February 2025 and that the company's accountant resigned on 15 January 2025. The CIT(A) admitted the appeal after condoning the delay. On 20 March 2025, the PCIT issued a notice under section 263 proposing to revise the same assessment order on the issue of depreciation, which is already a ground in the pending appeal. The company argues that penalty under section 270A cannot be levied because it disclosed all facts and the cash payment was a business exigency.
1. Was the appeal barred by limitation, and could the CIT(A) condone the delay?
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Under section 249(2), an appeal to the CIT(A) must be filed within 30 days of service of the notice of demand. Service was on 10 January 2025, so the normal deadline was 9 February 2025. Filing on 25 February 2025 was about 16 days late. The CIT(A) has power to admit a late appeal if satisfied that there was sufficient cause. The director's hospitalisation from 20 January to 15 February 2025 and the accountant's resignation on 15 January 2025 are plausible reasons, particularly because the company's authorised representative was unavailable during the period. The CIT(A) exercised discretion and admitted the appeal; unless the condonation is perverse, the appeal is validly before the CIT(A).
2. Can penalty under section 270A be levied on the section 40A(3) addition and the depreciation disallowance?
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For the section 40A(3) addition, penalty under section 270A is specifically protected. Section 270A(6)(c) excludes from penalty under-reported income in consequence of a disallowance under section 40A(3). The Rs 12,00,000 cash-payment disallowance therefore does not attract the 50% penalty, though the addition itself stands and the tax is payable. For the depreciation disallowance, the position depends on disclosure. If the car was used by the director and the company claimed depreciation knowing it was personal use, the disallowance is under-reported income and penalty at 50% of tax on Rs 3,00,000 may be levied. If the company disclosed all facts and had a bona fide belief that the car was a business asset, section 270A(6) may protect it. The company's business-exigency explanation for cash payment is not the main defence; the statutory exclusion is stronger.
3. Is the section 263 notice valid when the depreciation issue is pending before the CIT(A)?
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The notice is invalid to the extent it seeks to revise the depreciation issue. The Explanation to section 263(1) provides that where the assessment order has been the subject matter of an appeal, the PCIT's revision power extends only to matters that were not considered and decided in that appeal. The depreciation disallowance is already a ground in the pending appeal before the CIT(A). The PCIT cannot, in parallel, revise the same issue; that would duplicate jurisdiction and prejudice the appellate process. The PCIT may still revise other issues in the assessment order that are not covered by the appeal, provided they are erroneous and prejudicial to the interests of the revenue. The notice to the extent of the depreciation issue should be quashed.