When Mr. Rao surrendered three unit-linked insurance policies (ULIPs) that he had purchased from Bajaj Allianz Life Insurance 14 years ago for a total of Rs 75 lakh, he realized net long-term capital gains amounting to Rs 3.22 crore. However, he made an error in his income tax return (ITR) by incorrectly categorizing this Rs 3.22 crore in LTCG from the ULIP surrender as capital gains income instead of as income from other sources.
This mistake led the tax department to issue him a notice, resulting in a penalty of Rs 2.48 crore being imposed by the tax officer.
Rao chose to contest the penalty, first with the Commissioner of Income Tax (Appeals) (CIT(A)) and later at the Income Tax Appellate Tribunal (ITAT) in Hyderabad. On November 19, 2025, he won the case at the ITAT Hyderabad with the representation provided by Advocate H Srinivasulu.
Case Background
Mr. Rao, a non-resident individual, submitted his income tax return (ITR) for Assessment Year 2020-21 on December 2, 2020. He declared a total income of about Rs 5.2 crore, which included capital gains of approximately Rs 4.781 crore and income from other sources of about Rs 42.616 lakh.
Among the capital gains, Rao reported Rs 3.226 crore from redeeming three Equity Plus Funds issued by Bajaj Allianz Life Insurance. These funds had been purchased for Rs 25 lakh each on the following dates: November 28, 2004; March 28, 2005; and January 22, 2006.
His case was subsequently flagged for comprehensive scrutiny, and statutory notices under Section 143(2) and 142(1) of the Income Tax Act, 1961, were served to him.
Judgement Summary
According to Chartered Accountant (Dr.) Suresh Surana, in the case (no. ITA No. 1494/ Hyd/ 2025), the non-resident individual’s ITR for Assessment Year 2020-21 had been subjected to scrutiny. The individual reported capital gains and income from other sources, specifically declaring Rs 3.22 crore from the surrender/redemption of units of the Bajaj Equity Plus Fund in his return under the “Capital Gains” category.
The Assessing Officer (AO) opined that this income should be taxed as “Income from Other Sources” instead of capital gains. While the AO accepted the reported income amount, they imposed a penalty under section 270A of the Income Tax Act, 1961, citing “misreporting of income” due to the incorrect categorization by the assessee.
The Commissioner (Appeals) upheld the penalty, prompting the taxpayer to appeal to the Hyderabad Bench of the ITAT.
The ITAT ruled in favor of the taxpayer and annulled the penalty, asserting that the mere misclassification of income does not constitute “misreporting” as per the provisions of section 270A.
Surana explained, “The Tribunal observed that the taxpayer had fully and accurately disclosed the income from the surrender of the Bajaj Equity Plus Fund in both his return and statement of computation. The contention was solely about the appropriate tax category, either as ‘Capital Gains’ or ‘Income from Other Sources.’”
The Tribunal underlined that section 270A(9) delineates specific cases that are considered as misreporting income—namely misrepresentation, suppression of facts, or failure to report income. A genuine difference regarding the correct income category does not fit the criteria outlined in those clauses.
Citing established legal precedents, including the principle that a penalty cannot be enforced simply due to the AO altering the income category, the ITAT determined that Rao’s actions did not justify penalty imposition.
Thus, given the absence of concealment, misrepresentation, or incorrect claims, and since the income had been appropriately declared for taxation, the penalty under section 270A was deemed unwarranted and ordered to be revoked.
Analysis by ITAT Hyderabad
The ITAT Hyderabad noted in their ruling (ITA No. 1494/Hyd/2025) dated November 19, 2025, that after reviewing Rao’s income computation sheet, they found that he reported Rs 3,22,68,672 corresponding to the surrender of the Bajaj Equity Plus Fund in his ITR.
Rao’s advocate argued against the imposition of penalty under Section 270A (9), asserting that Rao had sufficiently disclosed all relevant facts in his ITR. He further contended that Rao acted in good faith, believing his income should be classified as capital gains, despite the tax officer’s view to categorize it as income from other sources.
Consequently, the ITAT Hyderabad stated that the sole query remained whether the penalty for misreporting under section 270A (9) was applicable given that Rao had unintentionally reported his income under the wrong category.
After reviewing the details of section 270A(9), the ITAT clarified that the circumstances necessitating a penalty must align with one of the clauses (a) to (f). In Rao’s case, he had duly reported the income generated from transferring the Bajaj Equity Plus Fund in his ITR.
The Tribunal emphasized that there was no misrepresentation or suppression of facts, thus declaring that Rao’s situation merely involved an innocent error in the income categorization.
The ITAT cited a similar judgement from the ITAT Mumbai concerning a case where the taxpayer inadvertently classified income under an incorrect head, leading to the conclusion that penalty imposition was not justified based solely on a change of income head.
Consequently, the ITAT concluded: “There is no basis for imposing a penalty under section 270A(9) for the taxpayer in this instance.”
Final Order by ITAT Hyderabad
The ITAT ordered:
- The deletion of the penalty imposed by the Assessing Officer.
- As the matter was resolved in favor of the taxpayer based on merits, other arguments regarding the legal validity of the penalty were rendered moot and were not reviewed.
- The appeal by the taxpayer is hereby granted. The order was made public on November 19, 2025.