Notice was sent because the taxpayer claimed a tax exemption of Rs 82.05 lakh under Section 10(10CC) for ESOP-related non-monetary perquisites, which the Income Tax Department later determined to be incorrect.
Here’s the sequence of events:
- Initial claim: The taxpayer filed his income tax return claiming an exemption of Rs 82.05 lakh based on his employer’s Form 16, which showed this amount as exempt income.
- Return processing: The department initially processed the return and issued a refund of approximately Rs 29.98 lakh.
- Scrutiny selection: The case was later selected for scrutiny assessment, during which the Assessing Officer (AO) reviewed the exemption claim.
- Assessment changed: The AO disallowed the entire Rs 82.05 lakh exemption, treating it as an incorrect claim. This increased the taxpayer’s assessed income from Rs 84.27 lakh to Rs 1.66 crore.
- Notice issued: On the same day as the assessment order (March 19, 2024), penalty proceedings were initiated under Section 270A, imposing a penalty of Rs 51.20 lakh for alleged misreporting of income.
The tax department’s reasoning was that the taxpayer had wrongly claimed the exemption and that without scrutiny, this income would have escaped taxation entirely. However, the ITAT later ruled in the taxpayer’s favor, finding that the claim was made in good faith based on the employer-issued Form 16, and therefore the penalty was not justified.
taxpayer who claimed a tax exemption based on the details mentioned in his employer-issued Form 16 was hit with a steep penalty of Rs 51.20 lakh, but the Income Tax Appellate Tribunal (ITAT), Bangalore, has now ruled in his favour, saying the claim was made under a bona fide belief and penalty cannot be imposed mechanically.
What ITAT said
The Bangalore bench of ITAT agreed with the taxpayer.
The tribunal noted that the employer had indeed issued Form 16 showing Rs 82.05 lakh as exempt under Section 10, and no TDS had been deducted on that amount.
Because of this, the tribunal said an employee could reasonably assume that the employer had correctly handled the tax treatment.
The bench observed that when the employer itself shows an amount as exempt in Form 16, an employee relying on that document in good faith cannot automatically be accused of misreporting.
The tribunal accepted the taxpayer’s explanation as bona fide and held that he had disclosed all material facts.
This brought the case within the protection available under Section 270A(6)(a), which excludes penalty in cases where the taxpayer offers a bona fide explanation and has disclosed all relevant facts.
Big procedural lapse
The tribunal also found a serious procedural defect in how the penalty was imposed.
It pointed out that the initial show-cause notice referred to under-reporting, but the final penalty order treated the matter as under-reporting arising from misreporting.
According to the tribunal, the tax officer himself appeared unclear about the exact charge.
ITAT said penalty proceedings under Section 270A must follow a clear legal sequence:
- First establish under-reporting
- Give the taxpayer a chance to explain
- Then determine whether the case qualifies as misreporting
The tribunal said this process was not properly followed.
It also stressed that penalties are discretionary and should not be imposed routinely just because an addition has been made in assessment.
Final verdict
In its order dated May 12, 2026, the ITAT directed deletion of the entire Rs 51.20 lakh penalty.
Key takeaway for taxpayers
This ruling does not mean every incorrect tax claim will escape penalty.
But it does underline an important principle: where a taxpayer acts in good faith, fully discloses facts, and relies on employer-issued documents such as Form 16, penalty may not automatically be justified.