Tax consultant faked deductions in his ITR, salaried employee got ₹2.21 lakh penalty, but ITAT saved him; here's how

The ITAT delivered the order on September 2, 2026 in Dilip Gangaram Mali v. ITO, Ward 2(1), Nashik, covering two appeals for assessment years 2017-18 and 2018-19

The case concerns Dilip Gangaram Mali of Nashik, an employee of Bosch Ltd. For assessment year 2017-18. His return was filed by the consultant disclosing total income of ₹5,06,720 and claiming deductions of ₹2,35,000 under Chapter VI-A along with a refund of ₹83,520.

The return had been filed by the tax consultant without verifying the deduction claims. The ITAT order noted that survey operations under section 133A were carried out on the consultant who had filed his return. Suspecting escape of income from assessment, the assessing officer (AO)reopened the case and issued a notice under section 148 in 2020. However, Mali had acted earlier. On June 6, 2019, he filed a revised return disclosing a higher income of ₹9,12,160 and paid income tax and interest of ₹1,02,875. He also filed a compliance return on May 23, 2020 with the same income.

The AO completed the assessment under section 147 read with section 144 on August 24, 2021, and then levied a penalty of ₹2,21,310 under section 270A on November 11, 2021 for under-reporting of income. The CIT(A), NFAC, sustained the penalty.

The tribunal's harshest words for the tax agent did not appear in Mali's order itself. They came from an earlier order that the bench reproduced in full and followed: Prashant Balasaheb Kage v. ITO, ITA No. 2021/PUN/2024, decided on 21 February 2025, which arose from the same scam.

The ITAT relied on Kage order to rule in favour of Mali. There was a direct link between the two cases. The Kage order recorded that the returns of most employees of CEAT Ltd, Bosch Company, HAL and M&M, including the assessee's, were filed by a tax consultant, named Kishor Patil. Employees had found that that the consultant was able to "legally calculate lower tax, resulting in refund of TDS deducted by employer". The survey under section 133A at the consultant's premises exposed the fraud.

"It was Kishor Patil who cheated all the employees & claimed excess deduction in their returns without informing them for his own benefit," the Kage order recorded, adding that it was "the hidden interest of the tax consultant who triggered the gun by using shoulders of the assessee"

The order also noted that the employees "does not understand ABCD of Income Tax" and had relied completely on the consultant, and that complaints were filed with the Economic Offence Wing of the Nashik police once the fraud surfaced.

Why the penalty against Mali failed

Two things led to an order in the favour of Mali. First, the Kage principle. Since the employee had corrected his return and paid the due tax with interest even before the notice under section 148 was issued, there was no under-reporting of income left to penalise.

Second, the penalty orders failed to identify which clause of section 270A(9) the misreporting allegation was based on.

Following coordinate bench decisions in Shashikant Sukdeo Ambekar, Annasaheb Namdeo Gunjal and Deepak Bhikha, the tribunal held such penalties unsustainable.

"Considering the facts, circumstances, submissions and the ratio of the judicial decisions," the bench set aside the CIT(A) order and directed the assessing officer "to delete the penalty". The second appeal, for assessment year 2018-19, was allowed on identical grounds.

For salaried taxpayers, there are two lessons from this case:

First, a consultant-generated refund may not be always risk-free. Since the taxpayer owns the return filed in his name, taxpayer must also check what is being filed by the consultant.

Second, if the error is corrected and tax paid before reassessment begins, penalty for under-reporting cannot survive.