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No. The Income Tax Appellate Tribunal (ITAT), Mumbai, held that rejection of a tax claim does not, by itself, establish concealment or false particulars. It deleted a ₹1,23,71,443 penalty imposed on Cyqurex Systems under Section 270A, relying on the disclosed accounting treatment and the nature of the dispute. The decision is fact-specific; it does not shield every disallowed expense or deduction from penalty.
What the ITAT Mumbai decided
In Cyqurex Systems Private Limited v. Deputy Commissioner of Income-Tax, Central Circle-2(3), Mumbai, ITA Nos. 297, 3499 and 4637/Mum/2026, for assessment year 2023–24, the ITAT Mumbai C Bench pronounced its order on 30 September 2026. It allowed ITA No. 297/Mum/2026 and directed deletion of the ₹1,23,71,443 penalty under Section 270A. The two other appeals, which arose from the same order and had identical grounds, were dismissed as withdrawn. The full order text is available via IndiaKanoon; LiveLawBiz reported the ruling on 5 October 2026.
Why the tax claim was rejected
Cyqurex Systems, a cyber-security and software-development company, claimed ₹7,41,16,000 as revenue expenditure for software-development projects in assessment year 2023–24. The assessing officer treated the amount as a capital loss, disallowed the claim, and imposed a ₹1,23,71,443 penalty for under-reporting income. The Commissioner of Income-tax (Appeals) upheld the penalty before the company appealed to the tribunal.
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The order breaks down the expenditure into two components:
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- ₹5,88,40,000 for impairment of the internally developed Saife IP asset.
- ₹1,52,76,000 for development costs for the Blackbox and Command Control Operating Platform, which remained recorded as capital work-in-progress.
The company said the components and their accounting treatment were disclosed in Notes 42 and 43 to its audited financial statements. The dispute was whether the software-related expenditure qualified as revenue expenditure or should instead be treated as capital expenditure.
Why disallowance did not establish concealment in this case
Section 270A provides for a penalty in cases of under-reported income. But Section 270A(6)(a) excludes an amount from under-reported income when the taxpayer provides a bona fide explanation and discloses all material facts necessary to substantiate it. The statutory wording is available on the Income Tax Department website.
The tribunal found that Cyqurex had disclosed the expenditure and its accounting treatment. It found no indication in the record that the expenditure was fictitious or inflated, and no finding that the company had concealed a receipt or asset or furnished false primary facts. The central disagreement concerned the legal and accounting characterization of the disclosed software costs—a question requiring examination of the facts and applicable legal principles.
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The bench, comprising Judicial Member Challa Nagendra Prasad and Accountant Member G. M. Doss, stated: “The fact that the claim of the assessee was not accepted in the assessment proceedings does not, by itself, establish that the assessee had furnished any false particulars or that the explanation offered by it was not bona fide.” The words “by itself” matter: the tribunal assessed the disclosure and circumstances in this case, rather than treating every rejected claim as immune from penalty.
The order also relied on Bombay High Court decisions, including G.M. Modular (P.) Ltd. v. Principal Commissioner of Income-tax and Trigent Software Ltd. The tribunal’s references to those judgments should not be read as a wider account of their holdings beyond the way the ITAT described them.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.What the decision means for another Section 270A case
This ruling is not a blanket rule that a disallowed deduction or expense can never attract a penalty. In assessing whether its reasoning may be relevant to another matter, the key questions are case-specific:
- Were the material facts and the accounting treatment disclosed?
- Was the taxpayer’s explanation bona fide and supported by the record?
- Is the dispute about the legal characterization of disclosed facts, or about whether the asserted facts are true?
- Is there evidence of fictitious or inflated amounts, concealed receipts or assets, or false primary particulars?
- Does the same statutory provision and version apply?
The answers must come from the other case’s evidence and applicable law. This ITAT result does not guarantee the outcome for another taxpayer.
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