Employee files ITR using Form 16, gets Rs 51.2 lakh tax penalty;
ITAT ruling offers key lessons for taxpayers
May 18, 2026
An IT employee who claimed an income tax exemption based on his employer-issued Form 16 was slapped with a Rs 51.2 lakh penalty for alleged misreporting. ITAT Bangalore has now deleted the penalty, saying the taxpayer acted in bona fide belief and penalty cannot be imposed mechanically.
A 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.
The case involved Renil E K Kumar, an employee of Wipro Ltd, for the assessment year 2022-23.
What happened in this case?
According to the tribunal order, the taxpayer filed his income tax return on December 30, 2022, declaring total income of Rs 84.27 lakh.
While filing the return, he claimed an exemption of Rs 82.05 lakh under Section 10(10CC) of the Income Tax Act in relation to ESOP-related non-monetary perquisites.
The claim, according to the taxpayer, was made based on the Form 16 issued by his employer, which reflected this amount as exempt income under Section 10. Since the employer had also not deducted tax at source on this amount, the taxpayer said he believed the tax treatment was correct.
Based on the return filed, he claimed a refund of Rs 28.69 lakh, and after processing under Section 143(1), the income tax department issued a refund of approximately Rs 29.98 lakh.
However, the matter later came under scrutiny.
Assessment changed everything
During scrutiny assessment, the Assessing Officer (AO) held that the exemption claim was incorrect and disallowed the full Rs 82.05 lakh.
As a result, the taxpayer’s assessed income jumped from Rs 84.27 lakh to Rs 1.66 crore under the assessment order dated March 19, 2024.
On the same day, penalty proceedings were also initiated.
The AO later imposed a penalty of Rs 51.20 lakh under Section 270A, treating the matter as a case of misreporting of income, which attracts a penalty of 200% of tax payable on the under-reported income.
Why did the tax department impose penalty?
The tax department argued that the taxpayer had wrongly claimed exemption and that had the case not been selected for scrutiny, the income would have escaped taxation.
The AO also rejected the taxpayer’s explanation that he had relied on the employer’s Form 16.
According to the order, the officer took the view that since the taxpayer was a senior executive at Wipro, the argument of limited tax knowledge was not convincing.
The department also argued that by not appealing against the assessment order, the taxpayer had effectively accepted that the exemption claim was wrong.
Taxpayer’s defence
The taxpayer did not challenge the tax addition itself and paid the tax dues.
In fact, after the assessment order, he returned the refund amount of Rs 29.98 lakh to the department on May 10, 2024.
But he challenged the penalty.
His core argument was simple: the exemption claim was made honestly based on the employer-issued Form 16, and there was no deliberate attempt to hide income or evade tax.
He told the tribunal that due to limited knowledge of tax provisions, he relied entirely on the salary certificate issued by the employer.
He also argued that penalty proceedings were flawed because the initial notice accused him of under-reporting of income, while the final penalty was imposed for misreporting of income, which are legally distinct concepts.
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.
Disclaimer:
This story is based on a specific ITAT Bangalore ruling and the facts of that individual case. Tax outcomes can vary depending on a taxpayer’s exact circumstances, nature of income, documentation, and applicable legal provisions. A tribunal ruling in one case may not automatically apply to all taxpayers. Readers should consult a qualified tax professional before taking any decision based on this report.
[The Financial Express]
