ULIP Investor’s ₹2.48 Crore Penalty Quashed by ITAT Over ITR Reporting Mistake

The Income Tax Appellate Tribunal (ITAT) Hyderabad recently cancelled a penalty of ₹2.48 crore levied on a non-resident taxpayer who reported a ₹3.22 crore ULIP payout under the wrong income head in his return.  

The tribunal held this misclassification as a genuine error and not misreporting as per Section 270A(9) of the Income Tax Act. 

ITAT Hyderabad Deems Misclassification as Bona Fide Error 

Mr Rao, a non-resident, surrendered three unit-linked insurance policies (ULIPs) from Bajaj Allianz Life Insurance bought 14 years ago for ₹75 lakh. He received ₹3.22 crore on surrender, which he reported as capital gains in his ITR for the Assessment Year 2020–21.  

The tax department however considered this income taxable under "Income from Other Sources" and subsequently imposed a penalty of ₹2.48 crore, terming it as misreporting. 

Rao challenged the penalty before the Commissioner (Appeals), and later at ITAT Hyderabad, where he argued that the income was fully disclosed and only the head of income was incorrectly chosen due to a bona fide belief. 

ITAT Clarifies Valid Grounds for Misreporting Penalty 

The ITAT reviewed Section 270A(9) and observed that misreporting must fall under specific clauses including suppression of facts or misrepresentation.  

Since Rao fully disclosed the ULIP surrender income, and there was no concealment or incorrect information, the misclassification did not qualify as misreporting under the specified clauses (a) to (f). 

The tribunal referred to a previous decision by ITAT Mumbai (D.C. Polyester Ltd vs DCIT), which supports not imposing penalties for wrong categorisation of income heads when the income is otherwise accurately reported in the return. 

Read More: MNCs Urge Indian Employees to Report Undisclosed Foreign Assets Before December Deadline! 

Final Verdict and Deletion of Penalty 

On November 19, 2025, ITAT Hyderabad allowed the appeal and directed the Assessing Officer to remove the penalty.  

The tribunal concluded that such instances of unintentional misclassification, in the absence of false claims or suppression, cannot attract penalty under Section 270A(9). 

Conclusion 

ITAT Hyderabad’s decision reinforces the distinction between deliberate misreporting and genuine reporting errors. By cancelling the ₹2.48 crore penalty, the tribunal recognised the importance of context and intent in tax reporting cases. 

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