The Assessee was an employee of an erstwhile state electricity board whose business was demerged to a public sector company. The assessee retired as an employee of Maharashtra State Electricity Distribution Company Ltd. and received a gratuity and leave encashment as his retirement benefit in the previous year. In his return for this year, the assessee claimed exemption of the sum received as gratuity u/s. 10(10)(i) and leave encashment u/s. 10(10AA)(ii) of the Act. On the ground that MSEB, was a public sector undertaking and not the Government, the AO restricted the exemption regarding gratuity and leave encashment, and the excess amount was disallowed. Treating the excessive claims as misreporting of income, the AO initiated penal proceedings for misreporting of income u/s.270A at an accelerated rate of 200 percent of tax sought to evade u/s. 270A(8) of the Act. Held that the levy of penalty was not warranted for the reasons that, the service the assessee was a State Government employee whose employment by enforcement of the Electricity Act, 2003 and the Maharashtra State Electricity Distribution Company Employees Service Regulations, 2005 was converted into non-Governmental service. Therefore, the belief under which full exemption of retirement benefit was claimed in the return filed was not incorrect in its entirety and certainly, it was bona fide. Further, the explanation offered by the assessee in support of his mistaken but bona fide belief and all material facts of his service disclosed and the circumstances under which he claimed full exemption squarely fell within clause (a) of sub-section (6) of section 270A of the Act, and therefore pardonable; and finally, the imposition of penalty was at the discretion of the AO, since sub-section (1) of section 270A of the Act, refers to the word “may” and not “shall“. The penalty imposed by the AO and confirmed by the CIT (A) at the accelerated rate was unwarranted.(AY. 2018-19)