Immunity scheme for penalty prevents penalty when a bona fide judicially supported claim is withdrawn and prescribed procedure followed.

Penalty treatment for disallowed surcharge and cess was considered in light of the statutory under reporting and immunity mechanisms: a bona fide, judicially supported claim that was voluntarily withdrawn and followed by timely filing of the prescribed application and payment engages the proviso to the under reporting deeming rule and the immunity pathway, excluding penalty where conditions are met. Absent specification or proof of the distinct misreporting ingredients, initiation and imposition of penalty under the misreporting limb is procedurally and substantively unsustainable, resulting in deletion of the penalty on the facts described.

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Issues: Whether the penalty imposed under section 270A of the Income-tax Act, 1961 for disallowance of health and education cess (AY 2020-21) is sustainable where the assessee had a bona fide, judicially supported claim, had withdrawn the claim and filed the prescribed form under section 155(18) / section 270AA within the prescribed time and complied with the statutory scheme for immunity.

Analysis: Section 155(18) deems claims of deduction of surcharge or cess which are not allowable under section 40 as under-reported income for the purposes of section 270A, subject to a proviso granting immunity where the assessee makes an application in the prescribed form and pays the differential tax within the specified time. Section 270AA provides a statutory route for immunity from penalty where statutory conditions (payment of tax/interest, no appeal, prescribed application within time and that penalty proceedings were not initiated for misreporting under section 270A(9)) are satisfied. Section 270A distinguishes under-reporting (section 270A(2)) from misreporting (section 270A(9)), and penalty severity depends on whether misreporting is established. A bona fide claim supported by then-existing judicial precedent and voluntarily withdrawn before completion of assessment, with disclosure of material facts and timely filing of the prescribed form, engages the exclusions in section 270A(6) and the proviso to section 155(18)/the immunity scheme under section 270AA. Where the assessing authority fails to specify which limb of section 270A(9) is attracted and does not demonstrate misreporting ingredients, initiation and imposition of penalty under the misreporting limb is procedurally and substantively unsustainable. Applying these principles to the facts, the assessee had a bona fide claim based on judicial decisions, withdrew the claim and filed the prescribed form within the prescribed period, and the authorities did not bring contrary material to establish misreporting or satisfy the specific limbs of section 270A(9).

Conclusion: Penalty under section 270A confirmed by the appellate authority is deleted and the appeal is allowed in favour of the assessee.

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