2025 (8) TMI 1375 - AT - Income Tax

Penalty under section 270A(2) deleted where assessee honestly surrendered deduction per proviso to section 155(18)

Koshambh Multitred Pvt. Ltd. Versus Deputy Commissioner of Income Tax, Circle-1 (1) (1), Vadodara

Koshambh Multitred Pvt. Ltd. Versus Deputy Commissioner of Income Tax, Circle-1 (1) (1), Vadodara - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether levy of penalty under Section 270A(2) for underreporting of income is sustainable where a deduction for education cess, claimed in an earlier year, was surrendered by the assessee during assessment proceedings after a retrospective amendment rendered such deduction not allowable. 2. Whether the proviso to newly inserted Section 155(18) (Finance Act, 2022) - which exempts from deemed under-reporting where the assessee makes an application in the prescribed form within the prescribed time and pays the amount due - applies to an assessee who voluntarily surrendered the disputed deduction during assessment proceedings (before or without filing the prescribed form), provided the surrender and payment occur within the statutory window. 3. Whether characterization by the assessing authority/CIT(A) of the act as 'misreporting' versus 'underreporting' affects the power to levy or remit penalty when the assessee surrendered the claim upon being confronted with the retrospective amendment. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Sustainability of penalty under Section 270A(2) where deduction was surrendered after retrospective amendment Legal framework: Section 270A(2) treats under-reporting of income as a basis for penalty. Finance Act 2022 retrospectively amended Section 40(a)(ii) to disallow deduction of surcharge/cess (including education cess) from 01-04-2005. Section 155(18) was simultaneously introduced to treat such earlier-allowed claims as deemed under-reported income for purposes of Section 270A(3), while also providing a proviso creating an exemption where the assessee applies and pays within prescribed time. Precedent treatment: At the relevant time of claim (AY 2020-21) some High Court decisions had held such education cess claims allowable; thus the claim was made in a bona fide, debatable legal position prior to the retrospective legislative change. Interpretation and reasoning: The Tribunal reasoned that the legislature, by coupling the retrospective disallowance with an express power of rectification (Section 155(18)) and a proviso granting immunity where the assessee elects to declare and pay within specified timelines, recognized the bonafide nature of prior claims and deliberately provided a protected mechanism rather than automatic penalization. Where an assessee, when confronted with the retrospective amendment, voluntarily and promptly surrendered the claim during assessment and paid the tax within the period that the proviso contemplated, the legislative policy of not penalising such bonafide claimants is satisfied. Ratio vs. Obiter: Ratio - Penalty under Section 270A(2) is not sustainable where the assessee surrendered the claim of education cess after the retrospective amendment and complied with the objective of Section 155(18) proviso by declaring and paying within the prescribed period. Obiter - Observations on the general interplay between judicial decisions favouring allowability and subsequent retrospective amendments. Conclusions: The levy of penalty under Section 270A(2) could not be sustained on facts where surrender occurred in assessment proceedings and payment/reckoning was within the temporal limits contemplated by the statute; the assessee is entitled to immunity under the proviso to Section 155(18). Issue 2 - Applicability of the proviso to Section 155(18) where surrender occurred during assessment without using the notified prescribed form Legal framework: The proviso to Section 155(18) exempts from being deemed under-reported income those claims in respect of surcharge/cess where the assessee makes an application in the prescribed form and within the prescribed time and pays the amount due. The form was notified w.e.f. 01-10-2022 and the time-limit prescribed was on or before 31-03-2023. Precedent treatment: No direct precedent mandating that the literal filing of the notified form is the only mode of compliance was treated as binding in the text; the Tribunal examined the legislation's spirit and timing. Interpretation and reasoning: The Tribunal interpreted the proviso purposively. The proviso's object is to protect bonafide claimants from penalty where they accept the retrospective legal position and pay tax within the prescribed window. The assessee had surrendered the claim during assessment proceedings (assessment order passed 13-09-2022) and the surrender/payment fell within the overall statutory timeline (i.e., before 31-03-2023). The Tribunal held that the assessee's voluntary surrender in the assessment proceedings fulfilled the spirit, purpose and objective of the proviso even though the formal prescribed form was notified later; therefore, to penalize such an assessee would defeat the legislative intent to provide a safe passage to bonafide claimants affected by the retrospective amendment. Ratio vs. Obiter: Ratio - Where the assessee surrendered the disputed deduction during assessment and paid the tax within the period contemplated by the proviso, the immunity envisaged by the proviso to Section 155(18) applies even if the specific prescribed form was notified later, provided procedural compliance does not fall short of the proviso's substantive purpose. Obiter - Remarks on the timing of notification of the prescribed form and administrative formalities. Conclusions: The proviso to Section 155(18) applies in substance to an assessee who has voluntarily surrendered the claim during assessment and paid within the prescribed window; formal non-use of the later-notified prescribed form does not, on these facts, defeat the immunity when the statutory purpose is otherwise satisfied. Issue 3 - Effect of characterization as 'misreporting' versus 'underreporting' and the power of appellate authority Legal framework: Section 270A distinguishes between misreporting and under-reporting of income with specified penal consequences. Appellate authority may examine classification but must act within statutory powers and the legislative scheme including exemptions provided by Section 155(18). Precedent treatment: The assessing officer initially levied penalty as misreporting; the Commissioner (Appeals) recharacterized to under-reporting and directed recomputation. The Tribunal considered those steps in light of the substantive immunity available to the assessee. Interpretation and reasoning: The Tribunal noted that characterization (misreporting vs underreporting) cannot override a statutory exemption. Whether AO labelled the conduct as misreporting and levied a higher penalty, or CIT(A) reclassified as underreporting for recomputation, is immaterial where the assessee satisfies the proviso to Section 155(18). Once immunity applies on facts, any penalty levied under either head is not sustainable. The Tribunal also observed that recharacterization by CIT(A) did not justify sustaining penalty where the statutory exemption is triggered. Ratio vs. Obiter: Ratio - Classification by authorities cannot defeat the substantive statutory immunity; where immunity under Section 155(18) proviso applies, penalties under Section 270A (whether as misreporting or underreporting) must be deleted. Obiter - Comments on limits of appellate power to reclassify if substantive law grants exemption. Conclusions: The appellate authority's reclassification does not validate penalty when the assessee fulfils the conditions (in substance) of the proviso to Section 155(18); penalty under Section 270A(2) or as misreporting is not sustainable on these facts. Cross-reference See Issue 1 and Issue 2: The Tribunal's conclusions on non-sustainability of penalty flow from the combined operation of the retrospective amendment to Section 40(a)(ii) and the protective proviso in Section 155(18), applied purposively where the assessee surrendered the disputed deduction during assessment and paid tax within the prescribed timeframe.