2025 (10) TMI 286 - AT - Income Tax

Penalty under section 270A for alleged under-reporting not leviable where precedents, anti-retroactivity applied and taxpayer withdrew deduction within Rule 132

ITAT DELHI - AT held that penalty under section 270A for alleged under-reporting was not leviable. Relying on existing High Court and SC precedents ... Penalty u/s 270A - disallowance of deduction claimed by the assessee in respect of education cess as business expenses - allegation of under-reporting of income - HELD THAT:- We hold that penalty is not leviable pursuant to the retrospective amendment in law. Reliance in this regard is placed on the decision of Hindustan Electro Graphites Ltd. [2000 (3) TMI 2 - SUPREME COURT]. As on the date of filing the original return of income and revised returns of income, the assessee was having the benefit of the following decisions in its favour Chambal Fertilisers & Chemicals Ltd [2018 (10) TMI 589 - RAJASTHAN HIGH COURT], Sesa Goa Ltd. [2020 (3) TMI 347 - BOMBAY HIGH COURT] From the above list of gists and events, it could be seen that assessee had voluntarily surrendered the claim of deduction on account of education cess within the time prescribed under Rule 132 of the Income Tax Rules. Hence this is not a fit case for levy of penalty under section 270A of the Act in the hands of the assessee and accordingly we direct the learned AO to delete the same. Accordingly, the grounds raised by the assessee are allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether penalty under section 270A of the Income-tax Act is leviable for under-reporting of income arising from a claim of deduction for education cess where that claim was made in the original/revised returns relying on favourable judicial precedents and subsequently withdrawn within the time and manner prescribed by statute/rules after a retrospective legislative amendment. 2. Whether the retrospective insertion of Explanation 3 to section 40(a)(ii) (prohibiting deduction of education cess from 1-4-2005) and the availability of statutory machinery (section 155(18) and Rule 132) to suo motu withdraw such claims precludes imposition of penalty under section 270A for the period when the claim was maintained in the return. 3. Whether conduct such as surrendering the claim after issuance of departmental notices or show-cause notices, or not making a separate application under section 270AA, disentitles the assessee from immunity from penalty where the assessee complied with the withdrawal procedure prescribed by the statute/rules and acted in reliance on then-binding judicial decisions. ISSUE-WISE DETAILED ANALYSIS Issue 1: Levy of penalty under section 270A for deduction of education cess claimed in return relying on favourable precedents Legal framework: Section 270A penalises under-reporting of income unless conditions for immunity or reasonable cause are met. The law recognises that a taxpayer acting on a reasonable legal position (including binding judicial precedent) may have a bona fide claim. Precedent treatment: The Court relied on the Supreme Court decision in Hindustan Electro Graphites Ltd (reported at 243 ITR 48) which supports that where an assessee acts in accordance with judicial precedents available at the time of filing returns, penalty may not be attracted. The Tribunal also noted contemporaneous High Court decisions favourable to claim of deduction. Interpretation and reasoning: The Tribunal found that at the time of filing the original and revised returns the assessee enjoyed a bona fide legal position based on existing High Court decisions supporting allowability of education cess as business expenditure. The Tribunal treated reliance on binding or persuasive precedents as evidence of a bona fide claim negating the culpable intent necessary for penalty. The presence of such judicial support renders the claim reasonable and not a case of deliberate concealment. Ratio vs. Obiter: Ratio - where a deduction is claimed in the return pursuant to existing favourable judicial decisions, imposition of penalty under section 270A is not justified merely because the claim is subsequently rendered unsustainable by later legislative amendment. Conclusion: Penalty cannot be sustained where the claim was bona fide and supported by prevailing judicial decisions at the time of filing returns. Issue 2: Effect of retrospective statutory amendment (Explanation 3 to section 40(a)(ii)) and availability of withdrawal mechanism (section 155(18) and Rule 132) on penalty liability Legal framework: The Finance Act inserted Explanation 3 to section 40(a)(ii) with retrospective effect, restricting deduction of education cess. Simultaneously section 155(18) and Rule 132 provided a statutory window and procedural form (Form 69) for assessees to suo motu withdraw such claims and recompute tax, with payment and filing obligations (Form 70) to avoid penalty. Precedent treatment: The Tribunal applied the principle that retrospective legislative changes coupled with express statutory machinery for voluntary withdrawal and rectification should be read to avoid penalising taxpayers who comply with the withdrawal scheme and who had acted on earlier legal positions. Interpretation and reasoning: The Tribunal emphasized that the statutory scheme explicitly contemplates withdrawal to avoid penalty. The assessee had, before assessment completion, invoked willingness to surrender the claim and filed revised computations; later it complied with the recomputation and paid the demand raised. The Tribunal held that because the assessee availed the time-bound statutory procedure created by the amendment and rules, it fell squarely within the protective intent of section 155(18)/Rule 132, thereby negating the basis for penalty under section 270A. Ratio vs. Obiter: Ratio - where Parliament provides a remedial mechanism to withdraw disputed claims retrospectively and avoid penalty, an assessee who avails that mechanism (or otherwise withdraws the claim within the prescribed framework and timeframe) cannot be subjected to penalty for the same claim. Conclusion: The retrospective amendment coupled with a legislative withdrawal mechanism precluded levy of penalty where the assessee withdrew the claim in the manner/time contemplated by the statute/rules. Issue 3: Effect of timing of surrender, departmental notices, and non-application under section 270AA on penalty immunity Legal framework: Section 270AA prescribes immunity procedure for certain misstatements; however, section 155(18) and Rule 132 create a specific route for withdrawal of education-cess claims. Penalty jurisprudence considers the timing and bona fides of withdrawal and cooperation with assessment proceedings. Precedent treatment: The Tribunal distinguished a formalistic insistence on concurrent use of any one remedial provision over another where the legislature itself provided a specific mode (section 155(18)/Rule 132) for withdrawal and penalty avoidance. Reliance on later departmental contentions that the claim was surrendered only after show-cause notice or that the assessee should have applied under section 270AA was rejected as inconsistent with the statutory scheme actually available to the assessee. Interpretation and reasoning: The Tribunal found factually that the assessee had: (a) raised and defended the claim in replies to notices; (b) communicated willingness to suo motu withdraw the claim on 2-3-2022 (prior to enactment becoming effective on 1-4-2022 the Finance Act envisaged retrospective prohibition but also provided withdrawal), (c) reiterated the surrender during assessment interactions, (d) filed revised computations, (e) accepted disallowance in the assessment order and paid the resultant demand within the stipulated time. The Tribunal held that these acts, taken together and within the timelines contemplated by Rule 132, fulfilled the legislative prescription for avoiding penalty. The mere fact that a show-cause notice had been issued earlier or that the assessee did not separately apply under section 270AA did not disentitle it when it had followed the specific statutory withdrawal mechanism and acted in conformity with existing judicial views when filing returns. Ratio vs. Obiter: Ratio - compliance with the statutory withdrawal process and timely payment/recomputation extinguishes the basis for penalty even if some departmental action (e.g., show-cause notice) preceded the formal withdrawal; requirement to separately invoke section 270AA is not mandatory where a specific statutory remedy is provided and followed. Conclusion: The assessee's surrender of the claim within the statutory framework and timelines, together with payment of tax demanded, precluded imposition of penalty under section 270A despite departmental contentions about timing or alternative procedures. Disposition The Tribunal concluded that penalty under section 270A was not leviable on the facts: the deduction was claimed in good faith relying on existing judicial precedents; the Legislature subsequently provided a retrospective bar coupled with a withdrawal mechanism (section 155(18) and Rule 132) which the assessee availed in substance and within time; accordingly, the penalty was deleted and the appeal allowed.