Bona fide disclosure: voluntarily withdrawing a disputed deduction after a retrospective amendment avoids penalty under penalty-exemption principles.

Where an assessee claimed deduction for health and education cess under a then-debatable legal position and fully disclosed the material facts, a subsequent retrospective statutory clarification rendering such claims disallowable does not attract penalty if the assessee voluntarily withdrew the claim during assessment. The article explains that bona fide claims, made under binding precedents and later surrendered after a retrospective amendment, fall within the exception permitting no penalty because they do not constitute under-reporting or furnishing inaccurate particulars; accordingly, the penalty assessed was deleted and the appeal allowed in favour of the assessee.

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Issues: Whether penalty under section 270A of the Income-tax Act, 1961 is leviable on the assessee for claiming deduction of health and education cess which was later disallowed after a retrospective amendment and which the assessee voluntarily withdrew during assessment proceedings.

Analysis: The claim for deduction of health and education cess was made when binding judicial precedents favoured allowability, rendering the legal position debatable. A retrospective Explanation by the Finance Act, 2022 to section 40(a)(ii) rendered such claims statutorily disallowable from 01.04.2005. The assessee disclosed all material facts in the return and during assessment, and on introduction of the retrospective amendment the assessee suo-moto withdrew the claim during assessment proceedings. Authorities and coordinate benches have held that a bona fide claim, fully disclosed and subsequently surrendered or withdrawn after a retrospective amendment, does not constitute under-reporting or furnishing of inaccurate particulars for the purpose of section 270A. The case falls within the scope of the exception in section 270A(6)(a) where a bona fide explanation is offered and material facts are disclosed.

Conclusion: Penalty under section 270A of the Income-tax Act, 1961 is not sustainable; the penalty of Rs.3,69,579/- is deleted and the appeal is allowed in favour of the assessee.

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