2026 (3) TMI 798 - AT - Income Tax

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 ... Penalty u/s 270A - disallowance of claim of Health and Education Cess - bonafide claim as relying on binding High Court decision - HELD THAT: - As decided in Sesa Goa Ltd. [2020 (3) TMI 347 - BOMBAY HIGH COURT] and Chambal Fertilisers & Chemicals Ltd. [2018 (10) TMI 589 - RAJASTHAN HIGH COURT] had taken a view favourable to the assessee holding that education cess is not covered by the expression “tax” appearing in section 40(a)(ii) of the Act and therefore is allowable as deduction. Thus, at the time when the assessee made the impugned claim, the legal position was clearly debatable and supported by binding judicial precedents which were in favour of the assessee. The Tribunal found that at the time the return was filed there were binding High Court decisions favourable to the assessee holding that education/cess was allowable as business deduction, making the legal position debatable. After the Finance Act, 2022 introduced a retrospective explanation rendering cess disallowable, the assessee suo-moto withdrew the claim during assessment and disclosed all material facts without any concealment or inaccurate particulars. Applying the principle that a claim made on bona fide legal interpretation with full disclosure does not attract penalty, and construing the facts within the scope of section 270A(6)(a) Final Conclusion: The appeal is allowed; the penalty imposed under section 270A is deleted because the assessee's claim for deduction of Health and Education Cess was based on prevailing judicial decisions, was fully disclosed and was voluntarily withdrawn during assessment, bringing the case within section 270A(6)(a). 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.