SHREE SWATI TEXDYES PVT. LTD.,AHMEDABAD vs. THE DY. CIT, CIRCLE-4(1)(1), AHMEDABAD

Consequent to the aforesaid disallowance, the Assessing Officer initiated penalty proceedings under section 270A of the Act for under- reporting of income to the extent of ₹21,53,724/-. The assessee submitted that the claim of deduction towards Health and Education Cess was made based on prevailing judicial precedents including the decision of the Hon’ble Bombay High Court in the case of Sesa Goa Ltd. v. JCIT (2020)

Aggrieved by the penalty order, the assessee preferred an appeal before the CIT(A). Before the CIT(A), the assessee raised three grounds of appeal challenging the levy of penalty under section 270A of the Act. In Ground No.1 the assessee contended that the deduction towards Health and Education Cess was claimed based on bona fide interpretation of law and judicial precedents prevailing at the time of filing of return of income and therefore no mala fide intention could be attributed to the assessee. In Ground No.2 the assessee contended that the claim of deduction was voluntarily withdrawn on suo-moto basis during the course of assessment proceedings after the introduction of retrospective amendment by Finance Act, 2022 and therefore the case was covered by the exception contained in section 270A(6) of the Act.

The assessee is in appeal before us against the order passed by the CIT(Appeals) dismissing the appeal of the assessee.

We have heard the rival submissions and perused the material available on record. The issue involved in the present appeal relates to the levy of penalty under section 270A of the Act on account of disallowance of deduction claimed towards Health and Education Cess.

It is an undisputed fact that when the assessee filed its return of income for the assessment year under consideration, there existed judicial Shree Swati Texdyes Pvt. Ltd. vs. DCIT Asst. Year –2020-21 - 5– precedents of the Hon’ble High Courts which had categorically held that education cess was allowable as deduction while computing business income. In particular, the Hon’ble Bombay High Court in Sesa Goa Ltd. v. JCIT (2020) 423 ITR 426 (Bom) and the Hon’ble Rajasthan High Court in Chambal Fertilisers & Chemicals Ltd. v. JCIT (2019) 107 taxmann.com 484 (Raj.) 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.

Subsequently, by the Finance Act, 2022 an Explanation was inserted in section 40(a)(ii) of the Act with retrospective effect from 01.04.2005 clarifying that the expression “tax” shall include surcharge and cess. As a consequence of the retrospective amendment, the deduction claimed by the assessee towards Health and Education Cess became statutorily disallowable. However, the material on record clearly shows that upon the introduction of the retrospective amendment the assessee suo-moto withdrew the claim during the course of assessment proceedings and accepted the disallowance. Thus, the conduct of the assessee demonstrates that the claim was made bona fide and without any intention to conceal income.

It is further noted that the assessee had disclosed all material facts relating to the claim in the return of income as well as during the course of Shree Swati Texdyes Pvt. Ltd. vs. DCIT Asst. Year –2020-21 - 6– assessment proceedings. There is no allegation that the assessee had concealed any income or furnished inaccurate particulars of income. In such circumstances, the mere disallowance of a claim made on the basis of prevailing legal interpretation cannot lead to levy of penalty under section 270A of the Act.

The Hon’ble Bombay High Court in CIT v. Yahoo India (P.) Ltd. (2013) 33 taxmann.com 332 (Bom) has held that where a claim is made on the basis of a bona fide interpretation of law and all material facts are disclosed, penalty cannot be imposed merely because the claim is disallowed. The Hon’ble Court observed that the very fact that the law was amended with retrospective effect indicates that the issue was debatable and therefore penalty cannot be sustained.

We further note that the issue is covered in favour of the assessee by the decisions of the Coordinate Benches of this Tribunal at Ahmedabad on identical facts.

In The Ahmedabad District Co-operative Bank Ltd. v. DCIT, order dated 24.04.2025, the Tribunal while deleting the penalty levied under section 270A on account of disallowance of education cess held as under:

The Coordinate Bench further held:

The Tribunal further observed: “When the legislature itself has recognized the debatable nature of the issue and provided a mechanism under section 155(18) enabling assessees to surrender such claims, the levy of penalty in respect of a bona fide claim made prior to the retrospective amendment cannot be justified.”

In the case of Capgemini Technology Services India Ltd. vs. Assistant Commissioner of Income-tax [2025] 180 taxmann.com 854 (Pune - Trib.), the Pune ITAT held that where allowability of health and education cess as an expense was a highly debatable issue and assessee had already accepted impugned disallowance on account of claim of cess during course of assessment proceedings and moreover assessee also filed Shree Swati Texdyes Pvt. Ltd. vs. DCIT Asst. Year –2020-21 - 8– Form 69 withdrawing its claim of deduction towards cess, penalty levied under section 270A of the Act for underreporting of income was not sustainable.

In the case of IIFL Samasta Finance Ltd. v. Dy. CIT [IT Appeal No. 1054 (Bang.) of 2024, dated 27-9-2024], the return was filed by the assessee at a time when judicial precedents of the Karnataka High Court and other Courts allowed deduction of employees’ PF contribution if paid before due date of filing return, and also allowed deduction of education cess as not being “tax”. The assessee had disclosed all material facts and claimed both deductions under a bona fide belief based on binding legal position then prevailing. Later retrospective amendments and subsequent Supreme Court judgment changed the legal position, leading to disallowance during assessment. The ITAT held that since there was no concealment or misreporting and the assessee had even withdrawn the claim of cess deduction before completion of assessment and applied for immunity under section 270AA, penalty for under-reporting and misreporting under section 270A of the Act was held to be unjustified

Respectfully following the aforesaid decisions on identical facts, we hold that the claim made by the assessee towards deduction of Health and Education Cess was based on judicial precedents prevailing at the relevant time and therefore the same was bona fide. The assessee had disclosed all material facts before the tax authorities and had voluntarily withdrawn the claim during the course of assessment proceedings after the retrospective amendment was introduced.

In such circumstances, the case of the assessee falls within the scope of section 270A(6)(a) of the Act which provides that under-reported income shall not include any amount in respect of which the assessee offers a bona fide explanation and has disclosed all material facts.

Accordingly, we hold that the penalty levied under section 270A of the Act is not sustainable in law. The penalty of ₹3,69,579/- levied by the Assessing Officer and confirmed by the CIT(A) is therefore directed to be deleted.

In the result, the appeal of the assessee is allowed. This Order is pronounced in the Open Court on 12/03/2026