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

The Ld. CIT(A) has erred in confirming penalty under section 270A of the Act of Rs. 3,69,579 on account of disallowance of claim of Health and Education Cess of Shree Swati Texdyes Pvt. Ltd. vs. DCIT Asst. Year –2020-21 - 2–

The Ld. CIT(A) has erred in confirming penalty under section 270A of the Act of Rs.3,69,579 on account of disallowance of claim of Health and Education Cess of Rs.21,53,724 inasmuch as the Notification G.S.R. 733(E) [NO. 111/2022/F.N0.370142/32/ 2022-TPL], which specify the procedure to surrender the impugned claim of Health and Education Cess, was issued on 28th September 2022 and effective from 01st October 2022, whereas the impugned assessment order disallowing the impugned claim was passed on 25th September 2022 and the appellant surrendered the claim during the assessments proceedings itself.”

The brief facts of the case are that the assessee company is engaged in the business of manufacturing reactive dyes and had filed its return of income for Assessment Year 2020-21 on 12.03.2021 declaring total income of ₹22,94,91,630/-. During the course of assessment proceedings, the Assessing Officer made two disallowances namely (i) disallowance under section 14A of the Act amounting to ₹43,36,150/- and (ii) disallowance of deduction claimed towards Health and Education Cess amounting to ₹21,53,724/-. The assessee preferred an appeal before the CIT(A) against the disallowance made under section 14A and the said addition was deleted by the CIT(A). However, the assessee did not challenge the disallowance made on account of Health and Education Cess and therefore the addition of ₹21,53,724/- attained finality.

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) Asst. Year –2020-21 - 3–

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 Asst. Year –2020-21 - 4–

The CIT(A) considered the submissions of the assessee but rejected the same. The CIT(A) held that the decision of the Hon’ble Bombay High Court in the case of Sesa Goa Ltd. was already available when the assessee filed its original return of income and therefore the explanation offered by the assessee was not acceptable. The CIT(A) further held that the retrospective amendment introduced by the Finance Act, 2022 clarified that cess is in the nature of tax covered by section 40(a)(ii) of the Act. According to the CIT(A), the withdrawal of the claim during the course of assessment proceedings could not be treated as voluntary as the same was done only after the Assessing Officer had proposed disallowance. The CIT(A) held that the assessee had under-reported its income within the meaning of section 270A(2) of the Act and the case was not covered by the exception provided under section 270A(6) of the Act. Accordingly, the CIT(A) upheld the levy of penalty of ₹3,69,579/- imposed by the Assessing Officer and dismissed the appeal of the assessee.

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 Asst. Year –2020-21 - 5–

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–

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, ITA No.1108/Ahd/2024, 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:

Similarly, the Ahmedabad Bench of the Tribunal in Koshambh Multitred Pvt. Ltd. v. DCIT, ITA No.1031/Ahd/2025, order dated 21.08.2025 while dealing with an identical issue observed as under:

The Tribunal further observed:

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 Asst. Year –2020-21 - 8–

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. Asst. Year –2020-21 - 9–

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 (NARENDRA P. SINHA) JUDICIAL MEMBER Ahmedabad; Dated 12/03/2026