GRANULES INDIA LIMITED,HYDERABAD vs. DCIT., CIRCLE-2(1), HYDERABAD

Succinctly stated, the assessee company, which is engaged in the business of manufacturing of pharmaceutical products, had filed its return of income for A.Y. 2020-21 on 15.02.2021, declaring its total income at Rs. 482,98,50,810/- and claiming a refund of Rs. 1,77,09,020/-. The return of income filed by the assessee company was processed under Section 143(1) of the Act, dated 24/12/2021, by the AP/CPC, Bengaluru, wherein its income was determined at Rs. 532,16,26,070/-.

Thereafter, the AO framed the assessment vide his order passed under Section 143(3) r.w.s. 144B of the Act, dated 27.09.2022, determining the total income of the assessee company at Rs. 538,95,85,660/- after, inter alia, making disallowances of, viz. (i) Health and Education Cess (HEC): Rs. 4,81,53,591/-; and (ii) ESOP expenditure: Rs. 1,98,06,000/-.

Thereafter, the AO, vide his order passed under Section 154 of the Act, dated 10/05/2023, recomputed the assessed income of the assessee company at Rs. 489,87,33,126/- and worked out a refund of the excess taxes/interest paid of Rs. 3,58,933/- in its case.

Thereafter, the AO, vide his order passed under Section 270A of the Act, dated 23/02/2023, imposed upon the assessee company, the penalty under Section 270A of Rs. 82,63,156 for under-reporting of income w.r.t the disallowance of HEC of Rs. 4,81,53,591/-.

In the result, appeal is partly allowed.”

The assessee company aggrieved with the CIT(Appeals) order has carried the matter in appeal before us.

We have heard the Ld. Authorised Representatives of both parties, perused the orders of the authorities below and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by the Ld. AR to drive home his contentions.

Ostensibly, the CIT(A) had confirmed the penalty imposed by the AO under Section 270A of the Act w.r.t the disallowance of HEC of Rs. 4,81,53,591/-. The CIT(A) observed that the assessee company contended that it had claimed “education cess” as a deduction relying on the judgment of the Hon’ble High Court of Bombay in the case of Sesa Goa Ltd. Vs. Jt. CIT (2020) 423 ITR 426 (Bombay), wherein it was held that cess (Health and Education cess), whenever paid in relation to business, is a deductible expense. The CIT(Appeals) observed that it was claimed by the assessee company that it had voluntarily offered for tax the deduction claimed towards Health & Education Cess (HEC), when it was retrospectively clarified vide Finance Act, 2022, that the term “tax” includes “Cess” for the purpose of Section 40(a)(ii) of the Act. However, the CIT(Appeals) did not find favour with the aforesaid claim of the assessee company. It was observed by him that the assessee company had filed its return of income for the subject year on 15/02/2021, declaring an income of Rs. 482.98 crores (approx.), against which it had raised a claim of refund of Rs. 1.77 crores (approx.). The said return of income was thereafter processed under Section 143(1) of the Act on 24/12/2021, determining the income of the assessee company at Rs. 532.16 crores (approx.), against which a demand of Rs. 10.71 crores (approx.) was raised. Elaborating further on the facts, the CIT(Appeals) observed that though the assessee company had claimed that due to the retrospective clarification issued vide the Finance Act, 2022, it had offered for disallowance the deduction of HEC that it had claimed in its return of income, but the proposals related to the Finance Act, 2022 were made public through budget presentation by the Hon’ble Finance Minister during the month of February, 2022. The CIT(Appeals), observed, that the assessee company had taken abnormally long time to realize the fact that it was not eligible for deduction of HEC as claimed in its return of income for the subject year, i.e., AY 2020- 21, and if its case would not have been picked for scrutiny assessment, then it would have never brought the said disallowance of HEC before the AO. The CIT(Appeals) to fortify his conviction had, observed that as the letter filed by the assessee company in the course of the assessment proceedings on 30/08/2022, wherein it had sought for the disallowance of its claim for deduction of HEC, was very near to the date of issue of “Show Cause” notice dated 10/09/2022 by the AO, calling upon the assessee company to explain why its said claim of deduction may not be disallowed, thus there was every probability that it had come forth with the said offer of disallowance only because it had pre-empted the said disallowance. Apart from that, the CIT(Appeals) observed that if the assessee company would have genuinely intended to have disallowed its claim for deduction of HEC which was legally not maintainable, then it would have immediately paid the corresponding taxes instead of coming up with a request for adjustment of the same against the refund, knowing well that the said refund did no more exist pursuant to the intimation issued by the AO/CPC under Section 143(1) of the Act, dated 24/12/2021, wherein its income was determined at Rs. 532.16 crores (approx.). Accordingly, the CIT(Appeals) based on his aforesaid observations upheld the penalty imposed by the AO w.r.t the disallowance of the claim of the assessee company for deduction of HEC of Rs. 4.81 crores (supra).

The assessee company aggrieved with the CIT(Appeals) order has carried the matter in appeal before us. We have heard the Ld. Authorised Representatives of both parties, perused the orders of the authorities below and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by them to drive home their respective contentions.

Shri. YV Bannu Narayan Rao, the Ld. Authorised Representative of the assessee company, submitted that the claim of deduction of HEC was bona fide made by the assessee company based on the prevailing judicial position at the time of filing the return of income, i.e., on 15/02/2021. Elaborating further on his contention, the Ld. AR submitted that the decision of the Hon’ble High Court of Bombay in Sesa Goa Ltd. Vs. Jt. CIT (2020) 423 ITR 426 (supra), wherein it was held that “cess” (Health and Education cess), whenever paid in relation to business, is a deductible expense, had thereafter been retrospectively amended by the Finance Act, 2022 w.r.e.f 01/04/2005, clarifying that “tax” includes “cess” for purpose of Section 40(a)(ii) of the Act. The Ld. AR submitted that the said amendment had led the assessee to voluntarily give up its claim for deduction of HEC during the course of assessment proceedings, i.e., prior to completion of the assessment. Elaborating further on his contention, the Ld. AR submitted that the assessee company, on learning about the retrospective clarification made available on the statute vide the Finance Act, 2022, had, by its letter filed with the AO on 30/08/2022, i.e., in the course of the assessment proceedings, sought to disallow its claim for deduction of HEC. The Ld. AR submitted that the offer for disallowance of HEC by the assessee company was made prior to the “Show Cause” notice (SCN) dated 10/09/2022 issued by the AO, wherein the assessee company was for the first time called upon to explain as to why its claim for deduction of HEC of Rs. 4.81 crore (supra) may not be disallowed. The Ld. AR submitted that such voluntary surrender, founded on a debatable legal issue, could not attract a penalty under Section 270A of the Act. The Ld. AR to buttress his contention, submitted that Section 155(18) of the Act, that had been inserted vide the Finance Act, 2022, w.e.f 01/04/2022, to deal with such claims for deduction of “cess”, evidences the legislative intent that such claims should not be treated as an under-reported income prior to the insertion of the said statutory provision. Apart from that, the Ld. AR submitted that the assessee company cannot be penalised for procedural impossibility when the prescribed forms, i.e., Form Nos. 69 & 70 were notified only with effect from 01.10.2022, whereas the assessment in the present case was completed on 27.09.2022.

Per Contra, the learned Departmental Representative (for short, “DR”), on the other hand, relied on the orders of the lower authorities and submitted, viz. (i) that the assessee company had claimed an inadmissible deduction in its return of income; (ii). offered the disallowance only when it was confronted during the course of the scrutiny proceedings; and (iii). that it did not pay the corresponding tax, thereby failing to satisfy the conditions for immunity. The Ld. DR relied upon the CIT(Appeals) order and contended that the penalty had rightly been levied/sustained by the authorities below.

We have heard the rival submissions and perused the material available on record. Admittedly, the assessee company had claimed deduction of HEC in its return of income by relying on judicial precedents then holding the field, viz. (i). Sesa Goa Ltd. Vs. Jt. CIT (2020) 423 ITR 426 (Bombay) – date of order: 28.02.2020; and (ii). Chambal Fertilisers & Chemicals Ltd. Vs. Jt. CIT, Range-2, Kota (2019) 107 taxmann.com 484 (Rajasthan)- date of order: 31.07.2018. Subsequently, pursuant to the retrospective amendment brought by the Finance Act, 2022 w.r.e.f 01/04/2005, the assessee company, during the assessment proceedings and before completion of assessment, had offered its aforesaid claim for deduction of HEC for disallowance.

Apropos the disallowance of HEC, it is evident that the said claim was made based on a legal interpretation supported by binding judicial precedents at the time of filing of the return of income by the assessee company. Admittedly, the subsequent retrospective amendment made available in the statute, vide the Finance Act, 2022, w.r.e.f 01/04/2005, altered the legal position. In our view, a claim made by the assessee in the return of income based on a debatable issue of law, supported by judicial authority, cannot be equated with under-reporting of income. In our view, the fact that the assessee company had given up its said claim for deduction during assessment proceedings, i.e., prior to completion of assessment, reinforces the bona fide nature of the claim. In our view, the non-payment of tax immediately upon such surrender of claim of deduction of HEC, in the peculiar facts where refunds and demands were fluctuating due to processing under Section 143(1) of the Act read a/w the assessment order passed under Sec. 143(3) r.w.s 144B of the Act, dated 27.09.2022, and Order under Section 154 of the Act, dated 10/05/2023, cannot convert a bona fide legal claim into a case of under-reporting warranting penalty.

We also find force in the Ld. AR’s contention that Section 155(18), though made effective from 01.10.2022, reflects legislative recognition that claims of surcharge or cess, when given up, should not ordinarily result in penalty under Section 270A. In our view, the assessee company could not have been penalised for not availing a procedural mechanism that was not operational on the date of completion of the assessment on 27/09/2022.

Coming now to certain material aspects emanating from the record, which fortifies our aforesaid conviction that the assessee company ought not have been visited with the penalty under Section 270A of the Act for under-reporting of income, we deem it apposite to cull out the same for the sake of clarity, as under:

In view of our aforesaid observations, we are of the considered opinion that the levy of penalty under Section 270A on the disallowance of Health and Education Cess (HEC) of Rs. 4,81,53,591/- is not sustainable in law. We thus, not being able to persuade ourselves to concur with the view taken by the CIT(Appeals), who has upheld the penalty of Rs. 82,63,156/- imposed by the AO, vide his order passed under Section 270A of the Act, dated 23/02/2023, set aside his order and direct the AO to vacate the said penalty.

In the result, the appeal filed by the assessee company is allowed.