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

आयकर अपीलȣय अͬधकरण, हैदराबाद पीठ
IN THE INCOME TAX APPELLATE TRIBUNAL
Hyderabad ‘B’ Bench, Hyderabad

BEFORE SHRI MANJUNATHA G, ACCOUNTANT MEMBER
AND SHRI RAVISH SOOD, JUDICIAL MEMBER

आ.अपी.सं /ITA No.1295/Hyd/2025
(िनधाŊरण वषŊ/Assessment Year:2020-21)

M/s. Granules India Limited,
Hyderabad.
PAN : AAACG7369K

Vs.
Dy. Commissioner of Income
Tax,
Circle 2(1), Hyderabad.
(Appellant)

(Respondent)

िनधाŊįरती Ȫारा/Assessee by:
Shri Y.V. Bhanu Narayan Rao,
C.A.
राज̾ व Ȫारा/Revenue by:
Dr. Sachin Kumar, SR-DR

सुनवाई की तारीख/Date of hearing:
22/12/2025
घोषणा की तारीख/Pronouncement: 24/12/2025

आदेश/ORDER
PER RAVISH SOOD, J.M:
The present appeal filed by the assessee company is directed against the order passed by the CIT(Appeals), NFAC,
Delhi, dated 24.06.2025, which in turn arises from the order passed by the AO under Section 270A of the Income-tax Act,
1961, dated 27.09.2022, for the Assessment Year 2020-21. The assessee company has assailed the impugned order of the CIT(Appeals) on the following grounds of appeal before us:
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“1. On the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals), NFAC, Delhi
[CIT(A)] erred in law and facts by upholding the penalty of Rs.
82,63,156/- levied by the learned Assessing OƯicer u/s 270A of the Act, and hence the same needs to be deleted.
2. On the facts and in the circumstances of the case, the learned CIT(A) failed to appreciate the fact that the impugned claim of deduction of Health and Education Cess by the Assessee company was based on the prevailing judicial pronouncement at the time of filing the return of income u/s.
139(1) of the Act, and as such the same cannot be construed as under reporting of income owing to any subsequent amendments in law and thus, penalty u/s.270A of the Act cannot be levied.
3. On the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals), NFAC, Delhi
[CIT(A)] ought to have appreciated the fact that the assessee had given up the claim of education cess of Rs.4,81,53,591/- pursuant to retrospective amendment enacted vide Finance Act,
2022 before the completion of the assessment, and ought to have deleted the penalty levied u/s 270A of the Act.
4. On the facts and in the circumstances of the case, the learned CIT(A) had grossly erred in not considering the fact that the very notification which specified the procedure to surrender the impugned claim of education cess was eƯective from 01/10/2022
whereas the impugned assessment order disallowing the impugned claim was passed on 27/09/2022, and he ought to have deleted the penalty erroneously levied u/s 270A of the Act.
5. Without prejudice to the above, the learned CIT(A) failed to appreciate the fact that Section 155(18) of the Act specifically provides that the claim for deduction of surcharge or cess shall not be deemed to be under-reported income for the purposes of sub-section (3) of section 270A of the Act if an application is made to the Assessing Officer in the prescribed form eƯective
1/10/2022. However, as the form itself was not notified at the time of passing of order u/s.143(3) of the Act, the provisions of section 155(18) cannot be applied to levy the penalty u/s.270A of the Act.
6. The assessee company craves your honours leave to add/
alter/ withdraw the above grounds at the time of the hearing”
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After considering the reply of the appellant, the AO made disallowance of Education cess of Rs.4,81,53,591/- and added it to the total income. The AO also initiated penalty proceedings u/s.270A of the Act and imposed penalty on this addition made. The appellant in the present proceedings submitted that it had voluntarily offered to tax for the deduction claimed towards Health & Education Cess (HEC) to the AO vide letter dated 29/8/2022. The Company further submits that vide letter dated 30/8/2022 it had submitted to disallow the claim made in respect of Health & Education Cess as it was retrospectively clarified vide Finance Act, 2022 that the term tax includes Cess for the purpose of section 40(a)(ii) of the Income Tax Act, 1961. The relevant extract of the submission is as under:
“Further to the above points, the Company makes following submission in relation to deduction claimed towards Education cess paid The Company submits that it claimed deduction of education cess paid for the year under consideration from its taxable income based on the decision of the Hon’ble Bombay
High Court in the matter of Sesa Goa Ltd [2020] 423 ITR
426(Bombay) where the Hon’ble court has held that cess (Health and Education cess) whenever paid in relation to business is deductible expense.
The Company understands that The Government of India vide
Finance Act, 2022 retrospectively clarified that the term tax includes Cess for the purpose of section 40(a)(ii) of the Income
Tax Act, 1961. Accordingly, the Company requests your goodself to consider the above-mentioned cess claimed by the Company as disallowance while computing assessed income for the year. The Company further submits that as per return of income filed for the year, a refund of INR 1,77,09,020 is due to the Company.
Hence, the Company has not paid any amount towards tax liability against the above claim.”
On going through the entire chain of events, appellant had claimed Education Cess relying on the decision of the Hon’ble Bombay
High Court in the matter of Sesa Goa Ltd [2020] 423 ITR 426
(Bombay) where the Hon’ble Court has held that cess (Health and Education cess) whenever paid in relation to business is deductible expense. The appellant further claimed thatit had voluntarily offered to tax for 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 40(a)(ii) of the Act.
However, as per the facts of the case appellant has filed the return of income for the assessment year on 15/2/2021 admitting total income of Rs.482,98,50,810/- claiming refund of Rs.177,09,020/-. Thereafter,
ITR was processed U/s.143(1) on 24/12/2021 determining total
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income at Rs.532,16,26,070/- raising a demand of Rs.10,71,35,510/-.
The appellant claiming that due to retrospective clarification issued vide Finance Act, 2022, it has offered disallowance of deduction claimed under HEC. However, the proposals related to Finance Act,
2022 are made public through budget presentation by Hon’ble
Finance Minister during the month of February, 2022 only. However, the appellant has taken abnormally long time to realize this fact that it was not eligible for deduction under HEC for the return filed for AY
2020-21. If at all scrutiny proceedings had not taken place, the appellant might have never would have brought this particular disallowance of deduction of HEC before the AO. The timing of the letter submitted by the appellant i.e. 30/8/2022 which is very near to the date of issue of show cause notice for disallowance of the deduction by the AO which is 10/9/2022. This clearly indicates during the assessment proceedings AO might have indicated the disallowability of the deduction of HEC and therefore, appellant might have preempted said action and filed a letter offering the same for disallowance. If the appellant was genuine in his intentions it would have paid the due taxes immediately. Instead it was offering to adjust the demand against the refund which it was very well aware that it does not exist due to the order issued u/s.143(1) of the IT Act. But still appellant referred to refund claimed by it while filing the return of income for the assessment year under consideration. The above facts clearly negates the appellant’s claim that it did not had malafide intention. In such facts, the penalty levied u/s.270A of the Act on the addition made on Rs.4,81,53,591/- on account of disallowance of Education Cess through well reasoned order by the AO is hereby confirmed.
5.3
It is noticed that in the case of the appellant, the issue of addition made by the AO in respect of ESOP expenses 1,98,06,000/- had been contested in first appeal filed vide Appeal No. NFAC/2019-
20/10182512 on 25/10/2022 has been disposed by this office in on 24/06/2025. This issue has been decided by this office in favour of the appellant and the disallowance made of ESOP expenditure of Rs.1,98,06,000/- has been deleted. Since the addition made by the AO has been deleted by this office, the penalty levied by the AO on this count also does not survive. Accordingly, the penalty U/s.270A levied by the AO on the disallowance made of Rs.1,98,06,000/- is directed to be cancelled.
5.4
The AO is directed to give relief to the extent of cancelled penalty as per para.5.3 and calculate penalty on the remaining amount of Rs.4,81,53,591/- which was confirmed vide para. 5.2 of this order for under-reporting of its income.
6. In the result, appeal is partly allowed.”
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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
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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 10

AO w.r.t the disallowance of the claim of the assessee company for deduction of HEC of Rs. 4.81 crores (supra).
10. 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.
11. 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
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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
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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. 12. 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.
13. We have heard the rival submissions and perused the material available on record. Admittedly, the assessee company
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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.
14. 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 14

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.
15. 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. 16. Coming now to certain material aspects emanating from the record, which fortifies our aforesaid conviction that the assessee
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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:
(i). At the threshold, we may may herein observe that the claim of deduction of HEC was raised 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, 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;
(ii). the assessee company was fastened with the disallowance of its claim for deduction of HEC of Rs. 4.81 crore (supra), which it had raised based on the judgment of the Hon’ble High Court of Bombay in Sesa Goa Ltd. Vs. Jt. CIT (supra), wherein it was held that cess (Health and Education cess), whenever paid in relation to business, is a deductible expense, pursuant to the retrospective amendment by the Finance Act, 2022 w.r.e.f
01/04/2005, clarifying that “tax” includes “cess” for the purpose of Section 40(a)(ii) of the Act;
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(iii). the assessee company, on learning about the retrospective clarification that was made available in the statute vide the Finance Act, 2022, had, by its letter filed with the AO in the course of the assessment proceedings on 30/08/2022, sought for the disallowance of its claim for deduction of HEC, which was 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 by him to explain as to why its claim for deduction of HEC of Rs. 4.81 crore (supra) may not be disallowed;
(iv). that as Section 155(18) of the Act, had been made available in the statute vide the Finance Act, 2022, w.e.f 01/04/2022, to deal with such claims for deduction of “cess”, thus, it 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;
(v).
that even otherwise, as Rule 132, i.e., the procedural rule for re-computation of income under Section 155(18) of the Act, had been introduced by the CBDT to provide the mechanism and forms i.e. Form 69 for the taxpayers to request re-computation of income from 01.10.2022 only, therefore, the assessee company
17

could not have been penalised for not availing a procedural mechanism that was not operational on the date of completion of the assessment, i.e., on 27/09/2022
17. 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.
18. In the result, the appeal filed by the assessee company is allowed.
Order pronounced in the open Court on 24th December,
2025. (MANJUNATHA G) (RAVISH SOOD)
ACCOUNTANT MEMBER JUDICIAL MEMBER

Hyderabad.
Dated: 24.12.2025. 18

Copy of the Order forwarded to :

BY ORDER,