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Income Tax Appellate Tribunal, “A” BENCH, AHMEDABAD
Before: MS. SUCHITRA KAMBLE & SHRI MAKARAND V. MAHADEOKAR
ORDER \nPER MAKARAND V. MAHADEOKAR, AM:\nThis appeal by the assessee is directed against the order passed by the\nCommissioner of Income-tax (Appeals), National Faceless Appeal Centre,\nDelhi [“CIT(A)"], dated 28.03.2024, arising from the penalty order passed by\nthe Assessing Officer under section 270A of the Income Tax Act, 1961 (“the\nAct\"), for the Assessment Year (AY)2020–21.\nFacts of the Case:\n2. The assessee is a Co-operative bank registered under the Gujarat Co-\noperative Societies Act, 1961 and governed by the Banking Regulation Act,\n1949, filed its return of income for the Assessment Year 2020–21 on 31.12.2020,\ndeclaring a total income of Rs.37,24,48,290/- under section 139(1) of the Act.\nThe case of the assessee was selected for scrutiny under section 143(3) of the\nAct through Computer Assisted Scrutiny Selection (CASS), primarily to\nexamine following:\n- High liabilities as compared to low income/receipts,\n- Sale consideration reported in ITR being less than sale consideration\nreported in SFT,\n- Deduction from total income under Chapter VI-A,\n- Non-compliance with Income Computation and Disclosure Standards.\n3. During the course of assessment proceedings, it was noticed that the\nassessee had claimed deduction of Rs.50,05,571/- towards payment of Health\nand Education Cess. The Assessing Officer, after issuing a show-cause notice,\ndisallowed the said claim, treating it as not allowable in view of the decision\nof the Hon'ble Supreme Court in the case of CIT v. K. Srinivasan [(1972) 83\nITR 346 (SC)] and the retrospective amendment brought by the Finance Act,\n2022, inserting Explanation 3 to section 40(a)(ii) of the Act. Consequently,\npenalty proceedings under section 270A of the Act were initiated, and penalty\nof Rs.34,98,290/- was levied on account of alleged under-reporting of income.\nIn appeal before the CIT(A), the assessee contended that the claim was made\nbased on judicial pronouncements prevailing at the time of filing return, the\namendment by Finance Act, 2022 had retrospective effect and no mala fide\ncould be attributed to the assessee and the procedure for surrendering the\nclaim under section 155(18) of the Act was notified only after the assessment\nwas completed.\n4. The CIT(A), after considering the submissions during the appellate\nproceedings, partly allowed the appeal. He held that though the disallowance\nof the education cess was justified, the penalty could not be levied at the rate\nof 200% applicable to cases of \"misreporting.\" He restricted the penalty to\n50% of the tax on the under-reported income, thereby confirming penalty to\nthe extent of Rs.8,74,573/- and granting partial relief of Rs.26,23,717/- to the\nassessee.\n5. Aggrieved by the partial sustenance of penalty, the assessee is in\nappeal before us with following grounds:
\n1. The learned Commissioner of Income-tax (Appeals) [CIT(A)] erred in law and\nfacts of the case by sustaining penalty to the extent of Rs.8,74,573/- levied under\nsection 270A of the Act by the learned Assessing Officer on account of claim of\neducation cess of Rs.50,05,571/-, pursuant to retrospective amendment enacted\nvide Finance Act, 2022. It is submitted that it be so held now and penalty\nu/s.270A of the Act as confirmed by the learned CIT(A) be deleted.\n2. The learned CIT(A) grossly erred in not considering the fact that the very\nnotification which specified the procedure to surrender the impugned claim of\neducation cess was effective from 01.10.2022 whereas the impugned assessment\norder disallowing the impugned claim was passed on 25.09.2022. Nevertheless,\nthe appellant surrendered the claim during the assessments proceedings itself and\nhence penalty u/s.270A is not leviable at all and the same may be deleted.\n3. The learned CIT(A) failed to appreciate the fact that the impugned claim of\ndeduction of Health and Education Cess by the Appellant was based on the\nprevailing judicial pronouncement at the time of filing the return of income u/s.\n139(1) of the Act, the same cannot be construed as under reporting of income\nowing to any subsequent amendments in law and thus, penalty u/s.270A of the\nAct cannot be levied.\n4. Without prejudice to the above, the learned CIT(A) failed to appreciate the fact\nthat Section 155(18) of the Act specifically provides that the claim for deduction\nof surcharge or cess shall not be deemed to be under-reported income for the\npurposes of sub-section (3) of section 270A of the Act if an application is made to\nthe Assessing Officer in the prescribed form. However, as the form itself was not\nnotified at the time of passing of order u/s.143(3) of the Act, the provisions of\nsection 155(18) cannot be applied to levy the penalty u/s.270A of the Act.\n5. The appellant reserves the right to add/alter or remove any of the above grounds\nof appeal.\n6. During the course of hearing before us, the learned Authorized\nRepresentative (“AR”) of the assessee submitted the timeline of the events\nand stated that the assessee had claimed the said deduction under section\n37(1) of the Act, and that the provisions of section 40(a)(ii), as they stood at\nthe time did not explicitly disallow deduction of cess. In support, reliance was\nplaced on judicial precedents namely, Sesa Goa Ltd. v. JCIT [(2020) 117\ntaxmann.com
96. (Bom)] and Chambal Fertilizers & Chemicals Ltd. v. JCIT\n[D.B. Income Tax Appeal No. 52/2018, decided on 31.07.2018 (Raj HC)],\nwherein the respective Hon'ble High Courts had held that education cess is\nan allowable business expenditure. It was contended that the subsequent\ninsertion of Explanation 3 to section 40(a)(ii) of the Act by the Finance Act,\n2022, with retrospective effect from 01.04.2005, merely clarified the legal\nposition and could not be invoked for levy of penalty on a claim made bona\nfide and supported by judicial rulings. The AR further pointed out that the\ndeduction was voluntarily surrendered during assessment proceedings, vide\nletter dated 15.09.2022, in view of the said retrospective amendment.\nHowever, due to the procedural limitation, the assessee could not file an\napplication under section 155(18) of the Act read with Rule 132, as the\nnotification prescribing the form and process was issued only on 28.09.2022,\neffective from 01.10.2022, whereas the assessment was completed on\n25.09.2022.\n6.
The learned AR specifically pointed out the protection under section\n270A(6)(a) of the Act, which stipulates that no penalty shall be levied under\nsection 270A if the assessee offers an explanation, and the Assessing Officer\nis satisfied that the explanation is bona fide, and all material facts have been\ndisclosed. It was submitted that the assessee had made a full and true\ndisclosure of the deduction claimed, and there was no concealment or\nsuppression of material facts. It was urged that the impugned addition arose\ndue to a bona fide claim based on a debatable legal issue, which was later\nnullified by retrospective amendment, and therefore, no penalty can be levied\nfor mere disallowance of a bona fide claim.\n6.
2. Alternatively, it was submitted that the penalty levied by the Assessing\nOfficer @ 200% was not sustainable in view of section 270A(7) of the Act, and\nthat the learned CIT(A) rightly restricted it to 50% by treating the case as one\nof under-reporting and not misreporting. However, even such reduced\npenalty, it was urged, ought to be deleted on account of the assessee's\nconduct being fully compliant with the law as understood at the relevant\ntime.\n6.
The learned AR placed reliance on the judgement of the Hon'ble\nBombay High Court in CIT v. Yahoo India (P.) Ltd. [(2013) 33 taxmann.com\n332 (Bom)] where it was held that penalty cannot be imposed where the claim\nis based on a bona fide legal interpretation and all facts are disclosed.\n7. The learned Departmental Representative (DR) relied on the order of\nCIT(A) and stated that the CIT(A) has given relief to the assessee and also\nargued that assessee could have availed section 155(18) option before penalty\nwas levied.\n8. We have carefully considered the rival submissions, perused the\nmaterial available on record, and examined the statutory provisions and\njudicial precedents cited before us. The penalty in the present case has been\nlevied under section 270A of the Act. Applicable statutory framework\ngoverning penalty under Section 270A is summarized as follows –\nSection 270A(1): The Assessing Officer may, during the course of any\nproceedings under this Act, direct that any person who has under-reported\nhis income shall be liable to pay a penalty in addition to tax, if any, on the\nunder-reported income.\nSection 270A(2)(a): A person shall be considered to have under-reported his\nincome if the income assessed is greater than the income determined in the\nreturn processed under section 143(1)(a).\nSection 270A(6)(a): The under-reported income shall not include the amount\nof income in respect of which the assessee offers an explanation and the\nAssessing Officer or the Joint Commissioner (Appeals) or the Commissioner\n(Appeals) or the Commissioner or the Principal Commissioner, as the case\nmay be, is satisfied that the explanation is bona fide and the assessee has\ndisclosed all the material facts to substantiate the explanation offered.\nSection 270A(7): In case of under-reporting (not misreporting), penalty shall\nbe fifty percent of the amount of tax payable on such under-reported income.\nSection 270A(9): In cases of misreporting of income, penalty shall be two\nhundred percent of the amount of tax payable on under-reported income.\n8.
1. In the instant case, the penalty has been levied for disallowance of the\ndeduction of Rs.50,05,571/- claimed towards Health and Education Cess. The\nclaim was made in the return filed on 31.12.2020. The disallowance was based\non the insertion of Explanation 3 to section 40(a)(ii) by the Finance Act, 2022,\nwith retrospective effect from 01.04.2005. It is undisputed that the assessee\nvoluntarily surrendered the deduction during the course of assessment\nproceedings, after the enactment of the Finance Act, 2022, vide submission\ndated 15.09.2022. The return was originally filed based on prevailing judicial\npronouncements which allowed such deduction. Full and true disclosure of\nthe claim was made in the return and the same was informed to the Assessing\nOfficer during the course of assessment proceedings.\n8.
The learned DR contended that after the Notification issued under Rule\n132, the assessee could have applied for re-computation under section 155(18)\nof the Act, which would have immunized the assessee from levy of penalty.\nSince the assessee did not avail the option post-notification, it was argued\nthat penalty proceedings were validly continued.\n8.
3. We find no merit in this argument for the following reasons:\n- The assessment order under section 143(3) r.w.s.144B was passed on\n25.09.2022, before the notification of Rule 132 on 28.09.2022. Thus, on\nthe date of finalization of assessment, there was no prescribed\nmechanism under Rule 132 to make an application under section\n155(18). Consequently, the assessee could not have filed the prescribed\nform at that stage.\n- The issuance of Notification No. 111/2022 dated 28.09.2022,\nprescribing Rule 132, enabled the filing of such application only\nprospectively from 01.10.2022. The assessee's case had already\nculminated in assessment on 25.09.2022, thereby rendering the remedy\nunder section 155(18) practically unavailable to the assessee.\n- Further, section 155(18) contemplates re-computation of total income\nby the Assessing Officer suo motu upon such application being filed. It\ndoes not automatically provide for withdrawal or waiver of penalty\nproceedings already initiated and concluded on or before availability\nof such procedural remedy.\nMoreover, it is trite law that a procedural opportunity which was not\navailable on the date of an adverse action (i.e., disallowance and\ninitiation of penalty) cannot be cited against the assessee. The maxim\n\"Lex non cogit ad impossibilia\" (the law does not compel a person to\ndo that which he cannot possibly perform) squarely applies to the\nassessee's situation.\nThus, we hold that the assessee cannot be faulted for not availing the\nbenefit of section 155(18) once the assessment was already finalized\nand penalty proceedings initiated. The subsequent availability of\nprocedural remedy cannot retrospectively cure the defect or justify the\nimposition of penalty.\n8.
In any case, applying the mandate of section 270A(6)(a), we find merit\nin the contention of the AR for the reasons that\n- The claim for deduction was made based on existing legal\ninterpretation available at the time of filing return.\n- Judicial pronouncements clearly supported such a view.\n- There is no allegation of concealment, falsification, or suppression of\nfacts.\n- The assessee voluntarily surrendered the claim immediately upon\nbeing made aware of the retrospective amendment.\n- The facts were fully disclosed by the assessee during the course of\nassessment proceedings.\n8.
It is relevant to note that both the Assessing Officer and the CIT(A)\naccepted that the case does not involve “misreporting" under section 270A(9)\nof the Act. Accordingly, penalty was restricted to 50% of tax on under-\nreported income. However, once it is found that the claim was bona fide and\nall facts were disclosed, even such penalty under section 270A(1) read with\nsection 270A(2)(a) of the Act becomes unsustainable in law.\n8.
In our opinion, mere making of a claim based on a bona fide\ninterpretation of law, subsequently found unsustainable by retrospective\namendment, does not attract penalty under the Act. This position is fortified\nby the Hon'ble Bombay High Court in case of Yahoo India (P.) Ltd. (supra),\nwherein it was reiterated that where a claim is made transparently and based\non legal interpretation, even if not accepted, it does not amount to furnishing\ninaccurate particulars or under-reporting. Thus, relying on the principles laid\ndown therein, we hold that the assessee's claim towards deduction of cess,\nmade prior to the retrospective amendment and disclosed in full, cannot\ntrigger penalty under section 270A of the Act.\n8.
In view of the foregoing discussion, the appeal of the assessee is\nallowed and the penalty levied under section 270A and sustained by the\nCIT(A) is directed to be deleted.\n9. In the result, the appeal of the assessee is allowed.\nOrder pronounced in the Open Court on 24 April, 2025 at Ahmedabad.\nSd/-\n(SUCHITRA KAMBLE)\nJUDICIAL MEMBER\nSd/-\n(MAKARAND V. MAHADEOKAR)\nACCOUNTANT MEMBER\nअहमदाबाद/Ahmedabad, दिनांक/Dated 24/04/2025\nटी. सी. नायर, व.नि. स. / T.C. NAIR, Sr. PS\nआदेश की प्रतिलिपि अग्रेषित/