SHARP GARUDA FARM EQUIPMENTS PVT.LTD,COIMBATORE vs. DCIT, CORPORATE CIRCLE 1, , COIMBATORE

The solitary issue that is raised is whether the First Appellate Authority (FAA) is justified in confirming the penalty imposed u/s.270A of the Act amounting to Rs.5,80,800/-.

Brief facts of the case are that the assessee is a company. For the assessment year 2020–21, the assessee filed its return of income on 12.01.2021 declaring a total income of Rs.14,49,74,090/-. Subsequently, the assessee filed a revised return of income on 31.03.2021 declaring a total income of Rs.14,38,20,240/-. In the revised return, the assessee had claimed education cess of Rs.11,53,846/- as an allowable deduction u/s.37 of the Act. The return was selected for scrutiny and notice u/s.143(2) of the Act was issued on 29.06.2021. During the course of assessment proceedings, the AO issued a draft assessment order along with a show-cause notice on 04.03.2022 proposing to disallow the education cess claimed by the assessee amounting to Rs.11,53,846/-. On receipt of the draft assessment order, the assessee filed a letter dated 04.03.2022, acknowledged on 05.03.2022, wherein the assessee conceded and withdrew the claim of deduction towards education cess amounting to Rs.11,53,846/-. Accordingly, the assessment was completed by adding back the education cess claimed by the

In the assessment so completed, the AO initiated penalty proceedings u/s. 270A of the Act for under-reporting of income in consequence of misreporting. In response to the penalty notice issued u/s.274 r.w.s. 270A of the Act, the assessee filed its reply dated 15.09.2022. In the said reply, the assessee submitted that it had voluntarily withdrawn the claim of deduction towards education cess in response to the draft assessment order issued during the assessment proceedings. It was further contended that the claim of deduction of education cess made in the revised return was based on various judicial pronouncements of different High Courts and therefore the claim was a bonafide one. Accordingly, the assessee pleaded that the proposed penalty u/s.270A of the Act should be dropped. However, the submissions of the assessee were rejected by the AO and penalty u/s.270A(8) r.w.s. 270A(9) of the Act was imposed amounting to Rs.5,80,800/-, being 200% of the tax on under-reported income (tax on under-reported income being Rs.2,90,400/-).

Aggrieved by the order of the AO imposing penalty u/s.270A of the Act, the assessee preferred an appeal before the First Appellate Authority (FAA). Before the FAA, the assessee reiterated the submissions made before the AO. It was submitted that the education cess was claimed as allowable deduction based on the judicial pronouncements prevailing at the relevant time and that when the Finance Act, 2022 proposed an amendment to clarify that education cess shall not be an allowable deduction, the assessee immediately filed a reply withdrawing the claim of deduction. However, the FAA held that the amendment brought by the Finance Act, 2022 is only clarificatory in nature. The FAA further observed that the assessee came forward to withdraw the claim of deduction only when it was called upon to explain as to why the education cess should not be disallowed. It was also stated by the FAA that voluntary withdrawal of a claim after detection by the Department would not absolve the assessee from penalty. Accordingly, the FAA held that penalty was leviable on the facts of the case and dismissed the appeal of the assessee.

Aggrieved by the order of the FAA, assessee has filed the present appeal before the Tribunal. The grounds raised read as follows:-

The Ld.AR has filed a paper-book enclosing therein the case laws relied thereon. The Ld.AR reiterated the submissions made before the income-tax authorities and relied on the grounds raised.

The Ld.DR on the other hand supported the orders of the AO and the FAA.

We have heard the rival submissions and perused the material available on record. The assessee had originally filed its return of income on 12.01.2021. Subsequently, a revised return was filed on 31.03.2021 wherein the assessee had claimed education cess amounting to Rs.11,53,846/- as an allowable deduction. It is stated that the claim of deduction of education cess was based on Circular No.91/58/66-ITJ(19) dated 18.05.1967 and the order of the Bangalore Bench of the Tribunal in the case of Honeywell Technology Solutions Lab Pvt. Ltd. vs. DCIT in ITA No.1210/Bang/2018 dated 07.01.2021. During the course of the assessment proceedings, the assessee was called upon to explain how education cess could be claimed as an allowable deduction. In the meanwhile, the Finance Act, 2022 proposed an amendment clarifying that education cess shall not

The AO had relied on the judgment of the Hon’ble Supreme Court in the case of CIT vs. Travancore Sugars & Chemicals Ltd. reported in 88 ITR 1. However, the Hon’ble Supreme Court in the said case was considering the issue of diversion of income by overriding title and not the issue relating to the deductibility of education cess. Therefore, the reliance placed by the AO on the judgment of the Hon’ble Supreme Court in the case of CIT vs. Travancore Sugars & Chemicals Ltd. (supra) is misplaced. The FAA has relied on the judgment of the Hon’ble Supreme Court in the case of CIT vs. K. Srinivasan reported in [1972] 83 ITR 346 (SC). In the said case, the Hon’ble Supreme Court was considering whether surcharge and additional surcharge could be levied in accordance with the provisions of the Finance Act, 1963. The Hon’ble Supreme Court was not dealing with the issue of

The Hon’ble Bombay High Court in the case of Sesa Goa Ltd. v. JCIT reported in (2020) 423 ITR 426 (Bom) had categorically held, prior to the amendment by the Finance Act, 2022, that education cess is not covered by section 40(a)(ii) of the Act and therefore the same is an allowable deduction. A similar view was taken by the Hon’ble Rajasthan High Court in the case of Chambal Fertilizers & Chemicals Ltd. v. JCIT reported in [2019] 107 taxmann.com 484 (Raj). When the assessee, in the revised return of income, claimed education cess as an allowable deduction, the judgments of the Hon’ble Rajasthan High Court and the Hon’ble Bombay High Court cited above were in force and, based on the same, the assessee had made the claim. Thereafter, the Finance Act, 2022 proposed an amendment whereby education cess was not to be treated as an allowable deduction. Pending the proposal of the Finance Bill (which had not yet become an Act), the assessee vide its letter dated 04.03.2022 conceded and withdrew its claim of deduction of education cess amounting to Rs.11,53,846/-.

From the facts narrated above, it is clear that the assessee had voluntarily surrendered the claim of deduction towards education cess during the course of the assessment proceedings after the announcement of the Finance Bill, 2022. Further, the revised return was originally filed claiming deduction of education cess based on the prevailing judicial pronouncements which had allowed such deduction. The assessee had made a full and true disclosure of the claim in the return of income and the same was also brought to the notice of the AO during the course of the assessment proceedings. Therefore, the claim of deduction of education cess made by the assessee at the time of filing the revised return was a bonafide claim and all material facts were duly disclosed. In such circumstances, the levy of penalty u/s. 270A(8) r.w.s. 270A(9) of the Act is unwarranted and the same is directed to be deleted. In taking the above view, we place reliance on the following judicial pronouncements: i. Hon’ble High Court of Rajasthan in the case of G R Infraprojects Ltd., vs. ACIT reported in [2024] 158 taxmann.com 80 (Rajasthan) ii. ITAT, Ahmedabad Bench in the case of Ahmedabad District Co-operative Bank Ltd., vs. DCIT in ITA No.1108/Ahd/2024 (order dated 24.04.2025)

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