Case Law Details
Poonawalla Fincorp Limited Vs ITO (ITAT Pune)
Bonafide Education Cess Claim and No Exempt Income Bar Penalty and Section 14A Disallowance: ITAT Pune
The Pune ITAT decided two appeals filed by the assessee relating to AYs 2019-20 and 2020-21. The first appeal concerned levy of penalty under Section 270A, while the second involved disallowance under Section 14A.
For AY 2019-20, the assessee challenged the penalty imposed under Section 270A(2)(a) for alleged under-reporting of income arising from the claim of deduction towards Education Cess. The assessee contended that the claim was made based on judicial precedents prevailing when the return was filed. Subsequently, the Finance Act, 2022 inserted Explanation 3 to Section 40(a)(ii) with retrospective effect from 01.04.2005, clarifying that tax includes surcharge or cess. The assessee also submitted that Section 155(18) and the option of filing Form No. 69 were inapplicable, as the claim had not been allowed in the assessment.
The Tribunal held that the penalty was unsustainable. It observed that the Assessing Officer invoked Section 270A(2)(a) although the assessment had been completed under Section 143(3), making the provision inapplicable. It further found that the assessee had made a legitimate claim based on settled judicial precedents existing when the return was filed and could not be treated as having under-reported income due to a retrospective amendment introduced later. The Tribunal also held that Section 155(18) did not apply since the Education Cess claim had not been allowed in the assessment. Accordingly, the penalty under Section 270A was deleted and the order of the CIT(A) was reversed.
For AY 2020-21, the dispute related to a disallowance of ₹3.52 crore under Section 14A computed by applying Rule 8D(2)(ii). The assessee contended that it had not earned any exempt income during the relevant year and that the amendment to Section 14A effective from 01.04.2022 operated prospectively.
The Tribunal found that the assessee had not reported any exempt income in its return and that the assessment order also did not refer to any exempt income. It held that, in the absence of exempt income, no disallowance under Section 14A could be made for the relevant assessment year. The Tribunal further observed that the amendment to Section 14A introduced with effect from 01.04.2022 was prospective and did not apply to the year under consideration. Accordingly, the disallowance under Section 14A was deleted, the CIT(A)’s order was set aside, and both appeals of the assessee were allowed.
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FULL TEXT OF THE ORDER OF ITAT PUNE
The captioned appeals at the instance of assessee pertaining to the Assessment Years 2019-10 and 2020-21 are directed against the separate orders dated 11.11.2025 of National Faceless Appeal Centre, Delhi passed u/s.250 of the Income-tax Act, 1961 (hereinafter also called ‘the Act’) arising out of the Assessment Orders dated 31.12.2022 passed u/s.143(3) r.w.s.260/143(3) r.w.s.144B of the Act.
2. We will first take up ITA No.486/PUN/2026 for A.Y. 2019-20. In this appeal, the sole grievance of the assessee is that ld.CIT(A) erred in confirming the action of the Assessing Officer levying penalty u/s.270A(2)(a) of the Act for the alleged under reporting of income.
3. Brief facts of the case as relevant for the issue under consideration are that the assessee is a Non-Banking Finance Company (NBFC) registered with Reserve Bank of India and engaged in the business of Asset Financing such as such as Car, Construction Equipment, Commercial Vehicle Home Loan etc. Income of Rs.58,08,12,930/- declared in the return of income for A.Y. 2019-20 e-filed on 24.10.2019. Assessment u/s.143(3) r.w.s.260 of the Act completed on 31.12.2022 wherein apart from other additions disallowance was also made for Education Cess and assessed the income at Rs,58,08,13,410/-. In the assessment order itself, ld. Assessing Officer initiated penalty proceedings u/s.270A(2)(a) of the Act for the under reporting of income regarding claiming Education Cess as expenditure. Thereafter, ld. Assessing Officer issued separate notice u/s.274 of the Act and proceeded further levying penalty u/s.270A of the Act.
4. It was submitted by the assessee that assessee made claim of expenditure towards Education Cess on the basis of judgments of various Hon’ble High Courts consistently holding that Education Cess is allowable as expenditure. Thereafter, by Finance Act, 2022 an amendment was made in section 40(a)(ii) of the Act retrospectively from 01.04.2005 inserting Explanation 3 clarifying that the tax shall include and shall be deemed to have been always include any Surcharge or Cess by whatsoever name called on such tax. It is submitted that when the assessee filed the return it claimed the expenditure on the basis of judgments of Hon’ble High Courts. Ld. Assessing Officer in the assessment proceedings has disallowed Education Cess claimed by the assessee therefore it cannot be said that the assessee has under reported the income. It is also stated that provisions of section 155(18) is applicable only in the case who have claimed and have been allowed the expenditure for Education Cess. In all such type of assesses can furnish an application to the Assessing Officer in the prescribed authority on Form No.69 and pay the tax liability. However, in the assessee’s case amount has already been disallowed therefore there is no possibility for the assessee to have filed application in the prescribed Form No.69. However, ld. Assessing Officer did not accept the submissions and levied the penalty u/s.270A of the Act at Rs.16,39,570/-.
5. Aggrieved assessee preferred appeal before ld.CIT(A) but failed to succeed. Now the assessee is in appeal before this Tribunal.
6. Ld. Counsel for the assessee reiterated the submissions made before both the lower authorities and further referred to various decisions given below :
1. Schneider Electric South East Asia (HQ) Pte Ltd v. Assistant Commissioner of Income Tax International Taxation Circle 3 (1)(2) (W.P.(C) 5111/2022 & C.M.Nos.15165-15166/ 2022) (Delhi)
2. DCIT v. Chakradhar Contractors and Engineers (P.) Ltd. [2025] 171 com 133 (Pune Trib.) order dated 26.12.2024
3. Alrameez Construction (P.) Ltd. v. CIT/ NFAC, Delhi [2023] 152 com 382 (Mumbai Trib.) order dated 12.06.2023
7. On the other hand, ld. DR supported the order of ld.CIT(A).
8. We have heard the rival contentions and perused the record placed before us. Assessee is aggrieved with levy of penalty u/s.270A(2)(a) of the Act which provides that a person shall be considered to have under reported his income if the income assessed is greater than the income determined in the return processed under clause (a) or sub-section (1) of section 143. Ld. Assessing Officer has levied the penalty for the alleged under reporting of income by the assessee claiming expenditure towards Education Cess. We note that the assessee has claimed the expenditure of Education Cess at Rs.93,84,000/- in its return of income. In absence of any specific provisions under the Act, at that point of time, various assessee(s) have been claiming Education Cess as an expenditure in light of the judicial precedents. Few of them have been referred by ld. Counsel for the assessee in the legal paper book
1. Jaipuria Samla Amalgamated Collieries Ltd. v. Commissioner of Income-tax [1971] 82 ITR 580 (SC)
2. Chambal Fertilisers & Chemicals Ltd. v. Joint Commissioner of Income-tax, Range-2, Kota [2019] 107 com 484 (Rajasthan)
3. Sesa Goa Ltd. v. Joint Commissioner of Income-tax, Range 1, Panaji Goa [2020] 117 com 96 (Bombay)
4. M/ S. Bajaj Allianz General Insurance v. Deputy Commissioner of Income Tax [ITA Nos. 1111 & 1112/ PUN/ 2017] (Pune Trib.) dt. 25.07.2019
9. Assessee has claimed the expenditure based on the settled judicial precedents. However, when the case was selected for scrutiny, the assessment has been framed u/s.143(3) r.w.s.260 of the Act and ld. Assessing Officer has disallowed the Education Cess claimed at Rs.93,84,000/-. Ld. Assessing Officer initiated the penalty proceedings u/s.270A(2)(a) of the Act and levied penalty at Rs.16,39,570/-.
10. Now the issue for consideration is whether it is a case of under reporting of income on the part of assessee. We note that firstly ld. Assessing Officer has invoked section 270A(2)(a) of the Act which is applicable only in the case of returns processed u/s.143(1)(a) of the Act. However, the case of the assessee is selected for scrutiny and assessment order has been passed u/s.143(3) r.w.s.260 of the Act. Prima-facie section 270A(2)(a) of the Act is not applicable and ld. Assessing Officer erred to initiate penalty proceedings. Therefore, on this ground itself, impugned penalty deserves to be deleted because ld. Assessing Officer has not issued the fresh notice with correct charge for which he intended to initiate the penalty proceedings.
11. Even otherwise on merits of the case also, we note that the assessee had made legitimate claim based on the settled judicial precedents of various High Courts/Coordinate Bench as referred (supra). Further, the amendment brought in by the Finance Act, 2022 inserting Explanation 3 to section 40(a)(ii) of the Act has been made with retrospective effect from 01.04.2005. Therefore, the assessee cannot be deemed to be in default for the provisions which have been inserted with retrospective effect from 01.04.2005 by the amendment brought in by the Finance Act, 2022. The return of income already stood filed for A.Y. 2019-20 prior to the date of amendment. Ld. Assessing Officer while levying the penalty observed that the assessee has not opted to make application on Form No.69 as provided in proviso to section 155(18) of the Act and has intentionally not calculated the tax on the total income on wrongly claiming deduction on Education Cess.
12. We do not find any merit in the observation of the Assessing Officer alleging the assessee to have not opted for the option available in proviso to section 155(18) of the Act because section 155(18) of the Act is applicable only where any deduction in respect of any surcharge of Cess which is not allowable as deduction u/s.40 of the Act has been claimed and allowed in the case of assessee in any previous year and such claim shall be deemed to be unreported income of assessee for the previous year for the purposes of section 270A(3) of the Act. Section 155(18) of the Act provides that only in a case where the Education Cess has been claimed and allowed then the assessee can avail the window available provided in proviso to section 155(18) to make an application to the Assessing Officer on Form No.69. But in the present case, though the assessee has made a claim in the income tax return but its claim has not been allowed by the Assessing Officer as the amount has already been disallowed in the assessment order u/s.143(3) r.w.s.260 of the Act. In view of the above, since the assessee has made legitimate claim based on the settled judicial precedents and amendment inserting Explanation 3 to section 40(a)(ii) has been made retrospectively from 01.04.2005 by the Finance Act, 2022 and thirdly the assessee case is not covered by the provisions of section 155(18) of the Act as the claim of Education Cess has not been allowed by the Assessing Officer in the return processed u/s.143(1)(a) or in the assessment order u/s.143(3) of the act therefore it is not a case of under reporting of income. In our view, ld.CIT(A) erred in confirming the action of the Assessing Officer levying penalty u/s.270A of the Act. Impugned penalty is deleted. Finding of ld.CIT(A) is reversed and grounds of appeal raised by the assessee are allowed.
13. In the result, the appeal of the assessee is allowed.
14. Now we take up ITA No.497/PUN/2026 for A.Y. 2020-21. The only issue for our consideration is about the disallowance u/s.14A of the Act at Rs.3,52,42,160/-.
15. At the outset, ld. Counsel for the assessee submitted that the assessee has not earned any exempt income during the year and also the amendment brought in section 14A w.e.f. 01.04.2022 are not retrospective in nature and therefore no disallowance u/s.14A is called for. The decisions referred by the ld. Counsel for the assessee placed in the legal paper book reads as under :
Administrative circulars cannot override or nullify the law as interpreted by judicial authorities:
1. UCO Bank v. Commissioner of Income-tax [1999] 104 Taxman 547 (SC)
2. Principal Commissioner of Income-tax-04 v. IL & FS Energy Development Company Ltd. [2017] 84 com 186 (Delhi)
3. Deputy Commissioner of Income-tax v. SP Port Maintenance (P.) Ltd [2024] 164 com 752 (Mumbai – Trib.)
Explanation to Section 14A operates prospectively and cannot be applied to periods prior to 01.04.2022:
1. Sedco Forex International Drill Inc. v. Commissioner of Income-tax, Dehradun [2005] 149 Taxman 352 (SC)
2. Williamson Financial Services Ltd. v. Commissioner of Income-tax [2024] 166 taxmann. corn 607 (Gauhati)
3. Principal Commissioner of Income-tax (Central) v. Keti Construction Ltd. [2024] 162 com 278 (Madhya Pradesh)
4. Principal Commissioner of Income-tax (Central) v. Era Infrastructure (India) Ltd. [2022] 141 com 289 (Delhi)
16. On the other hand, ld. DR supported the order of ld.CIT(A).
17. We have heard the rival contentions and perused the record placed before us. We note that the assessee is a Limited Company and income of Rs.47,40,28,530/- declared in the return of income for A.Y. 2020-21 e filed on 14.02.2021 which was subsequently revised on 25.05.2021 declaring the same income. In the assessment completed u/s.143(3) of the Act apart from other additions ld. Assessing Officer also made disallowance u/s.14A of the Act at Rs.3,52,42,160/- calculated by applying Rule 8D(2)(ii) of the IT Rules, 1962 @1% of the average investments of Rs.3.52 crore approx.. Further, the assessee challenged the disallowance before ld.CIT(A) but failed to succeed. Before this Tribunal the first contention of the ld. Counsel for the assessee is that assessee has not earned any exempt income during the year and reference was made to the income tax return Schedule El . We note that that no income is reported under the head exempt income. The fact that the assessee has not earned any exempt income also gets supported with the observation of ld. Assessing Officer where while calculating disallowance u/s.14A of the Act there is no reference of any exempt income earned by the assessee. It has been consistently held by Hon’ble Courts that in absence of any exempt income no disallowance u/s.14A of the Act can be made prior to the amendment brought in by the Finance Act w.e.f. 01.04.2022. We note that Hon’ble Madras High Court in the case of Redington. (India) Ltd. vs. ACIT [2017] 392 ITR 633 (2017) 392 ITR 633 has held that by application of the matching concept, in a year where there is no exempt income, there cannot be a disallowance of expenditure in relation to such assumed income. Similarly, Hon’ble Delhi High Court in the case of Cheminvest Ltd. Vs. CIT – ITA No. 749/ 2014 order dated 02.09.2014 Hon’ble Court has held that expression does not form part of the total income, in section 14A of the Act there should be actual receipt of income which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to said income. In other words, section 14A will not apply if no exempt income is received or receivable during the relevant previous year. In view of the above and under the given facts and circumstance where the assessee has not earned any exempt income, we are of the considered view that disallowance u/s.14A of the Act is uncalled for.
18. So far as applicability of amendment u/s.14A of the Act and being retrospective it has been consistently held that such amendments made after 01.04.2022 are prospective in nature and we find support from the following decisions :
1. Sedco Forex International Drill Inc. v. Commissioner of Income-tax, Dehradun [2005] 149 Taxman 352 (SC)
2. Williamson Financial Services Ltd. v. Commissioner of Income-tax [2024] 166 com 607 (Gauhati)
3. Principal Commissioner of Income-tax (Central) v. Keti Construction Ltd. [2024] 162 com 278 (Madhya Pradesh)
4. Principal Commissioner of Income-tax (Central) v. Era Infrastructure (India) Ltd. [2022] 141 com 289 (Delhi)
19. Accordingly, disallowance u/s.14A made by the Assessing Officer is deleted. Finding of ld.CIT(A) is set aside and Grounds of appeal No. 1 and 2 raised by the assessee are allowed.
20. In the result, the appeal of the assessee is allowed.
21. To sum up, both the appeals of the assessee are allowed as per terms indicated hereinabove.
Order pronounced on this 19th day of June, 2026.
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