Case Law Details
Wellknown Polysters Limited Vs DCIT (ITAT Mumbai)
The assessee filed an appeal before the Income Tax Appellate Tribunal (ITAT), Mumbai, against the order of the National Faceless Appeal Centre (NFAC) for Assessment Year 2020-21, which confirmed a penalty of Rs. 68,12,391 under Section 270A of the Income-tax Act for alleged under-reporting of income arising from the disallowance of deduction claimed towards education cess.
The assessee, a company, filed its return of income on 15.02.2021 declaring a total income of Rs. 2,37,16,74,630. Following scrutiny assessment under Section 143(3), completed on 24.10.2022, the Assessing Officer determined the total income at Rs. 2,40,35,49,937 after disallowing the deduction of education cess amounting to Rs. 3,18,75,307. Thereafter, separate penalty proceedings under Section 270A were initiated for under-reporting of income.
In response to the penalty notice, the assessee submitted that the disallowance resulted solely from the retrospective amendment introduced by the Finance Act, 2022. It contended that the deduction for education cess had been claimed before the amendment and was supported by judicial precedents prevailing at the relevant time. The assessee relied on the decision of the Bombay High Court in Sesa Goa Ltd. v. JCIT, wherein it had been held that such a claim could not be regarded as furnishing inaccurate particulars of income or concealment of income.
The assessee further argued that the Legislature itself had acknowledged the bona fide nature of such claims by inserting Section 155(18) through the Finance Act, 2022. According to the assessee, this provision created a mechanism for recomputation of income and excluded the levy of penalty where the prescribed conditions were fulfilled. The assessee stated that it intended to comply with the proviso by filing the prescribed application. However, the CBDT had not notified the prescribed form at the relevant time, making it impossible to file the application. The assessee submitted that no adverse inference could be drawn because compliance had become impossible due to the absence of the prescribed mechanism. It also relied upon additional judicial decisions in support of its submissions.
The Assessing Officer rejected the explanation and imposed a penalty of Rs. 68,12,391, being 50% of the tax payable on the under-reported income. The Commissioner (Appeals) confirmed the penalty, observing that although the deduction had been claimed on a bona fide belief and the disallowance arose due to a retrospective amendment, the assessee had failed to establish why it had not explored the option of making an application under Section 155(18). The Commissioner (Appeals) concluded that the assessee had failed to substantiate its grounds and upheld the penalty.
Before the Tribunal, the assessee reiterated that the claim for deduction of education cess was made under a bona fide belief supported by judicial precedents existing at the time of filing the return, and that the disallowance arose only because of the subsequent retrospective amendment introduced by the Finance Act, 2022. The Revenue relied upon the orders of the lower authorities.
The Tribunal observed that although the legislative amendment was retrospective, the Legislature itself had simultaneously inserted a beneficial and saving provision in Section 155(18). The Tribunal noted that this proviso granted assessees an opportunity to withdraw such claims and avoid penalty, thereby recognising that the issue had been debatable in earlier assessment years.
The Tribunal further held that the assessee’s claim for Assessment Year 2020-21 was supported by judicial precedents prevailing at the relevant time and therefore could not be treated as furnishing inaccurate particulars of income or as misreporting or under-reporting of income. It observed that a claim made on the basis of a plausible interpretation of the law existing when the return was filed could not attract penalty merely because it later became inadmissible due to a retrospective legislative amendment.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
Present penalty appeal filed by assessee arises out of the Order dated 26.11.2025, passed by National Faceless Appeal Centre (NFAC), Delhi for the A.Y 2020-21, on the following grounds of appeal:-
“1. On the facts and circumstances of the case as well as in law, the Learned CIT(A) has erred in confirming the action of the Learned Assessing Officer in levying penalty u/ s.270A of the Income Tax Act 1961 of Rs.68,12,391/ -being 50 percent of the tax payable on under reported income, without considering the facts and circumstances of the case.
2. On the facts and circumstances of the case as well as in law, the Learned CIT(A) has erred in confirming the action of the Learned Assessing Officer in imposing penalty of Rs.68,12,391/ – without appreciating the fact that the quantum of penalty imposed is not in accordance with the provision of section 270A of The Income Tax Act 1961, without considering the facts and circumstances of the case.
3. On the facts and circumstances of the case as well as in law, the Learned CIT(A) has erred in confirming the action of the Learned Assessing Officer in considering that the appellant has under reported his income to the extent of Rs.3,18,75,307/ – without appreciating the fact that disallowance of education cess has come by way of retrospective amendment in the Income Tax Act through Finance Act 2022, without considering the facts and circumstances of the case.”
2. Brief facts of the case are as under:
2.1 .The assessee is a company and filed its return of income for the year under consideration on 15.02.2021 declaring total income at Rs. 2,37,16,74,630/-. The case was selected for scrutiny and notice under section 143(2) of the Act was issued. In response to the statutory notices, the assessee furnished various details and explanations. Thereafter, assessment under section 143(3) of the Act came to be completed on 24.10.2022 determining the total income at Rs. 2,40,35,49,937/- after disallowing the claim of deduction towards education cess amounting to Rs. 3,18,75,307/-.
2.2. Subsequently, penalty proceedings under section 270A of the Act were initiated separately for under-reporting of income. In response to the notice issued, the assessee filed a reply dated 11.11.2022 contending that the disallowance of education cess arose only on account of the retrospective amendment brought in by the Finance Act, 2022. It was submitted that the deduction towards education cess had been claimed much prior to the said amendment and was otherwise supported by judicial precedents prevailing at the relevant point of time.
2.3. The assessee placed reliance upon the decision of the Sesa Goa Ltd. v. JCIT reported in 379 ITR 321, wherein the Hon’ble Bombay High Court held that “by no stretch of imagination can such a claim be said to constitute furnishing of inaccurate particulars of income or concealment of income.”
2.4. The assessee further submitted that the legislature itself, while introducing the amendment, recognized the bona fide nature of such claims made in earlier years and, accordingly, inserted a special saving provision under section 155(18) of the Act, which excluded levy of penalty subject to fulfilment of prescribed conditions. It was contended that the assessee had every intention to comply with the proviso to section 155(18) by filing the prescribed application before the Ld. AO for recomputation of income, thereby ensuring that the claim of deduction towards cess would not be treated as under-reported income.
2.5. However, it was submitted that the prescribed form contemplated under the proviso to section 155(18) had not been notified by the CBDT at the relevant time and, therefore, the assessee was rendered incapable of making such an application. The assessee thus contended that, in the absence of the prescribed mechanism due to a technical impossibility beyond the control of the assessee, no adverse inference could be drawn against it.
2.6. The assessee also relied on following decisions of the Hon’ble Bombay High Court and Hon’ble Ahmedabad Tribunal in support of the submissions.
CIT v. Yahoo India Pvt. Ltd [ITA 2014 of 2012 (Bombay High Court)]
ITO v. IN.K. Industries Ltd [ITA No. 1910/Ahd/ 2011, order dated 02.05.2016 (Ahmedabad ITAT)]
Sun Petrochemicals Pvt. Ltd v. ITO [ITA No. 1010/Ahd/ 2009 (Ahmedabad ITAT)]-
2.7. The Ld. AO ignored the submissions of the assessee and levied penalty of Rs. 68,12,391/- being 50% of the amount of the tax payable or disallowance made on under reporting of the income u/s. 270A of the Act.
Aggrieved by the Order of the Assessing Officer, the assessee preferred an appeal before the Ld.CIT(A).
3. The Ld.CIT(A) while confirming the penalty observed as under:
“I have considered the submission of the assessee as filed above, case records and gone through the AO’s observation & decision in penalty vis-a-vis assessment order. It is observed from the penalty order that the AO has imposed penalty of Rs. Rs. 68,12,391/- after being satisfied on completion of scrutiny assessment as per the acceptance of the appellant regarding proposed disallowance of deduction of education cess of Rs.. 3,18,75,307/ -. I find from the case records vis-à-vis assessment order that despite getting multiple opportunity of hearing the appellant miserably failed to file satisfactory compliance/ explanation with supporting documents before the assessing officer (AO) in favour of its claim being the penalty levied under section 270A of the Income-tax Act deserves to be deleted. It is observed that the appellant had claimed deduction of education cess in its return of income filed for the relevant assessment year on the bona fide belief, supported by judicial precedents. At the same time it is also observed that the appellant has realised that the disallowance in question is a direct result of a retrospective amendment of Act. Therefore it is mandatory in nature for which the appellant itself has already paid tax in respect of amount of disallowance made on account of cess. Thus the contention of the appellant that the penalty order passed being illegal, beyond jurisdiction and unjustified is incorrect and unacceptable.
Further during appeal proceeding also neither the appellant nor its authorised representative has justifiably established what prevented them to explore the option of making an application by virtue of section 155(18) of the Act. Therefore the appellant miserably failed to substantiate the grounds taken by them with the supporting documents This indicates the appellant is unable to establish its claim in grounds of appeal that penalty being unjustified and unwarranted. Hence for this reason the appeal is liable to be dismissed Considering the entire conspectus of the case the imposition of penalty of Rs. 68,12,391/- made in the penalty order by the AO under section 270Aof the LT Act stand confirmed And the grounds taken by the appellant are dismissed.
Aggrieved by the Order of the Ld.CIT(A) the assessee is an appeal before this Tribunal.
5.The Ld. AR reiterated the submissions advanced before the authorities below. It was submitted that the disallowance of education cess arose solely on account of the retrospective amendment introduced in the Income-tax Act by the Finance Act, 2022. The Ld. AR contended that, at the time of filing the return of income for the relevant assessment year, the assessee had claimed deduction of education cess under a bona fide belief, duly supported by prevailing judicial precedents, that such expenditure was allowable under the Act.
5.1. In support of the aforesaid contention, reliance was placed on the decision of the Sesa Goa Ltd. v. JCIT, wherein the Hon’ble Bombay High Court had accepted the allowability of deduction towards education cess.
5.2 On the contrary the Ld. DR relied on the Orders passed by the authorities below. We have perused the submissions advanced by both sides in light of records placed before u/s.
6. Admittedly, the amendment introduced by the Legislature was retrospective in nature. However, while introducing the said amendment, the Legislature itself recognized the bona fide nature of such claims made in the preceding assessment years and consciously incorporated a saving provision in section 155(18), providing that no penalty shall be leviable subject to fulfilment of certain conditions. For the sake of convenience, the relevant provision and proviso are reproduced hereinbelow:
“Section 155
[(18) Where any deduction in respect of any surcharge or cess, which is not allowable as deduction under section 40, has been claimed and allowed in the case of an assessee in any previous year, such claim shall be deemed to be under-reported income of the assessee for such previous year for the purposes of sub-section (3) of section 270A, notwithstanding anything contained in sub-section (6) of section 270A, and the Assessing Officer shall recompute the total income of the assessee for such previous year and make necessary amendment; and the provisions of section 154 shall, so far as may be, apply thereto, the period of four years specified in sub-section (7) of section 154 being reckoned from the end of the previous year commencing on the 1st day of April, 2021:
Provided that in a case where the assessee makes an application to the Assessing Officer in the prescribed form and within the prescribed time, requesting for recomputation of the total income of the previous year without allowing the claim for deduction of surcharge or cess and pays the amount due thereon within the specified time, such claim shall not be deemed to be under reported income for the purposes of sub-section (3) of section 2704.]
6.1. On a perusal of the aforesaid provision, it becomes evident that the proviso is in the nature of a beneficial and saving provision inserted by the Finance Act, 2022. The proviso grants an opportunity to the assessee to withdraw such claim and avoid consequential penal proceedings, thereby acknowledging the debatable and contentious nature of the issue prevailing in the earlier assessment years.
6.2. We further note that, for the assessment year under consideration, i.e., A.Y. 2020-21, the claim made by the assessee was duly supported by judicial precedents prevailing at the relevant point of time and, therefore, the same cannot be regarded as furnishing of inaccurate particulars of income or as a case of misreporting/under-reporting of income. In our considered view, a claim made on the basis of a plausible interpretation of law prevailing during the relevant period cannot attract penalty merely because such claim subsequently became inadmissible pursuant to a retrospective legislative amendment.
6.3. It is also pertinent to note that the assessee was prevented by reasonable cause from availing the benefit contemplated under the proviso to section 155(18), inasmuch as the prescribed form and procedure for making the application were admittedly not notified by the CBDT at the relevant point of time. Thus, the failure to file the prescribed application cannot be attributed to any deliberate default or contumacious conduct on the part of the assessee. The existence of such reasonable cause, coupled with full disclosure of all material facts in the return of income, clearly rules out any intention to under-report income so as to warrant levy of penalty.
6.4. There is nothing on record to demonstrate that the claim made by the assessee was either mala fide or lacking in disclosure of material facts. Considering the entirety of the facts and circumstances of the case, we are of the considered view that the penalty levied under section 270A of the Act is unsustainable in the eyes of law and deserves to be deleted.
Accordingly, the grounds raised by the assessee stands allowed.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 29/05/2026.
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