ORDER
Astha Chandra, Judicial Member.-The appeal filed by the assessee is directed against the order dated 29.03.2025 of the Ld. Commissioner of Income Tax (Appeals)/NFAC, Delhi [“CIT(A)/NFAC”] whereby he confirmed the penalty of Rs.93,30,373/-levied by the Ld. Assessing Officer (“AO”) for under reporting of income u/s 270A of the Income Tax Act, 1961 (the “Act”) pertaining to Assessment Year (“AY”) 2020-21.
2. The assessee has raised the following grounds of appeal:-
“1. That on the facts and circumstances of the case and in law, the impugned order passed by the Hon’ble CIT(A) is based on incorrect appreciation of facts and incorrect interpretation of law, and therefore erroneous, bad in law;
2. That on the facts and circumstances of the case, the penalty order under section 270A is bad in law and void ab initio and same needs to be quashed considering that the AO has initiated the penalty proceedings under the category of under reporting of income in consequence of misreporting (as per the provisions of section 270A(9) read with section 270A(8) while the final order is passed under the category of underreporting of income(as per the provisions of section 270A(2) read with section 270A(7).
3. The CIT(A) has erred in confirming the penalty levied under section 270A of the Act for claiming deduction of Health and Education Cess by the Appellant which was supported by various Judicial precedents.
4. The Ld. AO / CIT(A) has failed to appreciate that the claim of Health and Education Cess was made by Appellant in good faith and hence does not tantamount to under-reporting of income as per the provisions of section 270A of the Act.
5. The Ld. AO has erred in passing the penalty order dated 30th March 2023 without considering the Form 69 filed by the Appellant on 25th March 2023 as per Notification no. 111/2022, dated 28-09-2022 issued by the CBDT.
6. The Ld. AO / CIT(A)has failed to appreciate that Form 69 was filed on 25th March 2023 by the Appellant before due date of 31st March 2023 as per Notification no. 111/2022, dated 28-09-2022 issued by Central Board of Direct Taxation (“CBDT’j and even before the date of passing the penalty order (which was passed on 30” March 2023) and consequently the Appellant is eligible for immunity from levy of penalty under provisions of section 155(18) of the Act.
7. The Ld. AO CIT(A) has failed to appreciate that the Appellant has reduced the amount of MAT credit to be carried forward to the extent of incremental taxes arising on account of disallowance of Health & Education Cess in the current assessment year and has paid higher amount of taxes in the final year of utilisation of MAT Credit.
8. The Ld. AO/ CIT(A) has erred in levying penalty under section 270A without appreciating the fact that the Appellant has not underreported the income as per the exclusions provided under section 270A(6)(a).
9. The Appellant craves leave to add to, withdraw or modify any of the grounds of objections at the time of hearing. “
3. Briefly stated, the facts of the case are that the assessee is engaged in the business of providing software engineering services and solutions for the communication industry. For AY 2020-21, the assessee e-filed its return of income declaring total income of Rs.4,06,55,53,790/-. The case of the assessee was selected for complete scrutiny under the E-assessment Scheme, 2021. The assessment was completed u/s 143(3) r.w.s. 144B of the Act by the Ld. AO vide order dated 24.09.2022 making disallowance of health and education cess of Rs.5,34,01,866/-. The Ld. AO also initiated the penalty proceedings u/s 270A of the Act. After considering the reply of the assessee filed from time to time, the Ld. AO imposed penalty of Rs.93,30,373/- (being 50% of the tax of Rs.1,86,60,746/- on under reported income of Rs.5,34,01,866/-) u/s 270A of the Act, vide order dated 30.03.2023 by observing as under :
“3.7.1 As seen from the above reply of the assessee, the assessee has contented that while passing the assessment order the AO has committed various mistakes which are apparent from records, which needs rectification u/s.154 of the Income Tax Act, 1961 and requested to keep the proceedings kept in abeyance till the disposal of the rectification application. However, there is no direct relation between addition made by the Assessing Officer in the assessment order and points raised by the assessee for rectification. The Assessing Officer has made addition on account of addition of “Health and Educational Cess” Rs. 5,34,01,866/-. In view of the above, it is concluded the assessee has not furnished sufficient explanation as to why the penalty u/s. 270A should not be imposed for the above assessment year except stating that rectification applications filed which is subject matter of the JAO and does not have any bearing to the penalty proceedings by the Faceless Penalty Officer. Therefore, the further contention of the assessee to keep the penalty proceeding in abeyance is baseless. Accordingly, it is inferred that this is a fit case for levying penalty u/s. 270A of Income Tax Act, 1961 for the above assessment year. Hence, penalty order is being passed accordingly.”
4. The appeal of the assessee against the penalty order passed by the Ld. AO has been confirmed by the Ld. CIT(A)/NFAC vide his impugned order dated 29.03.2025 by observing as under :
“7. 1 Ground no. 1 pertains to the passing of penalty order u/s 270A. The appellant states that it had time available till the 31.03.2023 for filing of Form 69 and, therefore, the order should have been passed only on that date. The fact is that form 69 has been filed on 25.03.2023 and the reference to the same is also made in para 3.22 of the said order where the reply of the appellant dated 26.03.2023 has been reproduced. Since form 69 has been filed well before the due date the AO could have passed the order also considering the submission of the appellant during penalty proceedings. Therefore, to state that the order should have been passed only on the 31st or after the time available to the appellant cannot be accepted. The ground is dismissed.
7.2 Ground no. 2 pertains to the newly inserted proviso to sub section 18 of section 155. The appellant states that even after timely filing of Form 69 the penalty has been levied. The proviso to Section 155(18) states that the benefit will be given to the assessee in a case where the assessee makes an application in the prescribed form, within the prescribed time and request for recomputation and pays the amount due within the specified time. It is seen in this case that while the form has been filed on time and in the proper format, the appellant claims to have carried forward reduced a MAT credit for A.Y. 2022-23, after adjusting for the incremental liability which arose due to the disallowance of health and education cess. A plain reading of the Act shows that the amount/ demand raised on account of the said disallowance has to be paid. In this case, the appellant has sought an adjustment in the succeeding years to account for this disallowance. This is not acceptable, considering the language of the Act and, therefore, the ground is disallowed.
7.3 Ground no. 3 pertains to the initiation of penalty u/s 270A. The assessment order in this case states that penalty u/s 270A is being initiated. There is no reference to any specific subsection and therefore this extrapolation on the part of the assessee is not acceptable and the ground is dismissed.
7.4 Ground no. 4 states that the penalty is that in law since the appellant is covered under the exclusions provided u/s 270A(6)(a) of the Act. It is seen that a specific subsection was introduced in section 155, i.e. subsection 18, to specifically deal with the issue of the disallowance for claims made u/s 40(a)(ii) and it is held that these shall be deemed to be under reporting, notwithstanding any contained in subsection (6) of section 270A. In view of this specific carve out, the claim of the appellant is not acceptable and the ground is dismissed. “
5. The Ld. AR submitted that the assessee has already accepted the disallowance made by the Ld. AO on account of claim on health and education cess u/s 40(a)(ii) of Rs.5,34,01,866/- during the course of assessment proceedings vide its submission made on 30.03.2022. Reiterating the submissions made before the lower authorities, the Ld. AR submitted that the assessee had initially claimed deduction on a bonafide basis and in view of the favourable judicial ruling of the Hon’ble High Courts and Tribunal including the Jurisdictional Delhi Tribunal at that point of time. Once the proposed amendment vide Finance Bill, 2022 in respect of non deductibility of cess levied on Income Tax Act as an expense while computing business income, was enacted and came into force by the Finance Act, 2022-23, the assessee withdrew its claim of deduction of health and education cess in the subject AY 2020-21 amounting to Rs.5,34,01,866/- (pages 187 and 235 of the paper book refers).
5.1 Referring to the amended provisions inserted with Finance Act, 2022 as an Explanation 3 to section 40(1)(ii) of the Act with retrospective effect from AY 2005-06 r.w.s. 155(18) of the Act, the Ld. AR further submitted that where an application is made to the Ld. AO in the prescribed form within the prescribed time then such claim shall not be deemed to be under reported income and falls outside the purview of penalty provisions u/s 270A of the Act. He submitted that the assessee had infact filed a letter with the Ld. CIT(A)/NFAC for a voluntary disallowance of health and education cess and also filed Form 69 as per requirement of section 155(18) of the Act. The assessee filed Form 69 on 25.03.2023 within the specified time of filing the same which was available till 31.03.2023. He also submitted that the assessee has suo-motu brought forward MAT credit of Rs.1,39,38,45,890 for AY 2022-23 vis-a-vis MAT credit carried forward of Rs.1,41,25,06,638 for AY 2021-22 which is clearly evident from the Schedule MATC of the ITR’s of both the AYs. The MAT credit was brought forward by the assessee for AY 2022-23 lower by Rs.1,86,60,746 (Rs.1,41,25,06,638 – Rs.1,39,38,45,890) after adjusting the incremental liability that may arise on disallowing health and education Cess. He, therefore, submitted that there is no basis for holding that the assessee has under-reported its income or done any act without good faith and due diligence and hence the provisions of section 270A of the Act do not apply to the case of the assessee and the penalty imposed on the assessee should be deleted.
5.2 In support of his contentions, the Ld. AR relied on the following cases wherein the Court(s)/Tribunal(s) have held that once the assessee withdrew its claim of deduction of cess u/s 40(a)(ii) of the Act in view of insertion of section 155(18) of the Act, the assessee is entitled for immunity from imposition of penalty u/s 270A of the Act.
| i. | | G R Infraprojects Ltd. v. Assistant Commissioner of Income-tax (Rajasthan)/(AY2020-21) (TS-17-HC-2024(RAJ) Dated 02.01.2024; |
| ii. | | Global Coal and Mining (P.) Ltd. v. National Faceless Penalty Centre [IT Appeal No. 2682 (Delhi) of 2024, dated 18-3-2025] (AY 2020-21); |
| iii. | | IIFL Samasta Finance Ltd. v. Dy. CIT [IT Appeal No. 1054 (Bang.) of 2024, dated 27-9-2024] (AY 2020-21). |
6. The Ld. DR, on the other hand, strongly supported the order of the Ld. AO and the Ld. CIT(A)/NFAC.
7. We have heard the Ld. Representatives of the parties and perused the material available on record and paper book filed by the Ld. AR on behalf of the assessee. We have also perused the decisions cited before us. It is the contention of the Ld. Counsel for the assessee that the assessee had made a bonafide claim of health and education cess which was approved by the various High Courts including the Hon’ble Jurisdictional Bombay High Court in the case of Sesa Goa Limited v. JCIT (Bombay)/[2020] 423 ITR 426 (Bombay) and the Hon’ble Rajasthan High Court in the case of G R Infraprojects Limited (supra). The allowability of cess as an expense was highly debatable issue which stood rested by the amendment brought in by the Finance Act, 2022 with retrospective effect. We find that before the amendment there were several favourable judgments allowing the claim of cess as an expense by the assessee. Admittedly, the assessee has already accepted the impugned disallowance on account of claim of health and education cess during the course of assessment proceedings and filed a letter for a voluntary disallowance of health and education cess. Post amendment brought by the Finance Act, 2022, the assessee also filed Form 69 as mandated by the amended provisions withdrawing its claim of deduction towards health and education cess for AY 2020-21. Therefore, in our view, there was no error on the part of the assessee in claiming education cess as an expense for the relevant AY under consideration. Since the assessee claimed the deduction based on the decision on the impugned issue in favour of the assessee and had also made the requisite compliance mandated by law, in our view, the penalty levied by the Ld. AO and confirmed by the Ld. CIT(A) is not sustainable. The Revenue has not brought on record any contrary material to rebut the submissions of the Ld. AR.
8. We find that the Hon’ble Rajasthan High Court in the case of G R Infraprojects Limited (supra) had held as under :
9. On merits, learned counsel for the petitioner-company has submitted that while filing return for the financial year 2019-20, the petitioner-company claimed the benefit of deduction of education cess, which was permissible during the relevant time of filing return of income in view of the judgment passed by this Court in Chambal Fertilisers and Chemical Ltd. v. JCIT, Range 2, Kota (D.B. Income Tax Appeal No.52/2018), wherein the Division Bench of this Court has categorically held that cess is not tax. It is further submitted that the Bombay High Court in Sesa Goa Limited v. JCIT (ITA No.17/2013) has also held that education cess is allowable expenditure/deduction.
10. It is contended that in the year 2022 vide Finance Act, 2022 sub-section (18) has been inserted in Section 155 of the Act and the said amendment came into force on 01.04.2022. As per the said amendment, it is provided that any deduction of any surcharge or cess, which is not allowable as deduction under Section 40 of the Act 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 under subsection (3) of Section 270A of the Act. It is further provided that such claim of surcharge/cess shall not be considered as under- reported in case the assessee makes an application to the assessing officer in the prescribed form and within the prescribed time, requesting for recomputation of total income of the previous year without allowing the claim for deduction of surcharge/cess and pay the amount of tax due thereon within specified time.
11. Learned counsel has further argued that the benefit of allowable deduction of education cess was claimed by the petitioner-company when it was permitted as per law, however, as soon as the amendment under Section 155 of the Act was introduced by way of inserting sub-section (18), the petitionercompany immediately suo moto withdrew its claim for cess amounting to Rs. 12,85,58,982/- to buy mental peace and to avoid litigation and levy of penalty etc. vide letter dated 19.03.2022. In such circumstances, it cannot be said that the petitioner-company has concealed any fact or misrepresented. In the above circumstances, it cannot be said that the petitionercompany has under-reported the income by way of misreporting.
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15. Per contra, learned counsel for the respondents countering the submissions of counsel for petitioner on merits has argued that the respondent-department has not committed any illegality in passing the impugned order as the petitioner-company is not eligible for immunity from levying of penalty under Section 270AA of the Act.
16. Heard learned counsel for the rival parties.
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19. For proper adjudication of controversy involved, we deem it appropriate to quote the relevant provisions of the Income Tax Act, which read thus:
“155. Other amendments
(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 underreported income for the purposes of sub-section (3) of section 270A.
270A. Penalty for under reporting and misreporting of income.
(9) The cases of misreporting of income referred to in sub- section (8) shall be the following, namely:-
(a) misrepresentation or suppression of facts;
(b) failure to record investments in the books of account;
(c) claim of expenditure not substantiated by any evidence;
(d) recording of any false entry in the books of account;
(e) failure to record any receipt in books of account having a bearing on total income; and
(f) failure to report any international transaction or any transaction deemed to be an international transaction or any specified domestic transaction, to which the provisions of Chapter X apply.
270AA. Immunity from imposition of penalty, etc. (1) An assessee may make an application to the Assessing Officer to grant immunity from imposition of penalty under section 270A and initiation of proceedings under section 276C or section 276CC, if he fulfils the following conditions, namely:-
(a) the tax and interest payable as per the order of assessment or reassessment under sub-section (3) of section 143 or section 147, as the case may be, has been paid within the period specified in such notice of demand; and
(b) no appeal against the order referred to in clause (a) has been filed.
(2) An application referred to in sub-section (1) shall be made within one month from the end of the month in which the order referred to in clause (a) of sub-section (1) has been received and shall be made in such form and verified in such manner as may be prescribed.
(3) The Assessing Officer shall, subject to fulfilment of the conditions specified in sub-section (1) and after the expiry of the period of filing the appeal as specified in clause (b) of sub-section (2) of section 249, grant immunity from imposition of penalty under section 270A and initiation of proceedings under section 276C or section 276CC, where the proceedings for penalty under section 270A has not been initiated under the circumstances referred to in sub-section (9) of the said section 270A.
(4) The Assessing Officer shall, within a period of one month from the end of the month in which the application under sub-section (1) is received, pass an order accepting or rejecting such application:
Provided that no order rejecting the application shall be passed unless the assessee has been given an opportunity of being heard.
(5) The order made under sub-section (4) shall be final.
(6) No appeal under section [section 246 or] section 246A or an application for revision under section 264 shall be admissible against the order of assessment or reassessment, referred to in clause (a) of sub-section (1), in a case where an order under sub- section (4) has been made accepting the application.”
20. Sub-section (18) of Section 155 of the Income Tax Act is inserted vide Finance Act, 2022 w.e.f. 01.04.2022. The above referred provisions provide that deduction of any surcharge, cess, which is not allowable as deduction under Section 40 of the Income Tax Act, then such claim shall be deemed to be under-reported income of the assessee for the purpose of levy of penalty under Section 270A of the Act. It further provides that if an assessee makes an application to the assessing officer in prescribed form in prescribed time requesting for recomputation of income of previous year deducting the surcharge or cess and pays the difference amount within specified time, his claim shall not be deemed to be unreported income.
21. Section 270A of the Act specifies penalty for under-reporting and misreporting, wherein sub-section (9) of Section 270AA of the Act categorizes the cases of misreporting of income.
22. Sub-section (3) of Section 270AA of the Income Tax Act empowers the assessing officer to grant immunity from imposition of penalty under Section 270A and initiation of proceedings under Section 276C or under Section 276CC of the Income Tax Act on fulfillment of the conditions of sub-section (1) of Section 270AA after the expiry of the period of filing the appeal if the proceeding has not been initiated against the assessee under the circumstances referred to in subsection (9) of Section 270A.
23. Sub-section (4) of Section 270AA provides that the assessing officer shall pass an order accepting or rejecting any application filed by the assessee seeking immunity from imposition of penalty under Section 270A within a period of one month from the end of month in which the application under sub-section (1) is received.
24. In the case of Schneider Electric South East Asia (HQ) Pte Ltd. (supra), Delhi High Court has held as under:
“6. Having perused the impugned order dated 09th March, 2022, this Court is of the view that the Respondents’ action of denying the benefit of immunity on the ground that the penalty was initiated under Section 270A of the Act for misreporting of income is not only erroneous but also arbitrary and bereft of any reason as in the penalty notice the Respondents have failed to specify the limb -“underreporting” or “misreporting” of income, under which the penalty proceedings had been initiated.
7. This Court also finds that there is not even a whisper as to which limb of Section 270A of the Act is attracted and how the ingredient of sub-section (9) of Section 270A is satisfied. In the absence of such particulars, the mere reference to the word “misreporting” by the Respondents in the assessment order to deny immunity from imposition of penalty and prosecution makes the impugned order manifestly arbitrary.
8. This Court is of the opinion that the entire edifice of the assessment order framed by Respondent No.1 was actually voluntary computation of income filed by the Petitioner to buy peace and avoid litigation, which fact has been duly noted and accepted in the assessment order as well and consequently, there is no question of any misreporting.
9. This Court is further of the view that the impugned action of Respondent No.1 is contrary to the avowed Legislative intent of Section 270AA of the Act to encourage/incentivize a taxpayer to (i) fast-track settlement of issue, (ii) recover tax demand; and (iii) reduce protracted litigation.
[Emphasis supplied]
25. In Ultimate Infratech Private Limited v. National Faceless Assessment Centre Delhi & Anr.(supra), Delhi High Court has held as under:
“5. Having heard learned counsel for the petitioner, this Court is of the view that it is only in cases where proceedings for levy of penalty have been initiated on account of alleged misreporting of income that an assessee is prohibited from applying and availing the benefit of immunity from penalty and prosecution under Section 270AA.
6. In fact, the statutory scheme for grant of immunity is based on satisfaction of three fundamental conditions, namely, (i) payment of tax demand; (ii) non-institution of appeal; and (iii) initiation of penalty on account of under reporting of income and not on account of misreporting of income.
7. This Court is also of the view that the petitioner cannot be prejudiced by the inaction of the Assessing Officer in passing an order under Section 270AA of the Act within the statutory time limit as it is settled law that no prejudice can be caused to any assessee on account of delay/default on the part of the Revenue.
8. In the present case, the petitioner has satisfied the aforesaid conditions, inasmuch as, (i) the tax has been paid on the additions; (ii) appeal has undisputedly not been filed; and (iii) penalty (as would be evident from the penalty notice) has been initiated on account of “underreporting” of income.”
26. In Rohit Kapur v. Principal Commissioner of Income Tax- 7, New Delhi & Anr. (supra), Delhi High Court has held as under:
“12. Before proceeding further, it is relevant to refer to Subsection 4 of Section 270AA of the Act, which reads as under:
270AA xxxx xxxx xxxx The Assessing Officer shall, within a period of one month from the end of the month in which the application under sub-section (1) is received, pass an order accepting or rejecting such application: Provided that no order rejecting the application shall be passed unless the assessee has been given an opportunity of being heard. xxxx xxxx xxxx
13. The proviso to Sub-section (4) of Section 270AA of the Act makes it amply clear that before an application of rejected, the applicant must be given an opportunity of being heard. In the present case, there is no dispute that the petitioner was not afforded the said opportunity.
14. In view of the above, this Court considers it apposite to set aside the impugned order as the same has been passed without following the procedure as set out in Section 270AA(4) of the Act. ”
27. In the present case, neither in the assessment order dated 22.09.2022 nor in the subsequent show-cause notices, the Assessing Officer has specified that the case of the petitionercompany is covered under which part of sub-section (9) of Section 270A of the Act. Even in the impugned order dated 31.03.2023 also, it is not specified that which part of sub-section (9) of Section 270A of the Act is attracted in the case of petitioner.
28. Otherwise also, the petitioner-company in its reply to show cause notice dated 16.03.2022 and subsequent replies to the different show cause notices has justified its claim for deduction of education cess, however, the Assessing Officer without considering the said justification or rejecting the same has passed the impugned order mechanically. We are of the view that once the petitioner-company has withdrawn its claim vide letter dated 19.03.2022 for deduction of education cess in view of insertion of sub-Section (18) of Section 155 before it came into force w.e.f. 01.04.2022, the petitioner-company is entitled for immunity from imposition of penalty under Section 270A of the Act though the proceedings against it were initiated for imposition of penalty. Moreover, while initiating the said proceedings vide order dated 22.09.2022, the Assessing Officer has failed to specify that which part of sub-Section (9) of Section 270A is attracted in the case of petitioner-company, the said initiation is nonest. The respondent vide impugned order dated 31.03.2022 has clarified that the petitioner-company is fulfilling the conditions mentioned in subSection (1) and (2) of Section 270AA, however, its conclusion that the petitioner-company do not fulfill the condition mentioned in subsection (3) of Section 270AA of the Act is illegal and cannot be sustained. ”
9. We find that the Delhi Tribunal in the case of Global Coal and Mining Pvt. Ltd. (supra) in turn relying on the decision of the Hon’ble Bombay High Court in Sesa Goa’s case, has held as under :
“6. We have heard the rival submissions and perused the materials available on record. In the instant case, from the perusal of the assessment order, we find that the Assessing Officer has initiated the penalty proceedings u/s 270A by recording the satisfaction that assessee has misreported the income and also directed to initiate the penalty proceedings separately u/s 270A for misreporting of income. However, as per the notice issued along with assessment order dated 08.09.2022 the penalty proceedings u/s 270A were initiated for under reported income is inconsequence of misreporting thereof. Such observations of the Assessing Officer are contrary to the satisfaction recorded in the assessment order where the penalty proceedings were initiated for misreporting of income. Further, the penalty is levied @ 200% u/s 270A(8) of the Act for under reporting of income as a consequence of misreporting. In the penalty order, the AO alleged that assessee has claimed deduction of Rs.99,58,838/- on account of Education Cess which is not allowable expenditure wholly and exclusively for the purposes of business. Further, the AO has placed reliance of amendment made in Finance Act 2022 where it is provided that corporate cannot claim deduction for taxes paid as cess u/s 37(1) of the Act. Such amendment was retrospective in nature and, accordingly, AO was of the opinion that assessee has under reported its income as a consequence of misreporting. Identical issue was came up before the Co-ordinate Bench of ITAT, Bengalore, wherein the Co-ordinate Bench in Para 5.10 to 5.12 has observed as under:-
“5.10 Therefore, it goes without saying that for the applicability of section 270A of the Act, the conditions stated therein must be strictly followed. A mere making of the claim which is based on a honest and bonafide belief and even offered for taxation before the completion of assessment by itself will not amount to under reporting resulting in misreporting of income.
5.11 In the present case, the assessee company well before the completion of the assessment proceedings ie. on 16.9.2022 filed a letter to AO for voluntary declaration of health and education cess by enclosing the revised computation. Considering the totality of the case, we are of the opinion that provisions of section 270A(6)(a) of the Act is squarely applicable in case of assessee company. Here, the assessee offered an explanation before the AO and we are of the opinion that the explanation is also bonafide. Since the assessee company claimed the deduction based on decision of Hon’ble jurisdictional & Non Jurisdictional High Court as well as Tribunals, and the assessee had disclosed all the material facts to substantiate the explanation. Further, the authorities below have also not controverted the decision relied on by the assessee to be incorrect. After the amendment in the Finance Act, assessee had also voluntarily disclosed the health and education cess before the AO well before the completion of assessment proceedings.
5.12 We are of the opinion that the penalty by hereditary nature is always discretionary. The legislature has used the word “may” in section 270A(1) of the Act which clearly says that it is discretionary on the part of the AO to levy penalty or not. We are also of the opinion that penalty is not at par with the tax and interest and therefore, penalty should not be levied in a light hearted manner or in routine manner and not every additions/disallowances are liable for penalty. The primary onus is on the revenue to prove that assessee falls under particular limb of default. The AO have to bring the case in the four corners of the sections in order to levy penalty which in our opinion, the authorities below failed to do so. The authority below misdirected themself by citing various irrelevant decisions of Hon’ble Supreme Court without understanding the real issues involved in the case of assessee company. Therefore, we are of the opinion that the explanation offered by the assessee is bonafide and the assessee has disclosed all material facts to substantiate the explanation. With the above observations, we delete the penalty levied u/s 270A of the Act and allow the appeal of the assessee”.
7. Since, in the instant case, the assessee has made a bonafide claim which was approved by various High Courts in the case of Sesa Goa Ltd. v. JCIT reported in [2020] (Bombay) and Chambal Fertilisers & Chemicals Ltd. v. JCIT reported in D.B. ITA No.52 of 2018 (Rajsthan High Court). Thus, claim of the assessee was not malafide and the allowability of Education Cess as expenses is highly debatable which stood resolved by the amendment made in Finance Act, 2022. At this juncture, it is relevant to state the explanation given in the —Memorandum explaining the provisions of Finance Bill, 2022″ wherein while explaining the amendment proposed in Clause -13, it is observed as under:
“Clarification regarding treatment of cess and surcharge
Section 40 of the Act specifies the amounts which shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”. Sub-clause (ii) of clause (a) of section 40 of the Act provides that any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”.
2. However, certain taxpayers are claiming deduction on account of ‘cess’ or ‘surcharge’ under section 40 of the Act claiming that ‘cess’ has not been specifically mentioned in the aforesaid provisions of section 40(a)(ii) and, therefore, cess is an allowable expenditure. This view has been upheld by Courts in a few judgments. Further, Courts are also relying upon the CBDT Circular No. 91/58/66-ITJ(19) dated 18-05-1967.
3. The assessees rely upon the decision of the Hon’ble Bombay High Court in the case of “Sesa Goa Limited v. JCIT ” and further on the decision of the Hon’ble Rajasthan High Court in the case of “Chambal Fertilizers & Chemicals Ltd v. JCIT”: D.B Income-tax Appeal No. 52/2018 decided on 31-07-2018, wherein, the Hon’ble High Courts relied upon the aforesaid CBDT Circular Dt. 18-05- 1967 and in view of the interpretation made by the CBDT have held that ‘education cess’ can be claimed as an allowable deduction while computing the income chargeable under the heads “profits and gains of business or profession”. Based on these decisions ITAT in various judgments have followed the same reasoning and have allowed deduction on account of payment of “Cess”.
4. However, one of the latest judgments of ITAT Kolkata has discussed the two High Court judgments as well as other judgments vide order dated 26-10-2021 in the case of M/s. Kanoria Chemicals & Industries Ltd ITA No. 2184/Kol/2018 (TS-1129- ITAT2021 Kol) and has held that the “Cess” is not to be allowed as deduction. The relevant portion of the judgment is produced below:
“19. However, with due respect to the decisions of the Hon’ble Bombay High Court and Hon’ble Rajasthan High Court and of coordinate Benches of this Tribunal, we find that the issue is squarely covered by the decision of the Hon’ble Apex Court of the country in the case of “CIT v. K. Srinivasan” (1972) 83 ITR 346, wherein the following questions came for adjudication before the Hon’ble Apex Court:- ” Whether the words “Income tax” in the Finance Act of 1964 in sub- s (2) and sub-s.(2)(b) of s. 2 would include surcharge and additional surcharge.”
20. The Hon’ble Supreme Court answered the question in favour of revenue observing as under:- “In our judgment it is unnecessary to express any opinion in the matter because the essential point for determination is whether surcharge is an additional mode or rate for charging income tax. The meaning of the word “surcharge” as given in the Webster’s New International Dictionary includes among others “to charge (one) too much or in addition” also “additional tax”. Thus the meaning of surcharge is to charge in addition or to subject to an additional or extra charge. If that meaning is applied to s. 2 of the Finance Act 1963 it would lead to the result that income tax and super tax were to be charged in four different ways or at four different rates which may be described as (i) the basic charge or rate (In part I of the First Schedule); (ii) Sur- charge; (iii) special surcharge and (iv) additional surcharge calculated in the manner provided in the Schedule. Read in this way the additional charges form a part of the income tax and super tax.”
21. The Hon’ble Supreme Court, therefore, has decided the issue in favour of the revenue and held that surcharge and additional surcharge are part of the income- tax. At this stage, it is pertinent to mention here that ‘education cess’ was brought in for the first time by the Finance Act, 2004, wherein it was mentioned as under:- “An additional surcharge, to be called the Education Cess to finance the Government’s commitment to universalise quality basic education, is proposed to be levied at the rate of two per cent on the amount of tax deducted or advance tax paid, inclusive of surcharge.”
22. The provisions of the Finance Act 2011 relevant to the Assessment Year under consideration i.e. 2012-13 are also relevant. For the sake of ready reference, the same is reproduced hereunder:- 2(11) The amount of income-tax as specified in subsections (1) to (10) and as increased by a surcharge for purposes of the Union calculated in the manner provided therein, shall be further increased by an additional surcharge for purposes of the Union, to be called the “Education Cess on income-tax”, calculated at the rate of two per cent. of such income-tax and surcharge, so as to fulfil the commitment of the Government to provide and finance universalised quality basic education.
23. A perusal of the aforesaid provisions of the Finance Act 2004 and Finance Act 2011 would show that it has been specifically provided that ‘education cess’ is an additional surcharge levied on the income-tax. Therefore, in the light of the decision of the Hon’ble Supreme Court in the case of “CIT v. K. Srinivasan” (supra) the additional surcharge is part of the income-tax. The aforesaid decision of the Hon’ble Apex Court and the provisions of Finance Act, 2004 and the relevant provisions of section 2(11) & (12) of the subsequent Finance Acts have not been brought into the knowledge of the Hon’ble High Courts in the cases of “Sesa Goa Ltd” & “Chambal Fertilisers” (supra). Since the decision of the Hon’ble Supreme Court prevails over that of the Hon’ble High Courts, therefore, respectfully following the decision of the Hon’ble Supreme Court in the case of “CIT v. K. Srinivasan” (supra), this issue is decided against the assessee. The additional ground of assessee’s appeal is accordingly dismissed.”
5. Rajasthan High Court has also relied upon the circular dated 18.05.1967 issued by CBDT, which is being reproduced as under:
“Interpretation of provision of s.40(a)(ii) of IT Act, 1961-Clarification regarding 18/05/1967 BUSINESS EXPENDITURE SECTION 40(a)(ii),
Recently a case has come to the notice of the Board where the ITO has disallowed the ‘cess’ paid by the assessee on the ground that there has been no material change in the provisions of s.10(4) of the old Act and s.40(a)(ii) of the new Act.
2. The view of the ITO is not correct. Clause 40(a)(ii) of the IT Bill, 1961 as introduced in the Parliament stood as under: “(ii) any sum paid on account of any cess, rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains”.
When the matter came up before the Select Committee, it was decided to omit the word ‘cess’ from the clause. The effect of the omission of the word ‘cess’ is that only taxes paid are to be disallowed in the assessments for the year 1962- 63 and onwards.
3. The Board desire that the changed position may please be brought to the notice of all the ITOs so that further litigation on this account may be avoided.”
6. In the above referred Circular issued by CBDT, ‘Cess’ is to be allowed under sub-clause (ii) of clause (a) of section 40 of the Act. However, it is to be noted that ‘Cess’ is imposed not only by the Central Government through Finance Act for a financial year, but also by various State Governments. It is pertinent to mention that in the above referred Circular of CBDT, there is no reference to the ‘Cess’ imposed by the Central Government through Finance Act for a particular year. This CBDT circular needs to be seen from the perspective that “Education Cess” imposed by Finance Act 2004 and subsequent Acts and then designated as “Education and Health Cess” are actually tax in the form of additional surcharge, as stated clearly in each of the relevant Finance Act imposing such “Cess”. It is only called “Cess” since they were imposedfor a particular purpose of fulfilling the commitment of the Government to provide and finance quality health services and universalized quality basic education and secondary and higher education.
7. This circular was in reference to “Cess” imposed by State Government which is actually of the nature of “Cess” and not of the nature of “Additional Surcharge” being termed as “Cess” in the relevant Finance Act. When an additional surcharge is imposed by the Central Government and it is named as “Cess”, then its allowability needs to be examined whether an additional surcharge is allowed to be a deduction or not. Hon’ble Supreme Court in the case of K Srinivasan has held that “surcharge” and “additional surcharge” are tax. Hence, the additional surcharge named as “Cess”and imposed by the Central Government through the Finance Act is nothing but a tax and hence, needs to be disallowed under sub-clause (ii) of clause (a) of section 40 of the Act. The relevant part of Hon’ble Supreme Court judgment is as under:
7. The above legislative history of the Finance Acts, as also the practice, would appear to indicate that the term “Income tax” as employed in Section 2 includes surcharge as also the special and the additional surcharge whenever provided which are also surcharges within the meaning of Article 271 of the Constitution. The phraseology employed in the Finance Acts of 1940 and 1941 showed that only the rates of income tax and supertax were to be increased by a surcharge for the purpose of the Central Government. In the Finance Act of 1958 the language used showed that income tax which was to be charged was to be increased by a surcharge for the purpose of the Union. The word “surcharge” has thus been used to either increase the rates of income tax and super tax or to increase these taxes. The scheme of the Finance Act of 1971 appears to leave no room for doubt that the term Income tax” as used in Section 2 includes surcharge.”
8. Since the judgments of Rajasthan High Court and Bombay High Court did not consider the judgment of Hon’ble Supreme Court discussed above, the judgments of these two High Courts appear to be per incuriam. It may be mentioned that in paragraph 578 at page 297 of Halsbury’s Laws of England, Fourth Edition, the rule of per incuriam is stated as follows
“A decision is given per incuriam when the court has acted in ignorance of a previous decision of its own or of a court of coordinate jurisdiction which covered the case before it, in which case it must be decided which case to follow; or when it has acted in ignorance of a House of Lords decision, in which case it must follow that decision; or when the decision is given in ignorance of the terms of a statute or rule having statutory force.”
9. From the above discussion it may be seen that the interpretations of two High courts and various ITATs are against the intention of legislature and not in line with the judgment of Hon’ble Supreme Court. Hence, in order to make the intention of the legislation clear and to make it free from any misinterpretation, it is proposed to include an Explanation retrospectively in the Act itself to clarify that for the purposes of this sub-clause, the term —tax” includes and shall be deemed to have always included any surcharge or cess, by whatever name called, on such tax. Amendment is made retrospectively to make clear the position irrespective of the circular of the CBDT.
10. This amendment will take effect retrospectively from 1st April, 2005 and will accordingly apply in relation to the assessment year 2005-06 and subsequent assessment years.
[Clause 13]”
The aforesaid explanation makes it clear that insertion of Explanation retrospectively was with sole object of clear the intention of the legislature and make it free from any misinterpretation. Therefore, there was no error on the part of the assessee in claiming education cess as expenses u/s 37(1) of the Act nor any malafide is established as when it was claimed as expenses, there were contrary judgments available and assessee followed one of the view which was in its favour. In view of these facts and by following the decisions of Co-ordinate Bench of Bangalore in case of IIFL Samasta Finance Limited v. DCIT (supra), in our opinion penalty could not be levied u/s 270A of the Act in the hands of assessee for claim of Education Cess which was brought to tax based on the retrospective amendment in Act. Accordingly, we hereby direct the AO to delete the penalty.”
10. Similar view has been taken by the Bangalore ITAT in the case of IIFL Samasta Finance Limited (supra) by holding as under :
“5. We have heard the rival submissions and perused the materials available on record. The AO has passed an order u/s 143(3) r.w.s. 144B of the Act on 16.9.2022 with a total income of Rs.128,25,28,401/- by making two disallowances in the assessment order viz. (a) disallowance of employee’s share of provident contribution u/s 36(1)(va) of the Act amounting to Rs.16,61,049/- and (b) disallowance of education cess claimed as deduction u/s 37 of the Act amounting to Rs.1,22,79,936/-. It is an undisputed fact that the Return of Income for the Asst. year under consideration was filed on 13.02.2021 and at the time of filing the Return, there were judgments of certain Jurisdictional as well as Non jurisdictional High Courts and the Tribunals cited supra in favour of the assessee and accordingly the assessee company claimed the same as expenditure in the original return of income based on an honest & bonafide belief that these are allowable expenditure. The assessee company not only contended the same before the AO but also before the ld. CIT(A). The Authorities below have also not disapproved that the judgments relied upon by the assessee company are incorrect. We are of the opinion that everything would depend upon the Return of Income filed because that is the only document where the assessee company can under report its Income or mis-report its Income. When such Income are found to be under reported in the return of Income or misreported in the return, then only the liability would arise. It is also an undisputed facts that with regard to employee’s contribution towards PF, the assessee contended before the authorities below that the claim was made in the return of income based on the decision of Hon’ble Jurisdictional High Court of Karnataka in the case of Essae Teroka Pvt. Ltd. v. DCIT cited (supra), wherein the employees contribution if paid before the due date of filing the return of income held to be allowed as per provisions contained in section 43B of the Act. It is only due to the clarification amendment in the Finance Act, 2021 which came after filing the Return of Income for the Asst. year 2020-21 by adding explanation2 in the section 36(1)(va) which says that the provisions of Section 43B shall not apply and shall be deemed never to have been applied for the purposes of determining the “due date” under this clause and as such the AO started disallowing the employee’s contribution to PF retrospectively. At the time of filing the return of Income only an order of the jurisdictional High Court in favour of the assessee company was there which was binding judicial precedent and based on that the assessee on a honest and bonafide belief claimed the same as deduction. Further the Hon’ble Apex court decision in the case of Checkmate Services Pvt. Ltd v. CIT as reported in civil Appeal No. 2833 of 2016 which ultimately settled the issue in favour of the revenue came only on 12/10/2022 i.e. way after filing the return of Income and till this order of the Hon’ble Apex Court, the ld. AO should have followed the jurisdictional High Court’s order. As submitted by the AR of the Assessee company that the disallowance under the employee’ share to PF was also not contested before the higher Authorities and the assessee company accepted the Assessment Order as well. Therefore, we are of opinion that the assessee’s contention before the authorities below that there was neither under reporting of Income nor mis reporting of Income seems to be correct. Now with regard to the deduction claimed in respect of Health & education cess amounting to Rs.1,22,79,926/-, the assessee contended that such deduction was claimed based on decision of the Hon’ble High Court of Mumbai as well as Hon’ble Rajasthan High Court noted (supra), which were also followed by Income Tax Tribunal, Pune and Kolkata. Since the deduction of Health & education cess was claimed on an honest & bonafide belief based on certain judicial pronouncements in favour of the assessee, there is no question of under reporting or misreporting of income. Further, the assessee contention that the Finance Act, 2022 with retrospective effect from 2005 brought the word “cess” within the meaning of tax which was not there at the time of filing the return for the Asst. year 2020-21. Therefore, the assessee company before the completion of assessment also filed a letter together with the revised computation of income withdrawing the claim of deduction of the Health & education cess as expenses since the filing of revised return was barred by time, which fact has been duly noted and accepted in the Asessment Order. Therefore we also find merits in this contention of the assessee too.
5.1 We also cannot brush aside the fact that assessee company had also filed Form No. 68 on 6.10.2022 as per the provision contained u/s 270AA(2) of the Act requesting for grant of immunity. The AO merely by stating that on the basis of the facts of the case, it is seen that it is not a case wherein immunity u/s 270A can be granted & accordingly rejected the application for grant of immunity vide Order dated 28/11/2022. The AO has levied penalty u/s 270A of the Act both under the provisions of sub-section (7) of section 270A of the Act as well as sub-section (8) of section 270A of the Act totaling Rs.84,58,184/-. The penalty under sub-section (7) of section 270A of the Act was levied for disallowance of employees contribution u/s 36(1)(va) of the Act treating as under reported under sub section (2) of Section 270A of the Act whereas disallowance of deduction of Health & education cess u/s 37 of the Act was considered under reported is in consequence of misreporting of income under section 270A(2) rws 270(9) of the Act.
5.2 For the purpose of evaluating the correctness of rival submissions addressed we deem it apposite to extract section 270A & 270AA of the Act herein below:
270A. Penalty for under-reporting and misreporting of income.
(1) The Assessing Officer or the Commissioner (Appeals) or the Principal Commissioner or Commissioner may, during the course of any proceedings under this Act, direct that any person who has under-reported his income shall be liable to pay a penalty in addition to tax, if any, on the underreported income.
(2) A person shall be considered to have under-reported his income, if—
(a) the income assessed is greater than the income determined in the return processed under clause (a) of sub-section (1) of section 143;
(b) the income assessed is greater than the maximum amount not chargeable to tax, where no return of income has been furnished or where return has been furnished for the first time under section 148;
(c) the income reassessed is greater than the income assessed or reassessed immediately before such reassessment;
(d) the amount of deemed total income assessed or reassessed as per the provisions of section 115JB or section 115JC, as the case may be, is greater than the deemed total income determined in the return processed under clause (a) of sub-section (1) of section 143;
(e) the amount of deemed total income assessed as per the provisions of section 115JB or section 115JC is greater than the maximum amount not chargeable to tax, where no return of income has been furnished or where return has been furnished for the first time under section 148;
(f) the amount of deemed total income reassessed as per the provisions of section 115JB or section 115JC, as the case may be, is greater than the deemed total income assessed or reassessed immediately before such reassessment;
(g) the income assessed or reassessed has the effect of reducing the loss or converting such loss into income.
(3) The amount of under-reported income shall be,—
(i) in a case where income has been assessed for the first time,—
(a) if return has been furnished, the difference between the amount of income assessed and the amount of income determined under clause (a) of subsection (1) of section 143;
(b) in a case where no return of income has been furnished or where return has been furnished for the first time under section 148,—
(A) the amount of income assessed, in the case of a company, firm or local authority; and
(B) the difference between the amount of income assessed and the maximum amount not chargeable to tax, in a case not covered in item (A);
(ii) in any other case, the difference between the amount of income reassessed or recomputed and the amount of income assessed, reassessed or recomputed in a preceding order:
Provided that where under-reported income arises out of determination of deemed total income in accordance with the provisions of section 115JB or section 115JC, the amount of total under-reported income shall be determined in accordance with the following formula—
(A — B) + (C — D)
where,
A =”the” total income assessed as per the provisions other than the provisions contained in section 115JB or section 115JC (herein called general provisions);
B =”the” total income that would have been chargeable had the total income assessed as per the general provisions been reduced by the amount of underreported income;
C =”the” total income assessed as per the provisions contained in section 115JB or section 115JC;
D =”the” total income that would have been chargeable had the total income assessed as per the provisions contained in section 115JB or section 115JC been reduced by the amount of under-reported income:
Provided further that where the amount of under-reported income on any issue is considered both under the provisions contained in section 115JB or section 115JC and under general provisions, such amount shall not be reduced from total income assessed while determining the amount under item D.
Explanation.—For the purposes of this section,—
(a) “preceding order” means an order immediately preceding the order during the course of which the penalty under sub-section (1) has been initiated
(b) in a case where an assessment or reassessment has the effect of reducing the loss declared in the return or converting that loss into income, the amount of under-reported income shall be the difference between the loss claimed and the income or loss, as the case may be, assessed or reassessed.
(4) Subject to the provisions of sub-section (6), where the source of any receipt, deposit or investment in any assessment year is claimed to be an amount added to income or deducted while computing loss, as the case may be, in the assessment of such person in any year prior to the assessment year in which such receipt, deposit or investment appears (hereinafter referred to as “preceding year”) and no penalty was levied for such preceding year, then, the under-reported income shall include such amount as is sufficient to cover such receipt, deposit or investment.
(5) The amount referred to in sub-section (4) shall be deemed to be amount of income under-reported for the preceding year in the following order—
(a) the preceding year immediately before the year in which the receipt, deposit or investment appears, being the first preceding year; and
(b) where the amount added or deducted in the first preceding year is not sufficient to cover the receipt, deposit or investment, the year immediately preceding the first preceding year and so on.
(6) The under-reported income, for the purposes of this section, shall not include the following, namely:—
(a) the amount of income in respect of which the assessee offers an explanation and the Assessing Officer or the Commissioner (Appeals) or the Commissioner or the Principal Commissioner, as the case may be, is satisfied that the explanation is bona fide and the assessee has disclosed all the material facts to substantiate the explanation offered;
(b) the amount of under-reported income determined on the basis of an estimate, if the accounts are correct and complete to the satisfaction of the Assessing Officer or the Commissioner (Appeals) or the Commissioner or the Principal Commissioner, as the case may be, but the method employed is such that the income cannot properly be deduced therefrom;
(c) the amount of under-reported income determined on the basis of an estimate, if the assessee has, on his own, estimated a lower amount of addition or disallowance on the same issue, has included such amount in the computation of his income and has disclosed all the facts material to the addition or disallowance;
(d) the amount of under-reported income represented by any addition made in conformity with the arm’s length price determined by the Transfer Pricing Officer, where the assessee had maintained information and documents as prescribed under section 92D, declared the international transaction under Chapter X, and, disclosed all the material facts relating to the transaction; and
(e) the amount of undisclosed income referred to in section 271AAB.
(7) The penalty referred to in sub-section (1) shall be a sum equal to fifty per cent of the amount of tax payable on under-reported income.
(8) Notwithstanding anything contained in sub-section (6) or sub-section (7), where under-reported income is in consequence of any misreporting thereof by any person, the penalty referred to in sub-section (1) shall be equal to two hundred per cent of the amount of tax payable on under-reported income.
(9) The cases of misreporting of income referred to in sub-section (8) shall be the following, namely:—
(a) misrepresentation or suppression of facts;
(b) failure to record investments in the books of account;
(c) claim of expenditure not substantiated by any evidence;
(d) recording of any false entry in the books of account;
(e) failure to record any receipt in books of account having a bearing on total income; and
(f) failure to report any international transaction or any transaction deemed to be an international transaction or any specified domestic transaction, to which the provisions of Chapter X apply.
(10) The tax payable in respect of the under-reported income shall be—
(a) where no return of income has been furnished or where return has been furnished for the first time under section 148 and the income has been assessed for the first time, the amount of tax calculated on the underreported income as increased by the maximum amount not chargeable to tax as if it were the total income;
(b) where the total income determined under clause (a) of sub-section (1) of section 143 or assessed, reassessed or recomputed in a preceding order is a loss, the amount of tax calculated on the under-reported income as if it were the total income;
(c) in any other case, determined in accordance with the formula—(XY)
where,
X =”the” amount of tax calculated on the under-reported income as increased by the total income determined under clause (a) of sub-section (1) of section 143 or total income assessed, reassessed or recomputed in a preceding order as if it were the total income; and
Y =”the” amount of tax calculated on the total income determined under clause (a) of sub-section (1) of section 143 or total income assessed, reassessed or recomputed in a preceding order.
(11) No addition or disallowance of an amount shall form the basis for imposition of penalty, if such addition or disallowance has formed the basis of imposition of penalty in the case of the person for the same or any other assessment year.
(12) The penalty referred to in sub-section (1) shall be imposed, by an order in writing, by the Assessing Officer, the Commissioner (Appeals), the Commissioner or the Principal Commissioner, as the case may be.
“270AA. Immunity from imposition of penalty, etc.—
(1) An assessee may make an application to the Assessing Officer to grant immunity from imposition of penalty under section 270A and initiation of proceedings under section 276C of section 276CC, if he fulfils the following conditions, namely:—
(a) the tax and interest payable as per the order of assessment or reassessment under sub-section (3) of section 143 or section 147, as the case may be, has been paid within the period specified in such notice of demand; and
(b) no appeal against the order referred to in clause (a) has been filed.
(2) An application referred to in sub-section (1) shall be made within one month from the end of the month in which the order referred to in clause (a) of subsection (1) has been received and shall be made in such form and verified in such manner as may be prescribed.
(3) The Assessing Officer shall, subject to fulfilment of the conditions specified in sub-section (1) and after the expiry of the period of filing the appeal as specified in clause (b) of sub-section (2) of section 249, grant immunity from imposition of penalty under section 270A and initiation of proceedings under section 276C or section 286CC, where the proceedings for penalty under section 270A has not been initiated under the circumstances referred to in sub-section (9) of the said section 270A.
(4) The Assessing Officer shall, within a period of one month from the end of the month in which the application under sub-section (1) is received, pass an order accepting or rejecting such application:
Provided that no order rejecting the application shall be passed unless the assessee has been given an opportunity of being heard.
(5) The order made under sub-section (4) shall be final.
(6) No appeal under section 246A or an application for revision under section 264 shall be admissible against the order of assessment or reassessment, referred to in clause (a) of sub-section (1), in a case where an order under sub-section (4) has been made accepting the application.”.
5.3 Before leaping to section 270A of the Act, we first consider section 270AA of the Act in order to find out whether the Form 68 filed by the Assessee Company on 06/10/2022 was valid. On plain reading of section 270AA of the Act, we are of the opinion that statutory scheme for grant of immunity is based on the satisfaction of the five conditions namely,
1. The tax and interest demand payable has been paid within the period specified in the notice of demand.
2. The Order of assessment or Reassesment must be passed u/s 143(3) and/or u/s 147 of the Act.
3. No appeal against the aforesaid order has been filed by the assessee.
4. Application in form 68 shall be made within one month from the end of the month in which the order has been received.
5. The proceedings for the penalty has not been initiated under the circumstances referred in section 270A(9) of the Act.
5.4 In the present case, no tax and interest demand payable is required to be paid as per the notice of demand issued u/s 156 of the Act. The assessment order is passed u/s 143(3) r.ws. 144B of the Act on 16.9.2022. Further, as stated by the ld. A.R. of the assessee, no appeal has been filed against assessment order dated 16.9.2022 and the assessee filed an application in form 68 (placed in page 53 of the appeal paper book) on 6.10.2022 i.e. within one month from the end of month in which the Assessment order has been received and the penalty for disallowance of employees contribution to EPF amounting to Rs.16,61,049/- is levied for under reporting of income as per the provisions contained in section 270A(2)(a) of the Act. Therefore, even if we assume that the penalty levied for disallowance of deduction of Health & Education cess to be under reported in consequence of misreporting then also the penalty levied in respect of disallowance of employee’s contribution to PF on account of “underreporting” of income is squarely covered under the provisions contained in section 270AA of the Act as the assessee company has satisfied all the aforesaid conditions.
5.5 By respectfully following the judgment of Hon’ble High court of Delhi in the case of Ultimate Infratech (P) Ltd. V. National faceless Assessment Centre Delhi & Anr (2022) 326 CTR 547, we are of the considered view that the assessee company acquired a right to be granted immunity u/s 270A of the Act. This is evident from the following observations as rendered therein:-
“5. Having heard learned counsel for the petitioner, this Court is of the view that it is only in cases where proceedings for levy of penalty have been initiated on account of alleged misreporting of income that an assessee is prohibited from applying and availing the benefit of immunity from penalty and prosecution under s. 270AA.
6. In fact, the statutory scheme for grant of immunity is based on satisfaction of three fundamental conditions, namely, (i) payment of tax demand; (ii) noninstitution of appeal; and (iii) initiation of penalty on account of underreporting of income and not on account of misreporting of income.
7. This Court is also of the view that the petitioner cannot be prejudiced by the inaction of the AO in passing an order under s. 270AA of the Act within the statutory time limit as it is settled law that no prejudice can be caused to any assessee on account of delay/default on the part of the Revenue.
8. In the present case, the petitioner has satisfied the aforesaid conditions, in as much as, (i) the tax has been paid on the additions; (ii) appeal has undisputedly not been filed; and (iii) penalty (as would be evident from the penalty notice) has been initiated on account of “underreporting” of income.
9. Consequently, this Court is of the view that the petitioner acquired a right to be granted immunity under s. 270AA of the Act. In fact, this Court, in Schneider Electric South East Asia (HQ) Pte Ltd. v. Asstt. CIT (International Taxation) & Ors. Writ Petn. No. 5111 of 2022, has held, “This Court is further of the view that the impugned action of respondent No. 1 is contrary to the avowed legislative intent of s. 270AA of the Act to encourage/incentivize a taxpayer to (i) fasttrack settlement of issue, (ii) recover tax demand; and (iii) reduce protracted litigation.”
10. Consequently, the impugned order under s. 270A of the Act is set aside and the respondents are directed to grant immunity under s. 270AA of the Act to the petitioner. With the aforesaid directions, the present writ petition along with pending applications stands disposed of. “
5.6 Further in the present case as we read the order of assessment, the AO initiated the penalty proceeding u/s 270A for under reporting of income in consequence of misreporting of income on the alleged ground that the assessee company suppressed its true income by misrepresentation of facts/suppression of facts whereas the AO while passing the penalty Order had observed that notice u/s 274 r.w.s 270A of the Act was issued on 16/09/2022 asking the assessee to show cause why a penalty should not be levied on the above two additions for under reporting in respect of late payment of PF contribution received from the employees and misreporting in respect of education cess claimed as deduction. In other words the AO himself was not clear as to which limb penalty proceedings was sought to be levied.
5.7 Now coming to section 270A of the Act, on plain reading of the same, we are of the opinion that when a notice u/s 270A of the Act is issued the following stepladder should to be followed by the AO while levying penalty u/s 270A of the Act
1. Underreporting – First the onus is on the AO to establish whether any of the contingency spoken of in clauses (a) to (g) of Section 270A(2) in the case of the assessee are attracted or not. If Yes, under which clause (limb) the assessee has underreported the income?
2. Now the onus shifted on the assessee to refute by establishing that the assessee falls within any of the clauses (a) to (e) of section 270A(6) of the Act & hence there is no underreporting of income & the proceedings end there. Section 270A(6) is a window given by the legislature to give a leave to the Assessee.
3. If the assessee is not able to controvert the charge of under reporting, the under reporting gets confirmed.
4. Once the charge of underreporting is confirmed, then the AO has to establish whether the underreporting is in consequence of any of the clauses (a) to (f) of Section 270A(9) of misreporting. If Yes, under which clause (limb) the assessee has misreported the income?
5.8 Therefore, we are of the considered opinion that without the charge of under reporting of income, the AO cannot jump directly with the charge of misreporting of income. In the present case although the AO specifically mentioned the exact limb of underreporting as per section 270A(2)(a) of the Act as the income assessed is greater than the income determined in the return processed u/s 143(1)(a) but there is not even a whisper as to how the ingredient of sub section (9) of section 270A is satisfied.
5.9 By respectfully following the judgment of Hon’ble High court of Delhi in the case of Schneider Electric South East Asia (HQ) PTE Ltd. V. Commissioner of Income Tax (International Taxation) & Ors. (2022) 443 ITR 186, we are of the considered view that failure on the part of the AO to show cause which of the specific action of the assessee company from clause (a) to (f) of Section 270A(9) was determinant before imposing penalty u/s 270A of the Act has rendered the proceedings invalid and thus untenable in the eyes of law.
5.10 Therefore, it goes without saying that for the applicability of section 270A of the Act, the conditions stated therein must be strictly followed. A mere making of the claim which is based on a honest and bonafide belief and even offered for taxation before the completion of assessment by itself will not amount to under reporting resulting in misreporting of income.
5.11 In the present case, the assessee company well before the completion of the assessment proceedings i.e. on 16.9.2022 filed a letter to AO for voluntary declaration of health and education cess by enclosing the revised computation. Considering the totality of the case, we are of the opinion that provisions of section 270A(6)(a) of the Act is squarely applicable in case of assessee company. Here, the assessee offered an explanation before the AO and we are of the opinion that the explanation is also bonafide. Since the assessee company claimed the deduction based on decision of Hon’ble jurisdictional & Non Jurisdictional High Court as well as Tribunals, and the assessee had disclosed all the material facts to substantiate the explanation. Further, the authorities below have also not controverted the decision relied on by the assessee to be incorrect. After the amendment in the Finance Act, assessee had also voluntarily disclosed the health and education cess before the AO well before the completion of assessment proceedings.
5.12 We are of the opinion that the penalty by hereditary nature is always discretionary. The legislature has used the word ‘may’ in section 270A(1) of the Act which clearly says that it is discretionary on the part of the AO to levy penalty or not. We are also of the opinion that penalty is not at par with the tax and interest and therefore, penalty should not be levied in a light hearted manner or in routine manner and not every additions/disallowances are liable for penalty. The primary onus is on the revenue to prove that assessee falls under particular limb of default. The AO have to bring the case in the four corners of the sections in order to levy penalty which in our opinion, the authorities below failed to do so. The authority below misdirected themself by citing various irrelevant decisions of Hon’ble Supreme Court without understanding the real issues involved in the case of assessee company. Therefore, we are of the opinion that the explanation offered by the assessee is bonafide and the assessee has disclosed all material facts to substantiate the explanation. With the above observations, we delete the penalty levied u/s 270A of the Act and allow the appeal of the assessee. “
11. Based on the factual matrix of the case and the legal position set out above and in the absence of any contrary material/judicial precedent brought on record by the Revenue, we set aside the order of the Ld. CIT(A)/NFAC. The impugned penalty imposed by the Ld. AO and confirmed by the Ld. CIT(A)/NFAC is hereby deleted. The grounds raised by the assessee are accordingly allowed.
12. In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 24th November, 2025.