ITAT Deletes Penalty in Education Cess Dispute; Says Retrospective Amendment Not Grounds for Penalty

The Income Tax Appellate Tribunal (ITAT), Ahmedabad, in a recent ruling, has deleted the penalty of Rs 3.69 lakh imposed on the grounds of under-reporting of income in the ITR and allowed the taxpayer’s appeal. Shree Swati Texdyes Private Limited had filed the appeal before the ITAT Ahmedabad, challenging an order dated October 16, 2025, passed by the CIT(A), NFAC Delhi. The order pertains to the Assessment Year 2020-21.

During assessment of the assessee’s ITR (Income Tax Return), the Assessing Officer (AO) had made two disallowances: first of Rs 43.36 lakh under section 14A of the Act, and second of Rs 21.53 lakh deduction claimed towards Health and Education Cess. However, the assessee challenged only the section 14A disallowance before the CIT(A), and the same was deleted. Since the Health and Education Cess disallowance was not challenged, the Rs 21.53 lakh addition has finality.

In conclusion, the AO initiated penalty proceedings under section 270A of the Act against the assessee for under-reporting Rs 21.53 lakh income. A penalty of Rs 3.69 lakh was imposed on the company, being 50% of the tax on under-reported income. Although the company accepted the disallowance, it argued that the claim was made in good faith based on existing court decisions at the time; hence, the penalty should not be imposed.

When the tribunal analysed the facts of the case, it noted that when the ITR was filed, the High Courts had allowed such deductions, making the issue debatable. Later, after the retrospective amendment in the Finance Act, 2022, had made such cess non-deductible. After this amendment, the company suo moto withdrew its claim during assessment proceedings.

The Tribunal highlighted that the company had disclosed all relevant facts and made the claim based on a genuine interpretation of the law. It held that a penalty cannot be imposed merely because a claim is later disallowed, especially when the legal position was unclear at the time.

The tribunal cited several earlier judgements based on similar issues, where the authorities had deleted the penalty levied under section 270A on account of the disallowance of education cess. Considering the same, the tribunal concluded that the company’s case qualified for relief under Section 270A(6), which protects taxpayers who provide bona fide explanations and full disclosure. Accordingly, the penalty was deleted, and the appeal was allowed.