The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) held that a penalty under Section 270A of the Income Tax Act, 1961, cannot be levied on a claim of deduction towards education cess that was made on the basis of judicial precedents prevailing at the time of filing the return and later became inadmissible due to a retrospective amendment introduced by the Finance Act, 2022. A Bench comprising Judicial Member Beena Pillai and Accountant Member Jagadish deleted the penalty of Rs 68.12 lakh imposed on Wellknown Polysters Limited for AY 2020-21.

The assessee had filed its return declaring a total income of Rs 237.16 crore. During scrutiny assessment proceedings, the Assessing Officer disallowed the deduction claimed towards education cess amounting to Rs 3.18 crore and completed the assessment under Section 143(3). Thereafter, penalty proceedings under Section 270A were initiated on the ground that the disallowance resulted in under-reporting of income.

The assessee contended that the deduction was claimed under a bona fide belief supported by judicial precedents, including the Bombay High Court’s decision in Sesa Goa Ltd. It was argued that the disallowance arose solely because of the retrospective amendment introduced by the Finance Act, 2022, which subsequently clarified that surcharge and cess are not allowable deductions.

The assessee further submitted that while introducing the retrospective amendment, the Legislature itself acknowledged the bona fide nature of such claims by incorporating a saving provision under Section 155(18), which provided immunity from penalty subject to fulfilment of prescribed conditions. However, the prescribed form for seeking recomputation was not notified by the CBDT at the relevant time, making compliance impossible.

“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.”

The Tribunal observed that the assessee’s claim was fully supported by the legal position prevailing when the return was filed and could not be characterised as furnishing inaccurate particulars of income or under-reporting of income merely because the law was retrospectively amended at a later stage.

The Bench also noted that the assessee was prevented by reasonable cause from availing the benefit under Section 155(18), as the prescribed form and procedure had not been notified by the CBDT. Therefore, failure to file the application could not be treated as a deliberate default.

“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.”

Finding no evidence of mala fide intent or suppression of material facts, the Tribunal held that the penalty under Section 270A was unsustainable in law. Thus, it deleted the penalty and allowed the appeal filed by the assessee.

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