ACIT Central Circle-2 vs Dhani Loans And Services Limited

7.

“I have considered the material on record including written submissions of the appellant filed in course of appellate proceedings. I have perused the penalty order u/s 270A of the Act as well as assessment order dated 30.09.2022 passed u/s 143(3) of the Act. In the present appeal the appellant has raised two (2) grounds of appeal. Since all are relate to imposition of penalty of Rs. 3,07,46,244/- u/s 270A of the Act therefore, all the grounds of the appeal are taken together.

8.

The assessee had claimed an amount of Rs. 6,09,64,362/- towards education cess in its Income Tax Return for the year under consideration. During the assessment proceedings, the assessee submitted that at the time of claiming this deduction, Explanation 3 to Section 40(a)(ii) was not present in the Income Tax Act, 1961. This explanation, which clarifies that the term "tax" includes "cess," was introduced retrospectively by the Finance Act, 2022, with effect from AY 2005-06. Similarly, on the issue of disallowance on account of delay in deposit employees contribution there was amendment made in Finance Act 2021 and prior to that there was an order of jurisdictional High Court in the case of CIT vs. AIMIL Ltd. The assessee argued that its claim was based on existing jurisprudence upheld by various High Courts and that retrospective application would be against principles of natural justice and amount to hardship.

9.

The AO, however, found the assessee's submission unacceptable, reiterating that the legislature had amended the Act to disallow 'Education Cess' as an allowable expenditure retrospectively from AY 2005-06/Consequently, the entire amount of Rs. 6,09,64,362/-claimed as education cess was disallowed and added back to the assessee's returned income. In the penalty order, the AO concluded that the assessee's submission on the education cess disallowance was "not found tenable" due to the retrospective amendment, characterizing it as "under-reporting of income in consequence of misreporting" under Section 270A(9)(a).

10.

The AO's approach in imposing the penalty under Section 270A(9)(a) for "misrepresentation or suppression of facts" warrants close scrutiny. For a penalty under this specific provision to stand, the AO bears the heavy burden of demonstrating how the assessee misrepresented or suppressed facts. The assessee explicitly states in its submissions that it "acted based on a bona fide legal interpretation, with full disclosure of all relevant facts, and there was no intention to misreport or conceal income". For the disallowance under Section 36(1)(va), the assessee highlighted that the facts of the delayed deposits were "duly captured by Tax Auditor in Tax Audit Report". The penalty order, however, merely states that "the facts of the case discussed above clearly show that the assessee committed default under section 270A(9)(a)" without providing specific evidence of factual misrepresentation or suppression.

11.

This lack of specificity in the AO's order is a lacuna in the penalty imposition. If the assessee fully disclosed the facts, and the dispute is purely on the interpretation of law -especially when that interpretation was genuinely debatable at the time of filing-then classifying such an action as "misrepresentation of facts" under Section 270A(9)(a) may not be appropriate.

12.

At the time of filing the Income Tax Return, the assessee claimed education cess as a deduction because there was no explicit statutory bar in the Income-tax Act, 1961, that disallowed such a claim. Explanation 3 to Section 40(a)(ii), which clarifies that "tax" includes "cess," was inserted by the Finance Act, 2022, with retrospective effect. The assessee contends that a retrospective amendment should not be used to impose a penalty for a position that was legally tenable at the time it was made. The said explanation was subsequently inserted by the Finance Act, 2022 with retrospective effect. The relevant extract is as follows: -

"(Explanation 3- For the removal of doubts it is hereby clarified that for the purposes of this sub clause the term "tax" shall include and shall be deemed to have always included any surcharge or cess by whatever name called on such tax."

13.

The Finance Act, 2021 introduced Explanation 2 to Section 36(1)(va) and Explanation 5 to Section 43B, clarifying that such deductions are not allowable unless paid within the due date under the respective Acts. It is pertinent to note that clarificatory amendments cannot form the basis for levying penalties if the claim made was in line with then prevailing legal interpretations and was made bona fide. Therefore, no penalty u/s. 270A is leviable on an incorrect legal claim/debatable issue. The Delhi High court in New Holland Tractors India P Ltd. v. CIT [2015] 275 CTR 291 (Delhi) has held that penalty u/s 271(1)(c) read with Explanation 1 clause (B) cannot be levied where a legal or a debatable claim is rejected. On this aspect, useful reference can be made also to the following observations of the Supreme Court in the case of M/s Reliance Petroproducts (P.) Ltd. wherein it was held unless the case is strictly covered by the provision, the penalty provision cannot be invoked. By any stretch of imagination, making an incorrect claim in law cannot tantamount to furnishing inaccurate particulars. Thus, penalty u/s 271(1)(c) cannot be levied on an incorrect legal claim.

14.

Position under section 270A- In the case of under-reported income, clause (a) of sub-section (6) of Section 270A is similar to Explanation 1 clause (B) of Section 271[1][c] of the Act. Hence, where a debatable issue is involved or an incorrect legal claim is involved then penalty under section 270A for under-reporting of income would not be leviable.

15.

Further, the assessee has already filed, on suo-motu basis, Form 69 as required u/s 155(18) of the Act to surrender its claim of education cess. This important fact is not contradicted by the Assessing Officer.

16.

In light of the detailed analysis and findings, the penalty levied by the Assessing Officer under Section 270A of the Income Tax Act, 1961, amounting to Rs. 3,07,46,244/-, is not sustainable. The appellant's grounds of appeal are allowed. As the appeal is allowed on merit, other arguments are not discussed being academic in nature.”

“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”.

“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 18-051967.

3.

The assessees rely upon the decision of the Hon’ble Bombay High Court in the case of “Sesa Goa Limited Vs. JCIT” (2020) 117 taxmann.com and further on the decision of the Hon’ble Rajasthan High Court in the case of “Chambal Fertilizers & Chemicals Ltd Vs. 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 Vs. 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 Vs. 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 Vs. 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, 1961Clarification 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 imposed for 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]”