Penalty for under-reporting deleted for bona fide claim of 'Health & Education Cess' basis prevailing judicial precedents (claim withdrawn after retrospective amendment)

 Recently, the Hon’ble Income-tax Appellate Tribunal, Pune (‘ITAT’) in the case of Capgemini Technology Services India Ltd. (‘the Company’), has held that penalty for under-reporting and misreporting of income cannot be levied for claiming Health and Education Cess as a deductible expense when such claim was made bona fide based on prevailing judicial precedents and was later withdrawn following a retrospective amendment to the law. The Hon’ble ITAT observed that the issue was highly debatable at the relevant time and, since there was no concealment or misreporting of income and the assessee had duly complied with the prescribed legal procedure, the penalty was unsustainable.

The Company filed its return of income for AY 2020-21 claiming deduction of Health and Education Cess as a business expense, based on the legal position and favourable judicial precedents prevailing at that time. During the course of assessment, the Assessing Officer disallowed the said claim and initiated penalty proceedings for under-reporting of income. Subsequently, pursuant to the retrospective amendment introduced by the Finance Act, 2022 clarifying that such cess is not deductible, the Company accepted the disallowance, voluntarily withdrew its claim, and filed Form 69 within the prescribed time seeking recomputation of income. However, the penalty levied by the Assessing Officer was upheld by the CIT(A), leading the Company to file an appeal before the Tribunal.

The Hon’ble ITAT held that penalty for under-reporting of income could not be sustained for disallowance of Health and Education Cess claimed by the assessee. It observed that, at the time of filing the return, the issue of allowability of cess was highly debatable and supported by favourable judicial precedents, and therefore the claim was made in a bona fide manner. The Tribunal further noted that the Company had voluntarily accepted the disallowance and duly complied with the statutory requirement by filing Form 69 within the prescribed time after the retrospective amendment introduced by the Finance Act, 2022. Relying on judicial precedents, the Hon’ble ITAT clarified that a genuine and legally supported claim, later withdrawn due to a change in law, does not amount to under-reporting or misreporting of income. Accordingly, the Tribunal directed deletion of the penalty for under-reporting of income.

This judgment reinforces that penalty cannot be imposed merely because a taxpayer made a claim that was legally permissible and widely accepted at the time of filing the return. The Tribunal clarified that when an issue is debatable and supported by judicial precedents, and the taxpayer subsequently withdraws the claim and complies with the law after a retrospective amendment, such conduct does not amount to under-reporting or misreporting of income. The ruling provides relief to taxpayers who have made bona fide claims based on the prevailing legal position and later corrected them in response to changes in law. It sets an important precedent that penalties should not be levied for genuine, good-faith claims, thereby promoting fairness and preventing undue hardship to taxpayers