Direct Tax Alert

Rajasthan HC holds that a penalty cannot be imposed if during assessment proceedings taxpayer withdrew the expense claim on account of legislative amendment

Background

Section 40 of the Income Tax Act, 1961 (IT Act) provides for certain items that shall not be deductible while computing the Profits and Gains of Business or Profession. Finance Act, 2022 amended Section 40 to provide that the term ‘tax’ shall include cess and surcharge and thereby not a deductible item. As a consequential amendment, it also introduced Section 155(18) in the IT Act (with effect from 1 April 2022) to provide that where any deduction in respect of any surcharge or cess has been claimed and allowed to a taxpayer in any fiscal year (FY), such claim shall be deemed to be taxpayer’s under-reported income for such FY for the purpose of section 270A(3)1 of the IT Act. Further, it also contained immunity from penalty (i.e. claim of education cess/ surcharge shall not be regarded as under-reported income) if:

  • The taxpayer makes an application for re-computation of the total to the tax officer
  • Such application should be made in the prescribed form and within the prescribed time; and
  • Taxpayer pays the amount of tax due thereon within the specified time.

Recently, the Rajasthan High Court (HC)2 had an occasion to analyse whether immunity can be granted where the taxpayer withdrew its claim for education cess after the introduction of section 155(18) but before it became effective. We, at BDO in India, have summarised this ruling and provided our comments on the impact of this decision hereunder:

FACTS OF THE CASE

Taxpayer, a public limited company, is engaged in the execution of turnkey infra projects. It filed its tax return for FY 2019-20 wherein it claimed education cess as a deductible item. The tax officer issued a show cause notice (SCN) to the taxpayer stating why the claim for deduction of education cess of INR 12.85mn should not be disallowed and penalty proceedings should not be initiated under Section 270A of the IT Act.

  • Before insertion of section 155(18) of the IT Act, the taxpayer vide its reply dated 19 March 2022 withdrew its claim for deduction of education cess and accepted the proposed variation. However, the tax officer initiated penalty proceedings under section 270A of the IT Act for under-reporting of income.
  • The taxpayer filed an application under section 270AA of the IT Act seeking immunity from imposition of penalty under section 270A of the IT Act under the prescribed form within the prescribed time.
  • The taxpayer replied to all the SCNs within the specified time. The tax officer passed an order imposing a penalty of 200% of tax sought to be evaded and thereby issued a notice of demand to the taxpayer.
  • Aggrieved, the taxpayer filed a writ petition before the Rajasthan HC.
HIGH COURT RULING

The Rajasthan High Court while setting aside penalty order as well as demand notice made the following observations:

  • The Hon’ble Supreme Court in M/s Godrej Sara Lee Ltd3., has held that where the controversy is purely legal and does not involve a disputed question of fact but only a question of law, then it should be decided by the High Court instead of dismissing the writpetition on the ground of alternative remedy. Thus, the objection raised by the tax authorities regarding the maintainability of the writ petition on the ground of alternative remedy of filing an appeal is rejected.
  • · Reliance placed by the taxpayer on the decision of the Delhi HC in the case of Schneider Electric South East Asia (HQ) Pte Ltd4 was affirmed. The Delhi HC in this ruling has held that the tax authorities did not specify which part of section 270A (9)5 of the IT Act is satisfied. It has failed to specify the limb "under-reporting" or "misreporting" of income, under which the penalty proceedings had been initiated. In the absence of such particulars, the mere reference to the word "misreporting" by the tax authorities in the assessment order to deny immunity from imposition of penalty and prosecution makes the impugned order manifestly arbitrary.

  • · Reliance was also placed on Delhi HC decision in the case of Ultimate Infratech Private Limited6. wherein it was held that it is only in cases where proceedings for levy of penalty have been initiated on account of alleged misreporting of income that a taxpayer is prohibited from applying and availing the benefit of immunity from penalty and prosecution under Section 270AA of the IT Act. The statutory scheme for grant of immunity is based on the 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. The taxpayer cannot be prejudiced by the inaction of the tax authorities in passing an order under Section 270AA of the IT Act within the statutory time limit.

  • The taxpayer has justified his claim of deduction of cess in his response to various SCNs. However, the tax officer without considering the said justification or rejecting the same has passed the impugned order mechanically.

  • Once the taxpayer has withdrawn its claim vide letter dated 19 March 2022 for deduction of education cess in view of insertion of Section 155(18) before it came into force w.e.f. 01.04.2022, the taxpayer is entitled to immunity from imposition of penalty under Section 270A of IT Act though the proceedings against it were initiated for imposition of penalty.

  • While initiating the penalty proceedings, the tax Officer has failed to specify that which part of Section 270A (9) is attracted in the case of the petitioner-company, the said initiation is non est.

The application filed by the taxpayer under Section 270AA of the IT Act seeking immunity from imposition of penalty has not been decided by the tax authorities within the prescribed time as per Section 270AA (4) of the IT Act.
 

BDO IN INDIA COMMENTS

This is a welcome ruling. It may be noted that even though the forms were yet to be prescribed for withdrawing the claim of education cess, a simple application from the taxpayer was treated as sufficient for the purpose of section 115(8) of the IT Act. Further, the Rajasthan HC has affirmed that the tax officer should specifically mention whether the penalty is being initiated for “misreporting” or “under-reporting”.

The taxpayer may evaluate the ratio laid down by Rajasthan HC where claims have been withdrawn in light of recent higher court rulings (for e.g. Hon’ble Supreme Court7 ruling on the applicability of the Most Favoured Nation Clause etc.).
 

1 Section 270A provides that the tax authorities may, during the course of any proceedings under the IT Act, direct any person who has under-reported his income to pay a penalty in addition to tax, if any, on the under-reported income.

2 G R Infraprojects Limited v. Assistant Commissioner of Income-tax [2024] 158 taxmann.com 80 (Rajasthan HC)[02-01-2024]

3 M/s Godrej Sara Lee Ltd. vs. The Excise and Taxation Officer-cum-Assessing Authority and Ors. (2023) (SCC Online SC 95)

4 Schneider Electric South East Asia (HQ) Pte Ltd. vs. ACIT International Taxation Circle 3(1)(2), New Delhi [2022] 443 ITR 186 (Delhi)

5 Section 270A(9) of the IT Act specifies a list of cases which would be considered as misreporting of income

6 Ultimate Infratech Private Limited vs. NFAC Delhi, 2022(4 ΤΜΙ 1086) (Delhi HC)

7 AO (Int. Taxation), Delhi v M/s. Nestle SA (Civil Appeal No(s). 1420 of 2023 to 1432 of 2023)