No Misreporting in PF and Cess Deduction Claims Made in Good Faith: ITAT quashes 84 Lakhs S.270 Penalty under Income Tax [Read Order]

Recently in a ruling the Income Tax Appellate Tribunal (ITAT) Bangalore quashed an ₹84 lakh penalty imposed on a company for under-reporting income under the Income Tax Act 1961 (ITA), specifically related to delayed Provident Fund (PF) contributions and disallowed cess deductions. The Tribunal held that there was no misreporting of income and that the claims were made in good faith based on existing judicial precedents.

The case involved the assessment year 2020-21, during which the appellant/assessee, IIFL Samasta Finance,  had filed its return, declaring a total income of ₹126.85 crore. However, during the assessment proceedings, the Assessing Officer (AO) made two disallowances, leading to a revised income of ₹128.25 crore. The first disallowance was for the delayed remittance of employee PF contributions, amounting to ₹16.61 lakh, while the second was for the deduction of health and education cess, totaling ₹1.22 crore.

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The assessee-company argued that although there had been some delays in PF payments due to financial constraints, all contributions were made before the deadline for filing the income tax return. The company relied on the Karnataka High Court's ruling in the case of Essae Teraoka Pvt. Ltd. which had permitted such remittances if made before the tax return filing date. However, the AO rejected this argument, citing the Finance Act, 2021 amendment, which clarified that the relief under Section 43B of the tax legislature does not apply to employee contributions to PF, thus disallowing the payment retrospectively.

Regarding the cess deduction, the assessee  had claimed it as an expense based on rulings from the Bombay High Court and the Rajasthan High Court, both of which had allowed such deductions. However, the Finance Act of 2022, with retrospective effect from 2005, clarified that cess is part of tax and thus not deductible. Recognizing this change, the assessee voluntarily withdrew the cess claim before the assessment was completed by submitting a revised computation to the AO.

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Despite the company’s proactive approach and reliance on court decisions, the AO initiated penalty proceedings under Section 270A of the tax statute, accusing the company of under-reporting and misreporting income. The AO imposed penalties totaling ₹84.58 lakh—50% for under-reporting income due to the delayed PF payments and 200% for misreporting related to the cess deduction.

The assessee-company contested the penalties, arguing that it had acted in good faith,  relying on judicial precedents at the time of filing its returns. The assessee also applied for immunity under Section 270AA of ITA, which grants protection from penalties if the assessee voluntarily pays any tax due and does not file an appeal. However, the AO rejected the immunity application, asserting that the case involved misreporting, making the company ineligible for relief.

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Aggrieved, the assessee appealed before the Commissioner of Income Tax (Appeals) [CIT(A)], who also upheld the AO’s order.

Aggrieved again the assessee appealed before the ITAT.

When the case reached the ITAT, the bench of Mr Waseem Ahmed and Mr Keshav Dubey examined the facts in detail. It agreed with the company’s argument that the claims were made based on an honest and bona fide belief in prevailing court rulings, including those from the jurisdictional Karnataka High Court. The ITAT noted that the amendment in the law through the Finance Act of 2021 and 2022, which led to the disallowances, occurred after the company had already filed its return. Therefore, the Tribunal concluded that the company’s actions did not amount to deliberate misreporting or suppression of facts.

The ITAT also criticized the AO for failing to clearly demonstrate how the company’s actions constituted misreporting under the strict provisions of Section 270A(9), which outlines specific conditions for such a finding. The Tribunal stressed that penalties should not be imposed in a "routine or light-hearted manner," especially when the assessee has disclosed all material facts and acted transparently.

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In its final ruling, the ITAT concluded that the penalty under Section 270A of the tax statute was not justified, as the company’s explanation for the PF and cess claims was bona fide. The Tribunal also noted that the company had voluntarily withdrawn the cess deduction before the assessment was completed, further demonstrating its good faith.

As a result, the ITAT quashed the ₹84 lakh penalty, offering significant relief to the company.

To Read the full text of the Order CLICK HERE

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