2013 (1) TMI 509 - AT - Income Tax

ITAT partially allows Revenue's appeal on penalties under sections 271(1)(c) and 40(a)(i)

Deputy Director of Income-tax (IT) - 2(1). Mumbai Versus Sumitomo Mitsui Banking Corpn.

The ITAT partly allowed the Revenue's appeal. The penalty under section 271(1)(c) related to disallowance under section 40(a)(i) and income of the Head ... Penalty u/s 271(1)(c) - Tax deducted in Korea by S.K. Telecom - Indian branch received an amount as income from M/s S.K. Telecom, Korea - Assessee is a corporate entity registered and controlled in India from Head Office in Tokyo, Japan - Held that:- There is no bonafide reason for excluding the above amount from the computation of income by assessee as on facts there is no dispute that the amount of Rs. 2,43,56,074 was receivable from M/s SK Telecom, Korea in respect of the loan granted by the Bank to DSS Mobile Communication Ltd in India. Assessee has in fact accounted for the total interest as income in the P/L A/c. The issue is with reference to the tax deducted by M/s SK Telecom, Korea as per the law of Korea to an extent of Rs. 59,85,368. It is to be kept in mind that assessee is not a resident in India. Assessee a resident of Japan has a Permanent Establishment (PE) in India and its taxation is governed by Indo Japan DTAA. Therefore, the decision given by the jurisdictional High Court in Madhavrao J. Scindia [1999 (2) TMI 25 - BOMBAY HIGH COURT] in the case of resident Indian do not support assessee's contention that the tax deducted in Korea by SK Telecom cannot be subject to tax in India. As seen from the computation statement, assessee has not even claimed the tax credit for the amount deducted in Korea as the same has to be given credit in the hands of the principal company in Japan. Therefore, as far as accrual of the income of assessee is concerned, the entire amount of Rs. 2,43,56,074 has accrued to the principal company through its branch in India which was the taxable entity by virtue of PE in India. There is no claim for credit of the tax paid in Korea. As assessee has accounted for the entire income in the books of account as accrued. No explanation was given why the amount was not included when assessee was claiming credit of tax so deducted while filing the return of income. Even though assessee has left a note that so much of the amount being the tax deducted in Korea does not accrue to its in India, the same cannot be accepted as assessee accounted entire amount as income in its books of account prepared for the purpose of being assessed in India having its PE. Since the amount excluded is not an expenditure claim but only a tax paid on behalf of the principal company in Korea ,as far as provisions of DTAA is concerned r.w. provisions of the Indian Income Tax Act governing the accrual of income, entire amount of Rs. 2,43,56,074 is taxable in the hands of assessee in India. Therefore, since this claim is not bona fide, nor there is any justification for excluding the same, not persuaded by the contention of assessee's that the principles laid down by the Hon'ble Supreme Court in the case of Reliance Petro Products (P.) Ltd. (2010 (3) TMI 80 - SUPREME COURT) will apply to assessee's case. Making a legal claim under the provisions of IT Act is different from not offering income without any valid/ bona fide reason. In view of this, since the exclusion of the amount is not bona fide and there is no justification for excluding the amount, penalty under section 271(1)(c) is warranted on the facts of the case - against assessee. Issues Involved:1. Deletion of penalty under section 271(1)(c) of the I.T. Act related to disallowance under section 40(a)(i).2. Deletion of penalty related to income of the Head Office/Foreign Branches.3. Deletion of penalty related to tax deducted in Korea by S.K. Telecom.Detailed Analysis:1. Deletion of Penalty under Section 271(1)(c) Related to Disallowance under Section 40(a)(i):The Revenue's appeal concerns the deletion of penalty imposed under section 271(1)(c) of the I.T. Act. The penalty was initially levied by the DDIT (International Taxation) on the disallowance of Rs. 21,46,12,294 under section 40(a)(i). The CIT (A) deleted the penalty, stating that the assessee had furnished all particulars of income and could not be accused of furnishing inaccurate particulars. The CIT (A) emphasized that the Explanation 1 to section 271(1)(c) has two limbs: the first limb applies when the explanation is false, and the second when the explanation is not substantiated or bona fide. The CIT (A) found that the assessee's explanation was bona fide and all facts were disclosed. The ITAT noted that the Special Bench of ITAT had deleted the two additions in the quantum appeal, and thus, the penalty on these issues did not survive for consideration.2. Deletion of Penalty Related to Income of the Head Office/Foreign Branches:The penalty was also levied on the income of the Head Office/Foreign Branches amounting to Rs. 21,46,12,294. The CIT (A) deleted this penalty for the same reasons as above, stating that the assessee had disclosed all particulars and the explanation was bona fide. The ITAT agreed that since the Special Bench of ITAT had deleted the additions in the quantum appeal, the penalty on these issues did not survive.3. Deletion of Penalty Related to Tax Deducted in Korea by S.K. Telecom:The remaining issue concerned the addition of Rs. 59,85,368, which was deducted as tax in Korea by S.K. Telecom. The assessee received Rs. 2,43,56,075 from S.K. Telecom as a guarantor for a loan and credited the entire amount in the Profit & Loss A/c. However, in the return, the assessee excluded the tax deducted in Korea, offering only the net amount received. The AO brought the entire amount to tax, stating that the income accrued in India under section 9(1)(i) of the Act. The ITAT confirmed this addition, referencing the Bombay High Court's decision in Madhavrao J. Scindia, which held that gross income should be taxed.When the penalty was levied, the CIT (A) deleted it, invoking Explanation 1 to section 271(1)(c). The Revenue argued that the High Court had already adjudicated that gross income should be taxed, and thus, the assessee's claim was not bona fide. The ITAT agreed with the Revenue, noting that the assessee could not justify excluding the amount and that the decision in Ambala Kilachand did not apply as it concerned a resident Indian. The ITAT concluded that the assessee's non-offering of income was not bona fide and attracted penalty under section 271(1)(c). The ITAT reversed the CIT (A)'s order and directed the AO to calculate the penalty at 100% of the tax sought to be evaded.Conclusion:The appeal filed by the Revenue was partly allowed. The ITAT upheld the deletion of penalty on the disallowance under section 40(a)(i) and the income of the Head Office/Foreign Branches, as these additions were deleted in the quantum appeal. However, the ITAT reversed the CIT (A)'s deletion of penalty related to the tax deducted in Korea by S.K. Telecom, directing the AO to levy the penalty at 100% of the tax sought to be evaded.