2016 (10) TMI 246 - AT - Income Tax

Tribunal cancels penalties under Section 271(1)(c) for full disclosure, no concealment, or inaccurate particulars.

The Tribunal upheld the CIT(A)'s decision to delete penalties imposed under Section 271(1)(c) for all assessment years, finding that the assessee made ... Penalty imposed u/s 271(1)(c) - additions made on account of attribution of business profits to assessee’s alleged PE in India - Held that:- The issue in respect of additions made on account of attribution of business profits to assessee’s alleged PE in India has been restored back to the file of AO. Therefore, the ld. CIT(A) has rightly observed that the ld. AO should have himself modified the penalty order by deleting the amount of penalty imposed upon the assessee in respect of such additions which have been sent back to the AO for fresh adjudication, as per provisions of section 275(1A) of the Act. Moreover, the penalty deleted by ld. CIT(A) on this count has not been challenged by the Revenue in any of the grounds of appeal before us. We, therefore, need not to address much on this part of penalty deleted by the ld. CIT(A). Deletion of penalty with respect to addition on account of FTS, we further do not find any good reason to interfere with the order of ld. CIT(A). It is borne out on record that the assessee had made true and complete disclosure in its return of income that it was following cash system of accounting with respect to FTS. Further there was no concealment of income. The penalty is imposed keeping in view the tax sought to be evaded. In the instant case the assessee had duly offered the income pertaining to the invoices raised by it during the year in subsequent years as and when the fee was received by assessee from M/s. ONGC and hence, there was no loss to the Revenue or evasion of tax. The issue whether income from FTS is taxable on accrual basis or cash basis is a debatable issue and therefore, where two views are possible, penalty is not leviable if the assessee has adopted one of the two possible views. In this context, the reliance placed by assessee in catena of decisions goes to support the case of the assessee. It is notable that every addition/adjustment does not entail penalty u/s. 271(1)(c) of the Act unless it is proved that the assessee has concealed the particulars of income or has furnished inaccurate particulars of such income. Hon’ble jurisdictional High Court has held, in the case of CIT vs Globe Sales Corporation [2005 (1) TMI 697 - DELHI HIGH COURT ] that merely because certain additions/ adjustments are made in the assessment, it does not necessarily follow that penalty is to be levied. In the instant case, there is no an iota of evidence to prove that the assessee has concealed or furnished inaccurate particulars of income on FTS. However, the dispute was with respect to method of accounting adopted by the assessee and that applied by the department. Hon’ble Delhi High court in Devsons Pvt. Ltd vs CIT [ 2010 (11) TMI 84 - DELHI HIGH COURT ] held that merely because tax department does not concur with the stand adopted by the assessee, it will not be enough reason to hold that assessee is guilty of concealment of income or of furnishing inaccurate details. Even if the claim of the assessee was found wrong upto the stage of Tribunal, such incorrect claim in the return, in the peculiar facts of the present case, cannot be said to prove furnishing of inaccurate particulars of income where the assessee had furnished complete details in respect of the claim so made in the return of income itself. For this, we stand fortified by the decision in CIT vs. Reliance Petroproduct (P) Ltd.,(2010 (3) TMI 80 - SUPREME COURT ). Therefore, for want of any contrary material brought on record, we are not inclined to interfere with the order of the ld. CIT(A) in deleting the penalty imposed against the assessee.- Decided in favour of assessee. Issues Involved:1. Deletion of penalty imposed under Section 271(1)(c) for furnishing inaccurate particulars of income.2. Taxability of Fees for Technical Services (FTS) on accrual basis versus cash basis.3. Attribution of profits to the Permanent Establishment (PE) in India.4. Applicability of mens rea in penalty proceedings under Section 271(1)(c).Issue-wise Detailed Analysis:1. Deletion of Penalty under Section 271(1)(c):The Revenue challenged the CIT(A)'s decision to delete penalties imposed by the AO under Section 271(1)(c) of the IT Act for the assessment years 2001-02 to 2004-05. The CIT(A) had deleted the penalties, holding that the assessee did not furnish inaccurate particulars of income. The Revenue argued that the CIT(A) erred in deleting the penalty because the assessee disclosed its business income only in response to notices under Section 148, and the matter was restored for verification by the High Court to the AO.2. Taxability of Fees for Technical Services (FTS):The Revenue contended that the CIT(A) erred in holding that the assessee could not be held liable for furnishing inaccurate particulars of income, even though the assessee did not offer income from FTS for taxation on an accrual basis. The CIT(A) had accepted the assessee's method of accounting on a cash basis, which was later upheld by the ITAT and the Delhi High Court. The Revenue argued that the CIT(A) failed to appreciate that the claim was incorrect in law and malafide, attracting Explanation 1 to Section 271(1)(c).3. Attribution of Profits to the Permanent Establishment (PE):The CIT(A) deleted the penalty related to profit attribution to the PE in India, as the High Court had remanded the matter back to the AO for fresh adjudication. The Revenue did not appeal against this deletion, focusing solely on the penalty related to FTS.4. Applicability of Mens Rea:The CIT(A) also held that there was no mens rea on the part of the assessee in not disclosing its income from FTS on an accrual basis. The Revenue argued that the Supreme Court's decision in Union of India and others V/s Dharmendra Textiles Processors and others (306 ITR 227) established that mens rea is not required for penalties under civil liability.Tribunal’s Findings:1. Common Issues and Consolidated Order:The Tribunal noted that common issues were involved in all appeals, and the arguments advanced by both parties were similar. Therefore, it consolidated the appeals for convenience and brevity, focusing on ITA No. 682/Del./2012.2. Assessee’s Method of Accounting:The Tribunal observed that the assessee, a company incorporated in Singapore, followed the cash system of accounting in India. The assessee declared income from FTS based on actual receipts, which was later assessed on an accrual basis by the AO. The CIT(A) and ITAT upheld the taxability of FTS on an accrual basis, but the High Court remanded the issue of PE and profit attribution to the AO.3. Penalty Proceedings and Full Disclosure:The Tribunal found that the assessee made a full disclosure in its return of income, stating that it followed the cash basis of accounting. The penalty was imposed due to the difference in the method of accounting for FTS. The Tribunal held that the issue of whether FTS should be taxed on an accrual or cash basis was debatable, and where two views are possible, penalty under Section 271(1)(c) is not warranted.4. No Concealment or Inaccurate Particulars:The Tribunal concluded that the assessee did not conceal income or furnish inaccurate particulars. The penalty is imposed based on the tax sought to be evaded, but in this case, the income was offered in subsequent years when received, resulting in no loss to the Revenue. The Tribunal relied on various judicial precedents to support its decision that penalty is not automatic and requires proof of concealment or furnishing inaccurate particulars.Conclusion:The Tribunal upheld the CIT(A)'s order deleting the penalties imposed under Section 271(1)(c) for all assessment years. It found no justification to interfere with the CIT(A)'s decision, as the assessee had made full disclosure and the issue was debatable. The appeals of the Revenue were dismissed.