KEB HANA BANK,CHENNAI vs. JOINT DIRECTOR OF INCOME TAX, CHENNAI

O R D E R

PER V. DURGA RAO, JUDICIAL MEMBER:

The above mentioned reporting of specified high value transaction/asset of residents of 85 countries has to be done by 31st May following the calendar year by each of the prescribed Financial Institutions so as to facilitate sharing of such details with the Treaty countries in time to enable them to take action as per their domestic law. In time reporting is the fundamental requirement, as every law has time limitation by which any action on defaulting taxpayer could be initiated. To ensure complete reporting of all reportable transaction/asset, sub-section (7) of section 285BA has mandated every such reportable entity to put in place 'Due diligence' process to ensure no reportable transaction/asset is missed out from in time reporting. What are the ‘Due diligence’ processes to be put in place by such reportable entities, has been laid out in detail under Rule-114H of the IT Rules, 1962. Considering the seriousness of such cent-percent reporting of all reportable transaction in time and considering that there could be such failure in the first instance of reporting, the law has factored by way of sub-section (6) of section 285BA, to every such reporting entity to inform the Department voluntarily of the errors/omission within 10 days of such initial reporting and file a revised statement. A penalty u/s 271FAA was introduced to ensure due compliance to this 'Due diligence' requirement considering the seriousness of such reporting requirement as per the tax treaties with various countries on exchange of information. The captioned assessee in appeal, a foreign bank was found, under reporting of certain reportable transactions of three Calendar years 2018, 2019 and 2020. This was detected during the course of random inspection by the Department in March, 2021. This detection of omission to report by the Department was almost nearly after three years, two years and one year from the respective year's original statement furnishing. It was only after the Department had pointed out the omission, in reporting of some vital high value transaction/asset, did the assessee bank re-look at their Due diligence' process which further lead to detection of 1192 transaction in Calendar year 2018, 855 transaction in the Calendar year 2019 and 510 transaction in the Calendar year 2020. The assessee's counsel claims that under reporting of reportable transaction happened due to the software bug which put in place to carry out the electronic searching of the reportable transaction/asset. This bug in its electronic search software was detected only when the Department flagged the issue through its notice. The reason put forth by the counsel of the assessee bank reflects the casual approach adopted by the assessee bank complying with such a in time critical reporting requirement mandate that too which relates to sharing of information between countries based on tax treaties. In other words, such admission amounts to acceptance of the fact that the assessee bank had not carried out complete testing of the software application of its robustness before deploying it in its production environment. This is a serious matter which could lead or could have led to tax evasion in such countries on account of limitations in initiation of action as per their respective laws of the country. The excuse put forth by the assessee could have been acceptable if years under the consideration were to be the first year of reporting mandate. Considering the seriousness of the lapse, the penalty levied of Rs.50,000/- per calendar year is just and need to be upheld as such punitive action would ensure such lapses are not repeated in future. The assessee's counsel has also heavily relied on sub-section (4) of section 285BA and stated that without default, within the notice timeline given of 30 days, the assessee bank had filed voluntarily its corrected statement including entries which the Department had not detected and hence there is no default which would attract penalty. It may be mentioned that nowhere in the sub-section (4), it has been stated that the assessee who comply by filing rectified statement with the timeline specified will be absolved of payment of penalty. Secondly, this compliance, cannot under any stretch of imagination, could be treated as voluntary compliance on the part of the assessee bank. The compliance came only after nearly three years that too after the Department identified omission. More importantly, the penalty in the assessee's case was levied under clause (a) of section 271FAA for non-compliance to the Due diligence' process as required sub-section (7) of section 285BA read with rule 114H of IT Rules and not on account of non- furnishing of a rectified statement within the timeline permitted under sub-section (4) of the section 285BA. It is requested that the above written submission may kindly be taken on record while passing the order.

6. Per contra, the ld. Counsel for the Reporting Entity has filed separate but identical written submissions for each assessment years of the Reporting Entity. The written submissions for the assessment year 2018-19 are reproduced as under: Assessment Year 2018-2019 Appeal No. ITA 440/CHNY/2023 This is with reference to the captioned appeal for the assessment year 2018-2019. The facts are as follows:

1. 1. KEB Hana Bank is a foreign bank operating in India as Scheduled Commercial Bank.

2. KEB Hana Bank filed Form 61B under section 285BA for the calendar year 2017 on 30.5.2018, within the time allowed (Statement ID 602557816300518).

3. KEB Hana Bank was advised by the Income Tax Officer, Intelligence and Criminal Investigation, Chennai, vide letter dated 30.3.2021, to rectify the discrepancy in the filed Form 61B.

4. KEB Hana Bank filed revised Form 61B on 8.4.2021 (Statement ID 493055004080421) and a further revised Form 61B on 15.4.2021 (Statement ID 171712880150421). The revised forms were filed within the time allowed in terms of section 285BA(4).

5. Section 285BA(4) reads "where the prescribed income-tax authority considers that the statement furnished under sub-section (1) is defective, he may intimate the defect to the person who has furnished such statement and give him an opportunity of rectifying the defect within a period of thirty days from the date of such intimation or within such further period which, on an application made in this behalf, the said income-tax authority may, in his discretion, allow; and if the defect is not rectified within the said period of thirty days or, as the case may be, the further period so allowed, then, notwithstanding anything contained in any other provision of this Act, the provisions of this Act shall apply as if such person had furnished inaccurate information in the statement".

6. The Addl. DIT/JDIT(1&CI) levied a penalty of Rs.50,000/- under section 271FAA vide order dated 26.11.202 1 received by the assessee on 9.2.2022.

7. Demand notice under section 156 was not received along with the order.

and objections to the penalty order:

1. No penalty is leviable under section 271 FAA, since, as explained above, the defects pointed out by the Income Tax Officer, Intelligence and Criminal Investigation, Chennai vide his letter dated 30.3.2021 were duly rectified and revised/rectified Form 61B was filed on 8.4.2021 and 15.4.2021, within the time allowed under section 285BA(4).

2. No penalty is leviable under section 271 FAA since there was no inaccuracy in the revised/rectified Form 61B filed by KEB Hana Bank.

3. There is no loss to the revenue.

4. It is an acknowledged and judicially recognized fact that the tax laws of this country are complex and complicated. It is equally well known fact that the legislation in this field undergoes so frequent changes and amendments that it is not possible for the Banks software to be updated so frequently. Also, due to the mammoth data base at the bank, it is not practical nor possible to manually gather data for this reporting. Case laws in support of our contention (As per Annexure B):

[2016] 74 taxmann.com 97 (Kolkata - Trib.) IN THE ITAT KOLKATA BENCH 'B' - Durgapur Steel Peoples' Cooperative Bank Ltd. v. Director of Income-tax (Intelligence & Criminal Investigation), Kolkata |2016] 72 taxmann.com 306 (Kolkata - Trib.)[03-08-2016] - IN THE ITAT KOLKATA BENCH 'A'- Malda District Central Co-op Bank Ltd. v. Director of Incomne-tax (1 & CI), Kolkata [2023] 150 taxmann.com 366 (Jaipur - Trib.) IN THE ITAT JAIPUR BENCH 'SMC - Jhalawar Kendriya Sahakari Bank Ltd. V. Additional/Assistant Director of Income- tax (1&CI) Jaipur [ASSESSMENT YEAR 2019-20] - JANUARY 11, 2023 5. In view of the foregoing, it would be incorrect to say that due diligence was not exercised in preparing and submitting the prescribed statement.

6. That in view of the facts and circumstances of the case, the Addl. DIT/JDIT(1&CI) has erred in law and on facts in levying a penalty of Rs.50,000/- under section 271 FAA of the Income Tax Act, 1961.

7. That the explanations given, evidence produced and material placed and made available on record have not been properly considered and judicially interpreted and the same do not justify the penalty imposed.

8. That the penalty imposed ís based on mere surmises and conjunctures and the same cannot be justified by any material on record and against the principle of natural of justice. Prayer: In view of the above facts, arguments and objections, it is pleaded that the present appeal of the assessee against the levy of penalty of Rs. 50,000/- should be allowed.

6.1 Before us, the ld. Counsel for the Reporting Entity has contended that the Reporting Entity has duly rectified the defect and revised/rectified Form 61-B was filed within the time allowed under section 285BA(4) of the Act. We have perused the relevant provisions of section 285BA(4) of the Act and the same are reproduced as under: (4) Where the prescribed income-tax authority considers that the annual information return furnished under sub-section (1) is defective, he may intimate the defect to the person who has furnished such return and give him an opportunity of rectifying the defect within a period of one month from the date of such intimation or within such further period which, on an application made in this behalf, the prescribed income-tax authority may, in his discretion, allow; and if the defect is not rectified within the said period of one month or, as the case may be, the further period so allowed, then notwithstanding anything contained in any other provision of this Act, such return shall be treated as an invalid return and the provisions of this Act shall apply as if such person had failed to furnish the annual information return. 6.2 In this case, the Prescribed Authority has notified the discrepancies vide his letter dated 30.03.2021 to the Reporting Entity to rectify the defects and accordingly, the revised/rectified Form 61-B was filed on 13.04.2021, 13.04.2021 and 15.04.2021 for the CY 2017, 2018 and 2019 respectively, which appears to be well within the time allowed under section 285BA(4) of the Act. Therefore, the ld. CIT(A) was not correct in confirming the order of the Prescribed Authority that the assessee has not rectified the defects within time. We find that the provisions of sub-section (4) of section 285BA of the Act mandate that the defect should be rectified within a period of one month from the date of such intimation and in the present case, the Reporting Entity has rectified the defects within the time limit as provided under section 285BA(4) of the Act. In view of the above, we set aside the order passed by the ld. CIT(A) and delete the penalty levied under section 271FAA of the Act for the assessment years 2018-19, 2019-20 and 2020-21.