ADIT(IT)-3(2), MUMBAI vs. M/S. LINKLATERS, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL “H” BENCH, MUMBAI BEFORE SHRI ABY T. VARKEY, JM AND SHRI OM PRAKASH KANT, AM आयकर अपील सं/ I.T.A. No.1826/Mum/2007 (निर्धारण वर्ा / Assessment Years: 2001-02) ADIT (IT)-3 (2) M/s. Linklaters (formerly बिधम/ Scindia House, Room known as Linklaters & Vs. No.132, 1st Floor, NM Paines) Road, Mumbai-400038. C/o. C. C. Chokshi & Co. Worli, Mumbai-400018.

Cross Objection No. 186/Mum/2007 Arising out of I.T.A. No.1826/Mum/2007 (निर्धारण वर्ा / Assessment Years: 2001-02) M/s. Linklaters (formerly बिधम/ ADIT (International known as Linklaters & Taxation) 3(2) Vs. Scindia House, 1st Floor, Paines) C/o. C. C. Chokshi & Co. N. M. Road, Mumbai-38. Worli, Mumbai-400018. स्थधयी लेखध सं./जीआइआर सं./PAN/GIR No. : AABFL2160M (अपीलार्थी /Appellant) .. (प्रत्यर्थी / Respondent) Assessee by: Shri Niraj Sheth Revenue by: Shri K. C. Kanojiya (DR) सुनवाई की तारीख / Date of Hearing: 07/06/2022 घोषणा की तारीख /Date of Pronouncement: 15/06/2022 आदेश / O R D E R PER ABY T. VARKEY, JM: These appeals have been filed by the revenue and cross- objection (CO) of the assessee are against the order of the Commissioner of Income Tax (Appeals)-XXXIII, Mumbai dated 06.11.2006 for A.Y.2001-02 passed u/s 271(1)(c) (penalty) of the Income Tax Act, 1961 (hereinafter “the Act”). 2. Brief facts of the case is that the assessee firm is based in United Kingdom and is engaged in the practice of law. It filed its return of

ITA No.1826/Mum/2007 C.O. 186/Mum/2007 A.Ys. 2001-02 M/s. Linklaters income on 31.10.2001 disclosing a total income of Rs.4,11,274/- and claiming a refund of Rs.1,67,35,618/- on account of Tax Deducted at Source. Later, the case of the assessee was selected for scrutiny and the AO noted that the assessee firm has provided professional service to certain clients whose operations extended to India. He also noted that the clients were (largely serviced by the partners and the staff in the U.K). However, the AO noted that the assessee has not offered any income for tax contending that since there is no Permanent Establishment (PE) in India, the income of the firm is not liable for tax in India. Thus, according to the assessee since there is no PE in India, the income of the Firm is not liable to be tax in India and it took recourse to the provisions of the Indo-UK, Double Taxation Avoidable Agreement (DTAA). However, it is a fact that along with the return, the assessee also placed without prejudice an income and expenditure account with a reference to fee charged to its clients as could be reasonably attributed to work performed in India. And the AO completed the assessment u/s 143(3) of the Act on 02.03.2004 determining the income of the assessee at Rs.27.62 crores. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who held that the Firm had PE in India. However Ld CIT(A) directed the AO to compute the income relating to services rendered only in India since it was only liable tax and not the entire income as assessed by the AO. The assessee thereafter, challenged the order of the Ld. CIT(A) before the Tribunal which was dismissed.

ITA No.1826/Mum/2007 C.O. 186/Mum/2007 A.Ys. 2001-02 M/s. Linklaters 3. Meanwhile, the AO gave effect to the order of the Ld. CIT(A) and also issued notice of levy of penalty u/s 271(1)(c) of the Act and passed the penalty order dated 10.03.2006, levying penalty of Rs.1,24,73,238/-. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who vide impugned order has deleted the penalty by holding as under: - “4, I have considered the facts of the case very carefully. The appellant is of the view that the appellant has no PE in India. This is the view taken by the appellant during the earlier assessment years also. The appellant has filed Note 7,8 & 9 to the return of income and the appellant is of the view that the appellant has no PE in India. In the Note no.10, the appellant has also submitted that without prejudice the appellant has prepared (extracted from its books) a profit and loss account with reference to the fees charged to clients as could reasonably be attributed to work performed in India. It is not a fresh issue in this year, it is an issue starting from the A.Y. 1995-96 onwards. So I am of the view that the he appellant under a bonafide belief claims consistently that it has no PE in in India. The issue is repeatedly under appeal. The. appellant has also taken the same view this year. The appellant’s contention that the appellant has no PE in India is based on various commentaries given in its submissions. 4.1 Further, the Hon'ble Supreme Court in the case of K.C. Builders and another Vs, ACIT 265 ITR 562 has made the following observations: “ Mere omission from the return of an item of receipt does neither amount to concealment nor deliberate furnishing of inaccurate particulars of income unless and until there is some evidence to show or some circumstances found from which it can be gathered that the

ITA No.1826/Mum/2007 C.O. 186/Mum/2007 A.Ys. 2001-02 M/s. Linklaters omission was attributable to an intention or desire on the part of the assessee to hide or conceal income so as to avoid the imposition of tax thereon. In order that a penalty under section 271(1)(c) may be imposed, it has to be proved that the assessee has consciously made concealment or furnished inaccurate particulars.” 4.2 So from the above, it is clear that there should be some intention on the part of the assessee to hide or conceal income so as to avoid the imposition of tax thereon then only penalty can be levied u/s. 271(1)(c) of the I-T. Act, 1961. In this case, the appellant has made a claim under a bonafide belief based on the interpretation of law. The addition is not because of the appellant’s non furnishing of the particulars of income or furnishing of inaccurate particulars of income. The facts are properly disclosed by the appellant in the return of income. In view of this, it is not a case of concealment of income or furnishing of inaccurate particulars of income. I am satisfied that it is not a fit case for levy of penalty w/s. 271(1)(c) of the Income Tax Act, 1961. I direct the Assessing Officer to delete the penalty levied u/s. 271(1)(c) of the Income Tax Act, 1961.”

ITA No.1826/Mum/2007 C.O. 186/Mum/2007 A.Ys. 2001-02 M/s. Linklaters “5.We have heard the rival submissions perused the material before us. We find that the assessee had filed the return of income jf its own, that it had claimed that income relatable to Indian clients was not taxable in India as per the provisions of DTAA, that alternatively it had submitted that a part of the income could be taxed in India, that the AO had taxed the whole income earned by the assessee, that the FAA had given a substantial relief to the assessee, that Tribunal had confirmed the order of the FAA. It is a fact that in the statement accompanying of income at page-81 to 83 of the Paper Book the assessee had made full disclosure income earned by it as well as non taxability of side income, that at para no. 10 of the statement an alternative argument has also been made that the assessee-firm had not concealed the particulars of its income. There was difference of opinion between the AO and the assessee about the taxability of income and PE. In our opinion, confirmation of the additions, made by the AO, in the appellate proceedings and levy of penalty u/s 271 (1)(c) of the Act are totally two different things. As per the settled principle of taxation jurisprudence, confirmation of addition in appellate proceedings should not result in automatic levy of penalty. The explanation filed by the assessee has to be looked into and only after that penalty can to be levied. In our opinion, in the case before us, the explanation filed by the assessee was one of the plausible explanation. We have taken note of the fact that the Hon'ble Jurisdictional High Court has admitted a substantial question of law (Income tax appeal No.6834 of 2010 dt.30.4.2014), with regard to addition partly confirmed by the Tribunal and PE. In the case of ICICI Bank Ltd. (supra), the Tribunal has dealt with a situation where appeal is admitted by the Hon’ble High Court against the order of the Tribunal

ITA No.1826/Mum/2007 C.O. 186/Mum/2007 A.Ys. 2001-02 M/s. Linklaters and levy of concealment penalty. We are reproducing the relevant portion of the said order and same reads as under: “4.1.In the matter of Nayan Builder and Developer (supra),the Hon'ble Jurisdictional High Court has held that once a question of law is admitted by the Hon'ble High Court in quantum proceedings the issue becomes debatable and penalty u/s 271(1)(c) of the Act cannot be levied Following the above decision. various Benches of the Tribunal have deleted the concealment penalty where the Hon'ble High Court had admitted the question of law with regard to quantum appeals. We have gone through the orders of Advaita Estate Development Pvt. Ltd.(supra), Schrader Dunken Ltd. (supra),Indusind Bank Ltd (supra),Development Credit Bank Ltd (supra) The perusal of the order lead us to the conclusion that once a substantial question of law is admitted by the Hon'ble High Court, then the penalty levied w/s. 271(1)(c) of the Act cannot survive. We have gone through the judgments of Hon'ble Gujarat High Court, relied upon by the DR wherein a contrary view has been taken and has been held that mere admission of quantum appeal by the Hon'ble Court does not mean that penalty u/s 271(1)(1)(c)cannot be levied Judicial discipline demands that until and unless the judgment of the Hon'ble jurisdictional High court is reversed it has to be respected and followed by the Tribunal functioning under the jurisdiction of that Court. Following the judgment of the Hon'ble Bombay High Court in the case of Nayan Builder and Developer(supra), we are reversing the order of the FAA, as the Hon'ble Court has admitted a question of law in quantum proceedings and thus it has become a debatable issue. Effective ground of appeal is decided in favour of the assessee.” Respectfully following the judgment of the Hon'ble Bombay High Court m the case of Nayan Builder and Developer Pvt. Ltd.(231

ITA No.1826/Mum/2007 C.O. 186/Mum/2007 A.Ys. 2001-02 M/s. Linklaters taxmann 665), we uphold the order of the FAA. Effective Ground of appeal, filed by the AO is decided against him. C.0.194/Mum/06 Assessment Year 1996-97: 6.Effective Ground of Cross objection is about quantification of the penalty levied by the AO in pursuance of the order of the FAA. As we have decided the appeal against the AO and in favour of the assessee so, the Cross Objection is treated as infructuous. ITA Nos.7082-85/Mum/2005 and C.O.Nos. 195-198/Mum/2005 AYs. 1997-98 to 2000-2001 7.The issues involved in the above mentioned four appeals and C.O.s are identical to the issues dealt by us at para No.5 and para No.6. Following the order of AY 1996-97 (ITA 7081 and CO 194/Mum/06),we dismiss.the appeal filed by the Assessing Officers. Co.s filed by the assessee, for all the above mentioned four AY.s are held to be infructuous. As a result, all the appeals filed by the AO stand dismissed and CO.s filed by the assessee are treated as infructuous.” 6. We note that in this AY 2001-01 also, the assessee had submitted along with the ROI, the profit and loss account regarding the fee charged to clients which could be reasonably be attributed to the work performed in India. Even though, it had claimed that since it had no PE in India and therefore, income of the Firm was not liable to be taxed in India, we note that the assessee Firm had made full disclosure about the income earned by it as well as non-taxability of the income at note no. 10. Thus, we find that the assessee firm had not concealed any particulars of income. Therefore the Ld. CIT(A) has rightly held that it was not a fit case for levy of penalty simply because the

ITA No.1826/Mum/2007 C.O. 186/Mum/2007 A.Ys. 2001-02 M/s. Linklaters assessee bonafidely believed that it had no PE in India which would attract tax liability in India. We note that while the Tribunal deleted the similar penalty levied u/s 271(1) (c) of the Act in assessee’s own case supra had noted that the quantum order of the Tribunal confirming the addition about Indian Clients had been challenged before the Hon’ble Bombay High Court, and that the High Court had admitted the appeal and a substantial question of law has been framed with regard to the issue of taxability of Indian income and existence of PE in India. In such scenario, Tribunal held that the issue was debatable and penalty u/s 271(1)(c) of the Act ought not be levied once the appeal had been admitted by the Hon’ble High Court, and when the fact remains that the assessee had voluntarily filed the return of income and had furnished all the necessary details. Respectfully following the ratio, laid by this Tribunal in assessee’s own case, we are inclined to uphold the action of the Ld. CIT(A) and dismiss this ground of appeal of the revenue. Cross-objection of the assessee is only supporting the action of the Ld. CIT(A). In the light of the aforesaid action upholding the action of the Ld. CIT(A), cross-objection has become infructuous. In the result, the appeal of revenue as well as cross-objection of the assessee are dismissed. Order pronounced in the open court on this 15/06/2022. Sd/- Sd/- (OM PRAKASH KANT) (ABY T. VARKEY) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated 15/06/2022. Vijay Pal Singh, (Sr. PS)

ITA No.1826/Mum/2007 C.O. 186/Mum/2007 A.Ys. 2001-02 M/s. Linklaters आदेश की प्रनिनलनि अग्रेनर्ि/Copy of the Order forwarded to : 1. अपीलार्थी / The Appellant 2. प्रत्यर्थी / The Respondent. 3. आयकर आयुक्त(अपील) / The CIT(A)- 4. आयकर आयुक्त / CIT ववभागीय प्रवतवनवि, आयकर अपीलीय अविकरण, मुंबई / DR, ITAT, Mumbai 5. गार्ड फाईल / Guard file. 6. आदेशधिुसधर/ BY ORDER, सत्यावपत प्रवत //True Copy// उि/सहधयक िंजीकधर /(Dy./Asstt. Registrar) आयकर अिीलीय अनर्करण, मुंबई / ITAT, Mumbai