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Income Tax Appellate Tribunal, “C” BENCH, MUMBAI
O R D E R
PER PAVAN KUMAR GADALE JM:
The Revenue has filed the appeal and the assessee has filed the Cross Objection against the order of the Commissioner of Income Tax (Appeals)(CIT(A)) –56, Mumbai passed u/s 271(1)(c) and 250 of the Income Tax Act, 1961.
CO No. 222/Mum/2019 CLSA Ltd, Mumbai - 2 -
The assessee has filed the Cross Objection on the legal issue of challenging the validity of Penalty notice. We shall take up Cross Objection (C.O) no.222/Mum/2019 and the facts narrated. The assessee has raised the sole ground of cross objection.
On the facts and circumstances of the case and in law, the CIT(A) erred in upholding the AO’s penalty order. Without appreciating that the A.O had not specified the limb of Sec. 271(1)(c) under which penalty proceedings were initiated i.e. whether for concealment of particulars of income or for furnishing of inaccurate particulars of income, either in the penalty initiation notice or in the assessment order dated 29.01.2016. Therefore, the penalty proceedings were void-ab- initio.
The Brief facts of the case are that, the assessee company is incorporated in Hong Kong and is a part of CLSA Group a leading independent brokerage house in Asia. The Group provides equity broking, capital markets, merger and acquisition, and asset management services to global corporate and institutional clients, having substantial operations in the Asia-pacific region. The assessee provides regional and operational support services including back office support services to the Group companies and also a CO No. 222/Mum/2019 CLSA Ltd, Mumbai - 3 - member of the Bombay Stock Exchange (BSE) and National Stock Exchange(NSE). In the financial year(F.Y)2010-11, the assessee has received service fees amounting to Rs. 71,58,54,279/- which has been offered to tax as fees for technical services on gross basis u/s 115A(1)(b)(BB) of the Act. The assessee company also received reimbursements amounting to Rs.41,45,88,932/- for the costs incurred in procuring services from other services providers to meet its service obligations under the SLA with CLSA India. The assessee has only recovered the cost it incurred in procuring these services from CLSA India without charging any mark-up i.e on a pure cost to cost basis and there was no profit element embedded in the payment of reimbursement received by the assessee and was not regarded as income chargeable to tax.
The assessee has filed the return of income for the A.Y 2011-12 on 25.03.2013 with a total income of Rs.71,58,54,279/-on the basis that reimbursement for costs incurred in procuring services from other service providers is not chargeable to tax in India. Subsequently, the case was selected for scrutiny and CO No. 222/Mum/2019 CLSA Ltd, Mumbai - 4 - notice u/s 143(2) of the Act was issued. In the assessment proceedings, the A.O required the assessee to explain as to why reimbursement amount received under the SLA with CLSA India should not be treated as fee for technical services and included in the total income liable to tax in India. In compliance, the assessee has filed the clarifications and submissions. Subsequently, the Assessing Officer (A.O) has passed the Draft assessment order on 30.03.2015 treating the reimbursement of expenses on par as the service fees received by the assessee under the SLA with CLSA India. Hence the services provided are in the nature to technical services and is chargeable to tax in India U/s 115A(1)(b)(BB) of the Act. Against the Draft assessment order, the assessee has filed objections before the DRP. After considering the assessee submissions and findings of the A.O. the DRP has confirmed the action of the A.O. and issued directions on 22.12.2015. Further the final assessment order was passed on 29.01.2016 as per directions of the DRP on reimbursement of expenses determining a total income of Rs. 1,13,04,43,211/-.
CO No. 222/Mum/2019 CLSA Ltd, Mumbai - 5 -
Subsequently, the A.O. has initiated the penalty proceedings u/s 271(1)(c) of the Act as the assessee has concealed the particulars of income and furnished the inaccurate particulars of income. The A.O. considered the findings of the assessment proceedings, submissions of the assessee on bifurcation of the receipts for fees for technical services and reimbursement of expenses from CLSA India and whereas only technical fees of Rs. 71,58,54,271/- was disclosed in total income as income from fees for technical services. However, an amount of Rs.41,45,88,932/- was shown as the reimbursement of expenses and no income has been offered. Therefore, the A.O. is of the opinion that the assessee has furnished the inaccurate particulars of income by disclosing fees for technical services as reimbursement of expenses. Whereas the said amount was part of the service receipts as per the service level agreement and TDS has been deducted on the total remittances. Finally the A.O. was not satisfied with the explanations and levied the penalty u/s 271(1)(c) of the Act of Rs.4,37,70,230/- and passed the order on 29-07-2016.
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Aggrieved by the penalty order u/s 271(1)(c) of the Act, the assessee has filed an appeal before the CIT(A). In the appellate proceedings, the CIT(A) has considered the grounds of appeal
, findings of the A.O, submissions of the assessee and additional ground of appeal. The CIT(A) has called for the remand report from the A.O and rebuttal/rejoinder of the assessee. The CIT(A) find the reimbursement of the expenses was treated as fees for technical services by the A.O. Whereas the CIT(A) considered the facts, submissions, objections filed before the DRP and the fact of deduction of TDS in Form-26AS where the reimbursement of expenses was treated as fees for technical services. Finally, the CIT(A) has observed at page
5. Para 11 to 16 of the order and partly allowed the penalty appeal of the assessee, which is read as under:
I find that all figures were presented to Assessing Officer. The issue is one of interpretation, by which character of receipt was changed in assessment. Each debit note mentioned the split up between service fee and reimbursement. Further para 6.1 of service level agreement distinguishes fee and reimbursement. Items on which mark-up is changed are listed in schedule 2 of fee memorandum. As such it is not in record that any of sums covered by reimbursement will fit in Schedule 2. This is one of the CO No. 222/Mum/2019 CLSA Ltd, Mumbai - 7 -
primary requirements to--- impose penalty. Although there is a split up as taxable and non-taxable receipts, nowhere in record, it is seen that appellant artificially split up receipts with a view to avoid payment of tax.
12. In regard to remand report of Assessing Officer (Reference para 6 of this order) some of the observations needs discussion. For example D is that no application for certificate for lower deduction was sought for. Even if non- deduction certificate is applied for and denied, that by itself does not forbid assessee from making a claim in return of income under bona fide belief. E is found to be assumption based. The case decision cited by Assessing Officer does not exactly fit since it is not conclusively established [from angle of imposition of penalty under section 271(1)(c)] that there is read artificial split up. A case of furnishing of inaccurate particulars of income necessitating imposition of penalty is not found to exist here.
The above being the case, I find that a clear case of furnishing of inaccurate particulars of income is not established. As long as it is not established that the sum received as reimbursement had a profit element, question of imposition of penalty under section 271(1)(c) for furnishing of inaccurate particulars of income does not arise. There was dispute on character of income, which went for decision by DRP and held to be taxable. That by itself is not sufficient to impose penalty under section 271(1)(c). Hence the penalty fails to survive and is cancelled. All grounds of appeal stands disposed of accordingly.
The Additional ground of appeal reads as under : Additional Ground CO No. 222/Mum/2019 CLSA Ltd, Mumbai - 8 -
6. On facts and circumstances of the case and in law, the AO erred by not specifying either in the penalty initiation notice or in the assessment order dated January 29, 2016 the limb of section 271(1)(c) of the Act under which penalty proceedings have been initiated ie whether for concealment of particulars of income or for furnishing of inaccurate particulars of income. Therefore, the penalty proceedings are void-ab initio.
The above was duly forwarded to Assessing Officer. Being a legal matter the ground is admitted and adjudicated as there is no estoppels against statute.
I find from the assessment order that the following is recorded. 6.5 Penalty proceedings u/s.271(1)(c) are separately initiated for furnishing inaccurate particulars and thereby concealing the income.
Thus the limb under which the penalty proceedings are initiated is clear. The aspect as to whether the initiation is for furnishing of inaccurate particulars of income or concealment of _particulars of income, the details are in assessment order itself. Hence the additional ground is dismissed.
The appeal is partly allowed (allowed on quantum but additional ground on technical deficiency dismissed).
Aggrieved by the CIT(A) order, the Revenue has filed an Appeal before the Honble Tribunal and the Assessee has filed the Cross objections. At the time of Hearing, the learned Authorized Representative(Ld.AR)
CO No. 222/Mum/2019 CLSA Ltd, Mumbai - 9 - submitted that the Ld.CIT(A) has erred in not considering the facts that the Notice u/sec 274 r.w.s.271 of the Act issued by the Assessing Officer does not specify, whether the penalty is levied for concealment of particulars of income or furnishing inaccurate particulars of income. The Ld.AR supported the submissions with judicial decisions and paper book and prayed for allowing the Cross Objection and the learned Departmental Representative (Ld.DR) relied on the order of the Assessing officer.
We heard the rival submissions and perused the material on record. Prima facie, the Ld.AR contentions are that the Notice u/sec 274 r.w.s.271 of the Act issued by the Assessing officer is defective, as it does not mention whether the penalty is levied for concealment of particulars of income or furnishing inaccurate particulars of income. The Ld. AR has filed the submissions and demonstrated the copy of Notice at page 15 of the paper book. We find, the Hon’ble Apex Court dismissed the Special Leave Petition filed by the Revenue against the judgment of the Hon’ble
CO No. 222/Mum/2019 CLSA Ltd, Mumbai - 10 - Karnataka High Court in of 2015 dated 23/11/2015 in the case of CIT vs. M/s. SSA’s Emerald Meadows where an identical issue was decided in favour of the assessee. We consider it appropriate to refer to the operative part of the decision of the Hon’ble High Court of Karnataka in the case of CIT Vs. M/s. SSA’s Emerald Meadows (supra) is read as under: “2. This appeal has been filed raising the following substantial questions of law: (1) Whether, omission if assessing officer to explicitly mention that penalty proceedings are being initiated for furnishing of inaccurate particulars or that for concealment of income makes the penalty order liable for cancellation even when it has been proved beyond reasonable doubt that the assessee had concealed income in the facts and circumstances of the case?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the penalty notice under Section 274 r.w.s. 271(1)(c) is bad in law and invalid despite the amendment of Section 27.41 13) with retrospective effect and bra virtue of the amendment, the assessing officer has initiated the penalty by properly recording the satisfaction for the same?
(3) Whether on the facts and in the circumstances of CO No. 222/Mum/2019 CLSA Ltd, Mumbai - 11 - the case, the Tribunal was justified in deciding the appeals against the Revenue on the basis of notice issued under Section 274 without taking into consideration the assessment order when the assessing officer has specified that the assessee has concealed particulars of income?
3. The Tribunal has allowed the appeal filed by the assessee holding the notice issued by the Assessing Officer under Section 274 read with Section 271(1)(c) of the Income Tax Act, 1961 (for short the Act') to be bad in law as it did not specify which limb of Section 271(1)(c) of the Act, the penalty proceedings had been initiated i.e., whether for concealment of particulars of income or furnishing of inaccurate particulars of income. The Tribunal, while allowing the appeal of the assessee, has relied on the decision of the Division Bench of this Court rendered in the case of COMMISSIONER OF INCOMETAX - VS- MANJUNATHA COTTON AND GINNING FACTORY (2013) 359 ITR 565.
4 In our view, since the matter is covered by judgment of the Division Bench of this Court, we are of the opinion, no substantial question of law arises in this appeal for determination by this Court. The appeal is accordingly dismissed.”
We are of the opinion that penalty provisions u/s 271(1)(c) of the Act are attracted, when the assessee has concealed the particulars of income or furnished inaccurate particulars of such income. It is a well accepted proposition that the aforesaid two limbs of CO No. 222/Mum/2019 CLSA Ltd, Mumbai - 12 - section 271(1)(c) of the Act carry different meaning. Therefore, it was imperative for the AO to strike off irrelevant limb so as to make the assessee aware as to what is the charge made against him and so that he can respond. Further, the Hon’ble High Court of Karnataka in the case of CIT vs. Manjunatha Cotton Ginning Factory (2013) 359 ITR 565 has observed that the levy of penalty has to be clear as to the limb under which it is being levied. As per the Hon’ble High Court, where the AO proposes to invoke the first limb being the concealment then, notice has to be appropriately marked. Further, the Hon’ble High Court has held that the standard proforma of notice u/s 274 of the Act, without striking of the relevant clauses would lead to inference of non-application of mind by the AO. In the present case, the learned Authorised Representative demonstrated the notice, we find that the AO is not sure whether he was to proceed on the basis that the assessee has concealed the particulars of his income or furnished inaccurate particulars of income. The Hon’ble High Court also observed that in such a situation, the levy of penalty suffers from non-application of mind.
CO No. 222/Mum/2019 CLSA Ltd, Mumbai - 13 -
We, considering the ratio of decision of Hon’ble Supreme Court in the case of CIT VS M/s. SSA’s Emerald Meadows (supra), Hon’ble High Court of Karnataka in the case CIT VS Manjunatha Cotton Ginning Factory (supra), and Hon’ble jurisdictional High Court decision in CIT Vs Samson Perinchary observe that the action of the AO in passing the penalty order u/s 271(1)(c) shows that there is non-application of mind thereby the penalty order is not sustainable. We also rely on ratio of the recent decision of the Hon’ble Jurisdictional High Court in Tax Appeal No. 51 & 57 of 2012 of Mohd. Farhan A. Shaikh v. DCIT dated 11.03.2021 has dealt on this disputed issue of validity of notice in question No. 1 Para 180,181 &182 and the observations are read as under:
“180. One course of action before us is curing a defect in the notice by referring to the assessment order, which may or may not contain reasons for the penalty proceedings. The other course of action is the prevention of defect in the notice—and that prevention takes just a tick mark. Prudence demands prevention is better than cure.
Answers:
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Question No.1: If the assessment order clearly records satisfaction for imposing penalty on one or the other, or both grounds mentioned in Section 271(l)(c), does a mere defect in the notice—not striking off the irrelevant matter—vitiate the penalty proceedings?
It does. The primary burden lies on the Revenue. In the assessment proceedings, it forms an opinion, prima facie or otherwise, to launch penalty proceedings against the assessee. But that translates into action only through the statutory notice under section 271(1)(c), read with section 274 of IT Act. True, the assessment proceedings form the basis for the penalty proceedings, but they are not composite proceedings to draw strength from each other. Nor can each cure the other’s defect. A penalty proceeding is a corollary; nevertheless, it must stand on its own. These proceedings culminate under a different statutory scheme that remains distinct from the assessment proceedings. Therefore, the assessee must be informed of the grounds of the penalty proceedings only through statutory notice. An omnibus notice suffers from the vice of vagueness.
More particularly, a penal provision, even with civil consequences, must be construed strictly. And ambiguity, if any, must be resolved in the affected assessee’s favour.”
The Ld.DR fairly accepted the Jurisdictional High Court decision in Mr. Mohd. Farhan A. Shaikh Vs DCIT (supra) and the fact that Assessing Officer has not applied his mind on the issue of penalty notice in non striking of CO No. 222/Mum/2019 CLSA Ltd, Mumbai - 15 - charge, whether the penalty is levied for furnishing in accurate particulars of income or concealment of income which is clearly evident on record. Accordingly, we quash the penalty notice and allow the ground of cross objections in favour of the assessee.
11. Since, we have allowed the cross objection filed by the assessee and the revenue appeal becomes in fructuous and is dismissed.
In the result, cross objection filed by assessee is allowed and appeal filed by the revenue is dismissed.
Order pronounced in the open court on 07.09.2021.