DE BEERS UK LTD,MUMBAI vs. ASST DIT (IT) 1(2), MUMBAI

Re-assessment was completed by the AO on 27.12.2007 without bringing any business profits to tax. A solitary addition made by the AO relates to the income from royalty amounting to Rs. 1,38,47,837/-. Matter travelled to the first appellate authority. During the proceedings before the first appellate authority, after considering the submissions of the assessee, CIT (A) confirmed the penalty u/s 271(1)(c) of the Act. Before the Tribunal, assessee did not press this ground. Para 4.1 of the order of the Tribunal in (AY 2007-2008), dated 18.11.2011 has a reference in this regard. However, AO proceeded to levy penalty u/s 271(1)(c) of the Act. CIT (A) confirmed the same. Therefore, the assessee is in appeal before the Tribunal.

Before us, Ld Counsel for the assessee brought our attention to the said page 47 of the paper book and submitted that the AO reopened the assessment essentially to tax the business profits of the assessee in India as evident from the fact that the permanent establishment is the conclusive finding of the AO before AO is satisfied to issue the notice u/s 148 of the Act. Assessee being a foreign company is covered by the treaty provisions and the business profits are required to be taxed in accordance with the provisions of Article-7 of the treaty. In this regard, bringing our attention to the assessment order as stated, the Ld Counsel for the assessee demonstrated that what is taxed is the royalty and not the business profits of the assessee at all. Connected to these facts, Ld Counsel for the assessee submitted that such addition is unsustainable in law when the business profits are not brought to tax, which is the subject matter of the reasons for issue of notice u/s 148 of the Act. Bringing our attention to the settled legal position in the matter, by virtue of the judgment of the Hon‟ble Bombay High Court in the case of Jet Airways (I) Ltd (331 ITR 236), Ld Counsel for the assessee demonstrated that it is the requirement of the law, the concealed income which is the subject matter of the reasons for the reopening ought to have been brought to tax in the re-assessment before royalty income is added in the re-assessment. In this regard, Ld AR also relied on various decisions, wherein the undersigned are the parties, to ascertain the above argument. Further, Ld Counsel for the assessee also submitted that the penalty levied u/s 271(1)(c) should be cancelled for the reason that the officers did not have clarity in their mind regarding the relevant limb of the provisions of clause (c) of section 271(1) of the Act, for which the penalty is initiated, notice was issued, penalty was levied etc. In this regard, Ld Counsel for the assessee relied on various decisions including the judgment of the Hon‟ble Karnataka High Court in the case of CIT vs. Manjunatha Cotton & Ginning Factory [2013] 35 Taxmann.com 250 (Kar.), dated 13.12.2012 and various orders of the Tribunal in this regard viz Shri Samson Perinchery vs. ACIT (ITA Nos. 4625 to 4630/M/2013 (AYs 2003-04 to 2008-09), dated 11.10.2013; M/s. Parinee Developers Pvt Ltd vs. ACIT (ITA No.6772/M/2013) dated 11.9.2015 and others.

On the other hand, Ld DR for the Revenue submitted that the royalty income is taxable under the domestic law as business profits. However, Ld DR has nothing to say contrary to the fact that the assessee is covered by the DTAA.

We have heard both the parties and perused the orders of the Revenue Authorities as well as the reasons for reopening of the assessment already extracted above. The permanent establishment and the taxation of the business profits is the core issue of the reasons recorded by the AO on 28.3.2007 before issuing the notice u/s 148 of the Act. The assessment order certainly confirms the fact of taxing the royalty income which is the decision outside the scope of the provisions of Article-7 of the treaty. Therefore, it is a natural inference that the head of income, which is the subject matter of the reasons was not brought to tax thereby the addition on account of royalty becomes unsustainable in law in view of the binding judgment of Hon‟ble jurisdictional High Court in the case of CIT vs. Jet Airways (I) Ltd. [2011] 331 ITR 236 (supra) for the proposition that this kind of reassessments are arbitrary, since, no addition was made on the strength of the reasons recorded at the time of assuming jurisdiction u/s 147 of the Act. The conclusion given in the above said judgment reads as under: “AO may assess or reassess the income in respect of any issue which comes to his notice subsequently in the course of the proceedings though the reasons for such issue were not included in the notice; however, if after issuing a notice under section 148, the AO accepted the contention of the assessee and holds that the income which he has initially formed a reason to believe had escaped assessment, has as a matter of fact not escaped assessment, it is not open to him independently to assess some other income.”

On this ground and based on the said reasoning alone ie the order of the AO taxing the said royalty income on merits becomes unsustainable if the assessee could not have contested seriously. When such assessment is unsustainable in law, in our view, the levy of penalty becomes futile exercise legally. On this reasoning, we are of the view, the said penalty is required to be deleted. Further, regarding the validity of the notice issued u/s 274 of the Act, we find from the perusal of the copy of the notice, placed at pages 51 and 52 of the paper book, the Assessing Officer did not strike off the relevant portion of the notice kept on page 52 of the paper book. As per the Act, section 271(1)(c) refers to „concealment of particulars of income‟ and „furnishing of inaccurate particulars of income‟. Assessing Officer did not strike off either of the two reflecting lack of clarity in the mind of the AO at the time of initiation of penalty proceedings. Further, we have also perused the penalty order dated 16.3.2012 and find, in para 5, that there is a reference to the following ie “the income in respect of which particulars have been concealed”. This expression is obviously not in accordance with the contents of clause (c) of section 271(1) of the Act. The officers have messed up the language and the expressions which can happen when there is no clarity in the minds of the officers. Considering the same, we are of the view, this is a fit case for applying the ratio of the judgment in the case of Manjunatha Cotton & Ginning Factory (supra). The said ratio was repeatedly invoked in various decisions of the orders passed by the Tribunal. For instance, the decision in the case of Shri Samson Perinchery vs. ACIT in to 4630/M/2013 (AYs 2003-04 to 2008-09), dated 11.10.2013 wherein the Ld Counsel relied on the said judgment of the Hon‟ble Karnataka High Court (supra) which was considered and allowed the appeals in favour of the assessee. For the sake of completeness of this order, we extract the relevant paras 11 to 13 of the said Tribunal‟s order (supra) dated 11.10.2013 and the same read as under:-

The above extracts reveal that the AO has not applied his mind to the fact for which reason of the penalty, the notices were issued. The above documents reveal that the penalty proceedings were initiated for “failure to furnish inaccurate particulars of income and however, the penalty was levied for concealment of income” . 12.1. In this regard, we have perused the said praras 59 to 61 of the Hon‟ble Karnataka High Court in the case of Manjunatha Cotton & Ginning Factory (supra) and the same read as under: “NOTICE UNDER SECTION 274 59. As the provision stands, the penalty proceedings can be initiated on various ground set out therein. If the order passed by the Authority categorically records a finding regarding the existence of any said grounds mentioned therein and then penalty proceedings is initiated, in the notice to be issued under Section 274, they could conveniently refer to the said order which contains the satisfaction of the authority which has passed the order. However, if the existence of the conditions could not be discerned from the said order and if it is a case of relying on deeming provision contained in Explanation-1 or in Explanation-1(B), then though penalty proceedings are in the nature of civil liability, in fact, it is penal in nature. In either event, the person who is accused of the conditions mentioned in Section 271 should be made known about the grounds on which they intend imposing penalty on him as the Section 274 makes it clear that assessee has a right to contest such proceedings and should have full opportunity to meet the case of the Department and show that the conditions stipulated in Section 271(1)(c) do not exist as such he is not liable to pay penalty. The practice of the Department sending a printed form „here all the ground mentioned in Section 271 are mentioned would not satisfy requirement of law when the consequences of the assessee not rebutting the initial presumption is serious in nature and he had to pay penalty from 100% to 300% of the tax liability. As the said provisions have to be held to be strictly construed, notice issued under Section 274 should satisfy the grounds which he has to meet specifically. Otherwise, principles of natural justice is offended if the show cause notice is vague. On the basis of such proceedings, no penalty could be imposed on the assessee.

Clause (c) deals with two specific offences, that is to say, concealing particulars of income or furnishing inaccurate particulars of income. No doubt, the facts of some cases may attract both the offences and in some cases there may be overlapping of the two offences but in such cases the initiation of the penalty proceedings also must be for both the offences. But drawing up penalty proceedings for one offence and finding the assessee guilty of another offence or finding him guilty for either the one or the other cannot be sustained in law. It is needless to point out satisfaction of the existence of the grounds mentioned in Section 271(l)(c) when it is a sine qua non for initiation or proceedings, the penalty proceedings should be confined only to those grounds and the said grounds have to be specifically stated so that the assessee would have the opportunity to meet those grounds. After, he places his version and tries to substantiate his claim, if at all, penalty is to be imposed, it should be imposed only on the grounds on which he is called upon to answer. It is not open to the authority, at the time of imposing penalty to impose penalty on the grounds other than what assessee was called upon to meet. Otherwise though the initiation of penalty proceedings may be valid and legal, the final order imposing penalty would offend principles of natural justice and cannot be sustained. Thus once the proceedings are initiated on one ground, the penalty should also be imposed on the same ground. Where the basis of the initiation of penalty proceedings is not identical with the ground on which the penalty was imposed, the imposition of penalty is not valid. The validity of the order of penalty must be determined with reference to the information, facts arid materials in the hands of the authority imposing the penalty at the time the order was passed and further discovery of facts subsequent to the imposition of penalty cannot validate the order of penalty which, when passed, was not sustainable. 61 The Assessing Officer is empowered under the Act to initiate penalty proceedings once he is satisfied in the course of any proceedings that there is concealment of income or furnishing of inaccurate particulars of total income under clause (c). Concealment, furnishing inaccurate particulars of income are different. Thus the Assessing Officer while issuing notice has to come to the conclusion that whether is it a case of concealment of income or is it a case of furnishing of inaccurate particulars. The Apex Court in the case of Ashok Pal reported in 292 flR 11 at page 19 has held that concealment of income and furnishing inaccurate particulars of income carry different connotations. The Gujrat High Court in the case of MANU ENGINEERING reported in 122 ITR 306 and the Delhi High Court in the case o VIRGO MARKETING reported in 171 Taxmn 156, has held that levy of penalty has to be clear as to the limb for which it is levied and the position being unclear penalty is not sustainable. Therefore, when the Assessing Officer proposes to invoke the first limb being concealment, then the notice has to be appropriately marked. Similar is the case for furnishing inaccurate particulars of income. The standard proforma without striking of the relevant clauses will lead to an inference as to non- application of mind.”

From the above, it is clear that the penalty should be clear as to the limb for which it is levied and the position being unclear here the penalty is not sustainable. Therefore, considering the same, we are of the opinion that the ground raised

In the result, appeal of the assessee is allowed.