CA SHARAD A SHAH 21/06/2014 DTRC - Pune WIRC-2014 1
Relevant Part of Section 271 (1) If the Assessing Officer] or the [Commissioner (Appeals)][or the Commissioner] in the course of any proceedings under this Act, is satisfied that any person (b). (c) has concealed the particulars of his income or furnished inaccurate particulars of such income, or he may direct that such person shall pay by way of penalty, (d).. (i) * * (ii). (iii) in the cases referred to in clause (c) or clause (d), in addition to tax, if any, payable by him, a sum which shall not be less than but which shall not exceed three times the amount of tax sought to be evaded by reason of the concealment of particulars of his income or fringe benefits or the furnishing of inaccurate particulars of such income or fringe benefits. 21/06/2014 DTRC - Pune WIRC-2014 2
Contd... Explanation 1 : Where in respect of any facts material to the computation of the total income of any person under this Act, (A)such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the Commissioner (Appeals) or the Commissioner] to be false, or (B)such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of clause (c) of this sub-section section be deemed to represent the income in respect of which particulars have been concealed. 21/06/2014 DTRC - Pune WIRC-2014 3
Contd... Explanation 4 : For the purpose of clause (iii) of this sub section, the expression "the amount of tax sought to be evaded", (a) in any case where the amount of income in respect of which particulars have been concealed or inaccurate particulars have been furnished has the effect of reducing the loss declared in the return or converting that loss into income, means the tax that would have been chargeable on the income in respect of which particulars have been concealed or inaccurate particulars have been furnished had such income been the total income; 21/06/2014 DTRC - Pune WIRC-2014 4
Contd... (b) in any case to which Explanation 3 applies, means the tax on the total income assessed as reduced by the amount of advance tax, tax deducted at source, tax collected at source and self assessment tax paid before the issue of notice under section 148 (c) in any other case, means the difference between the tax on the total income assessed and the tax that would have been chargeable had such total income been reduced by the amount of income in respect of which particulars have been concealed or inaccurate particulars have been furnished. 21/06/2014 DTRC - Pune WIRC-2014 5
Contd.. Explanation 7 : Where in the case of an assessee who has entered into an international transaction or specified domestic transaction defined in section 92B, any amount is added or disallowed in computing the total income under sub-section section (4) of section 92C then, the amount so added or disallowed shall, for the purposes of clause (c) of this sub- section, be deemed to represent the income in respect of which particulars have been concealed or inaccurate particulars have been furnished, unless the assessee proves to the satisfaction of the Assessing Officer or the Commissioner (Appeals) or the Commissioner] that the price charged or paid in such transaction was computed in accordance with the provisions contained in section 92C and in the manner prescribed under that section, in good faith and with due diligence 21/06/2014 DTRC - Pune WIRC-2014 6
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Facts of the case The assessee filed Return of Income alongwith the Tax Audit Report and was taken up for scrutiny. Documents comprising of share application form etc were impounded during survey u/s 133A on sister concern. This survey was conducted 10 months before the assessee filed the Return of Income. The AO specifically proceeded to seek the information regarding the relevant share applications. 21/06/2014 DTRC - Pune WIRC-2014 8
Supreme Court confirms HC s conclusion The AO, in our view, shall not be carried away by the plea of the assessee like "voluntary disclosure", "buy peace", "avoid litigation", "amicable settlement", etc. to explain away its conduct. The question is whether the assessee has offered any explanation for concealment of particulars of income or furnishing inaccurate particulars of income. Explanation to Section 271(1) raises a' presumption of concealment, when a difference is noticed by the AO, between reported and assessed income. The burden is then on the assessee to show otherwise, by cogent and reliable evidence. When the initial onus placed by the explanation, has been discharged by him, the onus shifts on the Revenue to show that the amount in question constituted the income and not otherwise. 21/06/2014 DTRC - Pune WIRC-2014 9
Contd.. Assessee has only stated that he had surrendered the additional sum of Rs.40 40,74 74,000 000/- with a view to avoid litigation, buy peace and to channelize the energy and resources towards productive work and to make amicable settlement with the income tax department. Statute does not recognize those types of defenses' under the explanation 1 to Section 271(1)(c) of the Act. It is trite law that the voluntary disclosure does not release the Appellant- assessee.from the mischief of penal proceedings. The law does not provide that when an assessee makes a voluntary disclosure of his concealed income, he had to be absolved from penalty. 21/06/2014 DTRC - Pune WIRC-2014 10
FINAL CONCLUSION BY SC We are of the view that the surrender of income in this case is not voluntary in the sense that the offer of surrender was made in view of detection made by the AO in the search conducted in the sister concern of the assessee. In that situation, it cannot be said that the surrender of income was voluntary. 21/06/2014 DTRC - Pune WIRC-2014 11
Another take away from the decision The AO has to satisfy whether the penalty proceedings be initiated or not during the course of the assessment proceedings and the AO is not required to record his satisfaction in a particular manner or reduce it into writing. DOES IT REALLY MEAN VERBATIME: WHETHER THE DECISION IN MWP LTD. CONTRADICTS MAKE DATA 21/06/2014 DTRC - Pune WIRC-2014 12
The Supreme Court has dismissed SLP against this decision. However, the order clearly states that the question of law is kept open 21/06/2014 DTRC - Pune WIRC-2014 13
Facts of the case The assessee filed Return of Income based on the Profit arrived at after deducting the amount towards diminishing in value of investment as per AS 13. During the course of assessment, the assessee was asked to explain this debit. The assessee wrote in its first communication that it is as per AS but not allowable in income tax. Department asking specifically that does it mean you are withdrawing the claim to which the assessee responded that the claim be treated as withdrawn. 21/06/2014 DTRC - Pune WIRC-2014 14
Facts of the case Cont d The Assessment was made by disallowing the said claim. At the end of the order, the following remark was written: Penalty under S. 271(1)(c) initiated separately The penalty levied by the AO was deleted by the Delhi High Court on the ground that the satisfaction is not recorded and therefore, penalty can not survive. 21/06/2014 DTRC - Pune WIRC-2014 15
Issue 1 What is the impact of the amendment [insertion of section 271(1B)] which reads as under. (Retro Amendment Effective From 01.04 04.1989 1989) Where any amount is added or disallowed in computing the total income or loss of an assessee in any order of assessment or reassessment and the said order contains a direction for initiation of penalty proceedings under clause (c) of sub-section section (1), such an order of assessment or reassessment shall be deemed to constitute satisfaction of the Assessing Officer for initiation of the penalty proceedings under the said clause (c). 21/06/2014 DTRC - Pune WIRC-2014 16
Madhushree Gupta (317 ITR 107) referred to in MWP- which concludes as under: (ii) The position of law both pre and post amendment is similar, in as much, the AO will have to arrive at a prima facie satisfaction during the course of proceedings with regard to the assessee having concealed particulars of income or furnished inaccurate particulars, before he initiates penalty proceedings. (iii) Prima facie satisfaction of the AO that the case may deserve the imposition of penalty should be discernible from the order passed during the course of the proceedings. Obviously, the AO would arrive at a decision, i.e., a final conclusion only after hearing the assessee. 21/06/2014 DTRC - Pune WIRC-2014 17
Madhushree Gupta Cont d (iv) At the stage of initiation of penalty proceeding the order passed by the AO need not reflect satisfaction vis-a- vis each and every item of addition or disallowance if overall sense gathered from the order is that a further prognosis is called for. (v) However, this would not debar an assessee from furnishing evidence to rebut the prima facie satisfaction of the AO; since penalty proceeding are not a continuation of assessment proceedings. [See Jain Brors. & Ors. vs. Union of India (1970 1970) 77 ITR 107 (SC)] (vi) Due compliance would be required to be made in respect of the provisions of ss. 274 and 275 of the Act. 21/06/2014 DTRC - Pune WIRC-2014 18
Issue 2 Contd.. What is impact of the decision of MAK DATA which says: The AO has to satisfy whether the penalty proceedings be initiated or not during the course of the assessment proceedings and the AO is not required to record his satisfaction in a particular manner or reduce it into writing. SC has kept the question of law open while dismissing SLP against the decision in MWP LTD. 21/06/2014 DTRC - Pune WIRC-2014 19
ANSWER??? The MAK DATA is not referred to in MWP case Supreme Court in MAK DATA states in the order that `The AO, in our view, has recorded a categorical finding that he was satisfied that the assessee had concealed true particulars of income and is liable for penalty proceedings under Section 271 read with Section 274 of the Income Tax Act, 1961. This probably reconcile with the Madjushree which says that Prima facie satisfaction of the AO that the case may deserve the imposition of penalty should be discernible from the order passed during the course of the proceedings. We do not have the access to the assessment order and therefore, not easy to conclude. 21/06/2014 DTRC - Pune WIRC-2014 20
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Fact of the case There has been addition to the income under normal computation of Income There is also an increase in the book profit u/s 115JB The assessee contested the levy of the penalty on the basis of Nalwa Sons Decision (which is approved by the Supreme Court. The Supreme Court confirmed the deletion of penalty when the tax was continued to be paid u/s 115JB JB. ITAT dismissed the assessee s plea. 21/06/2014 DTRC - Pune WIRC-2014 22
Fact of the Case: Nalwa Sons Investments Ltd. 327 ITR 543 (SC) There had been disallowances and additions under normal computation. The book profit was also increased to Rs. 4.01 Crore as against Rs. 3.70 Crore. The tax was finally paid on the basis of book profit u/s 115JB The A.O. levied penalty of Rs.90 Lakhs in respect of and based on the addition in normal computation. Supreme Court said that there is no tax impact on account of addition in normal case and therefore, deleted the penalty. The operating PARA for reasoning given by SC is as under:- The income of the assessee was thus assessed under s. 115JB and not under the normal provisions. It is in this context that we have to see and examine the application of Expln. 4. 21/06/2014 DTRC - Pune WIRC-2014 23
Analysis of Nalwa Sons. The question before supreme court was validity of penalty based on normal addition. The A.O. had not based his penalty on the difference in book profit. Can this decision be relied upon if the penalty is in respect of Increase in Book Profit.? Therefore, Interpretation in in Jubilant Enpro Pvt. Ltd. by the ITAT may have force when it upheld penalty levied in respect of Increase in Book Profit during the assessment. 21/06/2014 DTRC - Pune WIRC-2014 24
BASIS OF ITAT DECISION ITAT cautioned that Nalwa Sons ruling should not be misread and held that It is impermissible to read this judgment as laying down a universal principle that if income is computed under Chapter XII-B of the Act covering secs. 115JA and 115JB etc., then there can never be any penalty u/s 271(1)(c) of the Act. ITAT held, where the addition leading to the concealment, apart from altering the total income under the normal provisions of the Act, also enhances the computation of income under Chapter-XII XII-B of the Act, the penalty would be very much leviable on the amount represented by such increase in the deemed income u/s 115JA etc. because of addition leading to concealment. 21/06/2014 DTRC - Pune WIRC-2014 25
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Facts of the case There were various items on which addition/disallowance was made by the AO. But for the one, in all the items disallowed, the AO specifically directed to initiate penalty after concluding excessive deduction, wrong deduction etc. However, one of the items, namely, interest of Sugar Development Fund (SDF) loan, which was disallowed by invoking S. 43B (stating that SDF is financial institution), did not have any such conclusion that the assessee has claimed wrongly and/or direction to initiate penalty. 21/06/2014 DTRC - Pune WIRC-2014 27
Facts of the case Cont d The concluded paragraph states as under: `Assessed at Business Loss of Rs. (-)14 14,03 03,30 30,430 430/-. Issue necessary forms. Issue penalty notice u/s 271(1)(c) as discussed above The revenue invoked provisions of S. 271(1B) in the argument. The High Court deleted penalty in respect of disallowed interest on SDF loan by explaining MAK DATA decision. 21/06/2014 DTRC - Pune WIRC-2014 28
Facts of the case Contd The absence of a reference to the initiation of proceedings u/s 271(1)(c) is not an inadvertent omission since it is clear that in respect of several other heads, where the AO did consider it appropriate to initiate penalty proceedings, he made an observation to that effect. In fact, even in the concluding part of his order, the AO issued a direction for initiating penalty notice u/s 271(1)(c) as discussed above. The expression as discussed above is material because it refers to those heads in respect of which a specific direction was issued by him for initiating steps u/s 271(1)(c) )(c). 21/06/2014 DTRC - Pune WIRC-2014 29
Undoubtedly, as held in Mak Data 358 ITR 593 (SC), the AO has to satisfy himself whether penalty proceedings should be initiated or not during the course of assessment proceedings and he is not required to record his satisfaction in a particular manner or reduce it into writing. However, in the present case there is no direction whatsoever by the AO in respect of the specific head of interest on the SDF loan, on which the penalty was deleted by the Tribunal. This omission in the case of the SDF loan stands in sharp contrast to those items where the AO has specifically directed the initiation of penalty proceedings u/s 271(1)(c) )(c). Consequently, the Tribunal was justified in deleting the penalty u/s 271(1)(c) in respect of the SDF loan. 21/06/2014 DTRC - Pune WIRC-2014 30
TAKE AWAY It is very important how the assessment order is worded. There is a scope of interpreting S. 271(1B) 21/06/2014 DTRC - Pune WIRC-2014 31
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Facts of the case [the relevant claim ] This services were provided as part of Master Service Agreement. The AE was executing the contract of services to third party. The Assessee provided Software and IT Services to its AE as sub contractee. The AE allocated certain expenses out of its marketing expenses and recovered the same from the assessee. 21/06/2014 DTRC - Pune WIRC-2014 33
The Original Return of Income The Assessee filed its Original Return of Income claiming expenses relating to the reimbursement of market services availed from AE. The Transfer Pricing Report and Study Report filed on the basis of claim of such expenses and justifying the expenses as well as the profit at ALP. The Assessee is entitled to the deduction u/s 10A. The deduction was claimed on the basis of taxable income as arrived at after deducting such expenses. 21/06/2014 DTRC - Pune WIRC-2014 34
The Revised Return of Income After the receipt of TPO s Scrutiny Notice, the assessee filed revised return of income deleting the expenses in question and increasing the profit. The assessee however, increased its claim of deduction u/s 10A as the Profit of eligible business was returned at higher amount. Consequently, there was no final effect on the income. No revised Transfer Pricing Report and Revised Study Report were submitted by the assessee. 21/06/2014 DTRC - Pune WIRC-2014 35
Certain other relevant facts The TP Assessment for earlier years was by making adjustment for similar expenses treating the ALP for such expenses to be NIL. The basis of ALP to be treated as NIL was the conclusion that no marketing function was assigned to the assessee. In other words the marketing functions were carried out by AE and therefore, no allocation of marketing expenses was justified. No separate documentation qua the cost allocation was made by the assessee and the assessee did not provide any support for justifying the allocation of expenses by the AE. 21/06/2014 DTRC - Pune WIRC-2014 36
Conclusion by ITAT in favour of revenue Basis thereof - TP Adjustment The quantum appeal was always against the assessee as far as TP adjustment is concerned. Even in the penalty order, the quantum appeal issues have been discussed in favour of revenue with great force. As the assessee has filed Revised Return disclaiming the deduction of such expenses, the ITAT found one more reason to state that assessee admits that the claim was in-genuine genuine. The TP study report could not support that the ALP of relevant expenses was prepared in good faith and with due diligence. 21/06/2014 DTRC - Pune WIRC-2014 37
Conclusion by ITAT in favour of revenue Basis thereof Revised Return non est The Revised Return was filed only after the issue of TPO s notice for TP Scrutiny It was also a fact that earlier two assessments were made disallowing such expenses The revision is made in anticipation of the proposed adjustment and thus, it was not voluntary but guided by motive of eschew an adjustment. It also seems that ITAT sensed that the revision was more to avoid disallowance of deduction u/s 10A [90 90C( C(4) forbids 10A deduction on TP adjustment ]. 21/06/2014 DTRC - Pune WIRC-2014 38
Take away To save the levy of the penalty u/s 271(1)(c), is to prove that the price on arm s length principle, following the manner prescribed, in good faith and due diligence. It is clear that all the law thereby requires for the assessee is to be establish his bona fides. Even so, we are mindful of the fact that we are in penalty proceedings, so that a disclosure, even if barred by limitation s to time, may yet be valid from the standpoint of the levy of penalty if otherwise made bona fide. 21/06/2014 DTRC - Pune WIRC-2014 39
Take away Contd.. Could the penalty be avoided by Revising the Return before issue of TPO s Notice? Also revising the TP Audit Report and TP Study Report? (The Assessee s argument that there is no provision for submitting Revised TP Report did not find favour and ITAT says if anything is wrong, or discovered as so, must be withdrawn and correct version be furnished.. 21/06/2014 DTRC - Pune WIRC-2014 40
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Brief of the decision Penalty under S. 271(1)(c) )(c) Validity Validity Absence of specific finding Addition vis-a-vis cash credit upheld by Tribunal There was no clear-cut cut finding in the penalty order or the order of the CIT(A) as to whether there was concealment of income or furnishing of inaccurate particulars by the AO. Penalty was held not sustainable. 21/06/2014 DTRC - Pune WIRC-2014 42
Concealment vs. Submission of Inaccurate Particulars The dictionary meaning of the word conceal is to hide, withdraw, or remove from observation; cover or keep from sight; to keep secret; to avoid disclosing or divulging. Thus concealment of particulars of income means non disclosure of particulars of income. On the other hand, where particulars are disclosed but such disclosure is not correct, true or accurate, it would amount to furnishing of inaccurate particulars of income. 21/06/2014 DTRC - Pune WIRC-2014 43
Concealment vs. Submission of Inaccurate Particulars Cont d.. If there is a sale of immovable property and this transaction is not disclosed at all, it would amount to concealment of particulars of income but if sale is shown to be of Residential House instead of a commercial property, it would amount to furnishing of inaccurate particulars of income. 21/06 06/2014 DTRC - Pune WIRC-2014 44
THANK YOU 21/06/2014 DTRC - Pune WIRC-2014 45