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S. 271(1)(c) Ignorance of law can be valid excuse for non resident

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IN THE ITAT PUNE BENCH ‘A’

Emilio Ruiz Berdejo

versus

Deputy Commissioner of Income-tax 

IT Appeal Nos. 991 (Pune) of 2008

[Assessment years 2000-01 to 2005-06]

July 24, 2012

ORDER

1. Issue in all these appeals pertain to Penalty u/s.271(1)(c) with regards to offering the additional income on account of reimbursement towards tax rationalization as a taxable perquisite in response to notice u/s.148 of the Act. So they are being disposed off by a common order for the sake of convenience.

2. In ITA.No.991/PN/2008 for A.Y. 2000-01, the assessee raised the following grounds:

 “1.  That on the facts and in the circumstances of the appellant’s case, the learned Commissioner of Income-tax(Appeals)[CIT(A)] erred in upholding the levy of penalty under section 271(1)(c) of the Income Tax act 1961 (the ‘Act’). The CIT(A) ought to have held that no penalty was leviable, on the facts and in law.

 2.  That on the facts and in the circumstances of the appellant’s case, the CIT(A) erred in holding that the appellant concealed the particulars of his income and evaded assessment of his correct income.

 3.  The CIT(A) erred in not accepting the appellant’s contention to the effect that the appellant had bonafide believed that the additional income declared by him in his return was not liable to Indian taxation.

 4.  The CIT(A) erred and acted on the basis of conjecture, suspicion and surmises and contrary to the record in alleging that ‘it was only as a result of issuance of a notice u/s.148 by the Assessing Officer that the appellant was cornered to disclose his true and correct state of affairs.

 5.  The CIT(A) erred in alleging that the additional income was not voluntarily disclosed by the appellant.

 6.  The CIT(A) erred and acted on the basis of conjecture, suspicion and surmises and without any material in alleging that the appellant ‘kept on hiding his unreported income’ even after the issue of the notice u/s.148.

 7.  The order of the CIT(A) is vitiated inter alia by errors of fact and law and on account of its being based on conjecture, suspicion and surmises and allegations never put to the appellant in the course of the hearing of the appeal.

 8.  That on the facts and in the circumstances of the appellant’s case, the learned CIT(A) erred in holding that it was a fit case for levy of penalty at the rate of 150% of the tax sought to be evaded.”

3. The assessee is an employee of Tetra Pak International S.A., and has been deputed to India for working with Tetra Pak India Ltd. The assessee filed his return of income on 30.06.2000 declaring total income of Rs. 35,47,950/-. In fact the assessee has received certain amounts outside India from Tetra Pak International S.A. which he did not disclose in the original return of income filed by him. The amount not disclosed in the return of income was Rs. 87,86,620/-. Since the assessee did not disclose this income to the extent of Rs. 87,86,620/-, the Assessing Officer was of the view that income chargeable to tax has escaped assessment within the meaning of section 147 of the Act. Accordingly, he issued notice u/s.148 which was served on the assessee on 17.11.2006. In response to the notice u/s.148, the assessee filed return of income on 26.06.2007 showing total income of Rs. 1,23,34,570/- including income of Rs. 87,86,620/- not reported in original return of income. Assessment was completed by the Assessing Officer at total income of Rs. 1,23,34,570/-. Consequently, the penalty proceedings u/s. 271(1)(c) were also initiated.

4. During penalty proceedings, the explanation furnished by the assessee in response to a show cause notice issued by the Assessing Officer requiring the assessee to explain as to why penalty u/s. 271(1)(c) be not levied, did not find favour with the Assessing Officer who was of the view that additional income of Rs. 87,86,620/- has been disclosed by the assessee in return filed in response to notice u/s. 148 of the Act and same was not offered to tax in original return of income. Thus, according to the Assessing Officer, the intention of the assessee was to conceal the income received from Tetra Pak International S.A. The Assessing Officer, therefore, held that assessee was liable for imposition of penalty u/s. 271(1)(c) for concealment of particulars of income and accordingly levied penalty of Rs. 43,49,376/- being 150% of tax sought to be evaded. Matter was carried before the first appellate authority, who confirmed the same. Same has been opposed before us.

5. Before us, the Ld. Authorised Representative pointed out that appeal in assessee’s own case in 1st round was decided in his favour by the ITAT in ITA No.991/PN/2008 wherein vide paras 26 to 31, ITAT has decided the issue in favour of assessee by observing as under:

“26. We have already given a finding that the assessee’s explanation for not disclosing the income in question in his returned income is duly evidenced by the material on record and, as such, deserves to be accepted. We have also held that in the absence of categorical conclusions about taxability of an income, particularly when the said income is taxed only on the basis of assessee’s suo motu declaration and when, despite this declaration, the assessee has categorically challenged the taxability, a concealment penalty cannot be imposed. In these circumstances, it is not really necessary to go into the question whether or not there was any mens rea in the conduct of the assessee. That aspect of the matter, in this case, is somewhat academic. However, suffice to say that as held by the Hon’ble Supreme Court, in the case of Dilip N Shroff (supra), “before a penalty can be imposed, the entirety of the circumstances must reasonably point to the conclusion that the disputed amount represent income and that the assessee consciously concealed the particulars of his income or had furnished inaccurate particulars thereof”. While in Dharmendra Textiles (supra), doubts have been expressed on correctness of this judgment, the expression of doubts, by itself, does not dilute binding nature of Dilip N. Shroff (supra) judgement. It is still good law and binding on all of us under Article 141 of the Constitution of India.

27. As held by a three judge bench in the landmark case of Hindustan Steel Limited (supra), “penalty will not be imposed merely because it is lawful to do so” and “whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances”.

28. Bearing in mind this broad principle, let us take one more look at the facts of the case. The sequence of events in this case shows that merely because the Income tax return was filed after issuance of reassessment notice to bring to tax the income escaping assessment, it does not imply that the assessee withheld any information. As a matter of fact this notice could be issued only on the basis of information furnished, alongwith details of taxes paid, by the employer. The evidence on record shows that the assessee’s employer, rightly or wrongly, was actually of the view that the income not shown in the original return was not exigible to tax. In our considered view, on above facts, it was indeed not a fit case for imposition of penalty.

29. Hon’ble Supreme Court has, in the case of Dilip N. Shroff (supra), also approved the judgments of Hon’ble Delhi High Court in the cases of CIT v. Ram Commercial Limited (246 ITR 568) and Diwan Enterprises v. CIT (246 ITR 571) which require that the Assessing Officer must form his opinion and record his satisfaction before initiating the penalty proceedings. There is no such specific recording of satisfaction in this case. For this reason also, the impugned penalty order is vitiated in law.

Outcome of the appeal:

30. In the light of the above discussions, we are of the considered view that the impugned penalty is fit to be quashed. We, therefore, direct the Assessing Officer to delete the same. The assessee gets the relief accordingly.

31. In the result, the appeal is allowed. Pronounced in the open court today on 29th day of August 2008.”

5.1. Matter was carried before the jurisdictional High Court wherein the first appellant’s name in this group cases appeared at Income Tax Appeal No.2529/2009, wherein a group case, Hon’ble jurisdictional High Court has restored the issue to Tribunal by observing as under:

“1.  Learned Counsel for the appellant and learned counsel for the respondents have jointly tendered minutes of order. The same are taken on record and marked ‘X’ for identification.

 2.  All the appeals are disposed of in terms of minutes of order with no order as to costs.

MINUTES OF THE ORDER

Both the parties agree that the appeals should be restored to the Tribunal for fresh adjudication in view of the Tribunal’s erroneous reference to section 273B of the Act in view of the subsequent decision of a three judge Bench of the apex Court in Dharamendra Textile’s case (306 ITR 207) and other judgments, rendered after the date of the judgment of the Tribunal which the Tribunal did not have the occasion to consider. Both parties agree that all issues and contentions are left open.

Sd/- Sd/-
Advocate for the appellant Advocate for the Respondent

6. Thus, the matter has been restored to Tribunal as per the Minutes of the Order dated 23.11.2009, discussed above. In set aside proceedings, the Ld. Authorised Representative for assessee pointed out that similar issue has been decided in favour of assessee by the Pune Bench ‘B’ in IT Appeal.No.1583/PN/2008 and others in case of Hans Christian Gass v. Dy CIT wherein vide paras 9 to 12, the Tribunal decided a similar issue by observing as under:

“9. Considering the above facts and circumstances in totality, we find that the issue as to whether there was concealment of particulars of income on the part of the assessee in not offering tax on the reimbursement towards tax rationalization as a taxable perquisite to attract penalty under section 271(1)(c) depends on the acceptability of the explanation of the assessee that the mistake in this regard was inadvertent due to his ignorance of Indian Income-tax Law, hence there was bonafide reason for the same. Explanation 1 to section 271(1)(c) states that where in respect of any facts material to the computation of total income of any person under this Act, such person fails to offer an explanation or offers an explanation which is found by the AO or the Commissioner (Appeals) or the Commissioner to be false, then the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purpose of clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed. The other circumstances for deeming concealment of particulars of income is when such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bonafide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him. For a ready reference Explanation-1 to section 271(1)(c) is being reproduced hereunder:-

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 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, be deemed to represent the income in respect of which particulars have been concealed.”

Thus, in other words, if an assessee in respect of any facts material to the computation of his total income is able to offer an explanation which is not found by the Assessing Officer or Commissioner (Appeals) or Commissioner to be false, then the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purpose of clause (c) of section 271(1) be not deemed to represent the income in respect of which particulars have been concealed. Concealment of particulars of income on the part of the assessee would also not be deemed to levy penalty under section 271(1)(c) as per Explanation-l where such person offers an explanation which 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. The ld. CIT (A) has basically upheld the penalty levied by the AO in the present case on the basis that the assessee brought nothing on record to substantiate his claim of bona fide belief regarding non taxability of the tax perquisite. Thus the issue revolve around the fact as to whether in the present case the assessee was able to substantiate his explanation of bona fide belief regarding non taxability of tax perquisite, or not. Explanation of the assessee in this regard remained that he is a foreign national who was working as Managing Director of Sandvik Asia Ltd., a company incorporated in India. His contractual service period for SAL in India was for the period assessment years 1998-99 to 05-06. SAL deducted the applicable taxes on salaries paid to the assessee and paid it to the Indian Government Treasury. In addition to the employment income earned from SAL, the assessee also received some emolument outside India and reimbursement of tax, being difference in the tax rates between India and Sweden from Sandvik AB, Sweden though the employment was exercised in India. It was submitted that in the original return of income filed by the assessee for each of the above mentioned assessment years, total income reported by the assessee included remuneration received in India from SAL and emoluments received outside India from Sandvik AB, Sweden. Before being deputed to India, the assessee was assured by Sandvik AB, Sweden that any increase in over all tax liability of the assessee on account of different tax rates in India would be reimbursed to him. Such reimbursement was credited to his regular savings bank account. It was submitted that for the purpose of filing of return in India, the assessee was assisted by well-known tax consultants appointed by Sandvik Group. Such tax consultant computed the taxable income of assessee by analyzing various salary components received by him and determined the taxability of these components. The assessee based on the bona fide belief that reimbursement of incremental tax liability in India from Sandvik AB, Sweden being part of a tax rationalization measure is not a separate component of income liable to tax in India did not include this reimbursement while reporting his total income in the return of income filed for various years during his Indian assignment. During the course of assessment proceedings initiated under section 143(3) of the Act for the assessment year 2004-05, the assessee could learn that even the reimbursement towards tax rationalization needs to be considered as taxable perquisite and offered to tax in India. It was submitted that assessee accordingly agreed to the addition to the total income on account of grossed up tax perquisite as proposed by the AO and paid the additional tax including applicable interest as demanded by the AO for A. Y. 2004-05. It was submitted that as the additional tax liability arise on account of inadvertent bonafide error in understanding of law, which was agreed upon by the assessee in the course of assessment proceedings, the assessee did not prefer an appeal before the ld. CIT (A) against the assessment order. It was further explained that the assessee also voluntarily, on 30th December, 2006 i.e. within 1.5 months, paid off the incremental tax due along with applicable interest for all earlier and subsequent assessment years, including the assessment year 1998-99 and 1999-2000, notwithstanding that time limit for issue of notice for assessment/reassessment under section 147 for the said two assessment years i.e. 1998-99 and 1999-2000 had already elapsed, after rectifying similar inadvertent error made in these years. It was submitted that it was done despite of the fact that the assessee had already retired from his employment. On the objection of the department that the assessee was assisted by the tax experts so no excuse that the assessee was ignorant of the relevant provisions of law is available to the assessee, the submission of the ld. A/R remained that the tax perquisite law has under gone a significant change in the past years leading to a lot of uncertainty regarding the same and thus based on the advise of tax consultants, the assessee was under a bona fide belief at the time of signing his original returns of income that the information given in his original returns of income was correct and complete and that the amount of total income and other particulars shown therein were truly stated and were in accordance with the provisions of tax laws and thus he filed his original returns. It was further submitted that the assessee was entitled to reimbursement of incremental tax in India from Sandvik AB, Sweden and as such there was no economic rational for the assessee to conceal or under report his overseas salary income. The further plea of the Ld. AR before us also remained that the related law was complicated and possibility of mistake even on the part of an expert cannot be ruled out. In this regard he has placed reliance on the decision of Mumbai Bench of the Tribunal in the case of Sunil Chandra Vohra v. ACIT [2009] 32 SOT 365 (Mumbai). Considering these material facts in totality, we do not find reason to doubt the bona fide of above stated explanation furnished by the assessee during the course of penalty proceedings. The ld. CIT (A) has denied the explanation of the assessee on the basis that the assessee brought nothing on record to substantiate his claim of bona fide belief regarding non taxability of tax perquisite and in the light of judgment of Hon’ble Supreme Court in the case of UOI v. Dharmendra Textile Processors [2007] 295 ITR 244 (SC). So far as applicability of the said decision in the case of Dharmendra Textile Processors (supra) is concerned, we will discuss it in succeeding paras.

10. Regarding the first objection of ld. CIT (A) that assessee brought nothing on record to substantiate his claim of bona fide belief regarding non taxability of tax perquisite is concerned, we are of the view that it is not necessary that the claimed bona fide belief must be substantiated with some documentary evidence. The claim of bona fide belief can also be substantiated by circumstantial evidence when possibility of documentary evidence cannot be expected. In the present case, there is no dispute that the assessee was assisted by tax experts to compute his taxable income and furnish his return of income accordingly. The submission of the assessee in this regard cannot be doubted that under this bona fide belief that he has been assisted by tax expert he signed the return of income prepared by that expert. We also find substance in this explanation of the assessee that he was entitled to reimbursement of incremental tax in India from Sandvik AB, Sweden and as such there was no economic rational for the assessee to conceal or under report any part of his overseas ,salary income. On going through the contents of page 5 of the written submission, we find that the provisions laid down under section 10 of the Act has gone sequence of changes by Finance Act, 1993, Finance Act, 1970, Finance Act, 1988 and Finance Act, 2002. Section 10(b)(vii) of the Act provides exemption to tax paid by the employer for a period upto 5 years to technicians whose contract of service is approved by the Central Government and where their services commenced before 1st April, 1971. This sub-clause was omitted by the Finance Act, 1993. Section 10(b)(viia)(I) of the Act inserted by Taxation Laws (Amendment) Act, 1970, provide exemption in respect of tax paid by the employer to technicians for a period upto 4 years where services commenced before 15th April, 1988 but after 31st March, 1971 and where Government approval was obtained for a period beyond 2 years. Section 10(6)(viia)(II) of the Act inserted by Finance Act, 1988, provide exemption in respect of tax paid by employees for a period upto 4 years to technicians where services commenced before 15th April, 1993 but after 31st March, 1988. This sub clause was omitted by Finance Act, 1998. Section 10(5B) of the Act provided an exemption, for a period upto 4 years in respect of tax paid for technicians. The sub-section was amended later on and finally deleted by the Finance Act, 2002. The definition of persons qualifying as “technicians” for whom the exemption under each of the above mentioned sections has also under gone changes at various points of time. The Finance Act, 2002 introduced section 10(10CC) of the Act which provided an exemption from tax on non monetary perquisite. Under these circumstances we do not find reason to doubt the explanation of the assessee that mistake has happened only because of grossing-up principle embedded in the Act. The concept of grossing-up is of a technical nature and can certainly be treated as out of the scope of common knowledge of the tax payers. The very conduct of the assessee in the present case is also worth noting to decide the veracity of the claimed bona fide on the part of the assessee in not reporting tax on tax reimbursement. During the assessment year 2004-05 when assessment proceedings were initiated under section 143(3) and by issuance of notices under section 143(2) and 142(1), the assessee was specifically required to inform if there was any source of income excluding the income shown in the return of income and whether income arose in consequence of the services rendered in India to the employer and any other company, the assessee learned that the reimbursement towards tax rationalization needs to be considered as a taxable perquisite and he offered to tax in India. The assessee agreed to the addition to the total income on account of grossed up tax perquisite as proposed by the AO and paid of the additional tax including applicable interest as demanded by the AO for the assessment year 2004-05. The assessee also paid the incremental tax due along with the applicable interest for all earlier and subsequent assessment years i.e. 7 years in total, including the assessment years 1998-99 and 1999-2000 notwithstanding that time limit for issue of notice for assessment/reassessment under section 147 for these two years had already elapsed. It was done inspite of the fact that assessee had already retired from employment. The assessee filed revised return of income for the aforesaid assessment years offering to tax the appropriately grossed up amount of tax perquisite though as stated above, the additional tax along with the interest was already deposited in December, 2006. Under these circumstances, we do not agree with the finding of the lower authorities that the explanation offered by the assessee regarding his bona fide in not reporting the taxable income in question was not substantiated by him to avoid the penalty under section 271(1)(c) of the Act.

11. So far as applicability of the decision of Hon’ble Supreme Court in the case of UOI v. Dharamendra Textile Processors (supra) is concerned, we after having gone through the decisions relied upon by the Ld. AR find substance in his argument that the Hon’ble Judges in the case of UOI v. Rajasthan Spinning & Weaving Mills (supra) have been pleased to clarify that the principles laid down in the case of UOI v. Dharamendra Textile Processors (supra) needs to be interpreted to mean that every case of levy of penalty needs to be examined based on the facts of each case and the conditions specified in the law in this regard. For a ready reference the relevant extract of the decision in the case of UOI v. Rajasthan Spinning & Weaving Mills (supra) is being reproduced hereunder :-

“At this stage, we need to examine the recent decision of this Court in Dharamendra Textiles (supra). In almost every case relating to penalty, the decision is referred to on behalf of the Revenue as if it laid down that in every case of non-payment or short payment of duty the penalty clause would automatically get attracted and the authority had no discretion in the matter. One of us (Aftab Alam, J) was party to the decision in Dharmendra Textile and we see no reason to understand or read that decision in that manner ….

…. From the above, we fail to see how the decision in Dharamendra Textile can be said to hold that section 11AC would apply to every case of non-payment or short payment of duty regardless of the conditions expressly mentioned in the section for its application.”

In this regard it is also very pertinent to refer over here the recent decision of Hon’ble Supreme Court in the case of CIT v. Reliance Petro Products Pvt. Ltd. (supra) wherein the Hon’ble Court has been pleased to observe as under :-

“However, it must be pointed out that in Union of India v. Dharmendra Textile Processors (cited supra), no fault was found with the reasoning in the decision in Dilip N. Shroff v. Joint Commissioner of Income Tax, Mumbai & Am. (cited supra), where the Court explained the meaning of the terms “conceal” and inaccurate”. It was only the ultimate inference in Dilip N. Shroff v. Joint Commissioner of Income Tax, Mumbai & Am. (cited supra) to the effect that mens rea was an essential ingredient for the penalty under section 271(1)(c) that the decision in Dilip N. Shroff v. Joint Commissioner of Income-tax, Mumbai & Am. (cited supra) was overruled.”

The above observation of the Hon’ble Supreme Court implies that it is only on the point of “mens rea” that the judgment in the case of Dilip N. Shroff v. JCIT (supra) has been overruled. The meaning of term “conceal” as explained in the said judgment holds good. The Hon’ble Punjab & Haryana High Court in the case of CIT v. Sidhartha Enterprises (supra) has been pleased to hold that penalty is imposed only when there is some element of deliberate default and not a mere mistake. The Mumbai Bench of the Tribunal in the case of Glories Realty P. Ltd. v. ITO (supra) has held that if bona fide explanation of the assessee has not been found false then penalty will not be leviable. On the basis of the decision relied upon, we gather strength to form a view that penalty is not an automatic consequence of addition to income; penalty under section 271(1)(c) of the Act can come into play only when the conditions laid down under that section are satisfied; concealment of income cannot be a passive situation and it implies that the person concealing the income is hiding, covering up or camouflaging an income; penalty is not leviable in case where assessee is able to provide a ‘bona fide’ explanation; and penalty is not leviable in cases where assessee made errors ,under bona fide beliefs. The Hon’ble Supreme Court in the case of K.C. Builders v. ACIT (supra) has been pleased to refer meaning of the word “concealment” as found in Shorter Oxford English Dictionary, third edition, volume-1 as under :-

“In law, the intentional suppression of truth or fact known, to the injury or prejudice of another”. “The word “concealment” inherently carried with it the element of mens rea. Therefore, the mere fact that some figure or some particulars have been disclosed by itself, even if it takes out the case from the purview of non-disclosure, it cannot by itself take out the case from the purview of furnishing inaccurate particulars. 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 omission was attributable to an intention or desire on the part of the assessee to hide or conceal the income so as to avoid the imposition of tax thereon.”

In the case of Dilip N. Shroff v. CIT (supra), the Hon’ble Supreme Court has again been pleased to refer that the expression “conceal’ is of great importance. According to Law Lexicon, the word “conceal” means: to hide or keep secret. The word “conceal” is con+celare which implies to hide. It means to hide or withdraw from observation: to cover or keep from sight; to prevent the discovery of; to withhold knowledge of. The offence of concealment is, thus a direct attempt to hide an item of income or a portion thereof from the knowledge of the income tax authorities. The Hon’ble Supreme Court has further observed that it signifies a deliberate act or omission on the part of the assessee. In the case of T. Ashok Pai v. CIT (supra), the Hon’ble Supreme Court has been pleased to hold that ” Concealment of income’ and ‘furnishing of inaccurate particulars’ carry different connotations. Concealment refers to deliberate act on the part of the assessee. A mere omission or negligence would not constitute a deliberate act of suppressio veri or suggestio falsi.” In law, the intentional suppression of truth or fact known, to the injury or prejudice of another, held the Hon’ble Supreme Court. In the case of Cement Marketing Co. of India Ltd. v. ACIT (supra), the assessee did not include a particular item in the taxable turnover under a bona fide belief that he is not liable to include it. The Hon’ble Supreme Court held that it would not be right to condemn the return as a “false” return inviting imposition of penalty. The Hon’ble Supreme Court also held that if an alternative view is taken, then even where assesses have a bona fide view of how taxes should be computed, the assessee would have to pay taxes based on the other view under the apprehension of being held liable for penalty in case his contention is ultimately found by the court to be not acceptable and this could surely not have been intended by the Legislature. In the case of Velayudhan Nair v. ITO (supra) the assessee was paid salary along with traveling, conveyance and food allowances. For the said assessment year, the assessee filed his return of income on the basis of Form 16 issued by his employer, which did not include reimbursement. However, on the basis of advice, the assessee’s employer paid the difference by way of tax deducted at source and also paid interest thereon. The AO issued a notice under section 148 to the assessee for concealment of income. It was held that the assessee did not include the items in the taxable bracket under a bona fide belief that he was not liable to do so. Therefore, the assessee was held not liable to pay penalty under section 271(1)(c) of the Act. In the case of Kanbay Software India Pvt. Ltd. v. DCIT (supra), the Pune Bench of the Tribunal has held that there is still a third scenario in which an addition is made to the income but it is established, or can be reasonably inferred, that the assessee’s conduct and explanation is bona fide. These are the situations in which the assessee is able to establish his innocence. In such a situation, in accordance with the undisputed scheme of section 271(1)(c), neither the penalty was leviable prior to Hon”ble Supreme Court judgment in the case of Dilip N. Shroff v. JCIT (supra) nor is it leviable after the Dharmendra Textile Processor’s case. Under these facts and circumstances, we are of the view that the judicial principle expressed in the above cited decisions are applicable to the case of the assessee in a situation where income has inadvertently been under reported under a bona fide belief that salary as reported in the return of income is correct since the same has been determined by well-known tax advisers and hence penalty is not leviable on the assessee for the concealment of income. We thus while setting aside the orders of the lower authorities, direct the AO to delete the penalty in question levied under section 271(1)(c) of the Act. The grounds are accordingly allowed.

12. In the result, appeals are allowed.

7. In this regard Ld. Authorised Representative pointed out that Revenue opposed the decision in Hans Christian Gass (supra) before the jurisdictional High Court wherein the Hon’ble High Court was pleased to dismiss the appeal of Revenue in IT Appeal No.2290 of 2010 and others by observing as under:

“1.  Heard learned Counsel for the appellant. None present for the respondent.

 2.  In all these appeals, the revenue is aggrieved by the order of the ITAT whereby the penalty levied under section 271(1)(c) of the Income Tax Act, 1961 has been deleted.

 3.  The assessee was working as a Managing Director of Sandvik Asia Ltd. (SAL) and apart from salary had received some emoluments outside India from Sandvik Group. The said amount received from Sandvik was towards reimbursement of the tax liability incurred by the assessee in India. In the return of income, the assessee had not offered the above reimbursed amount to tax under the bonafide belief that the same were not taxable. However, when a query was raised by the assessing officer during the assessment proceedings, the assessee immediately offered that amount to tax for all the years. The penalty imposed under section 271(1)(c) of the Act by the assessing officer was deleted by the ITAT after recording detailed reasons that it was a case of bona fide mistake and that there was no intention to evade tax. The discretion exercised by the ITAT in accepting the explanation given by the assessee is reasonable and we see no reason to interfere with the decision of the Tribunal which is based on finding of facts. Accordingly, all these appeals are dismissed with no order as to costs.”

8. Further, Ld. Authorised Representative pointed out that Tribunal Pune Bench ‘A’ in case of Asstt. CIT v. Alaxender Reuss in IT Appeal.No.662/PN/2010 and others has decided similar issue in favour of assessee by observing as under:

“7. Having considered the rival submissions and perused the material on record, we find that Daimler AG a company deputed few employees to Mercedes-Benz India Pvt. Ltd. (hereinafter referred to as ‘MB India’ (formerly known as Daimler Chrysie India Pvt. Ltd. During the course of the expatriates’ India deputation the assessee was in employment with Daimler AG as well as MB India. The assessee filed his return of income on 1-9-2003 for A.Y. 2003-04 declaring income of Rs. 25,699/-comprising of salary from MB India and Daimler Chrysler AG. As regards salary income received by the assessee from MB India the applicable taxes thereon were deducted and paid into the Indian government treasury by MB India. As regards the salary income by the assessee from Daimler AG the assessee was entitled to a ‘net of tax’ salary and the Indian taxes were borne by Daimler AG and hence the liability to pay Indian taxes in respect of salary income from Daimler AG was on Daimler AG. Given the above, Daimler AG in consultation with its tax advisor computed salary income of the expatriates taxable in India for each of the relevant assessment years and taxes hereon were disbursed to the expatriates to be deposited directly by the respective expatriates into the Indian Government treasury.

8. In early 2005, there was a change in Daimler Ag’s tax advisor. The new tax advisor (M/s. S.R. Batliboi & Co.) commenced the work of collecting information for the purpose of preparation of the income-tax returns for the expatriate employees of Daimler Ag for A.Y. 2005-06 which was due for filing by 31-7-2005. In the course of collecting this information, it was discovered that in respect of the expatriate employees of Daimler AG deputed to India, all the taxable components of their overseas compensation may potentially not have been completely reported in their Indian tax returns for certain earlier assessment years. Based on this, Daimler AG in July 2005, commenced the process of discussions with the tax advisor for evaluating whether salary income for the earlier years in respect of its expatriates deputed to India has been inadvertently underreported. Daimler AG confirmed to its tax advisor in July 2005 itself that in case there was any underreporting of salary income and consequential under payment of taxes in the past years, then Daimler AG would want to suo moto and voluntarily report these to the Indian Revenue authorities and voluntarily deposit taxes and interest for all its expatriates. Thus no reporting was noticed in July 2005 and steps were initiated by Daimler AG in consultation with tax advisor.

9. Thereafter detailed review of the past reporting was done and the revised tax liability of the expatriates computed based on interpretation of the Indian tax laws by the new tax advisor of Daimler AG and also adopting various conservative positions Daimler AG then voluntarily and suo moto deposited the incremental tax arising after considering the taxable salary component’s, by way of tax deduction at source (TDS) along with interest u/s 201(1A) as per the provisions of the Act for all the relevant assessment years on 27-3-2006. Thereafter, Daimler AG issued form 16 inter alia to the assessee for tax deducted at source by Daimler AG. Subsequently, Daimler AG communicated the fact of payment of taxes to the CCIT wherein it was inter alia requested that the penalty proceedings should not be initiated because of voluntary disclosure by Daimler AG. However, time limit for filing the revised return of income for A.Y. 2003-04 had expired. Accordingly, the assessee could not file a revised return of income for a.y. 2003-04 despite the fact that entire tax liability including the taxes on the inadvertently underreported salary income) had completely been discharged.

10. The A.O initiated re-assessment proceedings for A.Y. 2003-04 requesting the assessee to file return of income. In response to the notice initiation of re-assessment proceedings the assessee filed his revised return of income for A.Y. 2003-04 wherein salary income reported was exactly as computation of income filed earlier in July 2006 with CIT – IV in June 2006. The A.O initiated penalty proceedings for each of the assessment years. In response to the above mentioned notices issued by the A.O detailed submissions were filed on behalf of the assessee during the course of penalty proceedings. However, the A.O concluded the penalty proceedings and levied penalty on the assessee at 100% of taxes applicable to the inadvertently under reported income disclosed voluntarily in the revised return of income of the assessee. On appeal, the CIT(A) deleted the penalty.

11. We find that Daimler AG issued form no. 16 inter alia, TDS deposited on 20-3-2006. Pursuant to the copies of computation of income of the assessee for all relevant assessment years the assessee filed an application in June 2006 with CIT – V along with copy of form no. 16 issued by Daimler AG. Subsequently in response to notice issued by the A.O u/s 148 the assessee filed revised return of income with A.O. the income disclosed by the assessee in this revised return is the same as earlier voluntarily disclosed income as mentioned above. The income disclosed by the assessee in the revised return was not disputed by the A.O. However, along with the assessment order u/s 147 of the Act the A.O issued one notice to the assessee for levying penalty u/s 271(1)(c) which is not justified. The A.O has levied penalty despite the fact that the payment of tax and filing of revised computation with CIT – V was done voluntarily without a finding in this regard by the A.O or in the proceedings being initiated against the assessee. In the assessment year under consideration, the penalty has been levied without appreciating the fact that the assessee was entitled to net pay from Daimler AG and Indian tax on salary received by the assessee from Daimler AG.

12. In the facts and circumstances, the A.O was not justified in levying the penalty under the provisions of sec. 271(1)(c) of the Same. The same has rightly been deleted by the CIT(A). We are not inclined to interfere with the same because the assessee has filed revised computation of income prior to any reassessment proceedings initiated by the revenue. This view is fortified by the decision of co-ordinate Bench of the Tribunal in the case of Hans Christian Gass v.. DCIT (ITA No. 1583/PN/2008 and 505 to 509/PN/2009 for A.Y. 2004-05, 2000-01 to 2005-06 dated 26-5-2010 wherein even after 148 proceeding tax has been deposited and penalty has been deleted. The overall conduct of the assessee shows that it is not a fit case for levy of penalty. Similar issue arose in other years with other employees of same employer placed on similar situation. Facts being similar, so following the same reasoning we are not inclined to interfere with the views of the CIT(A) who has deleted the penalty following the reasons in decision in the case of Rolf weinmann.

13. In the result, all the appeals filed by the revenue are dismissed.

9. In this background, the Ld. Authorised Representative submitted that the assessee is an employee of Tetra Pak International S.A. and has been deputed to India for working with Tetra Pak India Ltd. During the course of expatriate India deputation, assessee was in employment with Tetra Pak India Ltd. as well as Tetra Pak International S.A. The assessee filed its original return of income on 30.06.2000 declaring total income of Rs. 35,47,950/-. The assessee received certain amounts outside India from Tetra Pak International S.A. which he did not disclose in the original return of income filed by him. The amount not disclosed in the original return of income was Rs. 87,86,620/-. Since the assessee did not disclose this income to the extent of Rs. 87,86,620/-, the Assessing Officer was of the view that income chargeable to tax has escaped income within the meaning of section 147 of the Act. Accordingly, he issued notice u/s.148. In response to notice u/s. 148, the assessee filed return on 26.06.2007 showing total income of Rs. 1,23,34,570/- including the income of Rs. 87,86,620/- not reported in original return of income. Assessment was completed by the Assessing Officer on total income of Rs. 1,23,34,570/-. Accordingly, penalty proceedings were initiated and penalty of Rs. 43,49,376/- was levied which was confirmed by the CIT(A) as discussed above. The stand of the assessee is that the position taken by the company and consequently by the assessee in original return of income was bonafide and was based on judicial precedent. Accordingly, it did not amount to concealment of income. At relevant point of time, two views were possible regarding liability to Indian taxation of the additional income in question. The penalty was leviable as declaration made by tax payer was voluntary and was not compelled and was made without detection by Department and there was no mens rea on the part of the assessee. Moreover, in case of Hans Christian Gass (supra), the Tribunal had occasion to deal a similar penalty which was deleted by the Tribunal and deletion of the penalty has been confirmed by the jurisdictional High Court vide its order dated 22.06.2011. In similar set of facts, Tribunal has decided similar issue of the assessee in ITAT Pune ‘A’ Bench in ITa.No.662/PN/2010 in case of Alaxender Reuss (supra) and others as discussed above. Facts being similar, following the same reasoning the order of the CIT(A) should be set aside and penalty should be deleted in all these cases.

10. On the other hand, the Ld. Departmental Representative submitted that the explanation furnished by the assessee in response to show cause notice issued by the Assessing Officer requiring the assessee to explain as to why penalty u/s. 271(1)(c) be not levied, rightly did not find favour from the Assessing Officer who was of the view that additional income of Rs. 35,47,950/- had been disclosed by the assessee in the return filed in response to notice u/s.148 of the Act and the same was not offered to tax in original return of income while assessee was well aware of this addition and income in terms of conditions for deputation to India. Thus, the Assessing Officer was justified in holding that intention of the assessee was to conceal the income received from Tetra Pak International S.A. Accordingly, he rightly levied penalty under section 271(1)(c) at the rate of 150% of the tax sought to be avoided and same had rightly been confirmed by the concerned CIT(A). Accordingly all the appeals by the assessees be dismissed.

11. After going through the above submissions and material on record, we find that the original return of income was filed by the assessee on 30.06.2000 declaring total income of Rs. 35,47,950/-. As stated above, assessee is an employee of Tetra Pak International S.A. and has been deputed to India for working with Tetra Pak India Ltd. The assessee received certain amounts outside India from Tetra Pak International S.A. which he did not disclose in the original return of income filed by him. The amount not disclosed in the return of income was Rs. 87,86,620/-. Since the assessee did not disclose this income to the extent of Rs. 87,86,620/-, the Assessing Officer was of the view that income chargeable to tax had escaped assessment within the meaning of section 147 of the Act and accordingly, he issued notice u/s. 148. In response to notice u/s. 148, the assessee filed return of income on 26.06.2007 showing total income of Rs. 1,23,34,570/- including income of Rs. 87,86,620/- not reported in original return of income. The assessment was completed by Assessing Officer on total income of Rs. 1,23,34,570/-. Accordingly, penalty proceedings were initiated after rejecting the contentions on behalf of the assessee, Assessing Officer was of the view that explanation furnished by the assessee in response to show cause notice issued by Assessing Officer, he levied penalty after rejecting the contentions raised on behalf of the assessee because additional income of Rs. 87,86,620/- was disclosed by the assessee in return filed in response to notice u/s.148 and same was not offered to tax in original return of income. Thus, the intention of the assessee was to conceal income received from Tetra Pak International S.A. Accordingly penalty was levied which was confirmed by the CIT(A), as discussed above. Matter was carried before the ITAT who deleted the penalty in question as discussed in para 5 of this order. Subsequently, matter was carried before the jurisdictional High Court by Revenue wherein Hon’ble High Court was pleased to restore the matter vide order dated 23.11.2009 as discussed in para 6 of this order. Thus earlier order of ITAT in assessee’s case stand set aside. We find that ITAT Pune Bench ‘B’ in case of Hans Christian Gass in ITA.No.1583/PN/2008 and 505 to 509/PN/2008 had occasion to decide a similar issue wherein similar penalty was deleted by the ITAT as discussed in para 6 of this order. Revenue preferred appeal before the jurisdictional High Court wherein the order of the ITAT deleting the penalty levied in similar set of circumstances in case of Hans Christian Gass was dismissed as discussed in para 9 of said order. Similarly, ITAT Pune Bench ‘A’ in case of Alaxender Reuss (supra) in ITA.No.662 and others has decided a similar issue in favour of the assessee as discussed in para 8 of this order. Nothing contrary was brought to our knowledge on behalf of Revenue on above mentioned decisions in favour of the assessee.

12. Let us apply these legal proposition to fact of this case. We find salary income received by the assessee from Tetra Pak India Ltd., there is no dispute to the taxability of the income from the same. As regards the salary income received by the assessee from Tetra Pak International S.A., the assessee was entitled to net of taxes salary and Indian Taxes were borne by Tetra Pak International S.A. and hence, the liability to pay tax in respect of the salary income from Tetra Pak International S.A. was on Tetra Pak International S.A. itself. In view of such legal opinion, Tetra Pak International S.A. in consultation with tax advisors computed salary income of the expatriate taxable in India for each of the assessment years and taxes thereon have been claimed to be deposited along with interest thereon directly by respective expatriates into Indian Treasury. This fact has not been disputed by Revenue. Subsequently, it was found that in respect of the expatriate employees of the Tetra Pak International S.A., deputed in India all taxable components of their overseas compensation potentially may not have been completely reported in Indian Tax returns in certain years. In view of this opinion of tax consultants in India, it was decided by Tetra Pak International S.A. that in case there was any under reporting of salary income and consequently underpayment of taxes in past, then Tetra Pak International S.A. would suo moto and voluntarily report this to Indian Revenue authorities and voluntarily deposit taxes and interest for all these expatriates and same was completed. Accordingly, Tetra Pak International S.A. voluntarily and suo moto deposited tax after considering the taxable salary components by way of tax deducted at source along with interest u/s.201(1A) as per provisions of the Act for all relevant assessment years under consideration. Accordingly, Tetra Pak International S.A. also issued form 16 inter alia to assessee for tax deducted at source by Tetra Pak International S.A. This fact has also not been disputed on behalf of Revenue. Subsequently, Tetra Pak International S.A. communicated the fact of payment of taxes to the concerned Revenue authorities, inter alia requested that penalty proceedings should not be initiated because of voluntary disclosure by Tetra Pak International S.A. Thus, facts emerged that Assessing Officer has levied penalty inspite of the fact that payment of tax and filing of revised computation of income was done as discussed above. The issue as to whether there was concealment of particulars of income on the part of the assessee in not offering tax on the reimbursement towards tax rationalization as a taxable perquisite to attract penalty under section 271(1)(c) depends on the acceptability of the explanation of the assessee that the mistake in this regard was inadvertent due to his ignorance of Indian Income-tax Law, hence there was bona fide reason for the same. Explanation 1 to section 271(1)(c) states that where in respect of any facts material to the computation of total income of any person under this Act, such person fails to offer an explanation or offers an explanation which is found by the AO or the Commissioner (Appeals) or the Commissioner to be false, then the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purpose of clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed. The other circumstances for deeming concealment of particulars of income is when 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. For a ready reference Explanation-1 to section 271(1)(c) is being reproduced hereunder:-

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 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, be deemed to represent the income in respect of which particulars have been concealed.”

Thus, in other words, if an assessee in respect of any facts material to the computation of his total income is able to offer an explanation which is not found by the Assessing Officer or Commissioner (Appeals) or Commissioner to be false, then the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purpose of clause (c) of section 271(1) be not deemed to represent the income in respect of which particulars have been concealed. Concealment of particulars of income on the part of the assessee would also not be deemed to levy penalty under section 271(1)(c) as per Explanation-l where such person offers an explanation which 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. The ld. CIT (A) has basically upheld the penalty levied by the AO in the present case on the basis that the assessee brought nothing on record to substantiate his claim of bona fide belief regarding non taxability of the tax perquisite. Thus the issue revolve around the fact as to whether in the present case the assessee was able to substantiate his explanation of bona fide belief regarding non taxability of tax perquisite, or not. So far as applicability of the decision of Hon’ble Supreme Court in the case of UOI v. Dharamendra Textile Processors [2007] 295 ITR 244 is concerned, we after having gone through the decisions relied upon by the Ld. AR find substance in his argument that the Hon’ble Judges in the case of UOI v. Rajasthan Spinning & Weaving Mills [2009] 13 SCC 448 have been pleased to clarify that the principles laid down in the case of Dharamendra Textile Processors (supra) needs to be interpreted to mean that every case of levy of penalty needs to be examined based on the facts of each case and the conditions specified in the law in this regard. For a ready reference the relevant extract of the decision in the case of Rajasthan Spinning & Weaving Mills (supra) is being reproduced hereunder :-

“At this stage, we need to examine the recent decision of this Court in Dharamendra Textiles (supra). In almost every case relating to penalty, the decision is referred to on behalf of the Revenue as if it laid down that in every case of non-payment or short payment of duty the penalty clause would automatically get attracted and the authority had no discretion in the matter. One of us (Aftab Alam, J) was party to the decision in Dharamendra Textile and we see no reason to understand or read that decision in that manner ….

…. From the above, we fail to see how the decision in Dharamendra Textile can be said to hold that section 11AC would apply to every case of non-payment or short payment of duty regardless of the conditions expressly mentioned in the section for its application.”

In this regard it is also very pertinent to refer over here the recent decision of Hon’ble Supreme Court in the case of CIT v. Reliance Petro Products (P.) Ltd. [2010] 322 ITR 158 wherein the Hon’ble Court has been pleased to observe as under :-

“However, it must be pointed out that in Union of India v. Dharmendra Textile Processors (cited supra), no fault was found with the reasoning in the decision in Dilip N. Shroff v. Joint Commissioner of Income Tax, Mumbai & Am. (cited supra), where the Court explained the meaning of the terms “conceal” and inaccurate”. It was only the ultimate inference in Dilip N. Shroff v. Joint Commissioner of Income Tax, Mumbai & Am. (cited supra) to the effect that mens rea was an essential ingredient for the penalty under section 271(1)(c) that the decision in Dilip N. Shroff v. Joint Commissioner of Income-tax, Mumbai & Am. (cited supra) was overruled.”

The above observation of the Hon’ble Supreme Court implies that it is only on the point of” mens rea” that the judgment in the case of Dilip N. Shroff v. Jt. CIT 291 ITR 519 (SC) has been overruled. The meaning of term “conceal” as explained in the said judgment holds good. The Hon’ble Punjab & Haryana High Court in the case of CIT v. Sidhartha Enterprises [2010] 322 ITR 80 has been pleased to hold that penalty is imposed only when there is some element of deliberate default and not a mere mistake. The Mumbai Bench of the Tribunal in the case of Glories Realty (P.) Ltd. v. ITO [2009] 29 SOT 292 has held that if bona fide explanation of the assessee has not been found false then penalty will not be leviable. On the basis of the decision relied upon, we gather strength to form a view that penalty is not an automatic consequence of addition to income; penalty under section 271(1)(c) of the Act can come into play only when the conditions laid down under that section are satisfied; concealment of income cannot be a passive situation and it implies that the person concealing the income is hiding, covering up or camouflaging an income; penalty is not leviable in case where assessee is able to provide a ‘bona fide’ explanation; and penalty is not leviable in cases where assessee made errors ,under bona fide beliefs.

13. In view of the above, Assessing Officer was not justified in levying penalty u/s. 271(1)(c) of the Act and same is directed to be deleted following the decision of coordinate Bench as discussed above.

14. Similar issue arose in respect of other employees for other years of the same employer placed in similar situation, facts being similar so following same reasoning, penalty in question in all other assessee’s similarly placed assessee for different years is also directed to be deleted.

15. As a result, the appeals filed by the assessee are allowed.


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