Mere making of a claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars

ADIT v Fidelity Management Trust Co

ITAT BENCH ‘L’, MUMBAI

ITA Nos. 1617 to 1620 (MUM.) of 2010

Assessment Year: 2004-05

Decided on: 29 April 2011

Order

N.V. Vasudevan, JM

These are appeals by the revenue against four orders all dated 23-12-2009 of CIT(A) X, Mumbai relating to assessment year 2004-05. In these appeals the revenue has challenged the orders of  the CIT(A), whereby the CIT(A) has cancelled the order of the AO imposing penalty on the

assessees’ under section 271(1)(c) of the Income-tax Act,1961 (the Act).

2. The facts and circumstances under which the penalty under section 271(1)(c) of the Act was imposed by the AO on the assessees’ are as follows. All the assessees’ above named are  Nonresidents and are Funds registered as Foreign Institutional Investor (FII) with Securities and

Exchange Board of India (SEBI). The assessees’ in all these cases filed returns of income wherein they declared the gain/loss arising on sale of securities in India under the head “capital gain”. All the assessees’ filed a revised return of income reporting nil income and claiming refund of the taxes paid. The details in this regard are as follows:

3. If the income in question is considered as income from business then the same would be taxable only if the assessee’s who are non-residents have a permanent establishment in India. The reasons assigned for filing the revised returns of income have been set out by the assessees’ are common and the same is as follows:

“We refer to our representatives’ letter dated Aug. 6, 2004, enclosing the Return of Income (‘ROI’) in Form No. 3 for the assessment year under consideration, filed with your office on August 17, 2004, bearing acknowledgement No. 000092. A copy of the acknowledged RoI is enclosed herewith as Annexure A for your ready reference. The fund had, in the original RoI, offered to tax the income earned on sale of securities in India as Capital Gains and paid taxes thereon. However, as the Fund has been carrying on business as an investment trust, the shares and securities were held by the Fund as business assets, the profits from the purchase and sale of shares are in the nature of business income. The fact that the fund is carrying on business of dealing in shares and securities is also evident from the object of the Fund as seen from its charter documents, the registration with Securities & Exchange Board of India (‘SEBI’) as a Foreign Institutional Investor and the enormity and frequency of transactions of purchase and sale of shares and securities by the Fund. Further, in view of the provisions of the Double Taxation Avoidance Agreement (‘DTAA’) between India and USA, the business profits could be taxed in India only if there is a Permanent Establishment (‘PE’) in India. As the fund does not have an office, a place of business or a dependent agent in India, it does not have a PE in India and therefore, the business income on sale of securities would not be taxable in India. With regard to our claim that the income earned by the Funds is in the nature of business income we would like to place reliance on a recent ruling delivered by the Authority for Advance Rulings (‘AAR’) in respect of one of our sister funds, namely Fidelity Advisor Series VIII [2004] 271 ITR 1 (AAR), the facts of which are similar to our case. The ruling delivered by the AAR is enclosed herewith as Annexure b. In this case, the AAR, after perusing certain parameters such as the objects for which the applicant was established, the frequency of trade etc. held that the income earned by Fidelity Advisor Series VIII was in the nature of business income. The AAR also considered whether the presence of the custodian in India would tantamount to the Fidelity Advisor Series VIII having a PE in India, and in this regard ruled in  the negative. The AAR ruled that the income earned by Fidelity Advisor Series VIII was inthe nature of business income and in the absence of PE in India its income from sale of securities was not taxable in India. The AAR has taken a similar view in the case of XYZ/ABC Equity Fund [2001] 250 ITR 194 (AAR).

In view of the above, the Fund wishes to offer its income as business income and accordingly revise the RoI for the above mentioned assessment year. The revised RoI in Form No. 2 along with the computation of income is attached with this letter.”

4. In the assessment proceedings the AO was of the view that the income of the assessees’ for transactions in Indian Securities was capital gain. In coming to the above conclusion the AO analyzed the scheme of investment for FIIs and came to the conclusion that the policy of the Government was only to allow investment in capital gain market in India by FIIs and not to permit business activities of dealing in securities. The AO also in this regard referred to the Scheme of Taxation of capital gains of FIIs under section 115AD of the Act and the permission allowed by the SEBI and FEMA which only permits investments in Indian Securities. The AO also found that the other criteria for treating the income in question as income from business namely nature frequency and purpose of the transaction, maintenance of books of account etc not having been fulfilled in the case of the assessees’. Alternatively, the AO also held that the assessees’s had Permanent Establishments (P.E.) in India and, therefore, even otherwise the income in question is taxable. Thus capital gain declared by the assessees’ was brought to tax by the AO.

5. In respect of the claim made by the assessees’ that the income in question made by the assessees’s that the income in question is not capital gain and is business income and is not taxable in India in view of the provisions of Indo-US DTAA, which was rejected by the AO, the

AO initiated the penalty proceedings against the assessees’.

6. Against the order of the AO in the quantum proceedings the assessees’ field appeals before the CIT(A). In the meantime the assessees’ approached the AAR on the question whether the income in question could be said to be income from business. The AAR in Fidelity Northstar Fund, In re, [2007] 288 ITR 641 / 158 Taxman 372 (AAR) by its ruling dated 8-1-2007 held that the FIIs can invest in securities in India to receive income from them so long they hold the same and can realize capital gains on their transfer. The authority further ruled that the applicants did not maintain accounts to show the manner of valuation of stock-in-trade at the end of the financial year. There was nothing to show that investments were held as capital assets. The returns were field declaring capital gains. In those circumstances the AAR held that the transactions were only in the nature of investment and the profits arising there from cannot be treated as business income. The assessees’, therefore, withdrew their appeals before the CIT(A). It is in the above background of facts that the question as to whether the assessees’s can be said to be guilty of furnishing inaccurate particulars of income has to be decided.

7. The AO in imposing the penalty on the assessees’ primarily relied on Explanation-1 to section 271(1)(c) of the Act. The AO held that the revised return filed by the assessees’ obliterated the original return filed by the assessees’ and the revised return was not correct and complete and, therefore, the assessees, are guilty of furnishing inaccurate particulars of income. The AO also held that the assessees’ did not offer any bona fide explanation with regard to their claim. The  AO also held that the assessees’ did not file audit report under section 44AB of the Act, trading and P&L account and audited P&L Account and balance sheet. The AO also referred to the fact that in the past assessees’ had been declaring income under the head capital gain and has changed the stand in the present assessment year without any valid reason. The AO also held that the assessees’ on their own came to the conclusion that the income in question is business from business and that the assessees’ did not have PE in India and that they are entitled to the benefit of Indo-US Tax Treaty. For all the above reasons the AO imposed penalty on the assessees’.

8. On appeal by the assessees’ the CIT(A) cancelled the order of the AO imposing penalty for the

following reasons:

“1.3.1 I have considered the facts and gone through the penalty order passed by the AO and also the submissions made by the Appellant before me. I find that the assessee has filed original return of Income showing income under the head of “capital gain”. However, it was revised on the basis of Advance Ruling in the cases of XYZ/ABC Equity Fund, [2001] ( 250 ITR 194) (AAR) and Fidelity Advisors Series VIII, (2004) ( 271 ITR 1)(AAR), wherein based on same set of facts the income was held to be assessable as business income. The Appellant filed a revised return of income on 31-3-2005 showing taxable income at Rs. NIL and claiming refund of taxes paid, on the ground that its income was in the nature of “business income” and since the Appellant was not having PE, its income was not taxable in India in view of Article 7 read with Article 5 of DTAA. This revised return of income was filed with covering letter dated 25-3-2005 explaining the reasons thereof. However, the AO has assessed it as income from capital gains only. There is no allegation or observation of the AO in the assessment order that any fact material to the computation of income was either not disclosed or was found to be wrong. The assessment has been made on the basis of facts disclosed by the Appellant in the return of income and also during the course of assessment proceedings as and when demanded by the AO. Assessment has been made by the AO having a different opinion from the point of view of the Appellant. Thus there is no question of concealing any facts. The revised claim was based on legal ruling. Thus there was no concealment whatsoever, nor has the assessee has committed an act of furnishing inaccurate particulars of income. The entire facts and claim has been explained in the letter while filing the revised return of income and same was based on judicial ruling. A perusal of the penalty order reveals that the AO has rejected the contentions on the basis that ignorance of law does not extinguish the liability to obey the law. The AO observed that assessee has tried his luck to be in two boats at the same time with guilty mind, but at the same time claiming his assertion to be contention arisen out of bona fide belief, which does not hold water. This view of learned AO manifests that there was bona fide belief on the part of appellant and at the same time it was based on judicial ruling in same type of fund that the its income could be assessed as business income. The assessee filed revised returns of income along with a letter which explaining the reasons for filing the return of income.”

9. The CIT(A) further held that the assessees’s made full disclosure of all material facts and that the assessment was a result of difference of opinion between the AO and the assessees’ on a question of law and, therefore, the assessees’ should be entitled to the benefits of Explanation-1 to section 271(1)(c) of the Act. The CIT(A) also relied on the decision of the ITAT, Mumbai in the case of Variable Insurance Fund Overseas Portfolio v. ADIT, IT Appeal No. 559 (Mum.) 2009 for A.Y. 2004-05, wherein on identical facts penalty was held to be not leviable. For all the above reasons the CIT(A) cancelled the orders of the AO imposing penalty.

10. Aggrieved by the orders of the CIT(A) the revenue has field the present appeals before the Tribunal.

11. We have heard the rival submission. It was the submission of the learned D.R. that under Article 4 of the DTAA between India and USA, the term resident of a contracting state means a person who under the law of that State is liable to tax therein by reason of his domicile,  residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature, provided, however, that

(a)…

(b)in the case of income derived or paid by a partnership, estate, or trust, this term applies only to the extent that the income derived by such partnership, estate, or trust is subject to tax in that State as the income of a resident, either in its hands or in the hands of its partners or beneficiaries.

12. It was the submission of the learned D.R. that the assessees’ in the present case have not shown as to how income derived by it is subject to tax in USA either in its hands or in the hands of the beneficiary and they cannot not be said to be resident of USA and therefore could not have made a claim for the benefits of DTAA which are available only to the resident of the other contracting state, viz., USA.

13. In this regard the learned D.R. placed reliance on the decision of the Hon’ble AAR in the case of General Electric Pension Trust, In re [2006] 280 ITR 425 wherein it was held that in the case of a trust, the term “resident” of the USA in the USA law would apply only to the extent that income derived by such trust was subject to tax in the USA as the income of a resident either in its hands or in the hands of the beneficiaries. That, it being an admitted fact in that case that the applicant enjoyed exemption from payment of USA tax and nothing having been brought on record to show that the income from securities of Indian companies was being taxed in the USA in the hands of the beneficiaries of the trust, the applicant was not a resident of the Contracting State (USA) and, therefore, could not avail of the benefit of the terms of the Agreement for Avoidance of Double Taxation between India and USA.

14. Her next submission was that section 115AD of the Act was a code by itself for computation of capital gain by FII’s and the assessees’ being an FII could not have made a claim that the capital gain it earned was business income. In this regard our attention was drawn to the decision of the AAR in the case of Universities Superannuation Scheme Ltd., In re [2005] 275 ITR 434 wherein it was held that

(i)That the provisions of section 115AD would apply to an assessees’ who has suffered losses on the transfer of securities.

(ii)That being a special provision for FIIs, section 115AD will override the general provisions. Where Parliament so intended it provided, as in section 115-I, an option to be exercised by the assessees’. Absence of such a provision in the scheme of section 115AD indicates that no option is available to FIIs. By no principle of interpretation can such an option be read in section 115AD. For the reason that the applicant suffered capital loss in an assessment year, it cannot claim to opt out of section 115AD.

(iii)Having regard to section 115AD(3) even in the case of FIIs, while computing capital gains arising from the transfer of short-term or long-term capital assets, being securities other than units referred to in section 115AB, the operation of the first and second provisos to section 48 has to be excluded section 115AD is a self-contained code. It is an inclusive provision containing, inter alia, the mode of computation of capital gains and concessional rate of tax. Its application does not depend upon the result of the computation. Gain and loss are but two sides of the same coin and indeed a loss is nothing but negative profit.

15. It was further submitted that in the past the Assessees’ offered to tax income from dealing in securities under the head capital gains and this is the first year in which the assessees’ took a stand that the said income was business income. Thus the assessees’ were fully aware of the fact that income in question was assessable under the head capital gain yet the assessees’ chose to make a claim that the said income was business income and further wrongfully claimed non-taxability of the income by taking shelter under DTAA and making a claim that it had no PE in India. The assessees’ could not produce the required documents (Like profit and loss account) to prove its claim that income in question was business income and therefore the assessment was made treating the income as capital gain. The assessees’s claim was therefore not bona fide and therefore Expln.1 will apply and the penalty imposed should be restored.

16. The ld. Counsel for the assessees’ brought to our notice the decision of the Tribunal in the case of Variable Insurance Fund Overseas Portfolio (supra) and further field before us a copy of the order of the Tribunal in the case of ADIT v. Variable Insurance Products Fund III Balanced Portfolio (VIPAG) in IT Appeal 1126/M/2010 for A.Y. 2006-07 wherein on identical facts this Tribunal had confirmed the order of the CIT(A) cancelling penalty imposed by the AO. The ld. Counsel for the assessees’ narrated the circumstances under which the revised return was field and the reasons why the appeals before the CIT(A) were withdrawn in the quantum proceedings. The ld. Counsel for the assessees’ placed strong reliance on the decision of the Hon’ble Supreme Court in the case of CIT v. Reliance Petroproducts (P.) Ltd. [2010] 322 ITR 158, wherein it was held that making incorrect claim does not amount to concealment of particulars.

17. We have considered the rival submissions. We find that the revised return was field by the assessees’ in all these cases making the claim that the income from sale of securities was  usiness

income based on the decision of AAR in the case of one of the sister company namely Fidelity Advisors Series VIII, In re, [2004] 271 ITR 1. In the said decision AAR expressed the following

view.

” The applicant, an investment company, registered under a statute of the USA, was a nonresident for the purposes of income-tax in India. It was set up to provide investors a continuous source of managed investments in securities. Its investments were mainly in equity securities under an investment scheme of a state in the USA. The applicant was registered with the Securities and Exchange Board of India (SEBI) in India and obtained a Foreign Institutional Investor (FII) licence as required by the regulations of the SEBI. It invested in listed Indian companies under the FII regime. It had a foreign global custodian, which appointed the Standard Chartered Bank (SCB) as the domestic custodian under regulation 16(1) of the SEBI (FII) Regulations, 1995. The applicant had made enormous sale transactions in respect of shares. The applicant applied to the Authority for an advance ruling on three questions, viz., (i) whether the income from the portfolio companies and the gains arising from the sale of the investments herein would be business income under article 7 of the Agreement for Avoidance of Double Taxation and Prevention of Fiscal Evasion between India and USA and, therefore, not taxable in India, (ii) whether the applicant was absolved from filing a return of income under the Indian Act, and (iii) whether it would be liable to penalty if a return was not filed. At the time of the hearing of the application, the representative appearing for the applicant submitted that since the dividend income was exempt from tax in the hands of the shareholders and there was no significant interest income reference to these items might be deleted from question No. (i). On the facts stated, the Authority ruled:

(i)that since the applicant wanted only to confine question No. (i) to some of the items specified therein the applicant could be permitted to reframe the question;

(ii)that, since the applicant did not have any branch or office in India and SCB was providing services to a number of other local and international companies, SCB was an independent agent as contemplated by article 5(5) of the Double Taxation Avoidance Agreement, and it could not be said that the applicant had a permanent establishment in India;

(iii)that, on the facts, having regard to the object of the applicant company, the amount of investments in India, the registration with the RBI, obtaining FII licence and the enormity and frequency of purchases and sales, the applicant held the shares and securities as business profits, and, therefore, the business profits of the applicant could be taxed in India in view of article 7 of the Double Taxation Avoidance Agreement.”

18. The ruling of the AAR was rendered on 27-9-2004. Prior to this day the assessees’ had filed the returns of income i.e. on 17-8-2004 for A.Y 2004-05. The revised return of income was filed by the assessees’ on 25-3-2005. The assessees’ made it clear in a letter filed along with the  revised return of income that the same is being filed in view of the decision of the AAR in the case of sister concern of the assessee viz., Fidelity Advisors Series VIII, (supra). Later in point of time i.e. on 8-1-2007 the AAR in the case of Fidelity North Star Fund (supra) reversed its earlier decision in the case of Fidelity Advisors Series VIII, (supra). We have already narrated the ruling in the case of Fidelity North Star Fund (supra). It is consequent to this decision that the assessees’ withdrew its appeals against the assessment orders before the CIT(A). It is thus clear from the facts that the claim made by the assessees’s in the revised return cannot be said to be not bona fide.

19. In a recent judgment of the Hon’ble Apex Court in Reliance Petroproducts (P.) Ltd. (supra). Their Lordships, after considering various decisions include Dilip N. Shroff v. Jt. CIT [2007] uand Union of India v. Dharmendra Textile Processors [2008] 306 ITR 277 have observed and held (page 158 head notes) as under:

“A glance at the provisions of section 271(1)(c) of the Income-tax Act, 1961, suggests that in order to be covered by it, there has to be concealment of the particulars of income of the assessee. Secondly, the assessee must have furnished inaccurate particulars of his income. The meaning of the word “particulars” used in section 271(1)(c) would embrace the details of the claim made. Where no information given in the return is found to be incorrect or inaccurate, the assessee cannot be held guilty of furnishing inaccurate particulars. In order to expose the assessee to penalty, unless the case is strictly covered by the provision, the penalty provision cannot be invoked. By no stretch of imagination can making an incorrect claim tantamount to furnishing inaccurate particulars. There can be no dispute that everything would depend upon the return filed by the assessee, because that is the only document where the assessee can furnish the particulars of his income. When such particulars are found to be inaccurate, the liability would arise. To attract penalty, the details supplied in the return must not be accurate, not exact or correct, not according to the truth or erroneous. Where there is no finding that any details supplied by the assessee in its return are found to be incorrect or erroneous or false there is no question of inviting the penalty under section 271(1)(c). A mere making of a claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars of regarding the income of the assessee. Such a claim made in the return cannot amount to furnishing inaccurate particulars.”

20. Respectfully following the ratio of the above decision we observe that the situation in the present case is still better as no fault has been found with the particulars/explanation submitted by the assessee in its return and keeping in view that it is not the case of the revenue that the revised return was filed by the assessee after concealment was detected in the course of assessment proceeding or the revised return was not a voluntary return or valid return or the explanation given by the assessee was not bona fide, we are of the view that a mere making of a claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee such a claim made in the return cannot amount to concealment of income or furnishing of inaccurate particulars of such income which may attract levy of penalty under section 271(1)(c) of the Act. Accordingly, we are inclined to uphold the findings of the ld. CIT(A) in deleting the penalty imposed by the AO.

21. Similar view has also been expressed by the Tribunal in the case of Variable Insurance Products Funds Overseas Portfolio (supra) With regard to the contention put forth by the ld. D.R. on the basis that the assessees were not a resident of US, we find that this was not the basis on which the assessment proceedings proceeded before the AO nor it was the basis on which  penalty was imposed on the asssessees’. Moreover, the ruling of the AAR on the issue was the basis on which the assessees’ made the claim. It cannot be, therefore, said that the assessees’ furnished inaccurate particulars of income. The fact that section 115AD is a code by itself applicable to FIIs cannot also be the basis to hold that the assessee furnished inaccurate particulars of income especially in the light of the ruling of the AAR in Fidelity Advisors Series VIII (supra). We are, therefore, of the view that it is not a fit case for imposing penalty under section 271(1)(c) of the Act. For the reasons stated above we find no merit in these appeals. We, therefore, confirm the orders of CIT(A) and dismiss all these appeals by the revenue.

22. In the result, all the appeals by the revenue are dismissed.