Penalty U/s. 271(1)(c) on CA Firm for Concealment of Income

2.1. Deloittee Touche Tohmatsu International (DTTI), one of the leading accounting firms in the world established under Swiss Verein engaged in the practice of public accountancy in various countries. The Verein consists of members that are professional firms and are engaged in the profession of public accountancy. In other words, DTTI is a conglomeration of member firms, not individuals, which is being managed and run by a Board of Directors selected by member firms. DTTI has a member firm in India by the name of Deloittee Haskins & Sells (DHS) which is an association of four Indian accounting firms namely Khanna & Annadhanam, the assessee firm (KA), Fraser & Ross (FR), Gupta Choudhary and Ghosh (GCG) and P.C. Hansotia & Co. (PCH). Each of these four firms nominated three to four partners to DHS to represent the firms.

2.2. By virtue of an Agreement dated 1-1-1978 between Deloitte Haskins & Sells International and Gupta Choudhary & Ghosh, Calcutta, the partners of Gupta Choudhary & Ghosh were allowed to practice in the name of Deloitte Haskins & Sells in India. Accordingly, Partners of Gupta Choudhary & Ghosh formed a partnership in the name of Deloitte Haskins & Sells in India (DH&S). Consequent upon the merger of practices of DH&S and Touche & Ross internationally, a regional meeting of Deloitte Ross and Tohmatsu (DRT) International was held on 5-4-1990 in Hong Kong where the representatives of DRT International, DH&S and TR Firms in India were present.           At the  said meeting, DRT International representatives proposed the merger of DH&S and TR Firms in India in keeping with the international trend. In view of the fact that the Indian Laws permitted formation of a firm with not more than twenty partners, total merger was not considered feasible. In the circumstances, an `Umberalla Firm’ was formed with the representative partners of DH&S and TR Firms. It was decided that the respective firms joining the Umberalla Firm would nominate partners to the other firms.

2.3. KA became partner of DHS on 4^th September, 1991 along with two other firms namely GCG and PCH. Later on the partners of FR, one of the TR Firms also agreed to join the said merger. A Memorandum of Understanding was then executed on 1-6-1992 between the constituent firms namely KA, FR, GCG, PCH and the firm DHS was reconstituted. This MOU postulated nomination of partners by member firms as under:

GCG 5 Partners

PCH 4 Partners

KA 3 Partners

FR 3 Partners

2.4. The MOU contains clauses for rendering professional services in the name of DHS which inter alia, provided that for services rendered by the respective constituent firms for the work of DHS India, these would be entitled to fees commensurate with the work done as mutually agreed.

2.5. In the year 1987, internationally DHS and TR, another accounting firm merged. TR was represented in India by C.C. Choksi & Co., Bombay and FR, Madras. It did not practice in India in its own name, but the referred work was done either by CCC or FR. However, the TR’s work in India, unlike DHS was not substantial. After merger, the International Firm was known by the name of DTTI.

2.6. The clients of DHS which were mostly multi-national companies operating in India were referred to DHS for providing professional services by member firms of DTTI, mostly the US and UK firms. Since DHS was constituted by three firms and later on by four firms, after admission of M/s. Fraser & Ross, the firms agreed that the DHS clients should be serviced by the local firms as DHS did not have necessary infrastructure in the various cities. The billing of the clients was done by DHS through the services rendered by the constituent firms. It was agreed between the firms that for the services rendered by the respective firms to DHS clients, the firm will be entitled to fee commensurate with the work done as may be mutually agreed to between the firms. In view of this, 80 to 90% of the fees collected by the DHS was passed on to the constituent firms for their services. The balance was left in DHS for certain common expenses like training course, secretarial services, indemnity insurances, etc.

2.7. In view of the increased activities of DHS in India, the Apex Bodies i.e. DTTI was keen that all the firms constituting DHS should merge into one firm and practice only in the name of DHS. According to assessee, this arrangement was time consuming, DTTI, in the meantime, decided to grant concurrent membership to the four constituent firms of DHS. Accordingly concurrent membership agreement dated 1-9-92 was executed between KA and DTTI wherein KA was formally admitted as a member firm of DTTI.

2.8. Regarding reasons for withdrawal from the concurrent membership of DTTI, assessee submitted that DTTI was keen that the four constituent firms of DHS and two of TR firms should merge and form one national firm. The said merger required losing national identity for the firms and transfer of national clients to DHS as also, M/s. C.C. Choksi & Co. insisted on taking over DHS practice in India. As this was not acceptable to KA, the assessee contends that it was decided that DTTI would ask KA to withdraw from the membership of DHS/DTTI and agreed to pay compensation in question to KA, which has been treated by it as capital receipt in the hands of the partners.

2.9. In the course of assessment the assessee was asked to substantiate its claim as to why the amount should not be treated as revenue receipt being received in the pursuit of its profession. The assessee filed copies of relevant agreement with DTTI along with release document dated14-1 1- 1996 entered into between the assessee firm and DTTI and pleaded that the amount was a capital receipt and therefore it was directly credited to partners accounts.

2.10. The Assessing Officer held that when the assessee originally entered into contract with DTTI for grant of concurrent membership, it was a contract like any other contract in the course of profession. The assessee firm had certain rights and obligations in DTTI and was entitled to remain a member of DTTI at the pleasure of DTTI and as long as it acted in accordance with the terms of contract. Being member of DTTI entailed recognition as a global professional firm and thus the contract between the assessee and DTTI was not different from other contracts to achieve professional excellence and benefits. The Assessing Officer also held that the assessee had made sustained efforts for promoting DTTI and has provided valued services to DTTI’s referred clients and was instrumental in building a substantial BHS professional practice in Delhi. This fact has been acknowledged in clause 5 of the agreement dated 14.11.1996. By virtue of this agreement the assessee become entitled to impugned payment to compensate the assessee for the consequent professional loss and prejudice, the DTTI agreed to pay US$ 3.25 lacs. The Assessing Officer also held that though after the exclusion of the assessee from DTTI membership there was no reference of the clients by DTTI, yet the assessee was not prohibited from practicing the profession of accountancy. Thus there was neither restrictive covenant to carry on the profession by assessee nor cessation of assessee’ s business. The compensation paid was thus for profits which the assessee would have earned in future in the carrying on work with DTTI. Thus it can be said that the assessee only parted with particular fruits of the tree and not the tree itself. The source of assessee’ s income was accountancy profession and every client of the assessee cannot be regarded as separate source of income. The source of income was profession of accountancy as a whole. The Assessing Officer distinguished the case laws cited by assessee and relied upon following case laws to hold that the amount received by the assessee was revenue receipt simpliciter, chargeable to income tax:-

1. Chem plant Engineering Pvt. Ltd., 234 ITR 23 (Mad.);

2. Highway Construction Co. Pvt. Ltd., 223 ITR 32 (Gauh);

3. Blue Star Ltd., 217 ITR 514 (Bom.);

4. Bishambhar Nath Swarup Narain, 119 ITR 581 (All);

5. Stewart and Dholakia (P) Ltd., 95 ITR 573 (Cal.);

6 .Manna Ramji & Co., 86 ITR 29; &

7. Jaram Chand Thapar & Bros. P. Ltd., 67 ITR 705 (Cal.).

2.11. Aggrieved, assessee challenged this addition in first appeal. The learned CIT (A) held as under:-

“29. I have considered the submission of the AR of the appellant. I have also examined carefully the arguments taken by the A.O. and case laws relied upon by both the sides. On the totality of the facts and entirety of the circumstances of the case and in the light of the case laws relied upon by the assessee, unlike the one relied by the A.O., which are distinguishable, I am of the considered opinion that the stand of the assessee has great force. In this view of the matter, I hold that the assessee’ s claim that the amount received from DTTI is a capital receipt, and hence not taxable. Accordingly the addition made by the A.O. of Rs. 1,15,70,000/- is deleted.”

2.12. Aggrieved on the CIT(A)’ s order granting relief, revenue appealed before ITAT, which held the impugned receipt to be revenue in nature by following observations:

“15. Applying the principle laid down above and also on the basis of various judicial pronouncements we analyze facts of the present case. The assessee received the payment to facilitate orderly transfer of DTTI’s clients, files etc. to the DHS firm to be reconstituted. The same was measured in form of three times of net profit that the assessee will realize in connection with DTTI referred international work i.e. the profit from that portion of work which is recurring and will be lost due to the withdrawal from DTTI. After the cessation of the association between the assessee and DTTI, it may be a case that DTTI will not refer its clients to the assessee but the assessee continues and is not prohibited from carrying on the profession of accountancy. The clients of the assessee remain with it and are not to be transferred to DTTI or its associate office in India namely DHS. The assessee firm is an old established firm and in the course of carrying on of such profession, entered into an agreement for concurrent membership of DTTI in 1992. Since this arrangement was no more agreeable, this arrangement came to an end in a way it can be said that the arrangement or cessation of the arrangement is of in the course of carrying on the profession as such. The arrangement with DTTI and because of such association if any professional income is generated, it cannot be considered as a separate or distinguished profession de horse or unconnected with existing profession. The affect of new arrangement is that DTTI will not refer the clients and to facilitate the transfer of all referred clients. The assessee was compensated for probable loss or breach for the form of non-receipt of the professional fees. Thus all these things put together will be part of the profession. Accordingly, it can be said that, though voluntarily, the payment came to the Assessee in the course of carrying on the profession of accountancy. When such voluntary payments, which are connected with profession, will constitute income chargeable to tax. The payment has origin in the profession carried on which itself is a definite source of income and hence chargeable to tax. Serving the clients referred by DTTI cannot be considered as separate, distinct and definite source of income de horse the existing profession carried on. Each client if served does not become a separate and identifiable or distinct profession so as to say that if some of the clients cease, the receipt from them will be considered as capital. This fine distinction has always been upheld by various case laws cited by both the parties. In view of the above facts, we hold that the amount received by the assessee is arising in the course of carrying on profession and hence chargeable to tax as revenue receipt.”

3. After ITAT’s judgment on quantum, AO commenced penalty proceedings u/s 271(1)(c). In reply to show cause notice issued by the AO, the assessee contended that assessee was not liable for penalty u/s 271(1)(c) for the following reasons:

(i)  The assessee was advised that the receipt was capital in nature and not liable to income-tax.

(ii)  Dis-allowance being made on account of difference of opinion when all the facts were placed before the ld. AO.

(iii) No satisfaction was recorded as warranted by sec. 271 for initiating penalty proceedings.

(iv) Assessee was not guilty of contumacious conduct or willful or gross neglect.

(v)  Penalty proceedings were barred by limitation.

3.1. Reliance was placed on following case laws:

–       CIT Vs. Devi Dayal (1988) 171 ITR 683;

–       CIT Vs. Ram Commercial Entt. Ltd. 246 ITR 568;

–       CIT Vs. India Sea Foods 218 ITR 629 (Ker.);

–       GL Didwania Vs. ITO 224 ITR 687 (SC);

–       CIT Vs. Ajaib Singh & Co. 253 ITR 630.

3.2. AO, however, held that receipt of compensation in question was patently a revenue receipt and the assessee in order to benefit itself and to defraud revenue, instead of crediting the amount in its P&L A/c credited the amount directly in the account of partners. Therefore, the assessee tried to evade taxes by treating patent revenue receipt as capital receipt by crediting to partners accounts. AO further overruled assessee’ s objection by observing that in view of provisions of sec. 271B, the initiation of penalty proceedings constitutes a valid initiation. Relying on various case laws and that of Hon’ble Supreme Court judgment in the case of Dharmendra Textile Processors 295 ITR 244, holding that the penalty u/s 271(1)(c) was a civil liability and establishment of willful concealment was not necessary, AO levied the impugned penalty of Rs. 46,28,000/- being 100% of the tax sought to be evaded.

3.3. Aggrieved, assessee preferred first appeal before the CIT(A), who cancelled the penalty by following observations:

“I have considered facts of the case, It is seen that the basic issue involved in this case was whether the amount of Rs. 1,15,70,000/- received by the appellant was a capital receipt or a revenue receipt, exigible to tax. It is noticed from the assessment order that this amount was shown in the capital accounts of the partners. The appellant had earlier paid advance tax on this amount, treating it as revenue receipt. However, later on, while filing the return of income, the appellant claimed that it was advised that this receipt constituted capital receipt and hence, was not liable to tax. Accordingly, the receipt was not offered to tax. This fact is also stated in the penalty order. The claim of the appellant that this receipt was a revenue receipt was negatived at the assessment stage by the Assessing Officer but was accepted by the CIT(A). However, in the second appeal the Hon’ble ITAT vide its order in ITA no. 3444/Del/2001 dated 18.01.2008 reversed the decision of the CIT(A), treating the receipt as revenue receipt and taxable under the Income tax act. The assessing Officer, thereafter, levied penalty u/s 271(1)(c) holding that the assessee had furnished inaccurate particulars of income.

From the above facts, it is obvious that it is not a case of concealment of income or furnishing of inaccurate particulars of income. All the facts relating to the receipt had been disclosed by the appellant in the computation of income as well as in the audit report and balance sheet filed with the return. It was, therefore, only a case of difference of opinion which resulted in treatment of this receipt as revenue receipt instead of capital receipt, as claimed by the appellant. It is true that levy of penalty is a civil liability. However, the penalty for concealment cannot be levied merely on account of difference opinion. As held by the Apex Court, where the assessee does not include a particular item in the taxable income under a bonafide belief that he is not liable so to include it, it would not be right to condemn the return as a “false” return, inviting imposition of penalty (124 ITR 15). In the case before us, it is apparent that the appellant had disclosed all the facts relating to the receipt but had not offered it to tax under a bona fide belief, based on the opinion of taxation experts, that it was in the nature of capital receipt. The mere fact that the claim of the assessee was not accepted by the Assessing Officer does not amount to concealment of income or furnishing of inaccurate particulars of income. This view has also been upheld by the High Courts in the decision reported in 259 ITR 212 (Raj.) and 300 ITR 354 (P&H). Since this case is not caught by the mischief of seciton271(1)(c), the issue of mens rea does not arise at all. The penalty levied by the Assessing Officer, therefore, appears to be unjustified and is, accordingly, cancelled.”

Aggrieved, revenue is before us.

4. Learned DR at the out set contends that the issue of amount received by the assessee from DTTI has been decided by the ITAT and it has been clearly held that:

(i)  The assessee is carrying on the profession of accountancy and any receipt from the carrying on of such profession will be a professional receipt;

(ii) Services provided by the assessee to clients referred by DTII was undisputedly the source of income of the assessee and merely because the assessee entered into an agreement with DTII, the compensation received by the assessee against a possible future stoppage of income from such referred clients, cannot amount to closure of a source of income;

(iii) The impugned receipt of the assessee was patently in the course of carrying on accountancy profession of the assessee;

(iv) The assessee had no justifiable reason to assume that such receipts were capital receipts. The so called dispute about the nature of receipt is only figment of assessee’ s imagination to evade tax and was invented to create a smoke screen.

(v) The assessee itself is an accounting firm and the DTTI referred cientage yielded professional fee and in lieu of compensation assessee gave up such future professional fee, these clients in due course were replaced by other clients. More so when the assessee earned DTTI membership reputation.

(vi)Assuming but not admitting, even if it was assumed to be a capital receipt, the same should have been credited through firm’s P&L A/c. The assessee in order to create shroud and minimize disclosure instead of crediting receipt to P&L A/c routed it to partners’ capital account. It amounts to breach of accounting standards and practices. An accountancy firm should not indulge in such type of tricks. The assessee has failed to disclose this amount by way of proper accounting entries and is thus liable for furnishing of inaccurate particulars qua this income;

(vii) Merely a note in balance-sheet will not amount true and proper disclosure as the law & accounting policies expect the assessee to incorporate the receipts in proper and legal manner.

(viii) The interpretation of a private agreement between DTTI and assessee cannot over-ride the statutory provisions so as to give any credence to assessee’ s explanation that there was any doubt about the nature of payment. Agreement no where indicates it to be capital payment. Therefore, factually doubt never existed, it has been created by the assessee to evade the tax by giving a façade of advise.

(ix) Assessee claims to have followed the so called legal advises which were never furnished before the AO during the course of assessment proceedings. Only a generalize statement to the effect that “we were advised” was given. The assessee thus before the entire length and breadth of assessment proceedings up to the ITAT level never furnished copies of the written legal opinions of Mr. P.N. Pandey Ex. Chairman CBDT; Mr. G.N. Gupta, Ex. Chairman CBDT; and Mr. M.S. Syali, Advocate. They were for the first time filed much later before the CIT(A) in penalty proceedings. When assessee furnishes an explanation before AO, burden is on it to fully substantiate the same with relevant material. The assessee for the first time produced these written opinions before CIT(A), who deleted the penalty without bothering that the opinions were new material, produced in writing for the first time before him at a belated stage.

(x) Attention was invited to written submissions filed before AO by the assessee, placed on paper book (pages 18 to 38). In this 21 pages written submissions, there is not a whisper about the legal advice. Further attention is invited to assessee’ s written submissions before CIT(A) in assessment proceedings (paper book pages 39 to 91). In those proceedings also there is no reference to any alleged legal opinion. In the paper book filed before ITAT in quantum proceedings, there is neither copy nor reference to any legal opinion.

(xi) It is clear that the issue of legal opinion was raised in penalty proceedings for the first time that too assessee failed to discharge its burden by not adducing the opinions before the AO. These were produced before the CIT(A) for the first time in penalty proceedings.

4.1. Learned DR further contends that:

(a) DTTI agreement did not create any doubt, assessee paid advanced tax on such receipt and factually never intended to believe in these opinions and never took a plea in the course of assessment proceedings by filing copies of these legal opinions.

(b) Finding of the CIT(A) that assessee had a bona fide belief is bereft of any reliable material and analysis of facts. The assessee’ s bona fide is questionable and its conduct does not match with the situation and the attempt amounts to unacceptable strategy to put blinkers in the eyes of legal process to whatever extent possible. A firm of Chartered Accountants which is bound by the ethical code of profession of accountancy and also income-tax law practices, should not recourse to such type of dubious accounting entries and misinterpret facts which tend to subvert the proper tax assessment. Such attempt needs to be penalise in accordance with law, which has been duly exercised by the AO. CIT(A) has given relief only on subjective terms without appreciating the relevant and crucial facts. Learned DR relied on following judgements:

(1) DILIP N. SHROFF 291 ITR 519 SC

“The word ‘inaccurate’ signifies a deliberate act or omission on the part of the assessee. Such deliberate act must be either for the purpose of concealment of income or furnishing inaccurate particulars. The term ‘inaccurate particulars’ is not defined. Furnishing of an assessment of the value of property may not by itself be furnishing inaccurate particulars. Even if the Explanations are taken recourse to, a finding has to be arrived at – having regard to clause (A) of Explanation – that the Assessing Officer is required to arrive at a finding that the explanation offered by the assessee, in the event he offers one, was false. He must be found to have failed to prove that such explanation is not only not bona fide but all the facts relating to the same and material to the income were not disclosed by him. Thus, apart from his explanation being not bona fide, it should have been found as a fact that he has not disclosed all the facts, which were material to the computation of his income. The explanation must be preceded by a finding as to how and in what manner he furnished the particulars of his income. It is beyond any doubt or dispute that for the said purpose the Assessing Officer must arrive at a satisfaction in this behalf.

CIT v. Ram Commercial Enterprises Ltd. [2000] 246 ITR 568 (Delhi) and Diwan Enterprises v. CIT [2000] 246 ITR 571 (Delhi) followed.

The primary burden of proof is on the Revenue. The statute requires a satisfaction on the part of the Assessing Officer: he is required to arrive at a satisfaction so as to show that there is primary evidence to establish that the assessee had concealed the amount or furnished inaccurate particulars and this onus is to be discharged by the Department.

D.M. Manasvi v. CIT [1972] 86 ITR 557 (SC); [1973] 3 SCC 207 relied on.

While considering whether the assessee has been able to discharge his burden the Assessing Officer should not begin with the presumption that he is guilty.

The order imposing penalty is quasi-criminal in nature and the burden lies upon the Department to establish that the assessee had concealed his income. Sine burden of proof in penalty proceedings varies from that in the assessment proceedings, a finding in the assessment proceedings that a particular receipt is income cannot automatically be adopted, though a finding in the assessment proceedings constitutes good evidence in the penalty proceedings. In the penalty proceedings the authorities must consider the matter afresh as the question has to be considered from a different angle.”

(ii) DHARAMENDRA TEXTILES 295 ITR 244(SC DB)

“8. We are of the view that there is a conflict of opinions between the judgments of the Division Bench of this Court in the case of Dilip N. Shroff (supra) on one hand and on the other hand we have another judgment of this Court in the case of Shriram Mutual Fund (supra). Secondly, it may be pointed out that the object behind enactment of section 271 (1)( c) read with the explanations quoted above indicates that the said section has been enacted to provide for a remedy for loss of revenue. The penalty under the said section is a civil liability. Willful concealment is not an essential ingredient for attracting the civil concealment, that would be sufficient to sustain the penalty. Keeping in mind these two circumstances, we are of the view that the judgment of the Division Bench in the case of Dilip N Shroff (supra) needs consideration. The Explanations added to section 271(1)(c) in that entirety also indicate the element of strict liability on the assessee for concealment or for giving inaccurate particulars while filing returns. The judgment in Dilip N Shroff’s case (supra) has also not considered the provisions of section 276C of the Income-tax Act. Therefore, in our view, the judgment in the case of Dilip N Shroff (supra) needs consideration by the larger Bench of this Court particularly when it has ramifications not only regarding provisions of the Income-tax Act but also with regard to the provisions of sections 3A and llAC of the Central Excise Act and rule 6ZQ(S) of the Central Excise Rules.

9. For the afore stated reasons, we direct the Registry to place our order in this batch of civil appeals before the Hon’ble Chief Justice of India for appropriate directions.”

(iii) DHARMENDRA TEXTILES 306 ITR 277 (THREE JUDGE)

“ It is of significance to note that the conceptual and contextual difference between section 271(1)(c) and section 276C of the Income-tax Act was lost sight of in Dilip N Shroff’s case (supra).

The Explanations appended to section 272(1)(c) of the Income-tax Act entirely indicates the element of strict liability on the assessee for concealment or for giving inaccurate particulars while filing return. The judgment in Dilip N Shroff’s case (supra) has not considered the effect and relevance of section 276C of the Income-tax Act. Object behind enactment of section 271(1)(e) read with Explanations indicate that the said section has been enacted to provide for a remedy for loss of revenue. The penalty under that provision is a civil liability. Willful concealment is not an essential ingredient for attracting civil liability as is the case in the matter of prosecution under section 276C of the Income-tax Act.”

(iv) CIT V RELIANCE PETRO PRODUCTS 322 ITR 158 SC

“A glance of provision of section 271(J)(c) would suggest that in order to be covered, there has to be concealment of the particulars of the income of the assessee. Secondly, the assessee must have furnished inaccurate particulars of his income. The instant case was not the case of concealment of the income. That was not the case of the revenue either. It was an admitted position in the instant case that no information given in the return was found to be incorrect or inaccurate. It was not as if any statement made or any detail supplied was found to be factually incorrect. Hence, at least, prima facie, the assessee could not be held guilty of furnishing inaccurate particulars.

The revenue argued that submitting an incorrect claim in law for the expenditure on interest would amount to giving inaccurate particulars of such income. Such cannot be the interpretation of the concerned words. The words are plain and simple. In order to expose the assessee to the penalty unless the case is strictly covered by the provision, the penalty provision cannot be invoked By any stretch of imagination, making an incorrect claim in law cannot tantamount to furnishing of inaccurate particulars. [Para 7]

Therefore, it must be shown that the conditions under section 271(J)(c) exist before the penalty is imposed There can be no dispute that everything would depend upon the return filed, 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. [Para 8]

The word ‘particulars’ must mean the details supplied in the return, which are not accurate, not exact or correct, not according to truth or erroneous. In the instant case, there was no finding that any details supplied by the assessee in its return were found to be incorrect or erroneous or false. Such not being the case, there would be no question of inviting the penalty under section 271(J)(c). A mere making of the claim, which is not sustainable in law by itself will not amount to furnishing of inaccurate particulars regarding the income of the assessee. Such claim made in the return cannot amount to the inaccurate particulars. [Para 9]

The revenue contended that since the assessee had claimed excessive deductions knowing that they were incorrect, it amounted to concealment of income. It was argued that the falsehood in accounts can take either of the two forms: (i) an item of receipt may be suppressed fraudulently; (Ii) an item of expenditure may be falsely (or in an exaggerated amount) claimed, and both types attempt to reduce the taxable income and, therefore, both types amount to concealment of particulars of one s income as well as furnishing of inaccurate particulars of income. Such contention could not be accepted as the assessee had furnished all the details of its expenditure as well as income in its return, which details, in themselves, were not found to be inaccurate nor could be viewed as the concealment of income on its part. It was up to the authorities to accept its claim in the return or not. Merely because the assessee had claimed the expenditure, which claim was not accepted or was not acceptable to the revenue, that, by itself, would not attract the penalty under section 271 (l)(c). If the contention of the revenue was accepted, then in case of every return where the claim made was not accepted by the Assessing Officer for any reason, the assessee would invite penalty under section 271 (l)(c). That is clearly not the intendment of the Legislature. [Para 10 ]

Therefore, the appeal filed by the revenue had no merits and was to be dismissed.”

4.2. Shri K.C. Singhal, Advocate, learned counsel for the assessee, who appeared initially, reiterated the facts and submissions argued before AO and contended that the assessee had disclosed sufficient details about its belief that the income in question was a capital receipt by following notes in computation:

“Note: During the year the firm received US dollars 3,25,000 (Rs. 1,15,70,000/-) as compensation on withdrawal from the international accounting firm Deloitte Touche Tohmatsu International. The firm has been advised this receipt constitute a capital receipt and hence not liable to income tax.”

balance-sheet:

“Note” On withdrawal from Deloitte Touche Tohmatsu International as a member firm, the firm received a compensation of Rs. 1,15,70,000/-. The firm has been legally advised that the amount being in the nature of capital receipt, it is not liable to tax. After transferring Rs. 23,14,000/- to ‘Reserve for Professional Risks’, the balance amount has been credited to the partners’ accounts in the agreed ratio.”

4.3. The assessee made a legal claim and merely because the claim has been rejected, it cannot lead to levy of penalty u/s 271(1)(c). Reliance is placed on following judgments:

–          CIT vs. Reliance Petroproducts 322 ITR 158 (SC);

–          Shree Krishna Electrical V State of T.N. 23 VST 249 SC

–          CIT v. Nath Bros Exim International 288 ITR 670 (Del.)

–          CIT v. Auric Investment & Securities 310 ITR 121 (Del.);

–          CIT v. Hari Machines 311 ITR 285 (Del.);

–          CIT v. Budhewal co-op Sugar Mills 312 ITR 92 (P&H)

–          Kanbay Sofware India v. DCIT 122 TTJ 72 (Pune);

–          Rupam Mercantiles v. DCIT 91 ITD 237 (Ahd) (T.M)

–          Navbharat Enterprises v. ACIT 309 ITR (AT) 79 (Ahd)

–          ACIT v. U.P. Hotels 83 ITD 443 (All);

–          Equest India (P) Ltd. v. ITO 41 SOT 225 (Mum.);

4.4. Learned counsel contends that the assessee followed the legal advice given by the taxation experts Shri T.N. Pandy; Shri G.N. Gupta and Shri M.S. Syali. If the assessee follows the legal advices, then penalty cannot be imposed if the claim is rejected. Reliance is placed on following decisions:

–          T. Ashok Pai v. CIT 292 ITR 11 (SC);

–          DCIT v. Vertex Customer Services 126 TTJ 184 (Del.);

–          CIT v. S. Dhanbal 309 ITR 268 (Del).

4.5. The issue in question was clearly a debatable matter and two views were squarely possible on that issue. The compensation was given by DTTI binding the assessee not to give professional services to the clients which were referred by him. DTTI constitutes a distinct stream/ source of a particular nature; closure thereof amount to the end of a source. Since the receipt was for closure of a professional source, there existed a genuine debate about the receipt being capital in nature. The assessee adopted one of the possible views which was placed on sound legal opinions, therefore, the penalty cannot be imposed. Reliance is placed on following judgments:

–          CIT v. Harshwardhan Chemicals 133 Taxman 320 (Raj.);

–          Southern Gas Fittings v. DCIT 80 ITD 202 (Chennai);

–          CIT v. Regency Express Builders 166 Taxman 269 (Del)

–          DCIT v. Prabha Devi 34 SOT 125 (Bang.).

4.6. Learned counsel contends that conclusive determination of a capital or revenue receipt is a complex issue and there are no specific test laid down to decide the nature and each case has to be decided on its own facts as held by Hon’ble Supreme Court in following judgments:

–          CIT v. Rai Bahadur Jairam Velji 35 ITR 148 SC

–          Kettlewell Bullen and Co. v. CIT 53 ITR 261 (SC)

–          CIT v. Saurashtra Cements 325 ITR 422 (SC).

4.7. Their Lordships of the Hon’ble Supreme Court, the case of Rai Bahadur Jairam Velji (supra), observed as under:

“The question whether a receipt is capital or income has frequently come up for determination before the courts. Various rules have been enunciated as furnishing a key to the solution of the question, but as often observed by the highest authorities, it is not possible to lay down any single test as infallible or any single criterion as decisive in the determination of the question, which must ultimately depend on the facts of the particular case, and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a decision.”

4.8. It is pleaded that the Hon’ble Supreme Court in the case of Reliance Petroproducts (supra), has held that if the assessee has given the particulars in the return of income then taking a different view by AO did not constitute furnishing of inaccurate particulars. Mere making of claim, which is not sustainable in law, by itself will not amount to furnishing of inaccurate particulars and it was up to the AO to accept or reject the claim. Merely because the assessee has made a particular claim and the same is not accepted, will not make it liable for imposition of penalty.

4.9. Learned counsel further contends that merely because advance tax, will not lead to a conclusion that the assessee had formed an opinion that the receipt in question was revenue in nature. The advance tax was paid to avoid levy of consequential interest. The same cannot be held to be admission on the part of the assessee that the impugned income was revenue in nature. The assessee has a right to seek legal opinion and furnish return of income according to the legal advice, making a claim which it had no other way to make except by filing a return of income.

5. We have considered rival contentions and perused the material available on record. It is imperative to consider the nature of penalty proceedings and the case law in that behalf. Honourable Supreme Court in the case of Dilip N. Shrof (supra) has held that concealment of income and furnishing of inaccurate particulars are different and refer to deliberate act of the assessee and the revenue must establish the existence of mens rea. Later on, Division Bench of the Honourable Supreme Court in the case of Dharmendra Textiles (supra) had occasion to consider this judgement and held that the penalty levied u/s 271(1)(c) was not quasi criminal in nature, but was a civil liability. However, the Bench referred its judgement for decision by a larger bench of the Supreme Court. The Three Judge Bench in the case of Dharmendra Textiles 306 ITR 277 (supra), held that the Explanation appended to sec. 271(1)(c)entirely indicates the attribution of elements of strict liability on the assessee vis a vis concealment or furnishing of inaccurate particulars while filing the return. Thus, the settled preposition as laid down by the Three Judge Bench of the Honourable Supreme Court, unequivocally holds the act of furnishing of inaccurate particulars in the return of income, as a civil liability, albeit strict civil liability. This being the proposition laid down by Honourable Supreme Court, the facts of the assessee’ s case are to be viewed as to whether particulars in this case were furnished accurately and if so whether it amounts to penalty as envisaged by these case laws.

5.1. Adverting to the facts of the case, the assessee is in the profession of chartered accountancy and during the course thereof, it has to be associated with various modalities for rendering desired professional services to government agencies, banks, financial institutions, companies and various other entities by different profit earning arrangements. In this case, as a part of its profession, it entered into a partnership with DTTI, a non-resident professional undertaking, for the furtherance of its professional pursuit. The DTTI gave choice to assessee either to continue with it or discontinue with a compensation. Assessee thought, in its professional wisdom, chose to remain an independent player instead of an associate, so it preferred to disassociate from DTTI. If it had continued, the earning would have been professional receipt and the alternate receipt also takes same analogy and has no trapping of having any doubt about its being a purely professional receipt or the revenue receipt. The assessee is a firm of Chartered Accountants and it is not understandable that for such an issue about a clearly professional receipt, which is very basic in character, assessee had any doubt about its nature. If it is so, we are unable to understand how the assessee can discharge its role as a professional consultant, auditing number of clients, giving them valuable advices on the accounting and taxation aspects. It is unimaginable that a professional firm like the assessee, will tend to have any doubt on such a simple proposition of professional receipt. There is no whisper in the agreement between DTTI and the assessee which creates any doubt at all. In our view, the issue never called for any doubt or ambiguity, the same has been created by assessee and not by the law. Assessee has ventured into an adventure which was fraught with obvious risks which it has preferred to take. The assessee has pleaded that payment of advance tax does not amount to admission and the assessee is free to change its stand. In our view, advance tax payment may not be conclusive, but it is an indication to the mind set of the assessee. While construing strict civil liability, it becomes imperative to correlate assessee’s various activities and explanations.

5.2. Explanation to Sec. 271(1)(c) is attracted where an assessee fails to offer an explanation or offers an explanation which is false or, after September 10, 1986, where an explanation is offered but the assessee it is not able to substantiate such explanation and is not able to prove that explanation is bona fide. Bona fide explanation is one which is not mala fide, consequently assessee’ s mind set becomes a matter of inference. While inferring something, the facts are to be holistically seen and the discretion is to be accordingly exercised. We have to proceed with the mandate of Honourable Supreme Court that there is no obligation on revenue to establish mens rea in terms or akin to Section 276C for prosecution. Now the issue shifts to – whether the assessee’ s explanation is bona fide and whether the explanation given is properly substantiated by assessee or not.

5.3. The defence of the assessee is that it had made above disclosure in the computation of income which is accompanied to the return of income and the auditors had given above quantification in the balance-sheet. The disclosure was made on the basis of opinion sought from the above three gentlemen who are termed by the assessee to be experts in the field of taxation – two being retired Chairman of CBDT and one being a prominent lawyer.

5.4. Coming to the defence of the assessee, we have already held that the nature of receipt itself was decisive of the fact that assessee, a prominent Chartered Accountants firm, rendering professional services by various arguments and its association with world famous DTTI was in furtherance of profession and earned a lump sump professional compensation by choosing one out of two options.

5.5. The assessee firm can harbour any number of doubts, however, the law postulates that the assessee should file a return which is correct, complete and truthful. The law of Income-tax prescribes allowability of various kinds of incomes and expenses and in respect of professional income mandate is clear. The need of proper verification clearly indicates that law wants the assessee to be very vigilant while making a claim and not to make a claim which is not in accordance with law. If the receipt is prima facie revenue in nature, there is no gainsaying that assessee harboured doubt in respect of earning fruits of the tree though not from same branch of the tree.

5.6. Learned DR has pointed out that though the assessee is trying to shield itself behind the legal opinions, the glaring facts are – till the ITAT level in quantum proceedings i.e. before AO, in first appeal and in second appeal, the assessee has not revealed the contents of these legal opinions. In penalty proceeding also before AO the same were not produced.

5.7. In our view, here arises the question about the assessee’s explanation, about assessee’ s bona fides and ability to substantiate its explanation. The fact that during the entire length and breadth of assessment proceedings contents of none of the legal opinions were furnished indicates that the assessee realized the ineffectiveness of these opinions and still ventured into making a claim which was basically not allowable. Our view is further strengthened by the fact that in penalty proceedings before the AO none of these legal opinions were furnished and only before CIT(A) they were filed which is evident from the paper book filed by the assessee on the query from the Bench, which is not disputed by the assessee. Ld. CIT(A) also has not adverted to any legal opinion and has failed to appreciate that they were being produced before him for the first time.

5.8. Under these circumstances, we are unable to agree with the assessee that the impugned professional receipt created any debate about its nature as the receipt was patently a revenue receipt. From above it is clear that the assessee firm has attempted to evade tax on a purely professional receipt by propping up theory of doubt as a capital receipt. Besides, in the case of a partnership firm, receipt whether capital or revenue are to be credited to P&L A/c. The assessee in order to minimise disclosure, has taken a smart route of directly crediting the above receipt in the capital accounts of partners. The strategy saved the firm from taxation and the partners took plea that this was a capital receipt in the hands of the firm and not taxable in their hands, result – the Indian revenue looses due tax in the hands of the firm as well as partners. In these facts and circumstances we are unable to accede to assessee’ s plea that any doubt could be entertained about the assessee’ s professional revenue receipt or assessee’ s explanation was bona fide as it, apart from other facts, failed to contest the particular legal opinions before lower authorities.

5.9. Coming to the assessee’s plea that a substantial question of law has been admitted by the Hon’ble Delhi High Court on assessee’s quantum appeal, therefore, the question of levy of penalty u/s 271(1)(c) does not arise. Reliance has been placed on Ahmedabad Bench Third Member decision in the case of Rupam Mercantiles (supra), in our view the ratio of this judgment is not applicable to the assessee’ s case as –

i.  This does not lay a general proposition of law and this call is to be taken in the factual peculiarities of a case.