Legrand Netherlands B.V. Vs ACIT (ITAT Mumbai)
Facts and Background
Legrand Netherlands B.V., a company incorporated in and tax resident of the Netherlands, is engaged in manufacturing cable-management systems and providing associated engineering and installation services. It does not carry on business operations in India, holds a valid Tax Residency Certificate and claims benefits under the India-Netherlands DTAA.
For Assessment Year 2017-18, the assessee filed its return on 30.11.2017 declaring total income of Rs.3,52,91,25,531/-, including long-term capital gains of Rs.2,75,20,00,000/- arising from reduction of share capital of Novateur Electrical and Digital Systems Private Limited.
During assessment proceedings under section 143(3) r.w.s. 144C, the Assessing Officer examined the capital reduction transaction, the Indian company’s financials and accumulated profits. Applying section 2(22)(d) of the Income-tax Act, 1961, the AO treated Rs.138,47,19,180/- out of the amount reported as capital gains as deemed dividend taxable under the head “Income from Other Sources”.
The Dispute Resolution Panel upheld the AO’s conclusion in principle. The final assessment order dated 29.07.2022 determined total income at the same Rs.3,52,91,25,531/- declared in the return, although the composition of income changed because part of the capital gains was re-characterised as dividend income.
The Mumbai ITAT, by order dated 13.10.2023 in ITA No. 2487/Mum/2022, substantially confirmed the re-characterisation but directed that tax on the dividend be restricted to 10% under the India-Netherlands DTAA, inclusive of surcharge and cess.
Penalty Proceedings
Following the ITAT order, the AO issued notice under section 274 r.w.s. 270A on 29.02.2024. The AO concluded that failure to offer the impugned amount as dividend income constituted under-reporting under section 270A(2) and imposed a penalty of Rs.6,97,89,850/-, being 50% of the tax computed on the under-reported income.
The CIT(A) upheld the levy of penalty. However, since the AO had computed the tax using an effective rate of 10.08% instead of the 10% directed by the ITAT, the CIT(A) directed the AO to recompute the penalty by applying the correct 10% rate.
Assessee’s Submissions
The assessee contended that penalty under section 270A was not attracted because the total income declared in the return and the total income assessed remained identical. According to the assessee, the AO had merely reclassified Rs.138,47,19,180/- from capital gains to dividend income.
The assessee relied upon the conditions contained in section 270A(2) and submitted that none of the specified circumstances for under-reporting was applicable. It also relied upon D.C. Polyester Ltd. v. DCIT [2023] 157 taxmann.com 753 (Mum. Trib.), where the Tribunal had observed that an addition resulting from a change in the head of income would not give rise to under-reporting of income.
The assessee further relied upon PCIT Prafulbhai Vallabhdas Fuletra (R/Tax Appeal no. 650 of 2023) (Gu) HC), Sudarsan De Vs. DCIT Circle-2(1)(1), Ghaziabad ITA No. 5177/DEL/2024, and Penninti Vivekananda Rao v. ADIT (International Taxation)- taxmann.com 873 (Hyd ITAT) in support of its contention that where assessed income and returned income were identical, there was no under-reporting or misreporting for section 270A purposes.
The assessee also submitted that there was no loss of revenue. It stated that capital gains had been taxed at a higher rate of 10.812% under the Act, whereas the dividend income was taxable at 10% under the Treaty. The working placed before the Tribunal showed tax payable according to the return at approximately Rs.37.53 crore, compared with approximately Rs.36.40 crore under the assessment order. The assessee therefore contended that it had paid higher tax and would be entitled to a refund if the income was assessed as dividend income.
The assessee accordingly sought deletion of the penalty under section 270A.
Revenue’s Submissions
The Revenue submitted that the CIT(A) had correctly considered the levy of penalty under section 270A. It contended that the penalty provisions were not akin to the erstwhile section 271(1)(c) proceedings and that even re-characterisation of income could constitute mis-reporting or under-reporting of income, thereby triggering penalty.
The Revenue supported the CIT(A)’s order while accepting the direction concerning application of the Treaty tax rate.
Tribunal’s Analysis
The Mumbai ITAT noted that the returned income and assessed income remained the same, which was undisputed. It also noted that, according to the assessee’s working, the tax liability after reclassification was lower: tax according to the returned income was Rs.37.53 crore, whereas tax computed by the AO was Rs.36.40 crore.
The Tribunal considered whether penalty under section 270A could be imposed merely because the income had been reclassified.
It examined the decision in D.C. Polyester Ltd. v. DCIT [2023] 157 taxmann.com 753 (Mum. Trib.), where the Tribunal had considered a change in the head under which rental income was assessed. That decision observed that section 270A uses the expression “the Assessing Officer ‘may direct’”, indicating that levy of penalty is not automatic and discretion is available to the AO.
The Tribunal in that case had further observed that an addition arising because of a change in the head of income, attributable to the computational methodology prescribed under the Act, would not constitute under-reporting of income. It also referred to section 270A(6)(a), concerning income for which the assessee offers an explanation, the AO is satisfied that the explanation is bona fide, and all material facts have been disclosed.
Judicial Findings
Applying the reasoning from D.C. Polyester Ltd., the Tribunal found that the present case involved reclassification from capital gains to dividend income, while the effective tax liability was reduced following the Treaty rate. The Revenue had not controverted the assessee’s working.
The Tribunal observed that the present case was even stronger than the facts in D.C. Polyester Ltd., where the tax on reclassification had increased, yet the Tribunal had held that the change in the head of income did not amount to suppression or under-reporting.
The Tribunal concluded that there was no suppression of income or concealment of income by the assessee so as to invoke section 270A for imposing penalty.
Final Decision
The Mumbai ITAT set aside the CIT(A)’s order and directed the Assessing Officer to delete the penalty under section 270A.
Accordingly, the assessee’s appeal was allowed.
The order was pronounced in the open court on 16.07.2026.
Cases Discussed
- Penninti Vivekananda Rao v. ADIT (International Taxation)- taxmann.com 873 (Hyd ITAT)
- Sudarsan De Vs. DCIT Circle-2(1)(1), Ghaziabad ITA No. 5177/DEL/2024
- PCIT Prafulbhai Vallabhdas Fuletra (R/Tax Appeal no. 650 of 2023) (Gu) HC)
- D.C. Polyester Ltd. v. DCIT [2023] 157 taxmann.com 753 (Mum. Trib.)
