Merely depositing taxes due on concealed income not enough to avoid penalty,if Income not disclosed in ROI
IN THE ITAT DELHI BENCH ‘F’
ADIT, Circle-1(1), New Delhi
IT Appeal No. 1206 (Delhi) of 2011
Assessment year 2000-01
Date of Pronouncement – 15.10.2012
I.C. Sudhir, Judicial Member
The revenue has questioned first appellate order whereby the ld. CIT (A) has deleted the penalty imposed u/s 271(1)(c) of the Act by the AO.
2. We have heard and considered the argument advanced by the parties in view of orders of the authorities below, material available on record and the decisions relied upon.
3. The relevant facts are that the assessee was employed with HCL Deluxe NV (HDX), a company incorporated in Netherland. HCL Deluxe Pvt. Ltd. was an Indian subsidiary of HDX. The assessee derived salary income from HCL Deluxe Pvt. Ltd. Deluxe Corporation of USA, held 50% share holding in HDX. The other 50% was held by an Indian house. During March 1999, Deluxe Corporation USA acquired 50% holding of the Indian business partner, and restructured the management set up of HDX. By a letter dated 06.04.1999, Deluxe Corporation also terminated the services of the assessee but offered him continued employment for a limited tenure from 03.04.1999 to 01.08.1999, on same terms and remuneration as he was previously employed. In addition, Deluxe Corporation also offered to pay the assessee an extra ordinary compensation of USD 10 lacs, for retention and severance of his services. 50% of USD 10 lacs i.e. USD 5 lacs were paid on signing and agreeing to the terms of letter dated 06.04.1999. The balance USD 5 lacs were paid in August 1999, on continued employment of the assessee coming to an end.
4. The assessee, while submitting his income tax return for the A.Y. 2000-01 (under consideration) attached a note dated 08.05.2000 to the “computation of income”, claiming that non compete fee of USD 10 lacs received by him from Deluxe Corporation is a capital receipt not chargeable to tax. Before doing so the assessee had determined the tax payable on income after including the sum of USD 10 lacs as part of his income. The assessee deposited the tax amount so determined. However, in his return of income the assessee did not include the USD 10 lacs and claimed refund of the sum deposited. The AO did not agree with the assessee that the amount USD 10 lacs received by the assessee from Deluxe Corporation is a capital receipt hence not chargeable to tax. He framed the assessment on 28.03.2002 and taxed the sum of USD 10 lacs (INR 4,34,36,250/-). The assessee went in first appeal. The ld. CIT (A) held that 50% of USD 10 lacs i.e. USD 5 lacs is non taxable and allowed relief to the assessee to that extent. The Tribunal vide order dated 31st March, 2009 reversed the first appellate order. In result the addition of USD 10 lacs made to the income of the assessee by the AO was upheld. The AO issued notice u/s 271(1)(C) of the Act and vide order dated 29.01.2010 levied penalty of Rs. 1,43,33,963/- under the said provision. ld. CIT (A) has deleted the penalty on the basis that there was no concealment of particulars of income or furnishing inaccurate particular thereof on the part of the assessee since the assessee had disclosed all the necessary and material facts regarding the receipt of USD 10 lacs to the department. The ld. CIT (A) has held further that the explanation offered by the assessee was neither found false nor it remained unsubstantiated. He observed further that the bona fides of the assessee were proved by the disclosure in the return and the payment of taxes. The revenue has questioned this action of the ld. CIT (A).
5. In support of the ground the ld. DR has basically placed reliance on the penalty order. He submitted that there was no any scope of debate on the taxability of the amount received since the amount was received out of the contract for employment. The Tribunal has also upheld the action of the AO in holding that the amount is a taxable income in the hands of the assessee. Thus it is clear case of concealment of particulars of income and furnishing inaccurate particulars thereof on the part of the assessee to attract penal action u/s 271(1)(C) of the Act. The ld. DR submitted further that had there not been the scrutiny assessment u/s 143(3) of the Act the assessee would not have come forward to offer tax on the amount received by him. The ld. DR placed reliance on the following decisions:
– CIT v. ECS Ltd.  336 ITR 162
– ITO v. Pandit Vijay Kant Sharma [ITA No. 3709/Del/2008 order dated 29.5.2009].
– VLCC Health Care Ltd. v. ACIT [ITA No. 289/Del/2009 order dated 12.2.2010]
– Rayala Corpn. (P.) Ltd. v. Union of India  161 Taxman 127 (Mad.).
6. The ld. AR on the other hand tried to justify the first appellate order. He submitted that there was disclosure of all the necessary and material facts relating to the receipt of the amount of USD 10 lacs and taxability of the amount was a debatable issue. The assessee was under bona fide belief that the receipt was capital in nature hence not chargeable to tax and at the same time the assessee had determined the tax payable on income after including the sum of USD 10 lacs as part of his income. He had deposited the tax amount so determined. He submitted further that the explanation of the assessee about the amount received was neither found false nor unsubstantiated. The ld. AR also referred contents of Para nos. 6 to 13 of the appointment letter dated 6.4.1999 made available at page nos. 8 to 12 of the paper book filed on behalf of the assessee. He pointed out that as per the condition imposed upon, the assessee was not to divulge, communicate or pass on any confidential information of HDX or Deluxe or any of their respective subsidiaries to any person who is not in the employment of HDX or Deluxe or any of their respective subsidiaries and who does not have a need to know such information, for a period of 3 years and 4 months from the date of the said letter. The assessee was also restrained for an agreed period for not to directly or indirectly recruit, hire or discuss employment with prescribed person etc. All these shows that the payment was made as a non-compete fee. He submitted further that the decisions relied upon by the ld. DR having distinguishable facts are not helpful to the revenue. In support of the first appellate order on the issue the ld. AR cited following decisions:
(i) Karan Raghav Exports (P.) Ltd. v. CIT  21 taxmann.com 8 (Delhi)
7. We find that in the present case the assessee tried to establish his bona fide in nurturing a belief that amount received is a capital receipt not chargeable to tax. He also tried to establish his bona fide in not offering the tax in his return of income on the claimed capital receipt by stating that the assessee had calculated the tax on the capital receipt and paid it to the revenue and while not showing it as income of the assessee in his return of income he had claimed the tax paid as refund. We are of the view that there is scope of nurturing a bona fide belief that tax is not payable on a receipt where two views are possible regarding it. No such case is there in the present appeal before us. The provisions laid down u/s 17(3) of the Act are very clear that profits in lieu of salary includes the amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his self employment or the modification of the terms and conditions relating thereto. For a ready reference Clauses (i) and (ii) to sub-Section (3) to section 17 are being reproduced hereunder:
“3. “Profits in lieu of salary includes-
(i) the amount of any compensation due to received by an assessee from his employer or former employer at or in connection with the termination of his employment or the modification of the terms and conditions relating thereto;
(ii) any payment (other than any payment referred to in clause (10) clause (10A) clause (10B) clause (11), clause (12) clause(13) or clause (13A) of section 10, due to or received by an assessee from an employer or a former employer or from a provident or other fund to the extent to which it does not consist of contributions by the assessee or interest on such contributions or any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy.
Explanation – For the purposes of this sub-clause, the expression “keyman insurance policy” shall have the meaning assigned to it in clause (10D) of section 10;]”
In the appeals preferred by the parties before the Tribunal raising the issue on the taxability of the receipt the Tribunal vide its order dated 31.3.2009 in ITA nos. 3365 & 2629/Del/2004 has held that the amount paid to the assessee was because of termination of employment in terms of letter dated 6.4.1991, therefore, the payment of USD 10 lac received by the assessee is chargeable to tax as profit in lieu of salary u/s 17 (3) (i) of the Act. The Tribunal has discussed the issue in detail and decided it in view of several decisions relied upon by the parties before it. The assessee had placed reliance on several decisions like CIT v. Shyam Sundar Chhaparia  305 ITR 181; Rohitasava Chand v. CIT  306 ITR 242 and Saurabh Srivastava v. Dy. CIT  111 ITD 287 (Delhi) (SB). The Tribunal has distinguished these decisions on facts with this observation that in these cases the assessee was paid non-compete fee whereas in the case of the present assessee the payment has been made for termination of services. We are thus of the view that when provisions u/s 17(3) of the Act were clear and the amount whatever nomenclature can be attached to it was admittedly paid to the assessee due to termination of employer-employee relation, there was no scope of any debate that the amount received was not profits in lieu of salary within the meaning of the said provisions of u/s 17(3) of the Act. We are thus of the view that there was no any reason available with the assessee for nurturing a belief that the amount received is a capital receipt not chargeable to tax. Merely by depositing the due tax on the amount received the bona fide of the assessee in not declaring the receipt as income in its return of income is not established. The benefit of Explanation 1 to section 271(1)(C) of the Act for the exemption of levy of penalty is available to an assessee when assessee is able to establish that the explanation furnished by him for non-disclosure of payment of the receipt as income in his return of income is bona fide. The requirement for availing the benefit u/s 271(1)(C) Explanation 1 of the Act for exemption from penal action under the said provisions are available only if the assessee is able to prove that such explanation is bona fide and that all the facts relating to the income and material to the computation of his total income have been disclosed by him. For a ready reference the relevant extract of Section 271(1)(C) of the Act are being reproduced hereunder:
“271. Failure to furnish returns, comply with notices, concealment of income, etc.
(1) If the Assessing Officer or the Commissioner (Appeals) or the CIT in the course of any proceedings under this Act, is satisfied that any person
(b) has failed to comply with a notice [under sub-section (2) of section115 WD or under sub-section (2) of section 115 WE or] under sub-section (1) of section 142 or sub-section (2) of section 143 [or fails to comply with a direction issued under sub-section (2A) of section 142], or
(c) has concealed the particulars of his income or furnished inaccurate particulars of such income.
(d) has concealed the particulars of the fringe benefits or furnished inaccurate particulars of such fringe benefits,]
he may direct that such person shall pay by way of penalty,-
(ii) in the cases referred to in clause (b), [in addition to tax, if any, payable] by him, [a sum of ten thousand rupees] for each such failure;]
(iii) in the cases referred to in clause (c) [or clause (d)], [in addition to tax, if any, payable] by him, a sum which shall not be less than, but which shall not exceed [three times],the amount of tax sought to be evaded by reason of the concealment of particulars of his income [or fringe benefits] or the furnishing of inaccurate particulars of such income [or fringe benefits].
He may direct that such person shall pay by way of penalty.
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 CIT to be false, or
(B) such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of Clause (c) of this subsection, be deemed to represent the income in respect of which particulars have been concealed”.
It is very much clear from the perusal of the provisions laid down u/s 271(1)(C) of the Act that for seeking exemption from penal action regarding an income not declared in the return income, the assessee is required not only to establish that all the facts relating to the same and material to the computation of his total income have been disclosed by him but he has to establish also that the explanation for not showing this income in his return of income was bona fide. In the present case before us though the contention of the assessee that he had disclosed all the facts relating to the receipt by appending a note to the return of in this regard has not been disputed but the dispute before us is on the issue of bona fide of the assessee in nurturing a belief that the amount received is a capital receipt not chargeable to tax. In the preceding paragraphs we have discussed the facts of the present case and when it is considered in totality keeping in mind that the provisions laid down u/s 17(3)(1) of the Act were clear to bring the receipt as taxable and there was no scope of debate regarding its taxability, the bona fide of the explanation of the assessee that he was under a belief that the amount received is a capital receipt not chargeable to tax is not acceptable. In this regard we find strength from the recent decision of Hon’ble Delhi High Court in the case of CIT v. Zoom Communication (P.) Ltd.  191 Taxman 179 wherein the Hon’ble Jurisdictional High Court of Delhi after discussing several decisions including the decisions of Hon’ble Supreme Court in the case of Reliance Petroproducts (P.) Ltd. (supra), has been pleased to hold that if a view is taken that the claim which is wholly untenable in law and has absolutely no foundation on which it could be made, the assessee would not be liable to imposition of penalty even if he was not acting bona fide while making a claim of this nature, that would give a licence to unscrupulous assessees to make wholly untenable and unsustainable claims without there being any basis for making them, in the hope that their return would not be picked up for scrutiny and they would be assessed on the basis of self-assessment u/s 143(1) of the Act and even if their case is selected for scrutiny, they can get away merely by paying the tax, which in any case was payable by them. For a ready reference Para no. 16 to 21 of the said decisions are being reproduced hereunder:
“16. The proposition of law which emerges from this case. when considered in the backdrop of the facts of the case before the Court, is that so long as the assessee has not concealed any material fact or the factual information given by him has not been found to be incorrect, he will not be liable to imposition of penalty under section 271(1)(c) of the Act even if the claim made by him is unsustainable in law provided that he either substantiates the explanation offered by him or the explanation, even if not substantiated is found to be bona fide. If the explanation is neither substantiated nor shown to be bona fide. Explanation 1 to section 271(1)(c) would come in to play and the assessee will be liable to for the prescribed penalty.
19. It is true that mere submitting a claim which is incorrect in law would not amount to giving inaccurate particulars of the income of the assessee, but it cannot be disputed that the claim made by the assessee needs to be bona fide. If the claim besides being incorrect in law is mala fide, Explanation 1 to section 271(1) would come into play and work to the disadvantage of the assessee.
20. The Court cannot overlook the fact that only a small percentage of the Income-tax Returns are picked up for scrutiny. If the assessee makes a claim which is not only incorrect in law but is also wholly without any basis and the explanation furnished by him for making such a claim is not found to be bona fide, it would be difficult to say that he would still not be liable to penalty under section 271(1)(c) of the Act. If we take the view that a claim which is wholly untenable in law and has absolutely no foundation on which it could be made, the assessee would not be liable to imposition of penalty, even if he was not acting bona fide while making a claim of this nature, that would give a licence to unscrupulous assessees to make wholly untenable and unsustainable claims without there being any basis for making them, in the hope that their return would not be picked up for scrutiny and they would be assessed on the basis of self-assessment under section 143(1) of the Act and even if their case is selected for scrutiny, they can get away merely by paying the tax, which in any case, was payable by them. The consequence would be that the persons who make claims of this nature actuated by a mala fide intention to evade tax otherwise payable by them would get away without paying the tax legally payable by them, if their cases are not picked up for scrutiny. This would take away the deterrent effect, which these penalty provisions in the Act have.
21. We find that the assessee before us did not explain either to the Income-tax authorities or to the Income-tax Appellate Tribunal as to in what circumstances and on account of whose mistake, the amounts claimed as deductions in this case were not added, while computing the income of the assessee-company. We cannot lose sight of the fact that the assessee is a company which must be having professional assistance in computation of its income, and its accounts are compulsorily subjected to audit. In the absence of any details from the assessee, we fail to appreciate how such deductions could have been left out while computing the income of the assessee-company and how it could also have escaped the attention of the auditors of the company.”
8. In view of the aforesaid discussion on the issue, we come to the conclusion that while not declaring the capital receipt in question as his income in his return of income filed by the assessee, the assessee in the present case had furnished inaccurate particulars of income attracting the penal action provided u/s 271(1)(C) of the Act. We thus while setting aside first appellate order in this regard restore the order passed u/s 271(1)(C) of the Act imposing the penalty of Rs. 1,43,33,963/-. The ground involving the issue is thus allowed.
9. Consequently appeal is allowed.