IN THE ITAT MUMBAI BENCH ‘L’
Deputy Director of Income-tax (IT)
Sumitomo Mitsui Banking Corpn.
IT Appeal No. 6496 (Mum.) of 2006
[Assessment year 2001-02]
December 5, 2012
B. Ramakotaiah, Accountant Member
This is a Revenue appeal against the orders of the CIT (A)-6 Mumbai dated 9.10.2006. The issue in the appeal is with reference to the deletion of penalty under section 271(1)(c) of the I.T. Act levied by the DDIT (International Taxation) on the following three issues:
(a) Disallowance under section 40(a)(i)-Rs. 21,46,12,294
(b) Income of the HO/Foreign Branches- Rs. 21,46,12,294
(c) Tax deducted in Korea by S.K. Telecom- Rs. 59,85,368.
2. The above amounts were brought to tax in the course of the assessment and consequent to their confirmation by the CIT (A), AO finalised the penalty proceedings levying the penalty u/s 271(1)(c) on the above three amounts by working out the tax sought to be evaded and levying penalty at 100%. The CIT (A) after considering the submissions of assessee deleted the penalty by stating as under:
“1.11 I have duly considered the submissions of the authorised representative and findings of the AO. The AO has made certain additions to the total income of the assessee and levied penalty when those additions were confirmed by CIT(A). However, from the facts of the case, it is clear that assessee has furnished all the particulars of income and it cannot be accused of furnishing inaccurate particulars of income for levying penalty. The Explanation (1) to section 271(1)(c) has two limb wherein the first limb is applicable when such person fails to offer an explanation or offers an explanation which is found by the AO to be false. The second limb is where 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. In so far as the first limb is concerned, the AO has not considered the explanation filed by assessee to be false. AO has applied second limb which comes into play if such person gives an explanation which is not considered to be bonafide and all the facts relating to the same has not been disclosed by him. In the present case, the facts in respect of above claim has been fully disclosed in the return of income and the explanation of the assessee has not been considered as not bonafide. The second part of the Explanation can only be invoked if the full facts for computation of income has not been disclosed and the given explanation is not substantiated or the explanation is not bona fide. In view of above, in my opinion, no penalty is leviable. I may also add that Chandigarh Tribunal in the case reported in 93 ITD 442 has held that mere disallowance of a claim being not substantiated with sufficient evidence does not automatically result in levy of penalty under 271(1)(c). The relevant part of the head note are as under:-
“The explanation of the assessee created a dent or so to say, a doubt in favour of the assessee. As per well established principles of law, the benefit of doubt is bound to be given to the assessee. On the basis of claims of the assessee and counter claims of the revenue, it could not be said that the explanation furnished by the assessee had been proved to be false. The word ‘false’ involves an element of deliberateness. Since the assessee had made a claim, which was open for scrutiny and assessment.
The second part of the Explanation 1 (A) does not get automatically attracted if the explanation offered by the assessee is not substantiated unless the assessee fails to prove that all the material facts have been disclosed. In the instant case, it was the claim of the revenue that the explanation offered by the assessee was not substantiated. Once the claim made by an assessee of allowance or deduction is not substantiated, the consequences are that the assessee suffers tax in respect of the claim disallowed in assessment. There mere disallowance of claim for any reason including the reason of the claim not having been substantiated with sufficient evidence, does not automatically result in levy of penalty. The assessee having disclosed all the material facts in regard to the claims made in respect of the valuation of closing stock, the onus which was placed by Explanation 1 (B) to section 271(1)(c) upon the assessee stood discharged. Therefore, the penalty under section 271(1)(c) was not warranted”
3. Revenue is aggrieved. Assessee is a corporate entity registered and controlled from Japan with Head Office in Tokyo, Japan. Assessee is operating as a Bank in India through its branch offices in Bombay and New Delhi. These branches have been considered as permanent establishment for the principal bank in Japan. Accordingly, assessee filed the returns of income on the profits derived by its branches in India. Apart from other issues, the issue in Item Nos. 1 & 2 i.e. disallowance of interest paid to HO under section 40(a)(i) and also treating the same amount as income of the principal holding assessee as an Agent were considered by the Special Bench of the ITAT in assessee’s own case and accordingly, in the quantum appeal the two additions were deleted. Therefore, the learned CIT (DR) fairly admitted that the penalty on the above two issues does not survive for consideration.
4. The only remaining issue is with reference to the addition made in the assessment of Rs. 59,85,368. The facts of the issue are as under. Assessee branch in India has received an amount of Rs. 2,43,56,075 as income from M/s S.K. Telecom, Korea as the guarantor in respect of loan granted by the Bank to DSS Mobile Communication Ltd. This above amount was subjected to tax under the Korean law and accordingly an amount of Rs. 59,85,368 was deducted from the amount and balance amount was remitted to India. Assessee in the Profit & Loss A/c prepared for the purpose of Indian operations has credited the entire amount of Rs. 2,43,56,075. In the return filed however, this amount was excluded from the profits arrived at by the Indian Branches and offered only an amount of Rs. 1,83,70,706 i.e. amount received by the Branch in India. While doing so, assessee left a note in the computation of income statement as under:
“A sum of Rs. 2,43,56,074 were received by assessee bank from SK Telecom as the guarantor in respect of the loan granted by the Bank to DSS Mobile Communications Ltd has been subjected to tax in terms of the Korean law related to income tax. Assessee submitted that the tax so deducted has not accrued to it in India and hence it is not includible in its total income for the purpose of taxation”.
5. AO however, has not accepted assessee’s contentions and brought to tax the amount by stating as under:
“4. Amount received from SK Telecom:
In the notes attached to the computation of income filed along with the return of income, assessee has stated that “A sum of Rs. 2,43,56,074 were received by assessee bank from SK Telecom as the guarantor in respect of the loan granted by the Bank to DSS Mobile Communications Ltd has been subject to tax in terms of the Korean law related to Income Tax. Assessee submitted that the tax so deducted has not accrued to him in India and hence it is not includible in its total income for the purpose of taxation”
It is seen from the computation of total income that the assessee has offered to tax only Rs. 1,83,7,0,7061/- instead of Rs. 2,43,56,074/-. In this regard, the assessee was asked vide order sheet noting dated 22/01/2004 to explain as to why the entire amount received from S.K. Telecom should not be taxed. The assessee has not submitted any explanation in this regard nor has submitted any documentary evidence of tax being deducted by Korean law related to Income Tax. The assessee has simply stated in notes to the computation of income that the ‘tax’ deducted as per the Korean law did not accrue to it in India and hence not taxable in India. This contention of the assessee is not acceptable for the following reasons:-
(a) As per section 9(1)(i) of the Act-
“The following incomes shall be deemed to accrue or arise in India:-
(i) All income accruing or arising whether directly or indirectly) through or from any business connection in India) or through or from any property in India) or through or From any asset or source of income in India) or through the transfer of a capital asset situate in India”
In the case of assessee it has granted certain loan to DSS Mobile Communication Ltd and SK Telecom was the guarantor for this transaction. The funds which are advanced by assessee to DSS Mobile Communication Ltd are part of the funds raised through various ‘sources’ by the bank in India. Therefore, any income, received by the assessee bank from any person in respect of such advancement of loan, is takes the colour of income accruing or arising from business connection in India and gets squarely covered by section 9(1)(i) of the Act. Further, it is not an expenditure at all, whatever tax has been deducted in Korea, the assessee would be entitled for credit of the same in its home country. It only means an indirect receipt of income. In view of this, the ‘entire amount of Rs. 2,43,56,674 is added to the total income of the assessee instead of Rs. 1,83,70,706 as done by the assessee in its computation of total income”.
6. ITAT in its order in ITA No.3855/Mum/2005 for assessment year 2001-02 dated 18.05.2012 has confirmed the addition by stating as under:
“45. We have carefully considered the submissions of representatives of parties, orders of authorities below and decisions cited before us. We agree with the learned Authorized Representative that Hon’ble Bombay High Court in its earlier decision in the case of Ambala Kilachand (supra) held that tax deducted at source outside India on dividend is not includible in the total income of assessee and only net dividend is assessable. However, the said decision is dated 12.4.1994. Hon’ble Bombay High Court in its subsequent decision dated 24.2.1999 in the case of Madhabrao J Scindia (supra) considered the issue as to whether the Tribunal was right in holding that gross dividend declared by the companies in Ceylon was chargeable to tax or the net amount after deducting the tax at source. Hon’ble High Court in the above decision has decided the issue in favour of Revenue and against assessee. We agree with the learned DR that even if the said order has been passed by consent of parties, it does not affect merit of the case. Considering the above facts and the decision of Hon’ble Bombay High Court in the case of Madhavrao J. Scindia (supra) which is subsequent to its earlier decision in the case of Ambala Kilachand (supra) we uphold the order of learned CIT (A) and reject Ground No.2 of appeal taken by assessee”.
7. When the penalty was levied, the CIT (A) invoking Explanation 1 to section 271(1)(c) deleted the penalty. Learned DR referring to the facts as stated by AO in the assessment order and the order of the ITAT which confirmed the addition so made, justified levy of penalty. He referred to the decision of the Hon’ble Bombay High Court in the case of Meherbai N. Sethna v. CIT  209 ITR 453 rendered on 7th September, 1993 wherein the Hon’ble Bombay High Court upheld that despite restrictions in remittance of money, the whole of the dividend and the interests which accrued to assessee during the relevant previous year in Ceylon was liable to be assessed in his hands and further in the case of Madhavrao J. Scindia v. CIT  243 ITR 683 (Bom.), the Hon’ble Bombay High Court vide order dated 24.02.1999 upheld the contentions that gross dividend should be brought to tax as against the claim of net amount after deduction at source. Referring to the above judgments it was submitted that by the time assessee filed the income, the jurisdictional High Court has already adjudicated the issue that the gross amount only has to be brought to tax and not the net amount as claimed by assessee. It was his submission that assessee inspite of jurisdictional High Court judgment has not offered the amount even though the same was accounted in assessee’s own books of account and therefore, there is no bonafide reason for making the claim and the CIT (A) erred in deleting the penalty on the above amount.
8. On the contrary, the learned Counsel submitted that assessee was of the view that since the amount was deducted and paid to Korean Government what is accrued to assessee in India is only the net amount received and relied on the order of the Hon’ble Bombay High Court in the case of CIT v. Ambala Kilachand  210 ITR 844 dated 12.4.1994. He also relied on the decision of Hon’ble Madhya Pradesh High Court decision on the case of CIT v. Yawar Rashid  218 ITR 699 wherein it was held that only net amount was taxable. It was his submission that in the other two decisions which are relied upon by the learned DR, this decision was not cited and assessee has a bonafide belief that the amount is not taxable and accordingly it has excluded the same from the computation. The learned Counsel relied on the decision of the Hon’ble Supreme Court in the case of CIT v. Reliance Petro Products (P.) Ltd  322 ITR 158 and also the decision of the Mumbai ‘A’ Bench in the case of Asstt. CIT v. VIP Industries Ltd.  30 SOT 254 with reference to the non levy of penalty when a claim was made and rejected by AO.
9. After considering the rival submissions and examining the record, we are of the view that there is no bonafide reason for excluding the above amount from the computation of income by assessee. First of all, on facts there is no dispute that the amount of Rs. 2,43,56,074 was receivable from M/s SK Telecom, Korea in respect of the loan granted by the Bank to DSS Mobile Communication Ltd in India. Assessee has in fact accounted for the total interest as income in the Profit & Loss A/c. The issue is with reference to the tax deducted by M/s SK Telecom, Korea as per the law of Korea to an extent of Rs. 59,85,368. It is to be kept in mind that assessee is not a resident in India. Assessee a resident of Japan has a Permanent Establishment (PE) in India and its taxation is governed by Indo Japan DTAA. Therefore, the decision given by the jurisdictional High Court in the case of resident Indian do not support assessee’s contention that the tax deducted in Korea by SK Telecom cannot be subject to tax in India. As seen from the computation statement, assessee has not even claimed the tax credit for the amount deducted in Korea as the same has to be given credit in the hands of the principal company in Japan. Therefore, as far as accrual of the income of assessee is concerned, the entire amount of Rs. 2,43,56,074 has accrued to the principal company through its branch in India which was the taxable entity by virtue of PE in India. As rightly considered by AO in his order (extracted above) the amount deducted by the SK Telecom in Korea is not an expenditure at all. Whatever tax has been deducted in Korea on behalf of the non resident assessee has to be claimed in its own country i.e. Japan. Therefore, as far as assessee bank branches in India are concerned the entire amount of Rs. 2,43,56,074 has accrued to India, which was ultimately affirmed by the ITAT.
10. Now whether assessee’s contention that the tax deducted in Korea has not accrued to assessee is bonafide. In support it claims support from the decision of the Hon’ble Bombay High Court in the Ambala Kilachand (supra). On the facts in the said case, the Hon’ble Bombay High Court held as under:
“In respect of income which is received or which accrues in India, section 5 provides for inclusion of income which is deemed to be received or deemed to have accrued to the assessee in India. But in respect of income arising outside India, what is includible in the total income under section 5(1)(c) is only the income which actually accrues or arises to the assessee outside India during the relevant year. Further, by virtue of the provisions of section 194, read with section 198, in respect of any dividend income received in India, not merely the dividend amount actually received by the assessee but also the income-tax deducted thereon under section 194 is considered as income deemed to be received by the assessee, thus, falling under section 5(1)(a). Accordingly, the gross amount of dividend would be includible in the total income of the assessee. These sections, however, do not have any application to a company in the United Kingdom which declares a distribution of dividend or pays tax thereon in the United Kingdom. The basic scheme under the laws of the United Kingdom, as held by the Calcutta High Court, appears to be that it is the company which is liable to pay corporation tax on the distributions declared by it. It can recoup this tax from the dividend distributed by it to its shareholders as provided in the Finance Act, 1972. The shareholders resident in the United Kingdom who receive the dividend as reduced by corporation tax are entitled to tax credit for the amount of tax so deducted from their dividends. In respect of persons and companies resident in the United Kingdom, Schedule F provides for grossing up of that dividend income by the tax so deducted. These provisions, however, do not have any application to persons who are not resident in the United Kingdom. The dividends are received by them as diminished by the deduction of the corporation tax paid on it. This basic scheme has not changed even after the Finance Act, 1972. What, therefore, accrues to an assessee in respect of shares held by him in the United Kingdom is the dividend as actually distributed to him. The amount initially available for distribution by the U.K. company cannot be considered as income accruing to the assessee, because the assessee does not have any right to receive the amount so initially declared. He does not have any right to claim any credit for the tax which is deducted on that amount. Therefore, under no circumstances can a shareholder claim that the gross amount available for distribution has accrued to him. The company in the United Kingdom is liable to pay certain tax on that amount before the money goes into the hands of its shareholders. A shareholder outside the United Kingdom cannot claim any credit for the tax paid by the company. Therefore, the only entitlement of a shareholder outside the United Kingdom is to receive dividend as reduced by the deduction of the corporation tax.
Hence, the tax deducted by the company in the United Kingdom and paid into the treasury in the United Kingdom after deducting it from the dividend paid to the assessee (resident in India) in the United Kingdom was not includible in the chargeable income of assessee”. (Emphasis supplied)
11. As can be seen from the above said decision was rendered in the hands of the Indian resident interpreting the income arising outside India under section 5(1)(c) r.w. provisions 194 and 198 of IT ACT. Since assessee being a non resident, the said decision does not come to the help of assessee as assessee cannot claim any benefit under the provisions of section 194 and 198 for tax credit. One of the issue, which the Hon’ble Bombay High Court also considered is with reference to the benefit of tax credit provided under schedule F of UK for grossing up of the dividend income by the tax so deducted. Hon’ble Bombay High Court also noticed that these provisions do not have any application to persons who are not resident in the UK. Therefore, as seen from the above judgment the provisions of UK and the provisions of the Indian Income Tax Act applicable to the residents in India were interpreted to come to a conclusion that only the net dividend is assessable on the facts of the case.
12. The learned Counsel also relied on the Hon’ble Madhya Pradesh High Court in the case of Yawar Rashid (supra). In the above said case it was held as under:
“According to section 5 the total income of the assessee of the previous year who is a resident in India, includes all income from whatever source, i.e. which is received or deemed to be received in India in such year by or on behalf of such person; or accrues or arises or is deemed to accrue or arise to him in India during such year or accrues or arises to him outside India during such year. There are three categories which have been contemplated – one is that a person who has received the income or is deemed to have received the income in India ; second that income which accrues or arises or is deemed to accrue or arise to him in India and third which accrues or arises to him outside India. In the first category the person who has already received the income that he is having the actual receipt of the income and in the second category any income which accrues or arises that means income in the ordinary course under any law, accrues or arises to him or it could be deemed to have accrued to him or it could be deemed to have arisen to him, i.e., whatever income under any law that it has not been received by him in hand ; but it accrues or arises to him on account of loan from any source. Therefore, in category (b), it is fictionally deemed that even if the income which has not been received in hand but it arises or accrues to him from any source that will be treated to be the total income. But as against this, in category (c), it only talks about the income, i.e., which accrues or arises to him from outside India during that year. Therefore, a distinction has to be made between three clauses, i.e. clause (a) means the actual income received, clause (b) talks about the income which accrues or arises to him though it has not been received in hand, and clause (c) means that it accrues or arises to him from outside India that shows that income which has been received by the assessee from outside India, shall only be entitled to be taken as total income. This distinction has to be kept in mind that what income from abroad should be accounted towards the income of the assessee residing in India. Clause (c) as against clauses (a) and (b) stands on a different footing, i.e., clause (c) is in contradiction of clauses (a) and (b). In clause (a) money received or deemed to have been received in India, or clause (b) accrues or arises to him under any law in India. But as against clause (c) which was in the present tense means which accrues or arises to him outside India that means that only the income actually accrues or arises to him, that is the only total income. Therefore, in both the clauses, the word used “is received or is deemed to be received or accrues or arises or is deemed to accrue or arise in India”, i.e., in both clauses (a) and (b), no distinction has been made that what is due to him shall be counted. As against in clause (c ), it makes clear that what is actual income accrues or arises to him outside India shall be counted, i.e., the gross income in clause (c) is not to be counted, but actual income which is received at the hands of the assessee, is to be counted. Similarly, section 198 says how tax deducted should be included in the gross total income under the provisions of the Income-tax Act.
There is no such inclusion under section 198 of the income-tax deducted at source abroad. That gives an indication that the Legislature deliberately did not want to include that deduction as a part of the assessee’s income for the purpose of computing his gross income or it is a case of a bona fide omissions. But nonetheless, the fact remains that there is no provision which mandates that if any income has been deducted at source abroad then that income should also be computed for the purpose arriving at the gross income of the assessee for tax liability.
Section 5(1)(a) and (b) read with section 198 make it a one code and that leaves out section 5(1)(c), that means that such income which has been deducted at source abroad that will not be counted for the purpose of computing the total income of the assessee for tax liability in India. Therefore, these two provisions make it a harmonious reading and leaves out section 91 which is not applicable.
It is only when the income which has already suffered a tax, is being sought to be doubly taxed in India, then the question will arise that how the assessee shall be taxed and on what rate. But, if the assessee has only received the actual income and not the income which is deemed to accrue or is deemed to arise to him in that case, section 91 will not be applicable.
In view of the above, the Tribunal was right in law in holding that tax deducted at source outside India from foreign dividends and interest income was not part of total income and thus, not assessable in the hands of assessee”.
13. As can be seen from the above, this judgment is also rendered in the context of resident in India whose income includes all incomes from whatever source r.w. provisions of section 91 with reference to getting tax credit where he has paid tax in any country with which there is no agreement under section 90 for the relief or avoidance of double taxation, income tax by deduction, or otherwise under the law in force in that country. Therefore, on the given facts of the case particularly with reference to the scope of total income, provisions of section 198, this judgment was rendered. It is not explained how the provisions laid down for a resident in India were applicable to the foreign company which cannot claim any tax credit payable in a third country in its assessment in India. In fact the taxes paid in India can only be claimed as a credit while the incomes are being offered in Japan. Similarly assessee may be claiming the credit of taxes paid in Korea as far as it is global income in Japan is concerned. Therefore, in our view reliance on the above judgments given in the context of specific provisions applicable to resident Indian does not help assessee’s case.
14. Even if one were to consider that assessee had wrongly relied on the above provisions, latest judgment in the case of Madhavarao Scindia (supra), relying on the principles laid down by the jurisdictional High Court in the case of Meherbai N Sethna (supra) does establish that the gross amount is taxable in India. These judgments were also rendered prior to filing of assessee’s return of income. Therefore, we are of the opinion that the ‘bona fide belief’ so set by assessee does not hold in the light of the clear judgments of the jurisdictional High Court given in the context of Indian residents again. Therefore, assessee’s non-offering of income in our view attracts penalty under section 271(1)(c). In our view learned CIT(A) did not separately examine the issue of “bona fide belief” on this addition but considered the same along with other additions which stand deleted.
15. Assessee relied on the judgment of the Hon’ble Supreme Court in the case of Reliance Petro products (P.) Ltd. (supra) for the proposition that the claim made does not lead to penalty under section 271(1)(c). However, this is not a claim made as under the Income Tax Act at all. There is no claim for credit of the tax paid in Korea. As already discussed above, assessee has accounted for the entire income in the books of account as accrued. No explanation was given why the amount was not included when assessee was claiming credit of tax so deducted while filing the return of income. Even though assessee has left a note that so much of the amount being the tax deducted in Korea does not accrue to its in India, the same cannot be accepted as assessee accounted entire amount as income in its books of account prepared for the purpose of being assessed in India having its PE. Since the amount excluded is not an expenditure claim but only a tax paid on behalf of the principal company in Korea ,as far as provisions of DTAA is concerned r.w. provisions of the Indian Income Tax Act governing the accrual of income, entire amount of Rs. 2,43,56,074 is taxable in the hands of assessee in India. Therefore, since this claim is not bona fide, nor there is any justification for excluding the same, we are not persuaded by the contention of assessee’s Counsel that the principles laid down by the Hon’ble Supreme Court in the case of Reliance Petro Products (P.) Ltd. (supra) will apply to assessee’s case. Likewise the decision of the ITAT in the case of VIP Industries (supra) was also not applicable wherein claim of bad debts disallowed was considered for levy penalty was considered. Making a legal claim under the provisions of IT Act is different from not offering income without any valid/ bona fide reason.
16. In view of this, we are not in agreement with the CIT(A)’s observations that the second limb of Explanation 1 to section 271(1)(c) will apply. Since the exclusion of the amount is not bona fide and there is no justification for excluding the amount, we are of the opinion that penalty under section 271(1)(c) is warranted on the facts of the case. Accordingly, we reverse the order of the CIT (A) to that extent and direct AO to calculate the penalty applicable on the above amount at 100% of tax sought to be evaded. With these directions, the grounds are considered partly allowed.
17. In the result, appeal filed by the Revenue is partly allowed.