ADIT Vs Fidelity Management & Research Co. (ITAT Mumbai)
Conclusion: Penalty under section 271(1)(c) was not leviable as AO had not demonstrated any falsehood in the particulars provided by assessee. Mere making a claim that was not legally sustainable did not constitute furnishing inaccurate particulars of income by assessee.
Held: Assessee was registered as trusts and tax residents in foreign countries, had initially filed their income tax returns in India under the category of “Capital Gains” based on the income earned from the sale of securities. These assessees, sub-accounts of Funds registered with the Securities Exchange Board of India ( SEBI) as Foreign Institutional Investors (FIIs), also reported dividend income, which they claimed was exempt from tax. However, assessee revised their returns, declaring no taxable income and requesting a refund, arguing that their income should be categorized as “business income,” not subject to tax in India under Article 7, read with Article 5 of the DTAA, due to the absence of a Permanent Establishment ( PE ) in India. AO reviewed this stance within the context of the Indian government’s scheme allowing FIIs to operate in Indian securities and the specific provisions under Indian Income-Tax law regarding FII taxability. AO concluded that FIIs were permitted to invest as investors in the capital market, with gains from securities being taxed as “capital gains” under Section 115AD as outlined in the SEBI Regulations. AO noted that the funds’ primary objective was capital growth, with income derived from dividends and capital gains, which were either distributed or accumulated. AO rejected the assessees’ contention that their income should be classified as “business income” and thus not taxable in India. Consequently, AO completed the assessment under Section 143(3), taxing the income under “capital gains” and initiated penalty proceedings under Section 271(1)(c) for making false claims in the revised returns. CIT (A) reviewed the case and noted that assessees had fully disclosed the reasons for revising their returns and that there was no evidence of inaccurate particulars. On appeal by AO. It was held that the revised returns were based on a bona fide belief, supported by the AAR ruling that the income might qualify as business profits, which would be exempt from tax in India due to the absence of a PE. Tribunal found that AO had not demonstrated any falsehood in the particulars provided by assessees. In the case of CIT vs. Reliance Petro Products (P) Ltd., it was held that Section 271(1)(c) of the Income Tax Act applies when there is concealment of income or furnishing of inaccurate particulars. The Supreme Court ruled that merely making an incorrect legal claim does not equate to furnishing inaccurate particulars. Applying this precedent, the tribunal held that the penalties imposed by the AO in the assessees’ cases were not sustainable.
