2016 (10) TMI 1056 - AT - Income Tax

Penalty u/s 271(1)(c) - transfer of intellectual properties - Held that - The explanation of the assessee cannot be rejected as improbable or wholly contrary to the law. The assessee s claim that it has transferred certain intellectual properties, such as expertise and know how, in respect of GIS business, which were self generated and therefore not liable to tax, cannot be rejected outright as improbable. It is only on fine points of arrangements that it has been held to be a right to use, rather than outright transfer, which has been given to the subsidiary. Under these circumstances, in our considered view, the claim of the assessee cannot be held to a wholly unacceptable claim. What is even more important is that the claim has been made in a very fair and transparent manner. Of course, even when assessee makes a claim in transparent manner but such a case is based on patently inadmissible legal position or distortion of facts, the penalty could nevertheless be leviable but that is not the case here. Thus it was not a fit case for imposition of penalty under section 271(1)(c) - Decided in favour of assessee.

Summary

Issues Involved:
1. Justification of penalty under section 271(1)(c) of the Income Tax Act, 1961.
2. Nature of the receipt of ?2.60 crores – whether it is a capital receipt or revenue receipt.

Issue-wise Detailed Analysis:

1. Justification of Penalty under Section 271(1)(c):

The primary issue in this appeal is whether the penalty of ?95,55,000 imposed on the assessee under section 271(1)(c) of the Income Tax Act, 1961, for the assessment year 2003-04, was justified. The penalty was imposed because the Assessing Officer (AO) concluded that the assessee had concealed particulars of income or furnished inaccurate particulars of such income. The AO observed that the assessee claimed the sum of ?2.60 crores received from its subsidiary on account of transfer of expertise and know-how in the GIS business as not liable to capital gains tax, treating it as a capital receipt. However, the AO held that the receipt was akin to the transfer of a trade name and brand name, and thus taxable. The CIT(A) confirmed this penalty, stating that the mere disclosure of related facts in the income tax return could not rescue the assessee from the penalty.

The Tribunal, however, noted that the assessee made a legal claim in a fair and transparent manner. The Tribunal emphasized that assessment proceedings and penalty proceedings are independent, and while findings in quantum proceedings may be relevant, they cannot be decisive in penalty proceedings. The Tribunal cited the Full Bench of the Patna High Court in CIT vs. Nathulal Agarwala & Sons, which stated that the explanation offered by the assessee must be an acceptable explanation, reasonably valid, and not wholly improbable.

The Tribunal further noted that the assessee's explanation could not be rejected as improbable or wholly contrary to law, especially since the jurisdictional High Court had admitted an appeal on the matter. The Tribunal also highlighted that the assessee's claim was made transparently in the computation of income, citing the Supreme Court decision in B.C. Srinivasan Setty.

The Tribunal referred to Kanbay Software India Ltd. vs. DCIT, where it was observed that making a legal claim, even if ultimately found legally unacceptable, cannot amount to furnishing inaccurate particulars of income. The Tribunal concluded that the impugned penalty deserved to be deleted as it was not a fit case for imposition of penalty under section 271(1)(c) of the Act.

2. Nature of the Receipt of ?2.60 Crores:

The second issue was whether the receipt of ?2.60 crores for the transfer of technology was a revenue receipt or a non-taxable capital receipt. The AO concluded that the receipt was taxable under section 55(2)(a) of the Income Tax Act, as it was akin to the transfer of a trade name and brand name associated with the business. The CIT(A) and the Tribunal upheld this view, and the matter is currently pending before the Hon'ble High Court, which has admitted the appeal on substantial questions of law regarding the nature of the receipt.

The Tribunal noted that the assessee's claim that it transferred certain intellectual properties, such as expertise and know-how, in respect of the GIS business, which were self-generated and not liable to tax, could not be rejected outright as improbable. The Tribunal acknowledged that the authorities below had not considered the agreement dated 8.8.2003, which was crucial to the assessee's claim. The Tribunal emphasized that the assessee's claim was made transparently and in good faith, citing relevant case law and making full disclosure in the return of income.

Conclusion:

The Tribunal allowed the appeal, directing the AO to delete the penalty of ?95,55,000, as the assessee's claim was made transparently and in good faith, and the penalty under section 271(1)(c) was not justified. The Tribunal's decision underscored the importance of independent consideration of penalty proceedings and the need for an acceptable explanation from the assessee, rather than merely relying on the outcome of quantum assessment proceedings.