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2011 (4) TMI 684 - AT - Income TaxDTAA - Penalty - Business income or capital gain - Revised return - the assessees were fully aware of the fact that income in question was assessable under the head capital gain yet the assessees chose to make a claim that the said income was business income and further wrongfully claimed non-taxability of the income by taking shelter under DTAA and making a claim that it had no PE in India - mere making of a claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee such a claim made in the return cannot amount to concealment of income or furnishing of inaccurate particulars of such income which may attract levy of penalty under section 271(1)(c) of the Act - The fact that section 115AD is a code by itself applicable to FIIs cannot also be the basis to hold that the assessee furnished inaccurate particulars of income - Accordingly decided in the favour of the assessee
Issues Involved:
1. Imposition of penalty under section 271(1)(c) of the Income-tax Act, 1961. 2. Classification of income from the sale of securities as capital gains or business income. 3. Applicability of the Double Taxation Avoidance Agreement (DTAA) between India and the USA. 4. Validity of the revised returns filed by the assessees. 5. Bona fide belief and reliance on judicial rulings. Issue-wise Detailed Analysis: 1. Imposition of Penalty under Section 271(1)(c): The revenue appealed against the orders of the CIT(A) canceling the penalty imposed by the AO under section 271(1)(c) of the Income-tax Act, 1961. The AO had imposed the penalty on the grounds that the revised returns filed by the assessees obliterated the original returns and were not correct or complete, thus constituting the furnishing of inaccurate particulars of income. The AO also noted that the assessees did not file the necessary audit reports and had changed their stand without valid reasons. However, the CIT(A) canceled the penalty, noting that the revised returns were filed based on judicial rulings and that there was no concealment or furnishing of inaccurate particulars. 2. Classification of Income from Sale of Securities: The assessees, all non-resident FIIs, initially declared the income from the sale of securities as capital gains. They later filed revised returns claiming the income as business income based on the ruling of the AAR in the case of Fidelity Advisor Series VIII, which held that such income could be considered business income. The AO, however, assessed the income as capital gains, citing that the policy of the Government and the scheme of taxation under section 115AD of the Act were to treat such income as capital gains. The AO also noted that the assessees did not meet the criteria for treating the income as business income. 3. Applicability of DTAA between India and USA: The assessees argued that the income should be considered business income and, under the Indo-US DTAA, would not be taxable in India as they did not have a Permanent Establishment (PE) in India. The AO rejected this claim, stating that the assessees had PEs in India. The CIT(A), however, noted that the revised returns were filed based on a bona fide belief and judicial rulings, and thus there was no concealment or furnishing of inaccurate particulars. 4. Validity of Revised Returns: The revised returns were filed by the assessees on 25th March 2005, claiming the income as business income based on the ruling of the AAR in Fidelity Advisor Series VIII. The AO imposed penalties, arguing that the revised returns were not correct or complete. The CIT(A) canceled the penalties, noting that the revised returns were filed based on judicial rulings and that there was no concealment or furnishing of inaccurate particulars. 5. Bona Fide Belief and Reliance on Judicial Rulings: The CIT(A) and the Tribunal noted that the assessees had filed the revised returns based on a bona fide belief and reliance on judicial rulings. The Tribunal observed that the revised returns were filed in view of the decision of the AAR in Fidelity Advisor Series VIII, and later, the AAR reversed its decision in Fidelity North Star Fund. The Tribunal held that the claim made by the assessees in the revised returns could not be said to be not bona fide. The Tribunal also relied on the Supreme Court's decision in CIT v. Reliance Petroproducts (P.) Ltd., which held that making an incorrect claim does not amount to concealment of particulars. Conclusion: The Tribunal upheld the CIT(A)'s decision to cancel the penalties imposed by the AO, noting that the assessees had made full disclosure of all material facts and that the assessment was a result of a difference of opinion on a question of law. The Tribunal also noted that the revised returns were filed based on a bona fide belief and judicial rulings, and thus there was no concealment or furnishing of inaccurate particulars. Consequently, all appeals by the revenue were dismissed.
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