2011 (7) TMI 538 - AT - Income Tax

Penalty u/s 27(1)(c) - Professional receipt - sum received from an international consultancy firm DTTI was not reflected by the assessee in its P/L a/c but directly credited to partners accounts. Assessee is in the profession of chartered accountancy - Held that - In this case, as a part of its profession, it entered into a partnership with DTTI, a non-resident professional undertaking, for the furtherance of its professional pursuit DTTI gave choice to assessee either to continue with it or discontinue with a compensation - Assessee thought, in its professional wisdom, chose to remain an independent player instead of an associate, so it preferred to disassociate from DTTI - If it had continued, the earning would have been professional receipt and the alternate receipt also takes same analogy and has no trapping of having any doubt about its being a purely professional receipt or the revenue receipt - The assessee is a firm of Chartered Accountants and it is not understandable that for such an issue about a clearly professional receipt, which is very basic in character, assessee had any doubt about its nature - If it is so, it is unable to be understand how the assessee can discharge its role as a professional consultant, auditing number of clients, giving them valuable advices on the accounting and taxation aspects - There is no whisper in the agreement between DTTI and the assessee which creates any doubt at all - unable to agree with the assessee that the impugned professional receipt created any debate about its nature as the receipt was patently a revenue receipt - It is clear that the assessee firm has attempted to evade tax on a purely professional receipt by propping up theory of doubt as a capital receipt - Besides, in the case of a partnership firm, receipt whether capital or revenue are to be credited to P/L A/c. The assessee in order to minimize disclosure, has taken a smart route of directly crediting the above receipt in the capital accounts of partners - The strategy saved the firm from taxation and the partners took plea that this was a capital receipt in the hands of the firm and not taxable in their hands, result - the Indian revenue looses due tax in the hands of the firm as well as partners - Decided against the assessee.

Summary

Issues Involved:
1. Whether the amount received by the assessee from Deloitte Touche Tohmatsu International (DTTI) is a capital receipt or a revenue receipt.
2. Whether the penalty imposed under Section 271(1)(c) of the Income-tax Act, 1961, for furnishing inaccurate particulars of income is justified.

Detailed Analysis:

1. Nature of Receipt: Capital or Revenue

The primary issue was whether the sum of Rs. 1,15,70,000 received by the assessee from DTTI was a capital receipt or a revenue receipt. The assessee, a firm of Chartered Accountants, credited the amount directly to the partners' accounts, claiming it was a capital receipt. The Assessing Officer (AO) held it was a revenue receipt, taxable in the hands of the firm, as it was received in the course of the profession. This view was confirmed by the ITAT, which stated: "The payment has origin in the profession carried on which itself is a definite source of income and hence chargeable to tax."

The ITAT detailed the professional relationship between the assessee and DTTI, noting that the compensation was for the probable loss of professional fees due to the cessation of the association with DTTI. The ITAT concluded that the receipt was "patently in the course of carrying on accountancy profession" and thus a revenue receipt.

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

The AO initiated penalty proceedings under Section 271(1)(c) for furnishing inaccurate particulars of income. The assessee argued that the receipt was treated as a capital receipt based on legal advice and that there was no willful concealment or gross neglect. The CIT(A) canceled the penalty, stating that the issue was a matter of difference in opinion and that the assessee had disclosed all facts.

However, the ITAT reversed this decision, emphasizing that the nature of the receipt was clear and that the assessee, being a professional firm, should not have had any doubt about its taxable nature. The ITAT noted that the assessee did not produce the legal opinions during the assessment proceedings and only introduced them during the penalty proceedings before the CIT(A). The ITAT held that the assessee's actions amounted to furnishing inaccurate particulars of income, thus justifying the penalty.

Conclusion:

The ITAT concluded that the amount received from DTTI was a revenue receipt, taxable in the hands of the firm. The ITAT also upheld the penalty imposed under Section 271(1)(c), stating that the assessee's explanation was not bona fide and that the firm had attempted to evade tax by treating the receipt as a capital receipt. The order of the CIT(A) canceling the penalty was reversed, and the AO's imposition of the penalty was restored. The appeal by the revenue was allowed.