2013 (2) TMI 552 - AT - Income Tax

Penalty u/s 271(1)(c) - whether the assessee has properly disclosed all material facts relating to the taxability of the compensation in its return of income filed for the relevant assessment years - held that - When the assessee has been so specific in respect of one item, which he has treated as capital receipt and also given the reason why it has treated the amount as capital receipt, the assessee could have also included the compensation so received in its computation of income and then could have claimed exemption from tax. It is also not known on what basis the assessee has claimed the compensation so received as exempt from tax because the Auditors have given a simple Note that the company is advised that such compensation being in the nature of capital receipt can be directly brought to the capital reserve, without giving any basis for such opinion. Assuming, yet denying, that this is the proper disclosure, then every assessee will credit income/ Receipts directly to its capital account and claim that it has properly disclosed the income. Whereas the requirement is that there should be a proper disclosure in the return of income. - As the assessee has failed to disclose the compensation received from DBA, it is a fit case for the levy of penalty for concealment of income and also for filing of inaccurate particulars of its income. Relying upon the decision of Supreme Court in CIT v. Reliance Petro Products Pvt. Ltd. 2010 (3) TMI 80 - SUPREME COURT held that, the return of income is the only document where the assessee can furnish his particulars of income, whereas in the instant appeal, the appellant company has not disclosed the receipt of compensation received from DBA in its return of income nor in the computation of income accompanied with the return of income. - Penalty confirmed.

Issues Involved:
1. Legality of the penalty levied under Section 271(1)(c) of the Income-tax Act.
2. Nature of the compensation received by the assessee - whether it is a capital receipt or a revenue receipt.
3. Adequacy of disclosure of material facts by the assessee in its return of income.
4. Applicability of judicial precedents cited by the assessee.

Detailed Analysis:

1. Legality of the penalty levied under Section 271(1)(c) of the Income-tax Act:
The primary grievance of the assessee was that the Commissioner of Income-tax (Appeals) [CIT(A)] erred in upholding the penalty levied by the Assessing Officer (AO) under Section 271(1)(c) of the Income-tax Act for the assessment years 2001-2002 and 2002-2003. The AO had imposed penalties of Rs. 1,46,01,021 and Rs. 50,28,863 respectively for these years, citing concealment of income and filing of inaccurate particulars. The assessee argued that it had fully disclosed all material facts and was under a bona fide belief that the compensation received was a capital receipt and thus non-taxable. However, the Tribunal found that the assessee failed to disclose the compensation in its return of income and did not substantiate its claim with adequate basis, leading to the conclusion that the penalty was justified.

2. Nature of the compensation received by the assessee - whether it is a capital receipt or a revenue receipt:
The core issue revolved around the nature of the compensation received by the assessee from Deutsche Bank AG (DBA) for shifting its major clients. The assessee declared the compensation as a capital receipt, arguing that the closure of custodial services impaired its profit-earning apparatus. The AO and CIT(A) held that the compensation was a revenue receipt, taxable under Section 28(ii)(c) of the Act, as it was for the loss of income from clients and did not impair the profit-earning structure. The Tribunal upheld this view, noting that the compensation was for a service arrangement and not for the termination of an agency, thus making it a revenue receipt.

3. Adequacy of disclosure of material facts by the assessee in its return of income:
The Tribunal scrutinized whether the assessee had properly disclosed all material facts related to the compensation in its return of income. It was found that the assessee did not include the compensation in its computation of income and only mentioned it in the notes to accounts and directors' report. The Tribunal emphasized that proper disclosure should be made in the return of income itself. The failure to do so led to the conclusion that the assessee had concealed income and filed inaccurate particulars, justifying the penalty.

4. Applicability of judicial precedents cited by the assessee:
The assessee relied on various judicial decisions to argue against the penalty. However, the Tribunal distinguished these cases based on their facts. For instance, in the case of ITO v. Chhail Behari, the penalty was set aside due to a discrepancy between the initiation and levy of penalty, which was not applicable here. Similarly, in the case of Vanaik Investors Ltd. v. ITO, the claim was based on a Supreme Court decision, unlike the present case where no such basis was provided. The Tribunal also referred to the Supreme Court's decision in CIT v. Reliance Petro Products Pvt. Ltd., emphasizing that the return of income is the primary document for disclosing particulars, which the assessee failed to do.

Conclusion:
The Tribunal concluded that the assessee had not properly disclosed the compensation received from DBA in its return of income and failed to substantiate its claim of exemption. The compensation was deemed a revenue receipt, and the penalty under Section 271(1)(c) for concealment of income and filing of inaccurate particulars was upheld. The appeals filed by the assessee for both assessment years were dismissed.

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