1994 (5) TMI 51 - AT - Income Tax

Summary

Issues:
1. Penalty imposed under section 271B of the IT Act on a non-resident company for not maintaining formal income and expenditure accounts.
2. Interpretation of section 44AB applicability to a foreign company receiving royalty income.
3. Consideration of Double Taxation Agreement provisions in determining tax liability.
4. Assessment of whether penalty under section 271B is justified based on the company's business activities and compliance with audit requirements.

Detailed Analysis:
1. The Revenue appealed against the cancellation of a penalty of Rs. 1,00,000 imposed on a non-resident company by the CIT(A) under section 271B of the IT Act. The company received royalty income but did not maintain formal income and expenditure accounts, leading to penalty proceedings initiated by the Assessing Officer.

2. The Assessing Officer contended that the company's receipt of royalty income constituted business activities, necessitating compliance with section 44AB for audit requirements. The company argued that as a foreign entity, it was not carrying on business in India and cited the Double Taxation Agreement provisions between India and Germany to support its position that royalty income was separate from business income.

3. The CIT(A) analyzed the relevant provisions of the IT Act, CBDT Circular, and the Double Taxation Agreement to conclude that section 44AB was not applicable to the company as its income from royalty and technical fees did not fall under the category of business income. The CIT(A) emphasized that the company did not maintain accounts in India, and all receipts were subject to tax, leading to the cancellation of the penalty under section 271B.

4. Upon further review, the tribunal upheld the CIT(A)'s decision, noting that the company lacked a permanent establishment in India and received income solely from royalty and technical fees. The tribunal agreed that section 44AB did not apply to the company's non-business income and acknowledged the company's reasonable belief in not being subject to audit requirements due to its historical receipt of similar income. Consequently, the tribunal dismissed the Revenue's appeal, affirming the cancellation of the penalty under section 271B.