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2024 (6) TMI 155 - HC - Income TaxLevy of penalty u/s 270A - Immunity from Penalty - Penalty for under-reporting and misreporting of income - receipts of the petitioner being taxable in India as royalty - HELD THAT - As is evident from a reading of Section 270A (1), a person would be liable to be considered to have under-reported its income if the contingencies spoken of in clauses (a) to (g) of Section 270A (2) were attracted. In terms of Section 270A (3), the under-reported income is thereafter liable to be computed in accordance with the stipulations prescribed therein. However, the subject of misreporting of income is dealt with separately in accordance with the provisions comprised in sub-sections (9) and (10) of Section 270A. It is thus evident that both under-reporting as well as misreporting are viewed as separate and distinct misdemeanors. As we read the orders of assessment which were passed, the same carry no findings which may be viewed as indicative of the contingencies spelt out in clauses (a) to (f) of Section 270A (9) being attracted. In our considered opinion, in the absence of the AO having specified the transgression of the petitioner and which could be shown to fall within the ambit of sub-section (9) of Section 270A, proceedings for imposition of penalty could not have been mechanically commenced. Evaluation of the Assessment Orders and SCNs - We note that the SCNs which came to be issued for commencement of action under Section 270A were themselves vague and unclear. This since they failed to specify whether the petitioner was being charged with under-reporting or misreporting of income. The aforesaid aspect assumes added significance bearing in mind the indisputable position that a prayer for immunity could have been denied in terms of Section 270AA (3) only if it were a case of misreporting. The SCNs failed to indicate the specific charge which was sought to be laid against the petitioner. This, since they sought to invoke both sub-sections (2) as well as sub-section (9) of Section 270A. There was thus an abject failure on the part of the respondents to indicate the branch of Section 270A which was sought to be invoked. The SCNs would thus clearly fall foul of the principles which had been enunciated in Minu Bakshi 2022 (7) TMI 1307 - DELHI HIGH COURT and Schneider Electric 2022 (3) TMI 1295 - DELHI HIGH COURT Immunity from Penalty u/s 270AA - Since an application for grant of immunity cannot possibly be pursued unless the assessee complies with clauses (a) and (b) of Section 270AA (1), the observation of the respondent that mere payment of demand would not lead to a prayer for immunity being pursued is wholly unsustainable. In the facts of the present case, we find that a finding of misrepresentation, failure to record investments, expenditure not substantiated by evidence, recording of false entry in the books of account and the other circumstances alluded to in sub-section (9) of Section 270A has neither been returned nor recorded in the assessment order. The SCNs in terms of which the action under Section 270A came to be initiated also failed to specify whether the petitioner was being tried on an allegation of under-reporting or misreporting. Since there was a clear and apparent failure on the part of the respondents to base the impugned proceedings on a contravention relatable to Section 270A (9), the application for immunity could not have been rejected. As was noticed hereinabove, neither the AO nor the impugned SCNs laid an allegation which could be said to be reflective of the petitioner having been found to have violated Section 270A (9). In fact, the notices themselves sought to take a wholly ambivalent stance while alleging that the petitioner had indulged in under-reporting/misreporting . We thus have no hesitation in holding that the impugned SCNs are rendered unsustainable on this short ground alone. Undisputedly, the petitioner had duly complied with the statutory pre-conditions set out in Section 270AA (1). It was thus incumbent upon the respondent to have come to the firm conclusion that the case of the petitioner fell in the category of misreporting since that alone would have warranted a rejection of its application for immunity. On an overall conspectus of the aforesaid, we come to the firm conclusion that the impugned orders would not sustain. Accordingly, we allow the present writ petitions and quash the impugned orders in terms of which the application under Section 270AA of the Act came to be rejected.
Issues Involved:
1. Rejection of applications for immunity from penalty u/s 270AA (4) of the Income Tax Act, 1961. 2. Challenge to notices for levy of penalty u/s 270A of the Act. 3. Determination of income as royalty under Section 9(1)(vi) and Article 12 of the DTAA. 4. Compliance with conditions for immunity under Section 270AA. Summary: 1. Rejection of Applications for Immunity from Penalty u/s 270AA (4): The petitioner challenged the orders dated 28 December 2021 and 24 January 2022, rejecting their applications for immunity from penalty u/s 270AA (4) of the Income Tax Act, 1961. The court noted that the petitioner had complied with the conditions precedent prescribed in clauses (a) and (b) of Section 270AA of the Act. The court found the rejection of immunity applications unsustainable, emphasizing that the Assessing Officer (AO) must ascertain whether the provisions of Section 270A were attracted either for under-reporting or misreporting of income. The court held that the impugned orders failed to establish a case of misreporting as required under Section 270A (9). 2. Challenge to Notices for Levy of Penalty u/s 270A: The petitioner also challenged the notices for levy of penalty u/s 270A of the Act. The court observed that the show cause notices (SCNs) issued were vague and failed to specify whether the petitioner was charged with under-reporting or misreporting of income. The SCNs referred to both under-reporting/misreporting, which was deemed insufficient. The court emphasized the need for clarity and comprehensiveness in SCNs, as propounded in Minu Bakshi and Schneider Electric. Consequently, the court quashed the SCNs dated 16 November 2021. 3. Determination of Income as Royalty under Section 9(1)(vi) and Article 12 of the DTAA: The AO had determined the petitioner's receipts as taxable royalty under Section 9(1)(vi) and Article 12 of the DTAA. The court noted that the assessment orders failed to base the direction for initiation of proceedings under Section 270A on any considered finding of the petitioner's conduct falling within the ambit of Section 270A (9). The court found that the petitioner's assertion that the income from the sale and distribution of software could not be treated as royalty was based on existing legal interpretations and jurisdictional High Court judgments, which the AO disregarded without valid reasons. 4. Compliance with Conditions for Immunity under Section 270AA: The court highlighted that the petitioner had complied with the statutory pre-conditions set out in Section 270AA (1), including the payment of tax and interest and not filing an appeal against the assessment order. The court held that the AO failed to conclusively establish that the petitioner's case fell under the category of misreporting, which would have warranted a rejection of the immunity application. Conclusion: The court allowed the writ petitions, quashing the impugned orders dated 28 December 2021 and 24 January 2022, and the SCNs dated 16 November 2021. The court directed that the petitioner be entitled to consequential reliefs, emphasizing that the SCNs failed to meet the required standards of specificity and clarity, rendering them unsustainable.
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