Learning from recent case of Deloitte Consulting India Pvt. Ltd. - we must be very careful while making claims in returns and also while withdrawing claims by filing revised return.

[CA DEV KUMAR KOTHARI]

References:

Sections 10A, 92,92A, 92B,92C,92CA,  220 ,246, 246A and 271 of the Income-tax Act, 1961.

Deloitte Consulting India Pvt. Ltd. Mumbai versus The Assistant Commissioner of Income-Tax, Circle 2(2), Mumbai and others 2013 (2) TMI 241 - BOMBAY HIGH COURT

Relevant dates and important steps in proceedings:

On 1 November 2004, the Petitioner filed its return of income for Assessment Year 2004-05. determining a total income of Rs.56.60 lakhs after claiming  the payment of Rs.5.86 crores made to Deloitte as an allowable deduction.

During the course of the scrutiny, a reference was made by the Assessing Officer to the Transfer Pricing Officer (`TPO') to investigate into the reasonableness of the international transactions of the Petitioner with its associated enterprise.

On 29 March 2006, the Petitioner filed a revised return under section 139(5) without claiming the payment of Rs.5.86 crores made to Deloitte as a deduction and increased its total income for the year by the amount. However, the Petitioner increased the corresponding claim for a deduction under section 10A by the said amount.

The TPO passed an order on 10 August 2006 making an addition of Rs.5.86 crores under section 92CA(3), which was subsequently amended on 1 September 2006.

 The TPO following his findings for earlier assessment years (A.Y.2002-03 and 2003-04) came to the conclusion that no services which would benefit the Petitioner, had been rendered by Deloitte and that the Petitioner should not have made the claim for reimbursement.

 By an order dated 15 December 2006, the Assessing Officer passed an order under Section 143(3)(iii) determining a total income of Rs.6.41 crores after making an adjustment in terms of the findings of TPO, in the amount of Rs.5.86 crores to the the total income returned by the Petitioner.

The Petitioner filed an appeal, against assessment order, before the Commissioner of Income Tax (Appeals). The appeal was dismissed on 24 January 2011.

A notice was issued under section 271(1) (c) on 15 December 2006.

 An order  under section 271(1)(c), was passed on 30 March 2012 imposing a penalty of Rs.2.05 crores.

Assessee made an application  before the assessing officer under section 220(6) for stay of demand.

By an order dated 7 August 2012, stay  application was rejected and the assessee was directed to deposit 50% of the outstanding demand by 11 September 2012 and the balance by 10 October 2012.

The Petitioner moved the Additional Commissioner of Income Tax who  also  rejected the application on 10 December 2012 observing that the quantum addition on the basis of which the penalty was imposed, had been confirmed by the first appellate authority.

The Petitioner received a notice of the hearing of the appeal against the penalty on 5 December 2012 but the hearing was adjourned sine-die.

Upon an application made before the CIT(2), the request for stay of demand was rejected.

Quantum appeal dismissed by Tribunal:

The quantum appeal was in the meantime also dismissed by the Tribunal on 30 March 2012. Against the order of the Tribunal, the Petitioner has filed an appeal before the High  Court which is pending  for admission.

Writ Petition for stay of demand for penalty:

Assessee preferred a Writ Petition before the High Court. In course of the WP the following submissions have been made  on behalf of the Petitioner:

(i)                 The Petitioner has a prima facie case having regard to the fact that the order imposing a penalty under Section 271(1)(c) does not find that there was any concealment of income or failure to file accurate particulars of income.

(ii)                 As a matter of fact, in the present case, there was no concealment whatsoever since the claim of the Petitioner was exfacie disclosed, together with its basis, during the assessment proceedings;

(iii)               The mere fact that the addition which has been made, was confirmed in quantum proceedings, would not justify the imposition of a penalty unless the requirements of Section 271(1)(c) are fulfilled;

(iv)               Neither of the orders disposing of the application for stay of demand contains a prima facie evaluation of the merits of the case.

(v)                The assessing officer under Section 220(6) is duty bound while exercising his discretion to apply his mind prima facie before deciding whether to grant a stay of demand and if so subject to such conditions as may be prescribed.

(vi)              Similarly, the CIT (2) has also failed to even prima facie evaluate the case.

Revenue countered the above submission by urging as follows:

(i)                 the fact that the Petitioner had filed a revised return of income tax, withdrawing the claim of deduction which had been made earlier, would be indicative of the fact that the Petitioner had furnished incorrect particulars of income.

(ii)                Hence, no case for a grant of stay has been made out by assessee/ petitioner.

About nature of additions and penalty:

Court considered that together with the return of income as originally filed, the Petitioner annexed a copy of Form-3C** in which there was a disclosure of the amount of Rs.5.86 crores which was treated as a reimbursement in respect of marketing services alleged to have been availed of from Deloitte.

{per author it should be  Form 3CD and likely disclosure was about payments made to associated or related persons as required u/s 40A (2) (b) and can also be about TDS)

The transfer pricing analysis which was filed during the course of assessment proceedings similarly indicated the basis on which the deduction was claimed, in paragraph 2.2 of the statement.

When a revised return of income was filed, a disclosure was made to the effect that the return was revised with a view to add back the marketing expenses in the original return filed on 1 November 2004 with a view to avoid litigation in relation to the admissibility of the claim.

The assessee also revised deduction under section 10A accordingly (per author- this means that adjustment top accept disallowance was neutralised).

 That claim has been rejected by the assessing officer and in appeal as well as by the Tribunal.

Observations and order of the High Courts about stay of demand:

The High Court considered  and took note of the provisions of Section 220(6) under which the assessing officer is vested with the discretion, where an assessee has presented an appeal under section 246 or Section 246A.

 The AO can grant stay subject to such conditions as he may think fit to impose in the circumstances of the case to treat the assessee as not being default in respect of the amount in dispute in the appeal.

That the  discretion conferred  is wielded in the exercise of a quasi-judicial function.

Assessing officers, as the Court repeatedly finds in several cases, reject stay applications in a cavalier fashion by making a bald statement to the effect that 'looking to the facts and circumstances of the case', no case for stay has been made out.

Court considered and held that this, does not amount to a valid or proper exercise of discretion.

What is expected of an assessing officer is at least a brief statement in the order of the reasons on the basis of which he formed his decision under section 220(6). Otherwise recourse to Section 220(6) is a meaningless formality.

Assessing Officers when they dispose of applications under Section 220(6) are required to act fairly. Fairness as a concept does not undergo a change in the hands of an assessing officer. Fairness requires objectivity: Objectivity that is guided by the need to protect the revenue while at the same time being fair to the assessee whose case has to be tested in a statutory appeal. The reasons are subject to judicial review and must be capable of withstanding scrutiny.

Both the assessing officer as well as the CIT have failed to exercise their jurisdiction in accordance with law. The CIT adverted to the fact that the quantum appeal had been rejected by the CIT (A) and the ITAT. That in itself would not amount to a valid justification for imposition of a penalty.

Before a penalty is imposed, the requirements of Section 271 must be established. Accordingly, it would have been open to the Court to set aside the impugned order in its entirety and to remand the proceedings back to the assessing officer for fresh consideration.

Arguments before the Court have been addressed on the prima facie merits of the case as well, Therefore, Court did not follow the course  of setting aside the order since that would lead to another round of proceedings before the Court again.

The Court held that “having regard to the circumstances which have been noted hereinabove, we are of the view that an appropriate order for partial deposit of the penalty would be necessitated. An order for the deposit of the entire penalty is clearly not justified having regard, prima facie to the nature of the issues and the submissions which have been urged.”

Court  refrained  from making anything more than a prima facie observation.

 The Court disposed of the petition by directing that “ the Petitioner shall deposit an amount of Rs. Fifty lakhs in two installments each of Rs. Twenty five lakhs to be paid on or before 28 February 2013 and 31 March 2013. Conditional on the aforesaid payments, there shall be a stay of recovery of the demand in the amount of Rs.2.05 crores towards the penalty which has been imposed under section 271(1)(c) pending the disposal of the appeal before the CIT (A)”.

The Court further held that “in the event an order adverse to the Petitioner is passed by the CIT (A), no coercive steps for the recovery of the balance demand shall be pursued for a period of two weeks thereafter”.

Learning from the case:

The petitioner in this case is a world-wide renowned consulting concern and is also related or associate of one of big firms of Chartered Accountants world-wide. Therefore, as per information available in the judgment, the study of this case  reveals something  really disturbing and disappointing.

The study reveals that such a renowned consulting concern, make a substantial claim of expenditure for marketing and then surrenders such claim when an enquiry is started by tax authorities. This indicates casualness or lack of seriousness while making a claim. When a claim is made, there must be reason and rationale for making such claim. If the claim is made after some thought, then such claim should not be withdrawn by filing revised return. Attempt should be made to establish allowability of the claim based on reasoning and rational which prevailed in the mind at the time of making a claim. Withdrawal of claim, without any new legal development (by way of amendment or judicial pronouncement) must be avoided.

Another serious mistake which seems to have been made is that though a revised return was filed and claim for the impugned sum was withdrawn, the assessee also revised its claim for exemption of income u/s 10A. This seems to have been in disregard to the provisions of section 92C (4) and proviso thereto. As per proviso, “ … no deduction under section 10A …, shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under this sub-section.”

Apparently the claim was withdrawn because income was determined in accordance with arm’s length pricing determined in terms of Chapter X of the Income-tax Act. Therefore, exemption should not have been enhanced. However, there may be some other situation which warranted, a claim under section 10A which is not clear from the facts as reveled on reading the judgment.    

Reading of judgment also reveals that the TPO followed his findings in  earlier assessment years (A.Y.2002-03 and 2003-04) and  came to the conclusion that no services which would benefit the Petitioner, had been rendered by Deloitte and that the Petitioner should not have made the claim for reimbursement.

The findings of the TPO are definitely serious and put a big question mark on credibility of the books of account, and audit report and also the return of income filed by assessee.

By filing a revised return and withdrawing the claim, in a way assessee has accepted that the claim was not allowable. If that be the case, assessee could have avoided such claim in the original return itself, so that assessee could have claimed deduction under section 10A, without attracting proviso to section 92C(4).

It has been stated by the assessee that the return was revised with a view to add back the marketing expenses claimed in the original return filed on 1 November 2004 with a view to avoid litigation in relation to the admissibility of the claim. – It is surprising that claim was withdrawn simply to avoid litigation.

In ultimate analysis we learn that more seriousness is required in preparation of account, computation of income, making claims while filing return of income.

Much more seriousness is  required when a decision is taken to withdraw a claim made in the original return by filing a revised return. A withdrawal of claim, without any new legal or other development,  can be considered as if originally claim was wrongly made and inaccurate particulars of income were furnished.