2020 (6) TMI 50 - AT - Income Tax

Penalty u/s 271(1)(c) - bona fide view of the assessee - Income in relation to the New Mangalore Port Trust (NMPT) project - permanent establishment (PE) in relation to the NMPT project - India Netherlands Treaty - HELD THAT - None of the conditions is fulfilled in favour of the Revenue for imposing penalty. As it appears on record that at the very onset of filing of return the assessee explained the reasons for not including the amount in question being 3.79 crores received as arbitration award in its taxable income by annexing Note 7 relying upon the content of the India-Netherlands Treaty. Such Explanation has not been found to be false by the authorities below neither there is any finding to that effect as on record. Even assuming the assessee fails to substantiate the explanation, he has been able to demonstrate that the explanation is bona fide. All the details and justification of claim have been set out in said Note 7 annexed to the return of income filed by the assessee giving rational and computation which is evident from the statement showing gross total income as annexed to the Paper Book before us. Question of bona fides cannot be decided against the assessee either. The conduct of the assessee is bona fide or not is essentially a question of fact and the related facts are always in the exclusive knowledge of the assessee. The Revenue may or may not agree with this understanding of law of the assessee but the fact that there can be a bona fide view to that effect cannot be ruled out. The human probabilities favour acceptance of this explanation for bona fides. It cannot always be feasible to prove the claim of bona fides to the hilt, nor, in our considered opinion, the assessee cannot be expected to do so. As long as the explanation given by the assessee in the light of the human probabilities, there are no factual errors or inconsistencies, and it is supported by rational supporting evidences regarding factual evidences embedded therein, if any, the bonafides should be taken as proved. We observe that the assessee s explanation regarding bonafides of the claim does not suffer from any apparent inconsistencies or factual errors and it is quite in tune with the human probabilities. We, therefore, find no reason to reject the reason as unacceptable. In that view the matter the case of the assessee is not even hit by the mischief of any of the three eventualities envisaged by the deeming fiction under Explanation 1 to Sec. 271(1)(c) - Decided in favour of assessee.

Summary

Issues Involved:
1. Taxability of arbitration award under the India-Netherlands Tax Treaty.
2. Initiation and justification of penalty proceedings under section 271(1)(c) of the Income Tax Act, 1961.
3. Bona fide belief and disclosure of income particulars by the assessee.
4. Procedural compliance and timing of order pronouncement in light of COVID-19 pandemic.

Issue-wise Detailed Analysis:

1. Taxability of Arbitration Award:
The assessee, a Netherlands-based company, completed a dredging project for New Mangalore Port Trust (NMPT) in FY 1995-96 and subsequently closed its site office in India. The company received ?307,870,463 as an arbitration award in FY 2000-01, which it did not include in its taxable income, citing the absence of a Permanent Establishment (PE) in India as per the India-Netherlands Tax Treaty. The Assessing Officer (AO) disagreed, asserting that the business profits are taxable in India if the enterprise carries on business through a PE, regardless of the PE's existence in the year of income accrual.

2. Penalty Proceedings under Section 271(1)(c):
The AO initiated penalty proceedings under section 271(1)(c) for furnishing inaccurate particulars of income. The penalty was levied on the grounds that the assessee did not include the arbitration award in its taxable income, which was seen as an attempt to avoid tax. The CIT(A) confirmed this penalty, leading to the present appeal.

3. Bona Fide Belief and Disclosure:
The assessee argued that it had a bona fide belief, supported by legal interpretation and disclosure in Note 7 of the return, that the arbitration award was not taxable in India due to the non-existence of a PE. The Tribunal noted that the assessee provided a detailed explanation and justification for its claim, and there was no evidence of concealment or furnishing of inaccurate particulars of income. The Tribunal emphasized that raising a legal claim, even if ultimately rejected, does not amount to furnishing inaccurate particulars.

4. Procedural Compliance and COVID-19:
The Tribunal addressed the issue of delayed pronouncement of the order due to the COVID-19 pandemic. Citing the extraordinary circumstances and relevant judicial pronouncements, the Tribunal justified the delay, stating that the lockdown period should be excluded from the computation of the 90-day time limit for pronouncing orders as per Rule 34(5) of the Appellate Tribunal Rules, 1963.

Conclusion:
The Tribunal concluded that the penalty under section 271(1)(c) was not justified as the assessee had a bona fide belief and had disclosed all necessary details. The appeal was allowed, and the penalty was directed to be deleted. Additionally, the Tribunal acknowledged the procedural adjustments necessitated by the COVID-19 pandemic, ensuring compliance with judicial guidelines.