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TMI Blog2011 (4) TMI 684X X X X Extracts X X X X X X X X Extracts X X X X ..... V. VASUDEVAN, B. RAMAKOTAIAH, JJ. Smt. Malathi Shridharan for the Appellant. M.P. Lohia for the Respondent. ORDER N.V. Vasudevan, Judicial Member ‑ These are appeals by the revenue against four orders all dated 23-12-2009 of CIT(A) X, Mumbai relating to assessment year 2004-05. In these appeals the revenue has challenged the orders of the CIT(A), whereby the CIT(A) has cancelled the order of the AO imposing penalty on the assessees' under section 271(1)(c) of the Income-tax Act,1961 (the Act). 2. The facts and circumstances under which the penalty under section 271(1)(c) of the Act was imposed by the AO on the assessees' are as follows. All the assessees' above named are Non-residents and are Funds registered as Foreign Institutional Investor (FII) with Securities and Exchange Board of India (SEBI). The assessees' in all these cases filed returns of income wherein they declared the gain/loss arising on sale of securities in India under the head "capital gain". All the assessees' filed a revised return of income reporting nil income and claiming refund of the taxes paid. The details in this regard are as follows: Appeal No. 1617/M/10 1618/M/10 1619/M/10 1620/M/10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of the Double Taxation Avoidance Agreement ('DTAA') between India and USA, the business profits could be taxed in India only if there is a Permanent Establishment ('PE') in India. As the fund does not have an office, a place of business or a dependent agent in India, it does not have a PE in India and therefore, the business income on sale of securities would not be taxable in India. With regard to our claim that the income earned by the Funds is in the nature of business income we would like to place reliance on a recent ruling delivered by the Authority for Advance Rulings ('AAR') in respect of one of our sister funds, namely Fidelity Advisor Series VIII [2004] 271 ITR 1(AAR), the facts of which are similar to our case. The ruling delivered by the AAR is enclosed herewith as Annexure b. In this case, the AAR, after perusing certain parameters such as the objects for which the applicant was established, the frequency of trade etc. held that the income earned by Fidelity Advisor Series VIII was in the nature of business income. The AAR also considered whether the presence of the custodian in India would tantamount to the Fidelity Advisor Series VIII having a PE in India, an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 8-1-2007 held that the FIIs can invest in securities in India to receive income from them so long they hold the same and can realize capital gains on their transfer. The authority further ruled that the applicants did not maintain accounts to show the manner of valuation of stock-in-trade at the end of the financial year. There was nothing to show that investments were held as capital assets. The returns were field declaring capital gains. In those circumstances the AAR held that the transactions were only in the nature of investment and the profits arising there from cannot be treated as business income. The assessees', therefore, withdrew their appeals before the CIT(A). It is in the above background of facts that the question as to whether the assessees's can be said to be guilty of furnishing inaccurate particulars of income has to be decided. 7. The AO in imposing the penalty on the assessees' primarily relied on Explanation-1 to section 271(1)(c) of the Act. The AO held that the revised return filed by the assessees' obliterated the original return filed by the assessees' and the revised return was not correct and complete and, therefore, the assessees, are guilty of f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of view of the Appellant. Thus there is no question of concealing any facts. The revised claim was based on legal ruling. Thus there was no concealment whatsoever, nor has the assessee has committed an act of furnishing inaccurate particulars of income. The entire facts and claim has been explained in the letter while filing the revised return of income and same was based on judicial ruling. A perusal of the penalty order reveals that the AO has rejected the contentions on the basis that ignorance of law does not extinguish the liability to obey the law. The AO observed that assessee has tried his luck to be in two boats at the same time with guilty mind, but at the same time claiming his assertion to be contention arisen out of bona fide belief, which does not hold water. This view of learned AO manifests that there was bona fide belief on the part of appellant and at the same time it was based on judicial ruling in same type of fund that the its income could be assessed as business income. The assessee filed revised returns of income along with a letter which explaining the reasons for filing the return of income." 9. The CIT(A) further held that the assessees's made full dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om payment of USA tax and nothing having been brought on record to show that the income from securities of Indian companies was being taxed in the USA in the hands of the beneficiaries of the trust, the applicant was not a resident of the Contracting State (USA) and, therefore, could not avail of the benefit of the terms of the Agreement for Avoidance of Double Taxation between India and USA. 14. Her next submission was that Section 115AD of the Act was a code by itself for computation of capital gain by FII's and the assessees' being an FII could not have made a claim that the capital gain it earned was business income. In this regard our attention was drawn to the decision of the AAR in the case of Universities Superannuation Scheme Ltd., In re [2005] 275 ITR 434/145 Taxman 141 (AAR) (New Delhi) wherein it was held that (i) That the provisions of section 115AD would apply to an assessees' who has suffered losses on the transfer of securities. (ii) That being a special provision for FIIs, section 115AD will override the general provisions. Where Parliament so intended it provided, as in section 115-I, an option to be exercised by the assessees'. Absence of such a provision in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised return was field and the reasons why the appeals before the CIT(A) were withdrawn in the quantum proceedings. The ld. Counsel for the assessees' placed strong reliance on the decision of the Hon'ble Supreme Court in the case of CIT v. Reliance Petroproducts (P.) Ltd. [2010] 322 ITR 158/189 Taxman 322, wherein it was held that making incorrect claim does not amount to concealment of particulars. 17. We have considered the rival submissions. We find that the revised return was field by the assessees' in all these cases making the claim that the income from sale of securities was business income based on the decision of AAR in the case of one of the sister company namely Fidelity Advisors Series VIII, In re, [2004] 271 ITR 1/[2005] 142 Taxman 111 (AAR - New Delhi). In the said decision AAR expressed the following view. " The applicant, an investment company, registered under a statute of the USA, was a non-resident for the purposes of income-tax in India. It was set up to provide investors a continuous source of managed investments in securities. Its investments were mainly in equity securities under an investment scheme of a state in the USA. The applicant was registered with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ' had filed the returns of income i.e. on 17-8-2004 for A.Y 2004-05. The revised return of income was filed by the assessees' on 25-3-2005. The assessees' made it clear in a letter filed along with the revised return of income that the same is being filed in view of the decision of the AAR in the case of sister concern of the assessee viz., Fidelity Advisors Series VIII, (supra). Later in point of time i.e. on 8-1-2007 the AAR in the case of Fidelity North Star Fund (supra) reversed its earlier decision in the case of Fidelity Advisors Series VIII, (supra). We have already narrated the ruling in the case of Fidelity North Star Fund (supra). It is consequent to this decision that the assessees' withdrew its appeals against the assessment orders before the CIT(A). It is thus clear from the facts that the claim made by the assessees's in the revised return cannot be said to be not bona fide. 19. In a recent judgment of the Hon'ble Apex Court in Reliance Petroproducts (P.) Ltd. (supra). Their Lordships, after considering various decisions include Dilip N. Shroff v. Jt. CIT [2007] 291 ITR 519/161 Taxman 218 (SC) and Union of India v. Dharmendra Textile Processors [2008] 306 ITR 277/174 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the income of the assessee such a claim made in the return cannot amount to concealment of income or furnishing of inaccurate particulars of such income which may attract levy of penalty under section 271(1)(c) of the Act. Accordingly, we are inclined to uphold the findings of the ld. CIT(A) in deleting the penalty imposed by the AO. 21. Similar view has also been expressed by the Tribunal in the case of Variable Insurance Products Funds Overseas Portfolio (supra) With regard to the contention put forth by the ld. D.R. on the basis that the assessees were not a resident of US, we find that this was not the basis on which the assessment proceedings proceeded before the AO nor it was the basis on which penalty was imposed on the asssessees'. Moreover, the ruling of the AAR on the issue was the basis on which the assessees' made the claim. It cannot be, therefore, said that the assessees' furnished inaccurate particulars of income. The fact that section 115AD is a code by itself applicable to FIIs cannot also be the basis to hold that the assessee furnished inaccurate particulars of income especially in the light of the ruling of the AAR in Fidelity Advisors Series VIII (supra). We ..... X X X X Extracts X X X X X X X X Extracts X X X X
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