Non-Payment Of Tax Due To Uncertain Legal Position Existing At Time Of Filing Return Is Outside Scope Of 'Mis-Reporting': Delhi HC Deletes Penalty U/s 270A

The High Court also set aside an order dismissing immunity claimed by the assessee u/s 270AA and dropped the penalty proceedings u/s 270A due to AO's failure to allude to specific charge of misreporting or under-reporting in show cause notice.

Section 270A of the Income Tax Act states that an assessing officer (AO), a commissioner (appeals), a principal commissioner, or a commissioner may direct a person to pay a penalty if he under-reports or misreports his income. This penalty may range from 50% to 200%.

Pointing out that 'under-reporting' as well as 'misreporting' are separate and distinct misdemeanors, the Division Bench comprising Justice Yashwant Varma and Justice Purushaindra Kumar Kaurav observed that “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”. (Para 22 & 23)

Facts of the case:

The assessee, a non-resident entity involved in the business of providing IT and IT support services including software licenses to Indian entities, was classified as transfer of intellectual property, and assessed to tax on the payments received from these entities as royalty in terms of Section 9(1)(vi) of the Income tax Act read with Article 12 of the India-USA DTAA. Consequently, penalty proceedings were also initiated u/s 270A. Even though the assessee had availed MAP for AY 2017-2018, paid the demands for AY 2018-2019 and 2019-2020, and filed application for immunity u/s 270AA, the AO rejected the application stating mere payment of demand does not, ipso facto, amount to protection against misreporting as envisaged by section 270A(9).

Observations of High Court:

The Bench noted that the Show Cause Notice which came to be issued for commencement of action u/s 270A were themselves vague and unclear, as it failed to specify whether the assessee was being charged with under-reporting or misreporting of income.

Given the condition that a prayer for immunity could have been denied in terms of Section 270AA(3) only if it were a case of misreporting, the Bench pointed that the SCN failed to indicate the specific charge which was sought to be laid against the assessee.

The Bench opined that while examining an application for immunity, it was incumbent upon the AO to ascertain whether the provisions of Section 270A stood attracted either on the anvil of under-reporting or misreporting.

This obligation was embarked on the AO to be enabled to reject such an application of immunity from penalty only if it be found that penalty is founded on a charge which was referable to Section 270 A (9), added the Bench.

The Bench went on to observe that a finding of misrepresentation, failure to record investments, expenditure not substantiated by evidence, recording of false entry in the books of account alluded to u/s 270A(9) has neither been returned nor recorded in the assessment order.

Thus, the Bench opined that the SCN in terms of which the action u/s 270A came to be initiated also failed to specify whether the assessee was being tried on an allegation of under-reporting or misreporting.

Since there was a clear and apparent failure on the part of the Revenue to base the impugned proceedings on a contravention relatable to Section 270A(9), the Bench stated that the application for immunity could not have been rejected.

Therefore, finding that the assessee had duly complied with the statutory pre-conditions set out in Section 270AA(1), the High Court clarified that it was incumbent upon the Revenue to draw a firm conclusion that the case of assessee fell in the category of misreporting since that alone would have warranted a rejection of its application for immunity.

The High Court also justified non-payment of tax by assessee due to uncertainty in legal position existing at the time of filing the return of income, and clarified that such a scenario would be outside the scope of 'mis-reporting'.

Hence, the High Court allowed the Assessee's petition and quashed the show cause notice instituting penalty proceedings u/s 270A.

Cases Followed:

CIT vs. Minu Bakshi [2022]

Schneider Electric South East Asia (HQ) (P) Ltd. vs. CIT [2022 LiveLaw (Del) 257]

Counsel for Assessee: Sachit Jolly, Soumya Singh, Disha Jham, Devansh Jain, Aditya Rathore and Abhyudaya Shankar Bajpai

Counsel for Revenue: Puneet Rai, Ashvini Kumar and Rishabh Nangia, Ravi Prakash and Nikhil Jain

Case Title: GE Capital Us Holdings Inc Vs DCIT

Citation: 2024 LiveLaw (Del) 722

Case Number: W.P.(C) 1646/2022

Click here to read/ download the Judgment