Case Note & Summary
The revenue appealed against the common order of the Income Tax Appellate Tribunal (ITAT) which set aside the levy of penalty under Section 271(1)(c) of the Income Tax Act, 1961 for assessment years 2006-07 and 2007-08. The assessee, Indian Overseas Bank, a nationalised bank, had claimed the benefit of the Double Taxation Avoidance Agreement (DTAA) between India and China in respect of income earned by its branch in Hong Kong. The Assessing Officer disallowed the claim on the ground that Hong Kong was a Special Administrative Region (SAR) and the DTAA with China did not apply to it. The Commissioner of Income Tax (Appeals) confirmed the disallowance, and the assessee accepted that order without further appeal. However, the CIT(A) also deleted the penalty levied under Section 271(1)(c), which was confirmed by the ITAT. The revenue argued that the assessee was fully aware that the DTAA could not be extended to Hong Kong, and by accepting the disallowance, it had acquiesced to having made a wrongful claim, thus warranting penalty. The assessee contended that there was no concealment; the claim was made in bonafide belief that since Hong Kong became part of China from 01.07.1997, the DTAA with China applied. The assessee produced an official document from the Ministry of Foreign Affairs of China titled 'General Outline of the Hong Kong Special Administrative Region' which stated that Hong Kong is part of China. The court held that the assessee's belief was bonafide and supported by an official document, and there was no concealment or furnishing of inaccurate particulars. The court distinguished the Supreme Court's decision in Union of India v. Dharmendra Textile Processors, noting that in that case there was deliberate concealment, whereas here the error was genuine. The court dismissed the revenue's appeals, upholding the deletion of penalty.
Headnote
A) Income Tax - Penalty under Section 271(1)(c) - Concealment of Income - Bonafide Belief - The assessee, a nationalised bank, claimed benefit of DTAA between India and China for its Hong Kong branch. The claim was disallowed as Hong Kong was a Special Administrative Region and DTAA did not apply. However, the assessee acted on a bonafide belief based on an official document from the Ministry of Foreign Affairs of China stating that Hong Kong is part of China. The court held that there was no concealment or furnishing of inaccurate particulars, and penalty under Section 271(1)(c) was not attracted. (Paras 7-10) B) Income Tax - Section 90 - Double Taxation Avoidance Agreement - Special Administrative Region - Prior to amendment w.e.f. 01.10.2009, Section 90 did not provide for execution of DTAA with a Special Administrative Region. The assessee's claim for DTAA benefit for Hong Kong was erroneous, but the error was bonafide. (Paras 3-4) C) Income Tax - Penalty - Mens Rea - The court distinguished Union of India v. Dharmendra Textile Processors, noting that in that case there was deliberate concealment, whereas here the assessee had a genuine belief supported by an official document. (Para 4, 10)
Issue of Consideration
Whether the assessee is liable for penalty under Section 271(1)(c) of the Income Tax Act, 1961 for claiming benefit of DTAA between India and China in respect of its Hong Kong branch, when the claim was disallowed in quantum assessment.
Final Decision
The court dismissed the revenue's appeals, upholding the order of the ITAT deleting the penalty under Section 271(1)(c) of the Income Tax Act, 1961.
Law Points
- Penalty under Section 271(1)(c) requires concealment or furnishing of inaccurate particulars
- mere disallowance of claim does not automatically attract penalty
- bonafide belief based on official document can negate mens rea
