Introduction
In a landmark judgement, GE Capital US Holdings Inc. v. DCIT[i], the Delhi High Court (‘DHC’) addressed the challenges posed by a Petitioner against assessment orders, which denied their application for immunity from penalties under s. 270AA(4) of the Income-tax Act, 1961 (‘Act’) and the issuance of show cause notices (‘SCNs’) for the imposition of penalties under s. 270A of the Act. The primary issue in this case revolves around whether the Petitioner’s income was misreported or under-reported and whether the conditions for immunity under s. 270AA of the Act were satisfied. This ruling outlines the circumstances under which income can be classified as under-reported or misreported, each carrying different implications for penalty imposition.
Brief Facts
The Petitioner, in this case, challenged orders dated 28.12.2021 and 24.01.2022 (‘Impugned Orders’), rejecting their applications for immunity from penalty under s. 270AA(4) of the Act. The Petitioner also challenged SCNs dated 16.11.2021 issued to the Petitioner for levy of penalty under s. 270A of the Act.
The Petitioner received certain payments from its customers towards IT support services totalling Rs. 18,13,32,765 during the relevant assessment years (‘AYs’) 2018-19 and 2019-20. For AY 2017-18, an assessment order dated 15.12.2020 taxed the Petitioner’s receipts as royalty under s. 9(1)(vi) of the Act and a. 12 of the India-USA Double Taxation Avoidance Agreement (‘DTAA’), initiating penalty proceedings under s. 270A of the Act.
For AY 2018-19, the Petitioner filed its return of income (‘ROI’), and an assessment order dated 16.11.2021 was passed, treating the receipts as taxable royalty.
The assessments for AY 2018-19 and 2019-20 were passed after the Hon’ble Supreme Court’s (‘SC’) decision in Engineering Analysis Centre of Excellence Private Limited v. Commissioner of Income Tax and Anr.[ii], which clarified the taxability of software as royalty.
To avoid protracted litigation, the Petitioner accepted the orders for AYs 2018-19 and 2019-20 and applied for immunity from penalties under s. 270AA. However, the respondent rejected the said application for grant of immunity and passed the Impugned orders. Aggrieved by the same, the Petitioner challenged this rejection, arguing their compliance with s. 270AA(1) of the Act conditions obligated the respondent to process the immunity application as per s. 270AA(3) of the Act.
Held
The DHC, while allowing the present writ petition, quashed the impugned orders dated 28.12.2021 and 24.01.2022. It also quashed the SCNs dated 16.11.2021 and allowed all consequential reliefs to the Petitioner.
The DHC observed that s. 270A(1) of the Act delineated the circumstances constituting under-reported and mis-reported income. The distinction between the two was crucial in determining penalty applicability. It was observed that an income is said to be under-reported if contingencies are spoken of in clauses (a) to (g) of s. 270A(2) were attracted. However, the subject of misreporting is dealt with separately in accordance with the provisions comprised in s. 270A(9)(10) of the Act.
After making the above observations, the DHC found that the assessment orders did not specify any contingencies under clauses (a) to (f) of s. 270A(9) of the Act indicating misreporting. Further, it was observed that the SCNs were vague and did not clarify if the Petitioner was charged with under-reporting or misreporting income.
It further held that immunity under s. 270AA of the Act could be denied only in cases of misreporting, which the SCNs failed to specify. Further, the SCNs failed to indicate the specific charge sought to be laid against the Petitioner. Thus, the SCNs clearly defied the principles enunciated in CIT v. Minu Bakshi[iii] and Schneider Electric South East Asia (HQ) (P) Ltd. v. CIT[iv].
It was also held that s. 270AA(3) of the Act mandated the AO to assess compliance with conditions laid therein, which include compliance with the conditions specified in s. 270AA(1), expiry of appeal period under s. 249 and the subject matter of penalty not falling within the ambit of s. 270A (9) of the Act. These criteria were pivotal in evaluating eligibility for immunity under s. 270AA of the Act. Therefore, the observation of the respondent that mere payment of the demand did not suffice for immunity was held to be unsustainable.
Thus, the DHC held that in the facts of the present case, the assessment order had failed to document any instances of misrepresentation, unrecorded investments, unsupported expenditures, false entries, or other offences specified in s. 270A of the Act. Additionally, the SCNs failed to specify whether the Petitioner was accused of under-reporting or misreporting, rendering them legally unsustainable.
The DHC concluded that the Petitioner had satisfactorily fulfilled the statutory prerequisites under s. 270AA(1) of the Act, necessitating a conclusive determination of misreporting by the respondent to justify the rejection of immunity. Consequently, the Impugned Orders rejecting the immunity application were found to be unsustainable.
Our Analysis
The DHC’s ruling underscores the importance of clear and specific charges when issuing penalty-related notices under tax law, ensuring taxpayers are clearly informed of the charges against them. By quashing the Impugned Orders and the SCNs, the DHC reaffirmed that taxpayers who meet the statutory conditions for immunity under s. 270AA of the Act should not be denied such relief without substantive justification. Further, the decision provides clarity on the procedural requirements for penalty imposition under s. 270A of the Act.
The ruling sets a landmark precedent by clarifying the crucial distinction between under-reporting and mis-reporting of income. This precedent will significantly impact future tax assessments and the administration of penalties, promoting greater clarity and fairness in the tax system.
End Notes
[i] [2024] 163 taxmann.com 146 (Delhi) [31.05.2024]
[ii] (2022) 3 SCC 321
[iii] 2022 SCC OnLine Del 4853
[iv] 2022 SCC OnLine Del 870
Authored by Onam Singhal, Chartered Accountant at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.