Delhi High Court Quashes Penalty As The Show-Cause Notice Failed To Determine The Legal Position

Delhi High Court Quashes Penalty As The Show-Cause Notice Failed To Determine The Legal Position

The assessee was taxed on payments received from entities under the IT Act and the India-US DTAA

The Delhi High Court has quashed a show-cause notice issued by the Income Tax Department vaguely for the initiation of penalty proceedings under Section 270A, as the categorical finding of 'misreporting’ or ‘under-reporting’ is essential for levying a fine.

The Division Bench comprising Justice Yashwant Varma and Justice Purushaindra Kumar Kaurav also set aside an order dismissing immunity claimed by the assessee and dropped the penalty proceedings due to the failure of the assessing officer (AO) to allude to a specific charge of misreporting or under-reporting in the show cause notice.

Section 270A of the Income Tax Act, 1961 states that an 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 percent to 200 percent.

The bench pointed out that 'under-reporting' and 'misreporting' were distinct misdemeanors. It held, “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.”

The assessee is a non-resident individual providing IT and IT support services, including software licenses to Indian entities. Classified as a transfer of intellectual property, he was assessed to tax on the payments received from the entities as royalty in terms of Section 9(1)(vi) of the IT Act read with Article 12 of the India-USA Double Taxation Avoidance Agreement (DTAA).

As a result, penalty proceedings were initiated under Section 270A. Even though the assessee had availed Mutual Agreement Procedure (MAP) for the Assessment Year (AY) 2017-2018, paid the demands for AY 2018-2019 and 2019-2020, and applied for immunity under Section 270AA. The AO rejected the application stating that mere payment of demand did not, ipso facto, amount to protection against misreporting.

However, the bench observed that the show-cause notice was vague and unclear, as it failed to specify whether the assessee was being charged with under-reporting or misreporting of income. It failed to indicate the specific charge against the assessee. While examining an application for immunity, it was incumbent upon the AO to ascertain whether the provisions of Section 270A were meant for under-reporting or misreporting.

The judges noticed that a finding of misrepresentation, failure to record investments, expenditure not substantiated by evidence, and recording of false entries in the books of account were not recorded in the assessment order. Therefore, the application for immunity could not have been rejected.

Justice Varma and Justice Kaurav noted that the assessee had duly complied with the statutory pre-conditions set out in Section 270AA(1). Thus, it was incumbent upon the revenue department to conclude whether the assessee’s case fell in the category of misreporting. This alone would have warranted a rejection of its immunity application.

The bench justified the non-payment of tax by the assessee due to uncertainty in the legal position existing at the time of filing the Income Tax Return. It clarified that such a scenario would be outside the scope of 'misreporting'.

Thus, the Court allowed the assessee's petition and quashed the show cause notice.