The period of six months provided for imposition of penalty u/s 275(1)(a) starts running after the successive appeals from an assessment order have been finally decided by the CIT(A) or the ITAT. The proviso to s. 275(1)(a) extends the period for imposing penalty from six months to one year of the receipt of the CIT (A)’s order after 1.6.2003. The proviso carves out an exception from the main section inasmuch as in cases where no appeal is filed before the ITAT the AO must impose penalty within a period of one year of the date of receipt of the CIT (A)’s order. To read the provision as suggested by the assessee would obliterate the main provision itself. A proviso is merely a subsidiary to the main section and must be construed harmoniously with the main provision. The proviso to s. 275(1)(a) does not nullify the availability to the AO of the period of limitation of six months from the end of the month when the order of the ITAT is received (Rayala Corporation 288 ITR 452 (Mad) followed)

Under Article 5(5) of the DTAA, an agent is considered a permanent establishment for the principal if two conditions are fulfilled (i) the agent must be “dependent” on the principal and (ii) the agent must have the right to conclude contracts “in the name of” the principal. The question whether the agent has the authority to conclude contracts on behalf of the enterprise has to be considered, not from a literal sense whether the contracts are “in the name of the enterprise”, but from a functional sense whether the agent “in reality” binds the principal. The objective of Article 5 (5) is to protect the principle of source taxation, i.e. that the tax shall be due to the country where the revenue was created. This principle would be disregarded if only the commission relationship was considered despite the financial and legal attachment between the agent and the principal being strong. To ask if Dell AS “in reality” binds Dell Products is in accordance with the functional interpretation of Article 5 (5). The “substance” must prevail over the form. The fact that a commissionaire under the Commissionaire Act and the commission agreement does not bind the principal through his sales is not enough to rule out that a permanent establishment does not exist (Vienna Convention, OECD Model Convention Commentary, Commentaries by Klaus Vogel & Arvid Skaar considered, decision of the French Supreme Court in Zimmer that as the commissionaire did not bind the principal, it was not a PE despite dependence on the principal not followed)

The first limb of s. 2(22)(e) is attracted if the payment is made by a company by way of advance or loan “to a share holder, being a person who is the beneficial owner of shares”. While it is correct that the person to whom the payment is made should not only be a registered shareholder but a beneficial share holder, the argument that a firm cannot be treated as a “shareholder” only because the shares are held in the names of its partners is not acceptable. If this contention is accepted, in no case a partnership firm can come within the mischief of s. 2 (22)(e) because the shares would always be held in the names of the partners and never in the name of the firm. This would frustrate the object of s. 2(22)(e) and lead to absurd results. Accordingly, for s. 2(22)(e), a firm has to be treated as the “shareholder” even though it is not the “registered shareholder”

The Tribunal has side tracked the main issue. It was obvious that conversion of the land into investment just before the sale of the property was made to avoid payment of full taxes. Though the AO accepted the conversion, the assessee’s claim that the gains was a LTCG amounted to furnishing inaccurate particulars of income. The issue was not debatable as held by the Tribunal. Though the appeal was admitted by the High Court, the Tribunal glossed over a very important and fundamental fact that the appeal was admitted and dismissing the appeal on the same. Accordingly, when the order of the AO in quantum proceedings was sustained by all successive authorities and the High Court also dismissed the appeal at the admission stage, albeit after admitting the same, it cannot be said that the issue was debatable.

The argument that as the AO had called for the details of Rs. 1.66 crores and confined the addition only to Rs. 19.66 lakhs, the reopening is on a “change of opinion” is not acceptable. The question of change of opinion arises when the AO forms an opinion and decides not to make an addition and holds that the assessee is correct. Here, though the AO had asked specific and pointed queries with regard to the sundry creditors of Rs. 1.66 crores, he had made an addition of only Rs.19.86 lakhs and there was no discussion, ground or reason why addition of Rs. 32.97 lakhs was not made in-spite of the assessee’s failure to furnish conformation and details to that extent. The argument that when the assessment order does not record any explicit opinion on the aspects now sought to be examined, it must be presumed that those aspects were present to the mind of the AO and had been held in favour of the assessee is too far-fetched a proposition to merit acceptance (Consolidated Photo vs. ACIT 281 ITR 394 (Del) followed)