Analysis Of Two Important Judgements (April – May 2013)

1. Penalty u/s 271 (1)(c) cannot be levied in respect of an addition made u/s 50C – Calcutta High Court decision in the case of CIT vs. Madan Theatres Ltd. (www.itatonline.org).

The facts of this case were that the assessee sold property for a consideration of Rs. 2.50 crore. However, for the purpose of stamp duty, the property was valued at Rs. 5.19 crore and stamp duty was paid on that value. In its return of income, the assessee declared capital gains on the basis of the sale consideration of Rs. 2.50 crore. The Assessing Officer, invoking the provisions of section 50C, held that the transfer consideration has to be taken at Rs. 5.19 crore and computed the assessee’s capital gains on this basis. The Assessing Officer imposed penalty u/s 271(1)(c) in respect of the capital gains’ income enhanced in the assessment. The penalty was however deleted by the Commissioner (Appeals) and the Tribunal.

The appeal filed by the Department was also rejected by the High Court. The High Court held that though the assessee could have disputed the valuation on the basis of the deemed value and chose not to do so, the fact remains that the actual amount received was offered for taxation. It is only on the basis of the deemed consideration that the proceedings u/s 271(1)(c) was started. According to the High Court, the Revenue had failed to produce any iota of evidence that the assessee actually received one paise more than the amount shown to have been received by him. In these circumstances, the High Court dismissed the appeal of the Department.

Readers may note that the decision of the High Court can also be supported by further independent reasoning. It is true that the provisions of the section 50C (1) deem stamp duty valuation as the transfer consideration, where the same is more than the transfer consideration declared by the assessee in his return. But, according to the me, this deeming is only a presumption, which is capable of being rebutted by the assessee.

How does the law require the assessee to rebut this presumption? A careful reading of the provisions of sub-section (2) of section 50C will show all that the assessee is required to do is to make a claim before the Assessing Officer that according to him, the stamp duty valuation is more than the fair market value of the property transferred. There is no legal requirement in the provisions that the claim has to be supported by evidence at this stage of the assessment. A mere claim by the assessee to this effect should therefore suffice. Once such a claim is made, the presumption raised against the assessee in section 50C (1) stands rebutted and the onus shifts to the Assessing Officer to disprove the assessee’s claim by referring the valuation of the property to his Valuation Officer.

According to me, even when the assessee declares the sale consideration as per the sale agreement as the transfer consideration for capital gains’ computation in his return, this very act operates as a notice of his claim to the Assessing Officer that he disputes the substitution of the stamp valuation as the transfer consideration.

We have seen above that the provisions of section 50C nowhere mandate that if the stamp duty valuation is more than the consideration declared in the sale agreement, the assessee is bound to offer his capital gains’ income in his return on the basis of the stamp duty valuation only. On the contrary, he is free to compute his capital gains’ income in his return on the basis of sale consideration as per sale agreement and resist its substitution by the stamp duty valuation in the assessment proceedings. Whether he chooses to pursue this claim in further assessment proceedings or abandon it is his prerogative.

As far as the issue of concealment of income by an assessee is concerned, the same is always to be tested qua his return of income. This is because the return is the place where the assessee is bound to declare his income to the income tax department. If the assessee has declared the income in his return in the manner the law permitted him to do so, then there cannot be any quarrel if the income is subsequently enhanced in the assessment. Therefore, where the assessee has fully declared the sale consideration as per the sale consideration in his return of income, there cannot be concealment of income attributable to him if the transfer consideration is enhanced by the Assessing Officer under section 50C. Readers may thus ponder over the above propositions.

2. Ishikawajima-Harima survives the retrospective amendment in section 9 (1) (vii) – Income from Offshore Services not taxable despite PE in India:

The decision of the Mumbai Tribunal in the case of IHI Corporation vs. Addl. Director of Income Tax (International Taxation} [2013] 32 taxmann.com 132 {Mumbai –Trib} presents an interesting study regarding the impact of the retrospective amendment in section 9 (1)(vii) retaliating the decision of the Supreme Court in Ishikawajima-Harima Heavy Industries Ltd. vs. DIT (2007) 288 ITR 408 (SC).

The Supreme Court, in this case, on the subject of taxation of income from offshore services in context of section 9 (vii) of the Income Tax Act 1961 [ i.e. fees for technical services] and the provisions of the Indo-Japan DTAA had settled the following principles –

(a) In order that section 9 (1)(vii) be applicable, it is not just necessary that the technical services must utilized within India. It is also essential that the services must be rendered in India.

(b) Merely because the source of income exists in India, the same is not sufficient to subject the said income to tax entirely in India. Mere location of the source of income within India does confer sufficient nexus to tax the income from that source. The existence of territorial nexus is also essential.
If any operations deriving the income are not rendered in India, then the income relating to such operations cannot also be taxed in India. The income having territorial nexus with India must be determined on basis of apportionment and then taxed.

(c) Merely because offshore services of the assessee are effectively connected with a permanent establishment in India, it cannot render the assessee’s income entirely taxable in India. What can be taxed is only that portion of income which is attributable to the activities of the permanent establishment in India.

To counter this Supreme Court decision, the Legislature had introduced a new Explanation in section 9, that income of a non resident shall be deemed to accrue or arise in India in terms of clause (vii) of section 9 (1), whether or not the non resident has rendered services in India or not.

The decision of the Mumbai Tribunal in the IHI Corporation comes in the aftermath of this amendment. The decision of the Supreme Court in the case of Ishikawajima-Harima Heavy Industries Ltd. vs. DIT (2007) 288 ITR 408 (SC) is stated to be the assessee’s own case in the Tribunal decision.

Thus, following the Supreme Court decision, as passed in its own case, the Tribunal has held that the income from offshore services was not taxable. The reasoning, on which the decision has been rendered, is summarized as under :-

(a) Since the offshore services are admittedly in the nature of fees for technical services as understood in section 9 (1)(vii), the same will be taxable despite the fact that the same are not rendered in India in view of the retrospective amendment.

(b) Article 12 (5) of Indo-Japan DTAA provides that if the beneficial owner of the fees for technical services carries on business in India through a permanent establishment and the contract, in respect of which the fees for technical services is paid, is effectively connected with such permanent establishment, then the provisions of Article 7 {Business Profits} and not Article 12 {Fees for Technical Services}shall apply.

In the assessee’s case, the Tribunal found that the offshore services payments to the non resident assessee were in respect of a contract which was effectively connected with permanent establishment. Hence, it held that the question of taxation of the same must be considered under the provision of Article 5 {Business Profits}.

{d} If the provisions of Article 5 {Business Profits} are applied, then the income from offshore services cannot be taxed in India even though the assessee carried on business in India through a permanent establishment and the contract in respect of which the offshore services payments is effectively connected with this permanent establishment. This is because what can be taxed in India is only the income attributable to the permanent establishment. The activities relating to the offshore activities are not rendered in India and therefore, its income cannot be attributed to the permanent establishment by apportionment

The Tribunal thus found that since the provisions of the Indo-Japan DTAA were more beneficial to the assessee than the provisions of section 9 (1) (vii) of the Income Tax Act 1961, the assessee had the right u/s 90 to be assessed as per the DTAA. Based on this reasoning, the income from the offshore services was held not taxable in India.

The decision of the Tribunal, according to me, should serve sufficient notice to crafty law makers that domestic laws should not be amended to usurp jurisdictions which are internationally forbidden. The sanctity of taxing according to one’s own territorial jurisdiction is well protected in the international law contained in tax treaties.