State Bank of Mauritius Ltd. v. DDIT –(Intl. Taxation), Range-2(1), Mumbai
[Citation -2016-LL-0930-153]

Citation 2016-LL-0930-153
Appellant Name State Bank of Mauritius Ltd.
Respondent Name DDIT –(Intl. Taxation), Range-2(1), Mumbai
Court ITAT-Mumbai
Relevant Act Income-tax
Date of Order 30/09/2016
Assessment Year 2000-01
Judgment View Judgment
Keyword Tags profits and gains of business • avoidance of double taxation • capital or revenue receipt • permanent establishment • computation of income • concealment of income • imposition of penalty • criminal proceedings • disclosure of income • proprietary concern • revenue authorities • revenue expenditure • accounting standard • allowable deduction • capital expenditure • quantum proceeding • capital expenses • computing profit • debatable issue • business profit • wear and tear • capital loss • written off • wrong claim • mens rea
Bot Summary: The assessee s claims and contentions Vis- -vis the various expenses heads as under:- In view of the specific language of Article 7(3) of the Indo Mauritian Double Taxation Avoidance Agreement the assessee contends that all expenses incurred for the purpose of the business of its branches in Bombay is deductible in computing its total income for the purpose of tax under the Income tax Act, 1961. The assessee further contended that the AO had neither been able to prove that it had furnished inaccurate particulars nor had been able to give any specific finding in that regard, that the assessment proceedings were separate from the penalty proceedings, that penalty could be levied if the assessee acted with a malafide intention. The FAA referred to note No.2 given by the 3 3139-41/M/08 1194/M/10,State Bank of Mauritius Ltd. assessee and held that the assessee had over looked the provisions of Article 3(2) of the OECD and UN Model Convention. Referring to provisions of section 37 of the Act, he held that capital expenditure could not be claimed as deduction while computing the income chargeable under profits and gains of business,that it was not clear as to how the assessee could derive the inference that capital expenses were allowable while computing the income under the head business profit, that there was over valuing national and international judicial precedence to the contrary, that the assessee had not adduced any evidence to support in its favour either by way of any judicial precedent or by production of any legal mandate. Finally the FAA upheld the order of the AO. 4.Before us,the Authorised Representative(AR)stated that the assessee had agitated the quantum addition upto the AY.1999-2000 before the Tribunal,that after that it did not challenge the additions made in quantum proceedings, that in earlier years the AO had not 5 3139-41/M/08 1194/M/10,State Bank of Mauritius Ltd. levied any penalty even after initiating the proceedings,that the assessee had made full disclosure of all the relevant facts. The Departmental Representative(DR) referring to Article 7(3) of the treaty argued that the purchase of fixed assets had to be dealt as per provision of the Act, that assessee had not only claimed deduction of capital expenditure, but had also claimed depreciation, that the treatment given by the assessee in its books of account were based on basic principles of taxation. Merely because the assessee complies with the statutory procedural requirement of filing the prescribed form and certificate of the Chartered Accountant,cannot absolve the assessee of its liability if the act or attempt in claiming the deduction is not bona fide.


Income-tax Appellate Tribunal - L Bench Mumbai Before S/Sh.Rajendra,Accountant Member and Amit Shukla,Judicial Member I.T.A./3139/Mum/2008, Assessment Year: 2000-01 I.T.A./3140/Mum/2008,Assessment Year: 2001-02 I.T.A./3141/Mum/2008, Assessment Year: 2002-03 State Bank of Mauritius Ltd. DDIT (Intl. Taxation), Range-2(1) 101, Raheja Centre, Free Press Journal Scindia House, Ballard Pier, Road,Nariman Point Vs. Mumbai-400 038. Mumbai-400 021. PAN:AABCS 4465 K I.T.A./1194/Mum/2010, Assessment Year: 2004-05 State Bank of Mauritius Ltd. ADIT (Intl. Taxation), Range-2(1) Mumbai-400 021. Vs. Scindia House, Ballard Pier, PAN:AABCS 4465 K Mumbai-400 038. (Appellant) (Respondent) Revenue by: Shri T.R. Paite-Sr.AR Assessee by: Shri Niraj Sheth Date of Hearing: 20.09.2016 Date of Pronouncement: 30.09.2016 ,1961 254(1) Order u/s.254(1)of Income-tax Act,1961(Act) Per Rajendra, A.M.- Challenging orders,dt.29.02.2008 and 31.12.2009 of CIT(A)-XXXI, Mumbai and CIT(A)-II,Mumbai respectively Assessee has filed appeals for above mentioned four years.The assessee is engaged in business of banking.As issues involved in all appeals are common and involve identical issues,so we are disposing them off by consolidated order.The details of assessment orders, penalty imposed etc. can be summarised as under :- AY. 143(3)order,dt. Dt. of Penalty order Penalty Imposed CIT(A) order dt. 2000-01 28.03.2003 22.03.2007 Rs.6,46,976/- 29.02.2008 2001-02 12.03.2004 22.03.2007 Rs.3,01,073/- 29.02.2008 2002-03 07.03.2005 22.03.2007 Rs.15,69,520/- 29.02.2008 2004-05 nil 20.03.2009 Rs.3,51,943/- 31.12.2009 ITA./3139/Mum/2008,AY.2000-01: Assessee-company,filed its return of income on 02.12.1996, showing income of Rs.3.15 crores.Subsequently, Assessing Officer (A.O.) completed assessment u/s. 143(3) r.w.s. 147 of Act on 19.3.2007, determining income of assessee at Rs.5.27 crores. 3139-41/M/08 &1194/M/10,State Bank of Mauritius Ltd. 2.During course of assessment proceedings, AO found that assessee had claimed expenditure of Rs.2.31 crores on acquisition of fixed assets.The AO held that expenditure incurred by assessee was capital in nature though it had claimed it as revenue expenditure. He further found that assessee had not only claimed capital expenditure, but it had also claimed depreciation on assets.He held that assessee had claimed double deduction on same expenditure to extent of depreciation claimed. He directed assessee to show cause as to why capital expenditure incurred on fixed assets should not be treated as capital expenditure. After considering submission of assessee,the AO held that domestic law would apply in case of assessee , that claim made by it was on account of capital expenditure,for which deduction was not admissible. AO also initiated penalty proceedings as per provisions of section 271(1)(c) of Act.In reply to penalty notice,the assessee filed its letter,dated 10.03.2007 and argued that it had not concealed its income nor did it furnish inaccurate particulars, that in terms of Article-7(3)of Indo Mauritius DTAA Treaty it had claimed capital expenditure as deductible item,that expenditure was incurred wholly and exclusively for purpose of business. 2.1.After considering submission of assessee,the AO held that assessee,in addition to claiming 100% deduction on capital expenditure,claimed depreciation on fixed assets, that it amounted to double deduction to extent of depreciation claimed, that by making claim for deduction of capital expenditure, to which it was not eligible for, assessee had furnished inaccurate particulars of its income, that it was duty of assessee to show correct total income and pay taxes accordingly, that claim of assessee that disallow - ance was made only due to difference of opinion was incorrect statement, that assessee had claimed expenditure incurred for acquiring fixed assets, that it had also claimed depreciation,that assessee had furnished inaccurate particulars of income by claiming deduction for capital expenditure, that it was fit case where penalty u/s. 271(1)( c) should be levied.Accordingly, he levied penalty of Rs.1.27 crores. 3.Aggrieved by order of AO,the assessee preferred appeal before First Appellate Authority(FAA).Before him,it was argued that assessee had claimed expenditure on fixed assets of Rs.2.31 crores at time of filing of its return,that it had given complete disclosure in respect of its contention in statement showing computation of total income filed along with return. It referred to Note No.1 and 2 that reads as under :- 1.The assessee Bank is corporate entity formed, registered and controlled from Mauritius. India and Mauritius have entered into treaty for avoidance of double-taxation and other related matters. In terms of general principles specific terms of Double Taxation 2 3139-41/M/08 &1194/M/10,State Bank of Mauritius Ltd. Avoidance Agreement (DTAA) override provisions of feneral law in Income tax Act, 1961. principle which has been accepted and reiterated by central Board of Direct Taxes in its Circular No.333 dated April 2, 1982. 2. assessee s claims and contentions Vis- -vis various expenses heads as under:- (a) In view of specific language of Article 7(3) of Indo Mauritian Double Taxation Avoidance Agreement assessee contends that all expenses (both revenue and capital) incurred for purpose of business of its branches in Bombay (permanent establishment in India) is deductible in computing its total income for purpose of tax under Income tax Act, 1961. It was argued that India & Mauritius had Agreement of Avoidance of Double Taxation, that in terms of Article 7(3) of DTAA business of Permanent Establishment (PE) of Mauritian Enterprise,operating in India,had to be computed by deducting all expenses incurred for purpose of business whether such expenses were incurred in India or elsewhere, that though term business profit was not defined in DTAA, that Article- 7(3) specifically provides for computation of business income in particular manner, that Treaty provisions would override provisions of general law i.e. Act. assessee referred to Circular No.333 dated 02.04.1982 issued by CBDT. It referred to certain case laws, further it was stated that expenditure in question was incurred wholly and exclusively for purpose of earning business profit of PE,that full facts were given in return of income.The assessee further contended that AO had neither been able to prove that it had furnished inaccurate particulars nor had been able to give any specific finding in that regard, that assessment proceedings were separate from penalty proceedings, that penalty could be levied if assessee acted with malafide intention. 3.1.After considering assessment order,penalty order and submissions of assessee, FAA held that one of issues to be decided was as to whether disclosure made in return of expense being deductible against business profit suffice to save tax payer from levy of penalty. He referred to case of Vidyagauri Natwarlala (238ITR91) of Hon ble Gujarat High Court and to Explanation (1) to section 271 (1)(c ) of Act.Referring to cases of T.J. Mathai(269ITR492),K.P.Madhusudan(251ITR91), Navbharat Traders (248 ITR 255),he held that penalty was leviable in cases where assessee would not offer any explanation or would fail to substantiate it. He observed that AO had analysed all facts and had reached to conclusion that assessee was incorrect in claiming capital expenditure as allowable revenue expenditure, that conclusion of AO was based on analysis of accounting and commercial principles and were supported by provisions of treaty and commentary on International Taxation, that assessee had not offered any convincing explanation as to why and on what bsis it believed that capital expenditure could be claimed as deduction from business profits. FAA referred to note No.2 given by 3 3139-41/M/08 &1194/M/10,State Bank of Mauritius Ltd. assessee and held that assessee had over looked provisions of Article 3(2) of OECD and UN Model Convention. As per FAA business profit had to be ascertained in accordance to section 28 of Act,as envisaged by Article 3(2) of Treaty, that profits of PE were required to be computed in accordance to Chapter IV of Act, that provisions of section 37 did not allow capital expenditure for computing profit and gains of business and profession.He also held that assessee had not interpreted mandate of Article 7(3) of DTAA correctly,that said Article did not hold that even capital expenditure was allowable,that assessee was not able to explain as to how it arrived at conclusion that word expenses included capital expenditure also.He also referred to Article 23 of Indo-Mauritius DTAA and held that provisions of Act relating to computation of taxable income would definitely apply in case of assessee except where provisions contained in DTAA were contrary to conditions specifically mentioned in Act, that assessee could not have any advantage by citing provisions of Article-3 of DTAA, that there was no specific contrary provision in treaty, that restriction on deductibility of expenses under Act would be applicable in computation of profits attributable to Indian PE.s of Mauritius Tax Residence.He referred to cases of Mitsubishi Heavy Industries Ltd (61TTJ656), Mashreq bank Psc (14SOT1), Cir.No.5 of 28/ 09/04 of CBDT, Intl Tax Handbook of Internal Rev of United Kingdom and book of K.Vogel on Double Taxation Conventions and held that limitation under domestic law were taken into account for computation of profits of PE under Article 7(3) of India Mauritius Tax Treaty.Referring to provisions of section 37 of Act, he held that capital expenditure could not be claimed as deduction while computing income chargeable under profits and gains of business,that it was not clear as to how assessee could derive inference that capital expenses were allowable while computing income under head business profit, that there was over valuing national and international judicial precedence to contrary, that assessee had not adduced any evidence to support in its favour either by way of any judicial precedent or by production of any legal mandate. FAA also took notice of argument of assessee that there was difference of opinion between AO and assessee about interpretation of Article 7(3) of DTAA,that assessee had claimed deduction under bona fide understanding and belief that same was permissible as per provisions of DTAA.He held that assessee had to prove that debatable issue existed, it was not clear as to how it had formed opinion that issue is debatable,that judicial precedence, opinion of experts and legal position envisaged by Act and treaty established that there was no debate on issue, that all 4 3139-41/M/08 &1194/M/10,State Bank of Mauritius Ltd. authorities had unanimously held that expenses were to be allowed as per provisions of domestic law, that assessee had not quoted any contrary jurisprudence on issue or had brought to his notice any authority in that regard, that it had suo moto decided that it was entitled to deduct capital expenses from business profits, that it was not case where assessee had acted in conformity with decision of High Court/Apex Court in its favour on issue of deductibility of capital expenses, that decision and opinion of assessee was entirely unilateral, that it had not established existence of any debate on issue , that it had taken calculated risk knowing it very well that there were only remote chances of such wrong claim being allowed, that it had made incorrect claim, that contention of assessee that allowability of deduction was debatable issue was liable to be rejected. FAA distinguished cases relied upon by assessee . He referred to Explanation 1 to section 271(1)(c ) (A) and (B) of Act and held that assessee had not offered any explanation that was not substantiated by it. He also held that assessee had made disclosure of income in computation of income about allowability of capital expenses but it was not able to provide and substantiate basis of said claim. He further observed that assessee had even claimed depreciation on capital assets which had been written off by claiming full expenditure, that during assessment proceedings assessee was asked to provide basis of claim made with regard to allowability of capital expenditure, that in support of its claim assessee had advanced only theoretical arguments, that no conflicting jurisprudence was brought to light on issue, that claim of depreciation alongwith claim of full deduction of expenses of capital assets could not by any stretch of imagination be supported by any accounting standard or principles, that it was virtually prohibited by all accounting norms world over,that assessee had blatantly defrauded Revenue, that it was most appropriate case of furnishing inaccurate particulars of income.He referred to case of Steel Ingots Ltd.(296ITR228),P.K. Narayanan (238ITR905), B.A Balasubramanium and Brothers & Co.(236ITR997) and held that as matter of policy department was taking only 1-3% of cases for scrutiny, that as case has not been selected for investigation, there would have been loss of revenue on account of erroneous and unsupported claim of assessee, that assessee had furnished inaccurate particulars of income. Finally FAA upheld order of AO. 4.Before us,the Authorised Representative(AR)stated that assessee had agitated quantum addition upto AY.1999-2000 before Tribunal,that after that it did not challenge additions made in quantum proceedings, that in earlier years AO had not 5 3139-41/M/08 &1194/M/10,State Bank of Mauritius Ltd. levied any penalty even after initiating proceedings,that assessee had made full disclosure of all relevant facts.He referred to page No.91 and 104 of PB.He further argued that it was debatable issue as per order of Tribunal (Pg-22 to 27 of PB), that assessee had interpreted provisions of Articles as per its understanding that depreciation was not expenditure, that non-levy of penalty by AO in earlier years showed that there was doubt in mind of AO, that double deduction could not lead to levy of penalty.He referred to cases of Infosys Technologies Ltd. (360ITR714) and Rucha Engineers Pvt.Ltd.(90CCH232).He also argued that in Article 7(3) of Indo Singapore Treaty further restrictions were made which were not in Indo Mauritius Treaty, that assessee had not contravened provisions of section 271(1)(c). Departmental Representative(DR) referring to Article 7(3) of treaty argued that purchase of fixed assets had to be dealt as per provision of Act, that assessee had not only claimed deduction of capital expenditure, but had also claimed depreciation, that treatment given by assessee in its books of account were based on basic principles of taxation . He referred to case of Zoom Communication P. Ltd. (327ITR510) and N.G. Technologies (240Taxman6). 5.We have heard rival submissions and perused material before us.We find that assessee had acquired capital assets during year under appeal,that it had claimed that expenditure incurred for purchasing said assets was allowable as revenue expenditure as per provisions of Indo- Mauritius DTAA,that it had claimed depreciation for assets in question,that appeals for earlier years for quantum additions were decided against assessee, that AO levied penalty u/s.271(1)(c)of Act for filing inaccurate particulars of income for year under consideration and FAA upheld same. 5.1.Before proceeding further,we would like to mention that object behind enactment of Sec.271(1)(c) of Act is to provide for remedy for loss of revenue and it is civil liability.Courts are of opinion that imposition of penalty u/s.271(1)(c) is not akin to or like criminal proceedings and question of mens rea or mala fides on part of assessee need not be examined and is not relevant.In such cases,it has to be examined as to what was explanation of assessee during penalty proceedings and whether same could be treated bona fide explanation.In other words,if assessee fails to offer explanation about filing of inaccurate particulars or concealing particulars of income,or he offers explanation which is found by authorities to be false,or he offers explanation 6 3139-41/M/08 &1194/M/10,State Bank of Mauritius Ltd. which he is not able to substantiate and fails to prove that such explanation is bona fide then penalty u/s.271(1)(c) of Act can be imposed.We would also like to mention that words particulars and inaccurate in said section of Act mean that particulars which are not accurate,not exact or correct or not according to truth or erroneous are to be considered inaccurate particulars. facts of instant case are that expenditure incurred on account of capital assets was claimed as revenue expenditure and depreciation was also claimed.In short,the assessee had claimed double deductions.It is not case where view taken by assessee required consideration or it was reasonably arguable case.There was no justification on part of assessee to claim both deductions. Depreciation,as per established principles of tax jurisprudence,is allowable deduction for wear and tear of assets.It was not case where assets purchased by assessee were of nature where 100% depreciation was allowable and it had claimed same.The assets in question were capital assets and assessee was aware of fact.Even then it tried to interpret provisions of DTAA in its own manner and made claim in return of income. 5.2.In our opinion,mere recording of notes in return cannot absolve and protect assessee who had not furnished accurate particulars.If explanation and reasoning of assessee is accepted, then in all cases where note is made in return,but wrong claim of deduction is made,no penalty u/s.271(1)(c) of Act can be imposed.Merely because assessee complies with statutory procedural requirement of filing prescribed form and certificate of Chartered Accountant,cannot absolve assessee of its liability if act or attempt in claiming deduction is not bona fide. Bona fide of claim can be proved by circumstances and facts.If assessee had anything in its favour-in form of commentary,an opinion of tax expert dealing with such issues at international level,or order of any legal forum to hold that capital expenses can be claimed as revenue expenditure and depreciation can be claimed for such expenditure- stand taken by it would have been taken as bonafide belief.Here,the assessee claims it interpreted DTAA and decided that it was eligible for particular deduction.Thus,it has acted as interpreter of law and judicial authority.As per judicial procedure only and only Courts are authorised to interpret law. assesseess,AO.s,FAA.s and even Tribunal cannot interpret law.It is out of their domain.The assessee had interpreted Treaty for its own benefit resulting in paying lesser taxes.It is not case where assessee 7 3139-41/M/08 &1194/M/10,State Bank of Mauritius Ltd. makes claim during assessment proceedings after paying taxes about claims for which it had some doubt.If assessee interprets provisions of law without any legal basis and resultantly deprives State of its due taxes it is case of filing of inaccurate particulars.We agree that Act is one of most vexed and complicated legislation and has been subjected to numerous amendments from time to time,that it requires highest degree of interpretative skills and divergent views on interpretation of tax provisions,that law does not postulate that assessee must accept interpretation against him even when favourable view is credible and tenable.But,the facts of case prove that no judgment or opinion was brought to notice of revenue authorities indicating that stand taken by assessee was based on some reasonable basis.In our opinion,the claim made by it falls under category of fanciful claims under garb of interpretation ,and same is not bona fide. 5.3.We also want to mention that confirmation of order of AO by FAA and Tribunal in quantum proceeding has any relevance in deciding penalty proceedings before us.We hold that assessment and penalty proceedings are separate and independent and decision of levying or confirming penalty should be taken on basis of explanation filed during penal proceedings. In our opinion,if claim itself is not bona fide-that it lacks good faith-then penalty has to be imposed for filing inaccurate particular. Information in return was given to gain some tax advantage which was otherwise not due to assessee and such attempt has to be termed filing of inaccurate particulars. 5.4.Intention of assessees in claiming capital expenditure as allowable expenditure and further claiming depreciation is visible to proverbial naked eyes ,so, if AO/FAA decided not to remain mute spectator to such attempt,no fault can be found with them.The FAA has in his elaborate order clearly proved that as to how explanation of assessee was not genuine or bona fide and how it is not supported by any authority.Rather available material was against stand taken by assessee. It is also fact that assessee not small time trader running proprietary concern or shop in remote part of country and is not aware of tax laws.It is supported by team of professionals.Such assessees are expected to lead from front and not to claim deductions that are prima facie not admissible.Let us make it clear that we do not want to mix ethics and penalty matters.What we are emphasising is that assessee availing professional services should not make claims that are prima facie inadmissible to avoid penal consequences.We would also like to mention that cases relied upon by assessee are distinguishable on facts.In case of Infosys 8 3139-41/M/08 &1194/M/10,State Bank of Mauritius Ltd. Technologies Ltd.the issue was not about levy of penalty u/s.271(1)(c)of Act.In matter of Rucha Engineers Pvt.Ltd.(supra)the FAA deleted penalty holding that in case where issue was nature of receipt i.e. capital or revenue receipt penalty should not be levied.The order of FAA was confirmed by higher forums.In short,both cases are of no help to assessee.In contrast,the matter relied upon by DR,i.e.N.G. Technologies (supra)is useful in deciding issue In that matter assessee had pleaded that claim made by it was bonafide and all facts were disclosed.The FAA,upholding order of AO, had held that mistake committed by assessee could not be said to be bonafide.However, Tribunal reversed order of FAA.The Hon ble Apex Court dismissed SLP against High Court's ruling that where against basic principle of accountancy, assessee claimed capital loss on sale of fixed assets in profit and loss account and had not revised return voluntarily, penalty for concealment of income was justified.In our opinion,facts of case under consideration are quite similar to facts of N.G. Technologies (supra). Considering peculiar facts and circumstances of case cumulatively,we hold that order of FAA does not suffer from any legal or factual infirmity.Therefore, upholding same,we decide effective ground of appeal against assessee. ITA.s/3140-41/Mum/2008 & 1194/Mum/2010,AY.s. 2001-02 to 2002-03 &2004-05 , 6.Following our order for AY.2000-01,we decide remaining three appeals against assessee,as facts of case are same as dealt in appeal for that assessment year. As result,appeals filed by assessee stands dismissed. Order pronounced in open court on 30th September, 2016. 30 , 2016 Sd/- Sd/- (Amit Shukla ) (Rajendra) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated : 30. 09.2016. Jv.Sr.PS. Copy of Order forwarded to : 1.Appellant 2. Respondent 3.The concerned CIT(A) 4.The concerned CIT 5.DR L Bench, ITAT, Mumbai 6.Guard File //True Copy// BY ORDER, Dy./Asst. Registrar ITAT, Mumbai. 9 State Bank of Mauritius Ltd. v. DDIT (Intl. Taxation), Range-2(1), Mumbai
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