IN HIGH COURT OF JUDICATURE AT MADRAS DATED: 20.07.2017 CORAM : Hon'ble Ms.INDIRA BANERJEE, CHIEF JUSTICE AND Hon'ble Mr.JUSTICE M.SUNDAR Tax Case Appeal No.303 of 2017 Principal Commissioner of Income Tax 4, No.121, Nungambakkam High Road, Chennai-600 034. .. Appellant Vs. Hemalatha Rajan .. Respondent Tax Case Appeal is preferred under Section 260A of Income Tax Act, 1961 against order of Income Tax Appellate Tribunal, Madras 'A' Bench, dated 30th November 2016 in ITA No.02/Mds/2016. For Appellant : Mr.Karthik Ranganathan ---- JUDGMENT Hon'ble Chief Justice and M.Sundar, J. This is Tax Case Appeal under Section 260A of Income Tax Act, 1961 (hereinafter referred to as 'IT Act' for brevity). http://www.judis.nic.in 2 2 thumbnail sketch of facts necessary for appreciating this order are set out infra under caption 'Factual Matrix'. 3 FACTUAL MATRIX : 3(a) Income Tax Department, i.e., Principal Commissioner of Income Tax 4, No.121, Nungambakkam High Road, Chennai-600 034 is appellant before us. appellant is hereinafter referred to as 'Revenue' for sake of clarity and convenience. 3(b) Assessee, who is individual, is sole respondent before us. respondent is referred to as 'Assessee' for sake of clarity and convenience. assessment year, which is subject matter of this appeal is 2009-10 and same shall hereinafter be referred to as 'said assessment year' for convenience and clarity. 3(c) Assessee filed return of income for said assessment year on 31.3.2010, declaring total income of Rs.1,93,15,945/-. return was processed under Section 143(1) of IT Act on 23.03.2011 and subsequently, case was selected for scrutiny by issue of notice under Section 143(2) of IT Act on 20.8.2010. detailed questionnaire was issued to Assessee on 28.6.2011. In response to questionnaire and subsequent notices issued from time to time, authorised representative of Assessee appeared before Assessing Officer (hereinafter referred to as 'AO' for brevity) from time to time and submitted details called for. On basis of details furnished, assessment was completed. In assessment order, sum of Rs.3.82 crores was added by AO under http://www.judis.nic.in 3 Section 28(va) of IT Act. This sum of Rs.3.82 Crores was received by Assessee from Dutch company for relinquishing her right to sue for damages. Assessee's contention that this is capital receipt was turned down and AO treated same as revenue receipt. 3(d) Thereafter, owing to above said addition, separate penalty proceedings under Section 271(1)(c) of IT Act were initiated against Assessee. In and by order dated 30.7.2013, Deputy Commissioner of Income Tax, Company Circle-IV(1), Chennai imposed penalty of Rs.89,84,690/- being amount equivalent to tax, which according to said authority was tax sought to be evaded by Assessee by reason of alleged concealment of particulars of income. order of penalty came to be passed on basis that Assessee has concealed income in nature of 'success sharing bonus' to tune of Rs.2,67,60,000/- being money received by her from Dutch company as aforesaid for giving up her right to sue for damages. 3(e) Aggrieved, Assessee preferred statutory appeal before Commissioner of Income Tax (Appeals)-8, Chennai-600 034 (hereinafter referred to as 'CIT(A)' for brevity). After detailed hearing in statutory appeal, CIT(A), exercising his appellate powers under Section 250(6) of IT Act allowed appeal and cancelled penalty. CIT(A) came to conclusion that there is no concealment and that issue as to whether success sharing bonus is capital receipt or revenue receipt is debatable. 3(f) Not satisfied with decision of CIT(A), Revenue filed statutory appeal before Income Tax Appellate Tribunal, Bench, http://www.judis.nic.in 4 Chennai (hereinafter referred to as 'ITAT' for brevity). This appeal by Revenue is I.T.A.No.02/Mds/2016. ITAT also came to conclusion that aforesaid issue is debatable, that there is no concealment of income and confirmed above said order of CIT(A), wherein CIT(A) has allowed appeal and cancelled penalty. 3(g) Not satisfied with order of ITAT, Revenue has preferred instant appeal before us under Section 260A of IT Act on two questions, which according to Revenue are substantial questions of law. We shall deal with said two questions in later part of this judgment. 3(h) Before proceeding with discussion of case, this being thumbnail sketch of facts, we deem it appropriate to also set out detailed factual matrix with regard to how and circumstances under which payment received from Dutch company by Assessee (which is crux of matter) arose. 4 DETAILED FACTUAL MATRIX : 4(a) Assessee is Promoter Director and her spouse is Managing Director of public limited company incorporated in India in name and style Ma Foi Management Consultants Ltd. (hereinafter referred to as 'Ma Foi' for brevity). said company is providing Human Resource Services. It is case of Assessee that as part of its expansion strategy, company entered into strategic alliance with company based in Netherlands, which goes by name Vedior NV. Through agreement entered with Vedior NV, Assessee sold 82.48% of total equity http://www.judis.nic.in 5 shareholding of her company, i.e., Ma Foi to said Vedior NV. In agreement, it is not in dispute that there was clause, which granted preemptive rights to assessee to re-acquire shares of Ma Foi if and when Vedior NV wishes to sell out shares of Ma Foi to third party. According to this clause, Assessee was to be offered such shares at prices at which any third party has expressed its readiness to purchase. Only if Assessee is unable to purchase share at value stated therein within period of thirty days from date of offer, Netherlands based company, i.e., Vedior NV, will have right to transfer such shares to third party. 4(b) However, Vedior NV entered into deal with another company, being Randstad, wherein and whereby Vedior NV was taken over by Randstad. acquisition by Randstad was acquisition of Vedior NV as whole. Aggrieved by action of Vedior NV, Assessee issued legal notice to Vedior NV, alleging that by virtue of being taken over by Randstad, her shares (which were sold to Vedior NV) also stood transferred to Randstad. This, according to Assessee, has violated and breached her right of preemptive purchase of shares of Ma Foi. 4(c) In said assessment year (i.e., 2009-10), there was settlement between Assessee and Randstad. In settlement, Randstad offered to monetarily compensate Assessee in sum of Rupees one million Euro, if she withdraws notice to Vedior NV. settlement fructified and Randstad paid off Assessee for not proceeding further with legal notice and dropping intended proceedings. This payment made http://www.judis.nic.in 6 by Randstad to Assessee in Indian currency is Rs.2,67,60,000/-. Though Assessee had received said sum, she had not offered it for assessment as her income (revenue receipt) in her returns for said assessment year. Whether this is capital receipt or revenue receipt is crux and gravamen of this case. We now proceed to discuss case under caption 'Discussion' infra. 5 DISCUSSION : 5(a) In proceedings under Sections 143(2) and 142(1) of IT Act, Assessee, in response to notices, took stand that above said sum so received from Randstad is of capital nature and therefore, not taxable under IT Act as it is not revenue receipt. Assessee contended that said sum was received by her on agreement to refrain from endorsing her contractual rights, namely, her right of first refusal qua purchase of Ma Foi shares. According to Assessee, this arises out of share purchase agreement, which was under breach and therefore, receipt is capital receipt and not revenue receipt. AO did not accept this argument and added aforesaid sum to returned income. Effectively, AO added Rs.3.82 crores under Section 28(va) of IT Act. 5(b) To be noted, with regard to tax on such added component, Assessee carried same in appeal. During first appellate proceedings, CIT(A) held that taxing same under Section 28(va) of IT Act is incorrect and changed head of income. CIT(A) held it to be taxable under head 'income from other sources' and invoked provisions of Section http://www.judis.nic.in 7 56 of IT Act. matter was carried to ITAT. ITAT held against appellant and treated same as revenue receipt. relevant order of ITAT is dated 20.12.2012 made in I.T.A.No.1776/Mds/2012 and 1777/Mds/2012. Aggrieved by order of ITAT, appellant / assessee preferred appeal before this Court. This Court has admitted appeal of assessee vide Tax Case Appeal No.93 of 2013 (spouse K.Pandiarajan's case on same issue is T.C.A.No.92 of 2013). This court also has granted interim stay with regard to recovery of tax arrears. That Tax Case Appeals are pending in this court. It is not in dispute before us. 5(c) However, owing to above said addition alleging that same is willful concealment and non disclosure of income, separate penalty proceedings were initiated and penalty equivalent to sum of tax allegedly sought to be evaded was levied. Such penalty was levied under Section 271(1)(c) of IT Act as mentioned supra. This penalty component alone was assailed by Assessee before CIT(A) successfully as set out supra. CIT(A), relying on ratio in various reported judgments that debatable issue cannot be foundation for levy of penalty, came to conclusion that this is not fit case for imposition of penalty. 5(d) CIT(A) noticed that issue whether it is revenue receipt or capital receipt is res integra as matter is pending in this Court. Besides this, CIT(A) also relied on decision of ITAT in case of Assessee's spouse where same has been put in issue. ITAT, in case of Assessee's spouse vide I.T.A.No.54/Mds/2015 dated 12.6.2015, had cancelled penalty levied on same issue, observing that it is not http://www.judis.nic.in 8 dispute regarding disclosure of information relating to income as all relevant particulars pertaining contentious receipt had been produced and that it was only question whether to treat this as revenue receipt or capital receipt. 5(e) As stated supra, this was carried in appeal to ITAT by Revenue. ITAT concurred with finding returned by CIT(A) and held that issue is not clear and debatable as this Court (Madras high Court) is in seizin of matter in T.C.A.Nos.92 and 93 of 2013, which have been admittedly pending and interim order granted therein is operating. 5(f) We, therefore, examined two perspectives of matter. One perspective is, when particular issue is debatable or when particular matter is res integra and when Assessee takes position that is favourable to Assessee, can that be treated as concealment or non disclosure for purpose of penalty proceedings under Section 271(1)(c) of IT Act. To be noted, in instant case, issue is res integra in Assessee's case itself. second perspective is considering facts and circumstances of case, as also trajectory it has taken in reaching this court from AO via CIT(A) and ITAT, does any substantial question of law arise under Section 260A of IT Act. 5(g) With regard to first perspective, learned counsel for Revenue Mr.Karthik Ranganathan fairly submitted that there is no dispute that issue as to whether relevant payment received by Assessee from Dutch company towards giving up her right for right to sue for damages on account of breach is in nature of 'success sharing bonus' and whether such 'success sharing bonus' is to be treated as revenue receipt or capital http://www.judis.nic.in 9 receipt is clearly res integra in T.C.A.Nos.92 and 93 of 2013 in this Court. In other words, this court in in seizin of matter. As consequence, learned counsel for Revenue is not in position to debate or dispute that issue on date of filing of returns by Assessee in instant case was clearly debatable. As issue was debatable, Assessee has taken position that is favourable to her and treated same as capital receipt. Otherwise, there is no deliberate concealment or non disclosure. 5(h) By long catena of authorities, Courts have repeatedly held that for imposition of penalty under Section 271(1)(c) of IT Act, 'mens rea' is most important. In other words, in plethora of authorities, Courts have repeatedly held that in absense of mens rea on part of Assessee to conceal income or deliberate non disclosure, penalty proceedings cannot be initiated. To be noted, as far as tax component is concerned, same has been levied and it is now subject matter of T.C.A.Nos.92 and 93 of 2013, which will be decided independently on merits of matter. 5(i) We further put it to learned Standing Counsel for Revenue as to how he attempts to sustain penalty proceedings when it cannot be disputed that lone issue which is crux of matter is debatable. To this, learned Standing Counsel for Revenue replied by taking us through Section 275 of IT Act. Learned Standing counsel for Revenue would submit that there is cap qua time frame for imposing penalty, if they await outcome of T.C.A.Nos.92 and 93 of 2013, it will become too late for them to impose penalty and therefore, they have commenced penalty http://www.judis.nic.in 10 proceedings and imposed penalty on Assessee, though issue is, indisputably, debatable. 5(j) This submission, though attractive at first blush, on closer scrutiny does not find favour with us. reason is, question before us is whether conduct of Assessee in filing returns in instant case, is one that warrants imposition of penalty owing to non disclosure / concealment. Assuming for moment, if this court later returns finding in above said Tax Case Appeal that receipt in question from Dutch company should be treated as revenue receipt and not as capital receipt, that would not in any manner lead to conclusion that Assessee is guilty of deliberate non disclosure / deliberate concealment. That decision will only answer question as to whether Assessee is liable to pay tax or not. What is to be noted is, as on date of filing of return by Assessee for said assessment year in instant case, which is 31.3.2010, issue is as to whether relevant payment is revenue receipt or capital receipt was clearly debatable and therefore, Assessee chose to take position which is favourable for her. This in our opinion does not in any manner qualify as deliberate non disclosure or concealment. 5(k) We do not find any mens rea on part of Assessee qua concealment and non disclosure. Therefore, we have no hesitation in coming to conclusion that this may not be case which warrants penalty proceedings under Section 271(1)(c) of IT Act. However, this being appeal under Section 260A of IT Act, it can be entertained only on substantial questions of law and not even on questions of law. What is http://www.judis.nic.in 11 'substantial question of law' for purpose of Section 260A of IT Act has been well elucidated by Hon'ble Supreme Court of India. 5(l) In M.Janardhana Rao Vs. Joint Commissioner of Income Tax [2005 273 ITR 50 (SC) = (2005) 2 SCC 324], Supreme Court remanded to High Court appeal under Section 260A of IT Act since substantial questions of law were not framed at time of admission and were framed after conclusion of arguments. In doing so, it referred to Apex Court judgment in Sir Chunilal V. Mehta & Sons Ltd. vs Century Spg. & Mfg. Co. Ltd. [AIR 1962 SC 1314] to enumerate principles regarding substantial question of law. Though Chunilal Mehta's case dealt with Article 133(1) of Constitution of India which provides for certificate of appeal to be granted by High Court, if case involves substantial question of law of general importance, it was cited by Apex Court to enumerate principles regarding concept of substantial question of law . same case was referred to by Supreme Court in Hero Vinoth Vs. Seshammal [(2006) 5 SCC 545] to lay down principles regarding substantial question of law in appeal under Section 100 of CPC. 5(m) With regard to 'substantial question of law', tests laid down by Supreme Court of India for finding out whether given set of questions of law are mere questions of law or substantial questions of law is found in Hero Vinoth's case judgment. ratio laid down by Supreme Court is found in paragraphs 21 to 23 of said judgment, which read as follows : 21. phrase substantial question of law , as occurring in amended Section 100 CPC is not defined in Code. http://www.judis.nic.in word substantial, as qualifying question of law , means 12 of having substance, essential, real, of sound worth, important or considerable. It is to be understood as something in contradistinction with technical, of no substance or consequence, or academic merely. However, it is clear that legislature has chosen not to qualify scope of substantial question of law by suffixing words of general importance as has been done in many other provisions such as Section 109 of Code or Article 133(1)(a) of Constitution. substantial question of law on which second appeal shall be heard need not necessarily be substantial question of law of general importance. In Guran Ditta v. Ram Ditta [(1927-28) 55 IA 235 : AIR 1928 PC 172] phrase substantial question of law as it was employed in last clause of then existing Section 100 CPC (since omitted by Amendment Act, 1973) came up for consideration and their Lordships held that it did not mean substantial question of general importance but substantial question of law which was involved in case. In Sir Chunilal case [1962 Supp (3) SCR 549 : AIR 1962 SC 1314] Constitution Bench expressed agreement with following view taken by Full Bench of Madras High Court in Rimmalapudi Subba Rao v. Noony Veeraju [AIR 1951 Mad 969 : (1951) 2 MLJ 222 (FB)] : (Sir Chunilal case [1962 Supp (3) SCR 549 : AIR 1962 SC 1314] , SCR p. 557) When question of law is fairly arguable, where there is room for difference of opinion on it or where Court thought it necessary to deal with that question at some length and discuss alternative views, then question would be substantial question of law. On other hand if question was practically covered by decision of highest court or if general principles to be applied in determining question are well settled http://www.judis.nic.in and only question was of applying those 13 principles to particular fact of case it would not be substantial question of law. This Court laid down following test as proper test, for determining whether question of law raised in case is substantial: (Sir Chunilal case [1962 Supp (3) SCR 549 : AIR 1962 SC 1314] , SCR pp. 557-58) proper test for determining whether question of law raised in case is substantial would, in our opinion, be whether it is of general public importance or whether it directly and substantially affects rights of parties and if so whether it is either open question in sense that it is not finally settled by this Court or by Privy Council or by Federal Court or is not free from difficulty or calls for discussion of alternative views. If question is settled by highest court or general principles to be applied in determining question are well settled and there is mere question of applying those principles or that plea raised is palpably absurd question would not be substantial question of law. 22. In Dy. Commr. v. Rama Krishna Narain [1954 SCR 506 : AIR 1953 SC 521] also it was held that question of law of importance to parties was substantial question of law entitling appellant to certificate under (the then) Section 100 CPC. 23. To be substantial question of law must be debatable, not previously settled by law of land or binding precedent, and must have material bearing on decision of case, if answered either way, insofar as rights of parties before it are concerned. To be question of law involving in case there must be first foundation for it http://www.judis.nic.in laid in pleadings and question should emerge from 14 sustainable findings of fact arrived at by court of facts and it must be necessary to decide that question of law for just and proper decision of case. entirely new point raised for first time before High Court is not question involved in case unless it goes to root of matter. It will, therefore, depend on facts and circumstance of each case whether question of law is substantial one and involved in case or not, paramount overall consideration being need for striking judicious balance between indispensable obligation to do justice at all stages and impelling necessity of avoiding prolongation in life of any lis. (See Santosh Hazari v. Purushottam Tiwari [(2001) 3 SCC 179] .) 5(n) Now, in light of above, we examine two questions on which Revenue wants us to entertain this appeal, which read as follows : 1.Whether on facts and circumstances of case Appellate Tribunal was correct in deleting penalty levied u/s.271(1)(c) of Act? 2.Whether on facts and circumstances of case Appellate Tribunal was correct in deleting penalty on ground that assessee's Tax Case Appeal is admitted by Hon'ble High Court would give rise to presumption that issue is debatable? 5(o) We applied above tests and examined whether they are mere questions of law or substantial questions of law. As there is nothing of substance, of purport or nothing that would decide right of parties qua questions of law, we have no hesitation in holding that two questions of law as propounded by Revenue are not substantial questions of law at all. We http://www.judis.nic.in 15 are also of view that they may not even qualify as questions of law as very language in which questions are couched would demonstrate that there is huge factual element built into them. 5(p) Independent of aforesaid two questions suggested by Revenue in Memorandum of Appeal, we also applied our mind to see if any substantial question of law arises in instant case. To our mind, there is none. Therefore, we have no hesitation in coming to conclusion that no substantial question of law arises in instant case. 6 CONCLUSION : 6(a) Owing to all that have been stated supra, instant case is not fit enough to be entertained under Section 260A of IT Act. More so, as no substantial question of law arises, instant appeal deserves to be dismissed. 7 DECISION : 7(a) In light of all that have been stated supra, particularly under captions detailed factual matrix and discussion, instant Tax Case Appeal No.303 of 2017 is dismissed. As we have not issued notice to respondent, we are not examining aspect of costs. (I.B., CJ.) (M.S., J.) 20.07.2017 Index : Yes http://www.judis.nic.invvk 16 To Income Tax Appellate Tribunal, 'A' Bench, Chennai. http://www.judis.nic.in 17 Hon'ble Chief Justice and M.Sundar, J. vvk T.C.A.No.303 of 2017 20.07.2017 http://www.judis.nic.in Principal Commissioner of Income-tax-4, Chennai v. Hemalatha Rajan