Monday, December 17, 2012

Concealing a receipt in ROI attracts penalty even if taxes due thereon are deposited

Merely by depositing taxes due on concealed income, bona fides of assessee could not be said to be established until such income was included in the ROI filed by the assessee

In the instant case, the assessee was working with a foreign company (“the employer”) and his services were terminated by the said company. But the employer offered him continued employment for a limited tenure and paid him an extraordinary compensation for retention and severance of his services. The assessee had determined and paid the taxes due on his income after including the said sum. However, he attached a note to the computation of income and claimed that the said sum received was non-compete fee, which was not chargeable to tax being a capital receipt. Thus, he filed his ROI by excluding the said receipt and claimed refund of the sum deposited. The AO imposed concealment penalty on the assessee. However, the CIT(A) deleted the penalty holding that there was no concealment of particulars of income or  furnishing of inaccurate particulars thereof on the part of the assessee since the bona fides of the assessee were proved by the disclosure in the return and the payment of taxes.

On appeal, the Tribunal held in favour of revenue as under:

1) The provisions laid down under section 17(3) are very clear that profit in lieu of salary includes the amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his employment or the modification of the terms and conditions relating thereto. Thus, there was no reason available with the assessee for nurturing a belief that the amount received was a capital receipt not chargeable to tax;

2) Merely by depositing the due tax on the amount received on termination of employment the bona fides of the assessee in not declaring the receipt as income in its return of income were not established;

3) The provisions laid down under section 17(3) were clear to bring the receipt as taxable and there was no scope of debate regarding its taxability, the  explanation of the assessee that he was under a belief that the amount received was a capital receipt and was not chargeable to tax  was not acceptable; and

4) By not declaring the said receipt in his ROI, the assessee had furnished inaccurate particulars of income attracting the penal action provided under section 271(1)(c) - ADIT v. Ravindra Bahl [2012] 28 taxmann.com 130 (Delhi - Trib.)

Retro amendments don’t automatically alter analogous DTAA provisions and can’t be read into DTAA provisions

If a particular term has been specifically defined in the treaty, the retrospective amendment to the definition of such term under the Act would have no bearing on the interpretation of such term in the context of the Convention.

In the instant case, the Mumbai Tribunal decides on the issue of applicability of retrospective amendments to the provisions of treaty as under:

1) Para 1 of Article 23 of India-Mauritius treaty provides that “the laws in force in either of the Contracting States shall continue to govern the taxation of income in the respective Contracting States except where provisions to the contrary are made in this Convention”;

2) When we read full text of Para 1 of Article 23, it becomes manifest that if there is some provision in the Treaty contrary to the domestic law, then it is the provision of the treaty which shall prevail;

3) If the retrospective amendment is in the realm of a provision of which no contrary provision is there in the Treaty, then such amendment will have effect even under the DTAA and vice versa;

4) If a particular term has been specifically defined in the Treaty, the amendment to the definition of such term under the Act would have no bearing on the interpretation of such term in the context of the Convention;

5) A country who is party to a Treaty cannot unilaterally alter its provisions. Any amendment to Treaty can be made bilaterally by means of deliberations between the two countries who signed it;

6) The term “royalty” has been defined in the DTAA as per Article 12(3) of Indo-US DTAA.  Such definition of the term “royalty” as per this Article is exhaustive. Pursuant to the insertion of Explanation (5) by the Finance Act, 2012, no amendment has been made in the DTAA to bring the definition of royalty at par with that provided under the Act. Subject matter of the Explanation is otherwise not a part of the definition of Royalty as per Article 12; and

7) Thus, the retrospective insertion of Explanation 5 to section 9(1)(vi) couldn’t be read in the DTAA - WNS North America Inc. v. ADIT [2012] 28 taxmann.com 173 (Mumbai - Trib.)