Penalty levied with reference to revised return is bad in law

S. 271(1)(c); in favor of taxpayer : The taxpayer was a trust organized in the US and was a resident of the US. As regards India, it was registered with SEBI as a sub- account of M/s Fidelity Management Resources Co. It filed a return of income declaring short-term capital gains and dividend income.  Thereafter, based on an AAR ruling in case of XZY/ABC Equity  Fund (2005) (250 ITR 194), the taxpayer filed a revised return of income, wherein it claimed that the fund was carrying on business  as an investment trust and the shares and securities were held by the fund as business assets. Therefore, the profits from   purchase and sale of the shares were in the nature of business income and notcapital gains . Since the appel ant had no permanent establishment in India, as per DTAA, the said business profits were not taxable in India. A letter to this effect, explaining the reasons for revising the return, was also filed with the AO.



On its revised return, the AO issued a deficiency letter asking the taxpayer to file audit report. Since no India-specific accounts were maintained, the taxpayer expressed its inability to file these documents. Thereafter, AO treated these revised return as invalid under Section 139(9). The AO completed the assessment by holding the impugned income ascapital gains i.e., as per the position prevailing in the original return. Thereafter, the AO initiated the penalty proceedings under Section 271(1)(c) and levied penalty. On appeal, the first appellate authority sustained the levy of penalty. Aggrieved, the taxpayer filed an appeal before the Tribunal.



The Tribunal held that it is very clear that the AO rejected the revised return of income and treated the same as invalid return of income. Therefore, the very basis on which penalty was levied was not existing as per law. Hence, the penalty proceedings, which were initiated, based on non-existing reason were bad in law and needed to be deleted. The Tribunal further held that even on merits there was no concealment on part of appel ant as the same was explained by way of a letter. Also since the issue was debatable and the explanation furnished by the taxpayer was not held to be false by the AO, penalty levied under such circumstances was bad in law.



Decided by; ITAT – Mumbai In the case of Variable Insurance Products Fund