ADIT (IT) 2(2), MUMBAI V. FIDELITY MANAGEMENT TRUST CO A/C. FIDELITY GROUP TRUST FOR EMPLOYEE BENEFIT PLANS FIDELITY EMERGING MARKETS COLLETIVE POOL FUNDS, MUMBAI

ITA 1617/MUM/2010

• Counselvise Citation: 161719914 RSA 2010
• Duration Of Justice: 1 year(s) 1 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-04-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: F
• Next Hearing Date: 05-01-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 03-03-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Business income; Double taxation relief; Bonafide belief; Permanent establishment; Advance ruling; Question of law; Difference of opinion; Revised return; Ignorance of law

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH L, MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI B.RAMAKOTAIA H (A.M) ITA NO.1617/MUM/2010(A.Y. 2004-05) THE ADIT (IT) 3(2), SCINDIA HOUSE, R. NO.134, 1 ST FLOOR, N.M.ROAD, MUMBAI. (APPELLANT) VS. M/S. FIDELITY MANAGEMENT TRUST CO. A/C. FIDELITY GROUP TRUST FOR EMPLOYEE BENEFIT PLANS FIDELITY EMERGING MARKETS COLLECTIVE POOL FUNDS, C/O. BMR & ASSOCIATES. 3F, CONTRACTOR BUILDING, 41, R. KAMANI MARG, BALLARD ESTATE, MUMBAI -1 PAN: AAATF 1593P (RESPONDENT) ITA NO.1618/MUM/2010(A.Y. 2004-05) THE ADIT (IT) 3(2), SCINDIA HOUSE, R. NO.134, 1 ST FLOOR, N.M.ROAD, MUMBAI. (APPELLANT) VS. M/S. FIDELITY MANAGEMENT TRUST CO. A/C. FIDELITY INVESTMENT TRUST FOR EMPLOYEE BENEFIT PLANS FIDELITY INTERNATIONAL DISCOVERY FUND (FORMERLY KNOWN AS FIDELITY INVESTMENT TRUST FIDELITY INTERNATIONAL GROWTH AND INCOME FUND. C/O. S.R. BATLIBOI & CO. 18 TH FLOOR, EXPRESS TOWERS, NARIMAN POINT, MUMBAI 400 021 PAN:AAATF 0619E (RESPONDENT) ITA NO.1619/MUM/2010(A.Y. 2004-05) THE ADIT (IT) 3(2), SCINDIA HOUSE, R. NO.134, 1 ST FLOOR, N.M.ROAD, MUMBAI. (APPELLANT) VS. M/S. FIDELITY MANAGEMENT TRUST CO. A/C. FIDELITY INVESTMENT TRUST FIDELITY EMERGING MARKET FUND, C/O. S.R. BATLIBOI & CO. 18 TH FLOOR, EXPRESS TOWERS, NARIMAN POINT, MUMBAI 400 021 PAN:AAATF 1590Q (RESPONDENT) ITA NO.1617/MUM/2010(A.Y. 2004-05) 2 ITA NO.1620/MUM/2010(A.Y. 2004-05) THE ADIT (IT) 3(2), SCINDIA HOUSE, R. NO.134, 1 ST FLOOR, N.M.ROAD, MUMBAI. (APPELLANT) VS. M/S. FIDELITY MANAGEMENT TRUST CO. A/C. FIDELITY INVESTMENT TRUST FIDELITY DIVERSIFIED INTERNATIONAL FUND, C/O. S.R. BATLIBOI & CO. 18 TH FLOOR, EXPRESS TOWERS, NARIMAN POINT, MUMBAI 400 021 PAN:AAATF 1589K (RESPONDENT) APPELLANT BY : SMT. MALATHI SHRIDHARAN RESPONDENTS BY : SHRI M.P.LOHIA ORDER PER N.V.VASUDEVAN, J.M, THESE ARE APPEALS BY THE REVENUE AGAINST FOUR ORDE RS ALL DATED 23/12/2009 OF CIT(A) X, MUMBAI RELATING TO ASSESSME NT YEAR 2004-05. IN THESE APPEALS THE REVENUE HAS CHALLENGED THE ORDERS OF THE CIT(A), WHEREBY THE CIT(A) HAS CANCELLED THE ORDER OF THE AO IMPOSI NG PENALTY ON THE ASSESSEES UNDER SECTION 271(1)(C) OF THE INCOME TA X ACT,1961 (THE ACT). 2. THE FACTS AND CIRCUMSTANCES UNDER WHICH THE PENA LTY UNDER SECTION 271(1)(C) OF THE ACT WAS IMPOSED BY THE AO ON THE A SSESSEES ARE AS FOLLOWS. ALL THE ASSESSEES ABOVE NAMED ARE NON-RESIDENTS AN D ARE FUNDS REGISTERED AS FOREIGN INSTITUTIONAL INVESTOR(FII) WITH SECURIT IES AND EXCHANGE BOARD OF INDIA (SEBI). THE ASSESSEES IN ALL THESE CASES FI LED RETURNS OF INCOME WHEREIN THEY DECLARED THE GAIN/LOSS ARISING ON SALE OF SECURITIES IN INDIA UNDER THE HEAD CAPITAL GAIN. ALL THE ASSESSEES FILED A REVISED RETURN OF INCOME REPORTING NIL INCOME AND CLAIMING REFUND OF THE TAXES PAID. THE DETAILS IN THIS REGARD ARE AS FOLLOWS: ITA NO.1617/MUM/2010(A.Y. 2004-05) 3 APPEAL NO. 1617/M/10 1618/M/10 1619/M/10 1620/M/10 NAME OF FUND FIDELITY GROUP TRUST FOR EMPLOYEE BENEFIT PLANS FIDELITY EMERGING MARKETS COLLECTIVE POOL FUNDS FIDELITY INVESTMENT TRUST FIDELITY INTERNATIONAL DISCOVERY FUND FIDELITY INVESTMENT TRUST FIDELITY EMERGING MARKETS FUNDS FIDELITY INVESTMENT TRUST FIDELITY DIVERSIFIED INTERNATIONAL FUND ORIGINAL RETURN AS CAPITAL GAIN - DATE OF FILING -AMOUNT(IN RS) 17 TH AUG.2004 43,074,230 17 TH AUG.2004 51,060,460 17 TH AUG.2004 94,499,500 17 TH AUG.2004 476,344,885 REVISED RETURN AS BUSINESS INCOME RELYING UPON RULING OF THE AAR IN THE CASE OF FIDELITY ADVISOR SERIES VIII(2004) 271 ITR 1 AND XYZ/ABC EQUITY FUND (2001) 250 ITR 194 - DATE OF FILING - AMOUNT (IN RS) 25 TH MARCH 2005 NIL 25 TH MARCH 2005 NIL 25 TH MARCH 2005 NIL 25 TH MARCH 2005 NIL ASSESSED BY THE AO AS CAPITAL GAINS - DATE OF ORDER 26 TH DEC.2006 43,074,230 22 ND DEC.2006 51,060,460 22 ND DEC.2006 94,499,500 22 ND DEC.2006 476,344,885 3. IF THE INCOME IN QUESTION IS CONSIDERED AS INCOM E FROM BUSINESS THEN THE SAME WOULD BE TAXABLE ONLY IF THE ASSESSEES WH O ARE NON RESIDENTS HAVE A PERMANENT ESTABLISHMENT IN INDIA. THE REASONS AS SIGNED FOR FILING THE REVISED RETURNS OF INCOME HAVE BEEN SET OUT BY THE ASSESSEES ARE COMMON AND THE SAME IS AS FOLLOWS: WE REFER TO OUR REPRESENTATIVES LETTER DATED AUG. 06, 2004, ENCLOSING THE RETURN OF INCOME (ROI) IN FORM NO.3 FOR THE A SSESSMENT YEAR UNDER CONSIDERATION, FILED WITH YOUR OFFICE ON AUGU ST 17, 2004, BEARING ACKNOWLEDGEMENT NO.000092. A COPY OF THE ACKNOWLED GED ROI IS ENCLOSED HEREWITH AS ANNEXURE A FOR YOUR READY REFE RENCE. THE FUND HAD, IN THE ORIGINAL ROI, OFFERED TO TAX T HE INCOME EARNED ON SALE OF SECURITIES IN INDIA AS CAPITAL GAINS AND PA ID TAXES THEREON. HOWEVER, AS THE FUND HAS BEEN CARRYING ON BUSINESS AS AN INVESTMENT TRUST, THE SHARES AND SECURITIES WERE HELD BY THE F UND AS BUSINESS ASSETS, THE PROFITS FROM THE PURCHASE AND SALE OF S HARES ARE IN THE NATURE OF BUSINESS INCOME. THE FACT THAT THE FUND IS CARRYING ON BUSINESS OF DEALING IN SHARES AND SECURITIES IS ALS O EVIDENT FROM THE OBJECT OF THE FUND AS SEEN FROM ITS CHARTER DOCUMEN TS, THE REGISTRATION WITH SECURITIES & EXCHANGE BOARD OF INDIA(SEBI) A S A FOREIGN INSTITUTIONAL INVESTOR AND THE ENORMITY AND FREQU ENCY OF TRANSACTIONS OF PURCHASE AND SALE OF SHARES AND SECURITIES BY TH E FUND. FURTHER, IN VIEW OF THE PROVISIONS OF THE DOUBLE TAXATION AVOID ANCE AGREEMENT (DTAA) BETWEEN INDIA AND USA, THE BUSINESS PROFIT S COULD BE TAXED IN INDIA ONLY IF THERE IS A PERMANENT ESTABLISHMENT(P E) IN INDIA. AS THE ITA NO.1617/MUM/2010(A.Y. 2004-05) 4 FUND DOES NOT HAVE AN OFFICE, A PLACE OF BUSINESS O R A DEPENDENT AGENT IN INDIA, IT DOES NOT HAVE A PE IN INDIA AND THEREF ORE, THE BUSINESS INCOME ON SALE OF SECURITIES WOULD NOT BE TAXABLE I N INDIA. WITH REGARD TO OUR CLAIM THAT THE INCOME EARNED BY THE FUNDS IS IN THE NATURE OF BUSINESS INCOME WE WOULD LIKE TO PLACE RE LIANCE ON A RECENT RULING DELIVERED BY THE AUTHORITY FOR ADVANCE RULIN GS(AAR) IN RESPECT OF ONE OF OUR SISTER FUNDS, NAMELY FIDELITY ADVISOR SERIES VIII REPORTED IN (2004) 271 ITR 01(AAR), THE FACTS OF WHICH ARE S IMILAR TO OUR CASE. THE RULING DELIVERED BY THE AAR IS ENCLOSED HEREWIT H AS ANNEXURE B. IN THIS CASE, THE AAR, AFTER PERUSING CERTAIN PARAM ETERS SUCH AS THE OBJECTS FOR WHICH THE APPLICANT WAS ESTABLISHED, TH E FREQUENCY OF TRADE ETC. HELD THAT THE INCOME EARNED BY FIDELITY ADVISO R SERIES VIII WAS IN THE NATURE OF BUSINESS INCOME. THE AAR ALSO CONSID ERED WHETHER THE PRESENCE OF THE CUSTODIAN IN INDIA WOULD TANTAMOUNT TO THE FIDELITY ADVISOR SERIES VIII HAVING A PE IN INDIA, AND IN TH IS REGARD RULED IN THE NEGATIVE. THE AAR RULED THAT THE INCOME EARNED BY FIDELITY ADVISOR SERIES VIII WAS IN THE NATURE OF BUSINESS INCOME AN D IN THE ABSENCE OF PE IN INDIA ITS INCOME FROM SALE OF SECURITIES WAS NOT TAXABLE IN INDIA. THE AAR HAS TAKEN A SIMILAR VIEW IN THE CASE OF XYZ ABC EQUITY FUND (2001) 250 ITR 0194 (AAR). IN VIEW OF THE ABOVE, THE FUND WISHES TO OFFER ITS INCOME AS BUSINESS INCOME AND ACCORDINGLY REVISE THE ROI FOR THE ABOVE MENTIONED ASSESSMENT YEAR. THE REVISED ROI IN FORM NO.2 ALON G WITH THE COMPUTATION OF INCOME IS ATTACHED WITH THIS LETTER. 4. IN THE ASSESSMENT PROCEEDINGS THE AO WAS OF THE VIEW THAT THE INCOME OF THE ASSESSEES FOR TRANSACTIONS IN INDIAN SECURI TIES WAS CAPITAL GAIN. IN COMING TO THE ABOVE CONCLUSION THE AO ANALYZED THE SCHEME OF INVESTMENT FOR FIIS AND CAME TO THE CONCLUSION THAT THE POLICY OF THE GOVERNMENT WAS ONLY TO ALLOW INVESTMENT IN CAPITAL GAIN MARKET IN INDIA BY FIIS AND NOT TO PERMIT BUSINESS ACTIVITIES OF DEALING IN SECURITIES . THE AO ALSO IN THIS REGARD REFERRED TO THE SCHEME OF TAXATION OF CAPITA L GAINS OF FIIS UNDER SECTION 115AD OF THE ACT AND THE PERMISSION ALLOWED BY THE SEBI AND FEMA WHICH ONLY PERMITS INVESTMENTS IN INDIAN SECURITIES . THE AO ALSO FOUND THAT THE OTHER CRITERIA FOR TREATING THE INCOME IN QUESTION AS INCOME FROM BUSINESS NAMELY NATURE FREQUENCY AND PURPOSE OF THE TRANSACTION, MAINTENANCE OF BOOKS OF ACCOUNTS ETC. NOT HAVING BE EN FULFILLED IN THE CASE OF ITA NO.1617/MUM/2010(A.Y. 2004-05) 5 THE ASSESSEES. ALTERNATIVELY, THE AO ALSO HELD T HAT THE ASSESSEESS HAD PERMANENT ESTABLISHMENTS (P.E) IN INDIA AND, THEREF ORE, EVEN OTHERWISE THE INCOME IN QUESTION IS TAXABLE. THUS CAPITAL GAIN D ECLARED BY THE ASSESSEES WAS BROUGHT TO TAX BY THE AO. 5. IN RESPECT OF THE CLAIM MADE BY THE ASSESSEES T HAT THE INCOME IN QUESTION MADE BY THE ASSESSEESS THAT THE INCOME IN QUESTION IS NOT CAPITAL GAIN AND IS BUSINESS INCOME AND IS NOT TAXABLE IN I NDIA IN VIEW OF THE PROVISIONS OF INDO US DTAA, WHICH WAS REJECTED BY T HE AO, THE AO INITIATED THE PENALTY PROCEEDINGS AGAINST THE ASSESSEES. 6. AGAINST THE ORDER OF THE AO IN THE QUANTUM PROCE EDINGS THE ASSESSEES FIELD APPEALS BEFORE THE CIT(A). IN THE MEANTIME T HE ASSESSEES APPROACHED THE AAR ON THE QUESTION WHETHER THE INCOME IN QUEST ION COULD BE SAID TO BE INCOME FROM BUSINESS. THE AAR IN FIDELITY NORTH ST ART FUNDS & OTHERS IN RE, 288 ITR 641 (AAR) BY ITS RULING DATED 8/1/2007 HELD THAT THE FIIS CAN INVEST IN SECURITIES IN INDIA TO RECEIVE INCOME FRO M THEM SO LONG THEY HOLD THE SAME AND CAN REALIZE CAPITAL GAINS ON THEIR TR ANSFER. THE AUTHORITY FURTHER RULED THAT THE APPLICANTS DID NOT MAINTAIN ACCOUNTS TO SHOW THE MANNER OF VALUATION OF STOCK IN TRADE AT THE END OF THE FINANCIAL YEAR. THERE WAS NOTHING TO SHOW THAT INVESTMENTS WERE HELD AS C APITAL ASSETS. THE RETURNS WERE FIELD DECLARING CAPITAL GAINS. IN TH OSE CIRCUMSTANCES THE AAR HELD THAT THE TRANSACTIONS WERE ONLY IN THE NATURE OF INVESTMENT AND THE PROFITS ARISING THERE FROM CANNOT BE TREATED AS BUS INESS INCOME. THE ASSESSEES, THEREFORE, WITHDREW THEIR APPEALS BEFOR E THE CIT(A). IT IS IN THE ABOVE BACKGROUND OF FACTS THAT THE QUESTION AS TO W HETHER THE ASSESSEESS CAN BE SAID TO BE GUILTY OF FURNISHING INACCURATE P ARTICULARS OF INCOME HAS TO BE DECIDED. 7. THE AO IN IMPOSING THE PENALTY ON THE ASSESSEES PRIMARILY RELIED ON EXPLANATION-1 TO SECTION 271(1)(C) OF THE ACT. THE AO HELD THAT THE REVISED ITA NO.1617/MUM/2010(A.Y. 2004-05) 6 RETURN FILED BY THE ASSESSEES OBLITERATED THE ORIG INAL RETURN FILED BY THE ASSESSEES AND THE REVISED RETURN WAS NOT CORRECT A ND COMPLETE AND, THEREFORE, THE ASSESSES, ARE GUILTY OF FURNISHING I NACCURATE PARTICULARS OF INCOME. THE AO ALSO HELD THAT THE ASSESSEES DID N OT OFFER ANY BONA FIDE EXPLANATION WITH REGARD TO THEIR CLAIM. THE AO ALS O HELD THAT THE ASSESSEES DID NOT FILE AUDIT REPORT UNDER SECTION 44AB OF THE ACT, TRADING AND P&L ACCOUNT AND AUDITED P&L ACCOUNT AND BALANCE SHEET. THE AO ALSO REFERRED TO THE FACT THAT IN THE PAST ASSESSEES HAD BEEN DE CLARING INCOME UNDER THE HEAD CAPITAL GAIN AND HAS CHANGED THE STAND IN THE PRESENT ASSESSMENT YEAR WITHOUT ANY VALID REASON. THE AO ALSO HELD THAT TH E ASSESSEES ON THEIR OWN CAME TO THE CONCLUSION THAT THE INCOME IN QUESTION IS BUSINESS FROM BUSINESS AND THAT THE ASSESSEES DID NOT HAVE PE IN INDIA AND THAT THEY ARE ENTITLED TO THE BENEFIT OF INDO US TAX TREATY. FOR ALL THE ABOVE REASONS THE AO IMPOSED PENALTY ON THE ASSESSEES. 8. ON APPEAL BY THE ASSESSEES THE CIT(A) CANCELLED THE ORDER OF THE AO IMPOSING PENALTY FOR THE FOLLOWING REASONS: 1.3.1 I HAVE CONSIDERED THE FACTS AND GONE THROUG H THE PENALTY ORDER PASSED BY THE AO AND ALSO THE SUBMISSIONS MADE BY T HE APPELLANT BEFORE ME. I FIND THAT THE ASSESSEE HAS FILED ORIG INAL RETURN OF INCOME SHOWING INCOME UNDER THE HEAD OF CAPITAL GAIN. H OWEVER, IT WAS REVISED ON THE BASIS OF ADVANCE RULING IN THE CASE OF XYZ/ABC EQUITY FUND, (2001) (250 ITR 194) (AAR) AND FIDELITY ADVIS ORS SERIES VIII, (2004) (271 ITR 1)(AAR), WHEREIN BASED ON SAME SET OF FACTS THE INCOME WAS HELD TO BE ASSESSABLE AS BUSINESS INCOME . THE APPELLANT FILED A REVISED RETURN OF INCOME ON 31/3/2005 SHOWI NG TAXABLE INCOME AT RS. NIL AND CLAIMING REFUND OF TAXES PAID, ON TH E GROUND THAT ITS INCOME WAS IN THE NATURE OF BUSINESS INCOME AND S INCE THE APPELLANT WAS NOT HAVING PE, ITS INCOME WAS NOT TAXABLE IN IN DIA IN VIEW OF ARTICLE 7 READ WITH ARTICLE 5 OF DTAA. THIS REVISE D RETURN OF INCOME WAS FILED WITH COVERING LETTER DATED 25/3/2005 EXPL AINING THE REASONS THEREOF. HOWEVER, THE AO HAS ASSESSED IT AS INCOME FROM CAPITAL GAINS ONLY. THERE IS NO ALLEGATION OR OBSERVATION OF TH E AO IN THE ASSESSMENT ORDER THAT ANY FACT MATERIAL TO THE COMP UTATION OF INCOME WAS EITHER NOT DISCLOSED OR WAS FOUND TO BE WRONG. THE ASSESSMENT HAS BEEN MADE ON THE BASIS OF FACTS DISCLOSED BY TH E APPELLANT IN THE RETURN OF INCOME AND ALSO DURING THE COURSE OF ASS ESSMENT ITA NO.1617/MUM/2010(A.Y. 2004-05) 7 PROCEEDINGS AS AND WHEN DEMANDED BY THE AO. ASSESS MENT HAS BEEN MADE BY THE AO HAVING A DIFFERENT OPINION FROM THE POINT OF VIEW OF THE APPELLANT. THUS THERE IS NO QUESTION OF CONCEALING ANY FACTS. THE REVISED CLAIM WAS BASED ON LEGAL RULING. THUS THER E WAS NO CONCEALMENT WHATSOEVER, NOR HAS THE ASSESSEE HAS CO MMITTED AN ACT OF FURNISHING INACCURATE PARTICULARS OF INCOME. THE ENTIRE FACTS AND CLAIM HAS BEEN EXPLAINED IN THE LETTER WHILE FILING THE REVISED RETURN OF INCOME AND SAME WAS BASED ON JUDICIAL RULING. A PE RUSAL OF THE PENALTY ORDER REVEALS THAT THE AO HAS REJECTED THE CONTENTIONS ON THE BASIS THAT IGNORANCE OF LAW DOES NOT EXTINGUISH THE LIABILITY TO OBEY THE LAW. THE AO OBSERVED THAT ASSESSEE HAS TRIED HIS L UCK TO BE IN TWO BOATS AT THE SAME TIME WITH GUILTY MIND, BUT AT THE SAME TIME CLAIMING HIS ASSERTION TO BE CONTENTION ARISEN OUT OF BONAFI DE BELIEF, WHICH DOES NOT HOLD WATER. THIS VIEW OF LEARNED AO MANIFESTS THAT THERE WAS BONAFIDE BELIEF ON THE PART OF APPELLANT AND AT THE SAME TIME IT WAS BASED ON JUDICIAL RULING IN SAME TYPE OF FUND THAT THE ITS INCOME COULD BE ASSESSED AS BUSINESS INCOME. THE ASSESSEE FILED REVISED RETURNS OF INCOME ALONGWITH A LETTER WHICH EXPLAINING THE REAS ONS FOR FILING THE RETURN OF INCOME. 9. THE CIT(A) FURTHER HELD THAT THE ASSESSEESS MAD E FULL DISCLOSURE OF ALL MATERIAL FACTS AND THAT THE ASSESSMENT WAS A RESULT OF DIFFERENCE OF OPINION BETWEEN THE AO AND THE ASSESSEES ON A QUESTION OF LAW AND, THEREFORE, THE ASSESSEES SHOULD BE ENTITLED TO THE BENEFITS OF EX PLANATION-1 TO SECTION 271(1)(C) OF THE ACT. THE CIT(A) ALSO RELIED ON THE DECISION OF THE ITAT, MUMBAI IN THE CASE OF VARIABLE INSURANCE FUND OVERS EAS PORTFOLIO VS. ADIT, ITA NO.559/M/09 FOR A.Y. 2004-05, WHEREIN ON IDENTI CAL FACTS PENALTY WAS HELD TO BE NOT LEVIABLE. FOR ALL THE ABOVE REASONS THE CIT(A) CANCELLED THE ORDERS OF THE AO IMPOSING PENALTY. 10. AGGRIEVED BY THE ORDERS OF THE CIT(A) THE REVEN UE HAS FIELD THE PRESENT APPEALS BEFORE THE TRIBUNAL. 11. WE HAVE HELD THE RIVAL SUBMISSION. IT WAS THE S UBMISSION OF THE LEARNED D.R. THAT UNDER ARTICLE 4 OF THE DTAA BETWE EN INDIA AND USA, THE TERM RESIDENT OF A CONTRACTING STATE MEANS A PERSON WHO UNDER THE LAW OF ITA NO.1617/MUM/2010(A.Y. 2004-05) 8 THAT STATE IS LIABLE TO TAX THEREIN BY REASON OF HI S DOMICILE, RESIDENCE, CITIZENSHIP, PLACE OF MANAGEMENT, PLACE OF INCORPOR ATION, OR ANY OTHER CRITERION OF A SIMILAR NATURE, PROVIDED, HOWEVER, T HAT (A) (B) IN THE CASE OF INCOME DERIVED OR PAID BY A PART NERSHIP, ESTATE, OR TRUST, THIS TERM APPLIES ONLY TO THE EXTENT THAT THE INCOM E DERIVED BY SUCH PARTNERSHIP, ESTATE, OR TRUST IS SUBJECT TO TAX IN THAT STATE AS THE INCOME OF A RESIDENT, EITHER IN ITS HANDS OR IN THE HANDS OF IT S PARTNERS OR BENEFICIARIES. 12. IT WAS THE SUBMISSION OF THE LEARNED D.R. THAT THE ASSESSEES IN THE PRESENT CASE HAVE NOT SHOWN AS TO HOW INCOME DERIVE D BY IT IS SUBJECT TO TAX IN USA EITHER IN ITS HANDS OR IN THE HANDS OF THE B ENEFICIARY AND THEY CANNOT NOT BE SAID TO BE RESIDENT OF USA AND THEREFORE COU LD NOT HAVE MADE A CLAIM FOR THE BENEFITS OF DTAA WHICH ARE AVAILABLE ONLY T O THE RESIDENT OF THE OTHER CONTRACTING STATE, VIZ., USA. 13. IN THIS REGARD THE LEARNED D.R. PLACED RELIANCE ON THE DECISION OF THE HONBLE AAR IN THE CASE OF GENERAL ELECTRIC TRUST, IN RE 280 ITR 425 (AAR) WHEREIN IT WAS HELD THAT IN THE CASE OF A TRUST, TH E TERM RESIDENT OF THE USA IN THE USA LAW WOULD APPLY ONLY TO THE EXTENT THAT INCOME DERIVED BY SUCH TRUST WAS SUBJECT TO TAX IN THE USA AS THE INCOME O F A RESIDENT EITHER IN ITS HANDS OR IN THE HANDS OF THE BENEFICIARIES. THAT, IT BEING AN ADMITTED FACT IN THAT CASE THAT THE APPLICANT ENJOYED EXEMPTION FROM PAYMENT OF USA TAX AND NOTHING HAVING BEEN BROUGHT ON RECORD TO SHOW THAT THE INCOME FROM SECURITIES OF INDIAN COMPANIES WAS BEING TAXED IN T HE USA IN THE HANDS OF THE BENEFICIARIES OF THE TRUST, THE APPLICANT WAS N OT A RESIDENT OF THE CONTRACTING STATE (USA) AND, THEREFORE, COULD NOT A VAIL OF THE BENEFIT OF THE TERMS OF THE AGREEMENT FOR AVOIDANCE OF DOUBLE TAXA TION BETWEEN INDIA AND USA. ITA NO.1617/MUM/2010(A.Y. 2004-05) 9 14. HER NEXT SUBMISSION WAS THAT SEC.115 AD OF THE ACT WAS A CODE BY ITSELF FOR COMPUTATION OF CAPITAL GAIN BY FIIS AND THE ASSESSEES BEING AN FII COULD NOT HAVE MADE A CLAIM THAT THE CAPITAL GAIN I T EARNED WAS BUSINESS INCOME. IN THIS REGARD OUR ATTENTION WAS DRAWN TO THE DECISION OF THE AAR IN THE CASE OF UNIVERSITIES SUPERANNUATION SCHEME LTD. IN RE 275 ITR 434 (AAR) WHEREIN IT WAS HELD THAT (I) THAT THE PROVISIONS OF SECTION 115AD WOULD APPL Y TO AN ASSESSEES WHO HAS SUFFERED LOSSES ON THE TRANSFER OF SECURITIES. (II) THAT BEING A SPECIAL PROVISION FOR FIIS, SECTI ON 115AD WILL OVERRIDE THE GENERAL PROVISIONS. WHERE PARLIAMENT SO INTENDED IT PROVIDED, AS IN SECTION 115-I, AN OPTION TO BE EXERCISED BY THE ASSESSEES. ABSENCE OF SUCH A PROVISION IN THE SCHEME OF SECTION 115AD INDICATES THAT NO OPTION IS AVAILABLE TO FIIS. BY NO PRINCIPLE OF INTERPRETATIO N CAN SUCH AN OPTION BE READ IN SECTION 115AD. FOR THE REASON THAT THE APPLICANT SUFFERED CAPITAL LOSS IN AN ASSESSMENT YEAR, IT CANNOT CLAIM TO OPT OUT OF S ECTION 115AD. (III) HAVING REGARD TO SECTION 115AD(3) EVEN IN THE CASE OF FIIS, WHILE COMPUTING CAPITAL GAINS ARISING FROM THE TRANSFER O F SHORT-TERM OR LONG-TERM CAPITAL ASSETS, BEING SECURITIES OTHER THAN UNITS R EFERRED TO IN SECTION 115AB, THE OPERATION OF THE FIRST AND SECOND PROVISOS TO S ECTION 48 HAS TO BE EXCLUDED. SECTION 115AD IS A SELF-CONTAINED CODE. I T IS AN INCLUSIVE PROVISION CONTAINING, INTER ALIA, THE MODE OF COMPUTATION OF CAPITAL GAINS AND CONCESSIONAL RATE OF TAX. ITS APPLICATION DOES NOT DEPEND UPON THE RESULT OF THE COMPUTATION. GAIN AND LOSS ARE BUT TWO SIDES OF THE SAME COIN AND INDEED A LOSS IS NOTHING BUT NEGATIVE PROFIT. 15. IT WAS FURTHER SUBMITTED THAT IN THE PAST THE A SSESSEES OFFERED TO TAX INCOME FROM DEALING IN SECURITIES UNDER THE HEAD CA PITAL GAINS AND THIS IS THE FIRST YEAR IN WHICH THE ASSESSEES TOOK A STAND THAT THE SAID INCOME WAS BUSINESS INCOME. THUS THE ASSESSEES WERE FULLY AW ARE OF THE FACT THAT INCOME IN QUESTION WAS ASSESSABLE UNDER THE HEAD CA PITAL GAIN YET THE ASSESSEES CHOSE TO MAKE A CLAIM THAT THE SAID INCO ME WAS BUSINESS INCOME ITA NO.1617/MUM/2010(A.Y. 2004-05) 10 AND FURTHER WRONGFULLY CLAIMED NON TAXABILITY OF TH E INCOME BY TAKING SHELTER UNDER DTAA AND MAKING A CLAIM THAT IT HAD NO PE IN INDIA. THE ASSESSEES COULD NOT PRODUCE THE REQUIRED DOCUMENTS (LIKE PROF IT AND LOSS ACCOUNT) TO PROVE ITS CLAIM THAT INCOME IN QUESTION WAS BUSINES S INCOME AND THEREFORE THE ASSESSMENT WAS MADE TREATING THE INCOME AS CAPI TAL GAIN. THE ASSESSEESS CLAIM WAS THEREFORE NOT BONAFIDE AND TH EREFORE EXPLN.1 WILL APPLY AND THE PENALTY IMPOSED SHOULD BE RESTORED. 16. THE LD. COUNSEL FOR THE ASSESSEES BROUGHT TO O UR NOTICE THE DECISION OF THE TRIBUNAL IN THE CASE OF VARIABLE INSURANCE FUND OVERSEAS PORTFOLIO VS. ADIT,(SUPRA) AND FURTHER FIELD BEFORE US A COPY OF THE ORDER OF THE TRIBUNAL IN THE CASE OF ADIT VS. VARIABLE INSURANCE PRODUCTS F UND III BALANCED PORTFOLIO (VIPAG)IN ITA 1126/M/2010 FOR A.Y 2006-07 WHEREIN ON IDENTICAL FACTS THIS TRIBUNAL HAD CONFIRMED THE ORDER OF THE CIT(A) CANC ELLING PENALTY IMPOSED BY THE AO. THE LD. COUNSEL FOR THE ASSESSEES NARRATE D THE CIRCUMSTANCES UNDER WHICH THE REVISED RETURN WAS FIELD AND THE RE ASONS WHY THE APPEALS BEFORE THE CIT(A) WERE WITHDRAWN IN THE QUANTUM PRO CEEDINGS. THE LD. COUNSEL FOR THE ASSESSEES PLACED STRONG RELIANCE O N THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. RELIAN CE PETRO PRODUCTS PVT. LTD. 322 ITR 158(SC), WHEREIN IT WAS HELD THAT MAKI NG INCORRECT CLAIM DOES NOT AMOUNT TO CONCEALMENT OF PARTICULARS. 17. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE F IND THAT THE REVISED RETURN WAS FIELD BY THE ASSESSEES IN ALL THESE CAS ES MAKING THE CLAIM THAT THE INCOME FROM SALE OF SECURITIES WAS BUSINESS IN COME BASED ON THE DECISION OF AAR IN THE CASE OF ONE OF THE SISTER CO MPANY NAMELY FIDELITY ADVISORS SERIES VIII IN RE , 271 ITR 1. IN THE SA ID DECISION AAR EXPRESSED THE FOLLOWING VIEW. THE APPLICANT, AN INVESTMENT COMPANY, REGISTERED UNDER A STATUTE OF THE USA, WAS A NON-RESIDENT FOR THE PURPOSES OF INC OME-TAX IN INDIA. ITA NO.1617/MUM/2010(A.Y. 2004-05) 11 IT WAS SET UP TO PROVIDE INVESTORS A CONTINUOUS SOU RCE OF MANAGED INVESTMENTS IN SECURITIES. ITS INVESTMENTS WERE MA INLY IN EQUITY SECURITIES UNDER AN INVESTMENT SCHEME OF A STATE I N THE USA. THE APPLICANT WAS REGISTERED WITH THE SECURITIES AND EX CHANGE BOARD OF INDIA (SEBI) IN INDIA AND OBTAINED A FOREIGN INSTI TUTIONAL INVESTOR (FII) LICENCE AS REQUIRED BY THE REGULATIONS OF THE SEBI. IT INVESTED IN LISTED INDIAN COMPANIES UNDER THE FII REGIME. IT HAD A FO REIGN GLOBAL CUSTODIAN, WHICH APPOINTED THE STANDARD CHARTERED B ANK (SCB) AS THE DOMESTIC CUSTODIAN UNDER REGULATION 16(1) OF THE SE BI (FII) REGULATIONS, 1995. THE APPLICANT HAD MADE ENORMOUS SALE TRANSACTIONS IN RESPECT OF SHARES. THE APPLICANT A PPLIED TO THE AUTHORITY FOR AN ADVANCE RULING ON THREE QUESTIONS, VIZ., (I) WHETHER THE INCOME FROM THE PORTFOLIO COMPANIES AND THE GAINS A RISING FROM THE SALE OF THE INVESTMENTS HEREIN WOULD BE BUSINESS IN COME UNDER ARTICLE 7 OF THE AGREEMENT FOR AVOIDANCE OF DOUBLE TAXATION AND PREVENTION OF FISCAL EVASION BETWEEN INDIA AND USA AND, THEREFORE , NOT TAXABLE IN INDIA, (II) WHETHER THE APPLICANT WAS ABSOLVED FROM FILING A RETURN OF INCOME UNDER THE INDIAN ACT, AND (III) WHETHER IT W OULD BE LIABLE TO PENALTY IF A RETURN WAS NOT FILED. AT THE TIME OF THE HEARING OF THE APPLICATION, THE REPRESENTATIVE APPEARING FOR THE APPLICANT SUBMITTED THAT SINCE THE DIVIDEND INCOME WAS EXEMPT FROM TAX IN THE HANDS OF THE SHAREHOLDERS AND THERE WAS NO SIGNIFICANT INTER EST INCOME REFERENCE TO THESE ITEMS MIGHT BE DELETED FROM QUES TION NO.(I). ON THE FACTS STATED, THE AUTHORITY RULED: (I) THAT SINCE THE APPLICANT WANTED ONLY TO CONFINE QUE STION NO.(I) TO SOME OF THE ITEMS SPECIFIED THEREIN THE APPLICANT C OULD BE PERMITTED TO REFRAME THE QUESTION; (II) THAT, SINCE THE APPLICANT DID NOT HAVE ANY BRANCH OR OFFICE IN INDIA AND SCB WAS PROVIDING SERVICES TO A NUMBER OF OTHER LOCAL AND INTERNATIONAL COMPANIES, SCB WAS AN INDEPENDENT AGENT AS CONTEMPLATED BY ARTICLE 5(5) OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT, AND IT COULD NOT BE SAID THAT THE APPLIC ANT HAD A PERMANENT ESTABLISHMENT IN INDIA; (III) THAT, ON THE FACTS, HAVING REGARD TO THE OBJECT OF THE APPLICANT COMPANY, THE AMOUNT OF INVESTMENTS IN INDIA, THE RE GISTRATION WITH THE RBI, OBTAINING FII LICENCE AND THE ENORMI TY AND FREQUENCY OF PURCHASES AND SALES, THE APPLICANT HEL D THE SHARES AND SECURITIES AS BUSINESS PROFITS, AND, THEREFORE, THE BUSINESS PROFITS OF THE APPLICANT COULD BE TAXED IN INDIA IN VIEW OF ARTICLE 7 OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT. 18. THE RULING OF THE AAR WAS RENDERED ON 27/9/04. PRIOR TO THIS DAY THE ASSESSEES HAD FILED THE RETURNS OF INCOME I.E. ON 17/8/2004 FOR A.Y 2004- ITA NO.1617/MUM/2010(A.Y. 2004-05) 12 04. THE REVISED RETURN OF INCOME WAS FILED BY THE ASSESSEES ON 25/3/2005. THE ASSESSEES MADE IT CLEAR IN A LETTER FILED ALON G WITH THE REVISED RETURN OF INCOME THAT THE SAME IS BEING FILED IN VIEW OF THE DECISION OF THE AAR IN THE CASE OF SISTER CONCERN OF THE ASSESSEE VIZ., FIDELI TY ADVISORS SERIES VIII IN RE (SUPRA). LATER IN POINT OF TIME I.E. ON 8/1/2007 T HE AAR IN THE CASE OF FIDELITY NORTH STAR FUND & OTHERS (SUPRA) REVERSED ITS EARLIER DECISION IN THE CASE OF FIDELITY ADVISORS SERIES VIII IN RE , 271 I TR 1.(SUPRA). WE HAVE ALREADY NARRATED THE RULING IN THE CASE OF FIDELITY NORTH STAR FUND & ORS (SUPRA). IT IS CONSEQUENT TO THIS DECISION THAT TH E ASSESSEES WITHDREW ITS APPEALS AGAINST THE ASSESSMENT ORDERS BEFORE THE CI T(A). IT IS THUS CLEAR FROM THE FACTS THAT THE CLAIM MADE BY THE ASSESSEES S IN THE REVISED RETURN CANNOT BE SAID TO BE NOT BONA FIDE. 19. IN A RECENT JUDGMENT OF THE HONBLE APEX COURT IN CIT VS. RELIANCE PETROPRODUCTS PVT. LTD. (2010) 322 ITR 158(SC) THEI R LORDSHIPS, AFTER CONSIDERING VARIOUS DECISIONS INCLUDE DILIP N. SHRO FF VS. JCIT (2007) 291 ITR 519(SC) AND UNION OF INDIA VS. DHARMENDRA TEXTILE P ROCESSORS (2008) 306 ITR 277 (SC) HAVE OBSERVED AND HELD (PAGE 158 HEAD NOTES) AS UNDER: A GLANCE AT THE PROVISIONS OF SECTION 271(1)(C) OF THE INCOME TAX ACT , 1961, SUGGESTS THAT IN ORDER TO BE COVERED BY IT, THERE HAS TO BE CONCEALMENT OF THE PARTICULARS OF INCOME OF T HE ASSESSEE. SECONDLY, THE ASSESSEE MUST HAVE FURNISHED INACCURA TE PARTICULARS OF HIS INCOME. THE MEANING OF THE WOR D PARTICULARS USED IN SECTION 271(1)(C) WOULD EMBRA CE THE DETAILS OF THE CLAIM MADE. WHERE NO INFORMATION GIVEN IN T HE RETURN IS FOUND TO BE INCORRECT OR INACCURATE, THE ASSESSEE C ANNOT BE HELD GUILTY OF FURNISHING INACCURATE PARTICULARS . IN O RDER TO EXPOSE THE ASSESSEE TO PENALTY, UNLESS THE CASE IS STRICTL Y COVERED BY THE PROVISION, THE PENALTY PROVISION CANNOT BE INVOKED. BY NO STRETCH OF IMAGINATION CAN MAKING AN INCORRECT CLAI M TANTAMOUNT TO FURNISHING INACCURATE PARTICULARS. T HERE CAN BE NO DISPUTE THAT EVERYTHING WOULD DEPEND UPON THE R ETURN FILED BY THE ASSESSEE, BECAUSE THAT IS THE ONLY DOCUMENT WHERE THE ASSESSEE CAN FURNISH THE PARTICULARS OF HIS INCOME. WHEN SUCH PARTICULARS ARE FOUND TO BE INACCURATE, THE LIABILI TY WOULD ARISE. TO ATTRACT PENALTY, THE DETAILS SUPPLIED IN THE RET URN MUST NOT BE ITA NO.1617/MUM/2010(A.Y. 2004-05) 13 ACCURATE, NOT EXACT OR CORRECT, NOT ACCORDING TO TH E TRUTH OR ERRONEOUS. WHERE THERE IS NO FINDING THAT ANY DETAILS SUPPLIED BY THE ASSESSEE IN ITS RETURN ARE FOUND TO BE INCORRECT OR ERRONEOUS OR FALSE THERE IS NO QUESTION OF INVITING THE PENALTY UNDER SECTION 271(1)(C). A MERE MAKING OF A CLAIM, WHICH IS NOT SUSTAINABLE IN LAW, BY ITSELF, WILL NOT AMOUNT TO FURNISHING INACC URATE PARTICULARS OF REGARDING THE INCOME OF THE ASSESSEE . SUCH A CLAIM MADE IN THE RETURN CANNOT AMOUNT TO FURNISHIN G INACCURATE PARTICULARS. 20. RESPECTFULLY FOLLOWING THE RATIO OF THE ABOVE DECISION WE OBSERVE THAT THE SITUATION IN THE PRESENT CASE IS STILL BETTER AS NO FAULT HAS BEEN FOUND WITH THE PARTICULARS/ EXPLANATION SUBMITTED BY THE ASSES SEE IN ITS RETURN AND KEEPING IN VIEW THAT IT IS NOT THE CASE OF THE REVE NUE THAT THE REVISED RETURN WAS FILED BY THE ASSESSEE AFTER CONCEALMENT WAS DE TECTED IN THE COURSE OF ASSESSMENT PROCEEDING OR THE REVISED RETURN WAS NOT A VOLUNTARY RETURN OR VALID RETURN OR THE EXPLANATION GIVEN BY THE ASSESS EE WAS NOT BONAFIDE, WE ARE OF THE VIEW THAT A MERE MAKING OF A CLAIM, WHIC H IS NOT SUSTAINABLE IN LAW, BY ITSELF, WILL NOT AMOUNT TO FURNISHING INACC URATE PARTICULARS REGARDING THE INCOME OF THE ASSESSEE. SUCH A CLAIM MADE IN T HE RETURN CANNOT AMOUNT TO CONCEALMENT OF INCOME OR FURNISHING OF INACCURAT E PARTICULARS OF SUCH INCOME WHICH MAY ATTRACT LEVY OF PENALTY U/S. 271(1 )(C) OF THE ACT. ACCORDINGLY, WE ARE INCLINED TO UPHOLD THE FINDINGS OF THE LD. CIT(A) IN DELETING THE PENALTY IMPOSED BY THE AO. 21. SIMILAR VIEW HAS ALSO BEEN EXPRESSED BY THE TRI BUNAL IN THE CASE OF VARIABLE INSURANCE PRODUCTS FUNDS OVERSEAS PORTFOLI O (SUPRA) WITH REGARD TO THE CONTENTION PUT FORTH BY THE LD. D.R ON THE B ASIS THAT THE ASSESSES WERE NOT A RESIDENT OF US, WE FIND THAT THIS WAS NOT THE BASIS ON WHICH THE ASSESSMENT PROCEEDINGS PROCEEDED BEFORE THE AO NOR IT WAS THE BASIS ON WHICH PENALTY WAS IMPOSED ON THE ASSSESSEES. MORE OVER, THE RULING OF THE AAR ON THE ISSUE WAS THE BASIS ON WHICH THE ASSESSE ES MADE THE CLAIM. IT ITA NO.1617/MUM/2010(A.Y. 2004-05) 14 CANNOT BE, THEREFORE, SAID THAT THE ASSESSEES FURN ISHED INACCURATE PARTICULARS OF INCOME. THE FACT THAT SECTION 115AD IS A CODE BY ITSELF APPLICABLE TO FIIS CANNOT ALSO BE THE BASIS TO HOLD THAT THE ASSESSEE FURNISHED INACCURATE PARTICULARS OF INCOME ESPECIAL LY IN THE LIGHT OF THE RULING OF THE AAR IN FIDELITY ADVISORS SERIES VIII IN RE(SUPRA). WE ARE, THEREFORE, OF THE VIEW THAT IT IS NOT A FIT CASE FO R IMPOSING PENALTY UNDER SECTION 271(1)(C) OF THE ACT. FOR THE REASONS STAT ED ABOVE WE FIND NO MERIT IN THESE APPEALS. WE, THEREFORE, CONFIRM THE ORDERS O F CIT(A) AND DISMISS ALL THESE APPEALS BY THE REVENUE. 22. IN THE RESULT, ALL THE APPEALS BY THE REVENUE A RE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 29 TH DAY OF APRIL, 2011. SD/- SD/- (B.RAMAKOTAIAH ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED. 29 TH APRIL.2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RF BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM. ITA NO.1617/MUM/2010(A.Y. 2004-05) 15 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 26/04/2011 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 27/04/2011 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER