IIT CORPORTE SERVICES LTD, MUMBAI V. DCIT CIR 2(2), MUMBAI

ITA 3961/MUM/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 8277 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 5 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-11-2012
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 29-10-2012
• Assessment Year: 2001-2002
• Appeal Filed On: 14-05-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: P K SHUKLA
• Keywords: Capital asset; Business income; Opportunity of being heard; Bonafide belief; Capital receipt; Revenue expenditure

Judgement Text

, , , , , IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES I, MUMBAI ! , ' # $ $ $ $ $..&'(, ) #, * BEFORE SHRI D.K.AGARWAL, JM AND SHRI N.K.BILLAIYA, A M ./ ITA NOS.3961 & 3962/MUM/2010 ( ' , ' , ' , ' , / / / / ASSESSMENT YEARS : 2001-2002 & 2002-2003) M/S.IIT CORPORATE SERVICES LIMITED 28 BOMBAY SAMACHAR MARG RAJABAHADUR MANSION, 2 ND FLOOR FORT, MUMBAI 400 001. PAN : AAACI3356A. THE DY.COMMISSIONER OF INCOME-TAX CIRCLE 2(2) MUMBAI. ( -. / // / APPELLANT) / VS. ( /0-./ RESPONDENT) -. 1 11 1 2 2 2 2 / APPELLANT BY : SHRI RAJIV KHANDELWAL /0-. 1 2 1 2 1 2 1 2 / RESPONDENT BY : SHRI P.K.SHUKLA 1 3) / / / / DATE OF HEARING : 29.10.2012 45, 1 3) / DATE OF PRONOUNCEMENT : 07.11.2012 / / / / O R D E R PER N.K.BILLAIYA (AM) : BOTH THESE APPEALS BY THE ASSESSEE ARE DIRECTED AGA INST THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS) - 5 DAT ED 17.03.2010, PERTAINING TO ASSESSMENT YEARS 2001-2002 AND 2002-2 003. AS BOTH THE APPEALS WERE DECIDED BY THE CIT(A) BY A COMMON ORDER, FOR THE SAKE OF CONVENIENCE, WE TAKE UP BOTH THE APPEALS TO GETHER. 2. THE SUM AND SUBSTANCE OF ASSESSEES GRIEVANCE IN BOTH THE YEARS IS THAT THE CIT(A) ERRED IN UPHOLDING THE ACTION OF THE ASSESSING OFFICER IN LEVYING PENALTY OF ` 1,46,01,021 FOR ASSESSMENT YEAR 2001- 2002 AND ` 50,28,863 FOR ASSESSMENT YEAR 2002-2003, U/S 271(1) (C) OF THE ACT. ITA NOS.3961 & 3962/MUM/2010. M/S.IIT CORPORATE SERVICES LIMITED. 2 3. THE FACTS AND CIRCUMSTANCES UNDER WHICH THE PENA LTY WAS IMPOSED BY THE A.O. ON THE ASSESSEE AND CONFIRMED B Y THE CIT(A) ARE AS FOLLOWS. 4. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PROVI DING VARIOUS CORPORATE SERVICES SUCH AS D.P.OPERATION, ACTING AS REGISTRAR TO PUBLIC ISSUES, CUSTODIAL SERVICES, DATA ENTRY OPERATION ET C. IN REGARD TO CUSTODIAL SERVICES, THE ASSESSEE HAD SERVICE CONTRA CT WITH SEVERAL CLIENTS SUCH AS TATA MUTUAL FUND ETC. 5. AS PER THE REGULATIONS 7 OF THE SEBI (CUSTODIAN OF SECURITIES) REGULATION, 1996, ALL CUSTODIANS WERE REQUIRED TO F ULFILL NET WORTH NORM OF ` 50 CRORE. THE ENTITIES WHICH WERE NOT FULFILLING TH E NET WORTH NORM BUT WERE OPERATING AS CUSTODIAN ON THE D ATE OF NOTIFICATION OF THE REGULATION, COULD BE GRANTED A TIME PERIOD UP TO FIVE YEARS TO FULFILL SUCH REQUIREMENT. THE ASSESSE E IN TERMS OF THE SAID REGULATIONS 7 HAVE BEEN GRANTED EXTENSION OF F IVE YEARS IN MEETING THE REQUIREMENT BY 15.05.2001. 6. THE ASSESSEE IN THE YEAR 2000 STARTED THE PROCES S OF SHIFTING MAJOR CLIENTS AND REACHED MEMORANDUM OF AGREEMENT D ATED 19.07.2000 WITH DUETSCHE BANK AG (DBA) FOR SHIFTING OF MAJOR CLIENTS. IN TERMS OF THE SAID AGREEMENT, THE ASSESS EE HAD RECEIVED COMPENSATION OF ` 3,69,17,881 FOR ASSESSMENT YEAR 2001-2002 AND ` 1,40,86,453 FOR ASSESSMENT YEAR 2002-2003. DURING T HE COURSE OF ASSESSMENT PROCEEDINGS OF THE AFORESAID ASSESSMENT YEARS, THE DISPUTE ITA NOS.3961 & 3962/MUM/2010. M/S.IIT CORPORATE SERVICES LIMITED. 3 AROSE IN RELATION TO THE TAXABILITY OF THE ABOVE SA ID SUMS WHICH THE ASSESSEE HAD DECLARED AS CAPITAL RECEIPT AND NON-TA XABLE. THE QUANTUM PROCEEDINGS ON THIS ISSUE WERE CONCLUDED AG AINST THE ASSESSEE. THE TRIBUNAL THUS HELD : 4. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE RAISED IN THESE APPEALS IS REGARDING TAXABILITY OF AMOUNTS RECEIVED BY THE ASS ESSEE FROM DBA IN CONNECTION WITH THE SHIFTING OF CERTAIN CUST ODIAL CLIENTS OF THE ASSESSEE TO THE LATTER. THE ASSESSEE IS IN THE BUSINESS OF PROVIDING VARIOUS CORPORATE SERVICES ONE OF WHICH I S CUSTODIAL SERVICE. IN RESPECT OF CUSTODIAL SERVICES, THE ASSE SSEE HAD AGREEMENTS WITH SEVERAL CLIENTS FOR PROVIDING SERVI CES SUCH AS SAFE KEEPING OF SECURITIES, COLLECTING DIVIDEND, BO NUS OR RIGHTS ACCRUED TO THE CLIENTS, MAINTAINING ACCOUNTS OF SEC URITIES ETC. THE ASSESSEE WAS PROVIDING SUCH SERVICES FROM THE FINAN CIAL YEAR 199596. THE SEBI (CUSTODIAN OF SECURITIES) REGULATI ONS, 1996 STIPULATED THAT ALL CUSTODIANS MUST FULFIL THE CRIT ERIA OF NET WORTH OF RS. 50 CRORES AND THOSE WHO WERE NOT FULFILLING THE CRITERIA ON THE DATE OF NOTIFICATION, HAD BEEN GRANTED TIME PER IOD OF FIVE YEARS FOR MEETING THE REQUIREMENT. IN CASE OF THE ASSESSE E THE SAID DEADLINE WAS TO EXPIRE ON 15TH MAY, 2001. THOUGH TH E ASSESSEE WAS STILL PURSUING WITH SEBI FOR FURTHER EXTENSION, APPREHENDING THAT EXTENSION WILL NOT BE GRANTED THE ASSESSEE STA RTED THE PROCESS OF SHIFTING SOME OF THE MAJOR CLIENTS TO SOME OTHER CONCERNS. IT HAD ENTERED INTO AN AGREEMENT WITH DBA IN THIS REGA RD ON 19TH JULY, 2000 AND IN TERMS OF THE SAID AGREEMENT HAD R ECEIVED PAYMENTS OF RS.3,69,17,881 AND RS. 1,40,86,453 IN T HE ASST. YRS. 200102 AND 2002-03 RESPECTIVELY. THE DISPUTE IS REG ARDING TAXABILITY OF THE SAID SUMS. 4.1 THE AO IN THE ASSESSMENT HAS HELD THAT THE AMOU NTS RECEIVED FROM DUESCHE BANK AG WERE COMPENSATION FOR LOSS OF INCOME FROM THE CLIENTS AND THEREFORE WERE TAXABLE AS REVE NUE RECEIPTS. IT WAS ALSO HELD THAT EVEN IF COMPENSATION WAS FOR LOS S OF AGENCY WITH THE CLIENTS, IT WOULD STILL BE A REVENUE RECEI PT AS TERMINATION HAD NOT IMPAIRED THE PROFIT EARNING APPARATUS. RELI ANCE HAD BEEN PLACED ON THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF KETTLEWELL BULLEN & CO. LTD. (SUPRA). THE AO ALSO H ELD THAT EVEN IF THE TERMINATION HAD IMPAIRED THE PROFIT EARNING APPARATUS AND THE AMOUNT WAS CAPITAL RECEIPT, IT WAS TAXABLE UNDE R THE SPECIFIC ITA NOS.3961 & 3962/MUM/2010. M/S.IIT CORPORATE SERVICES LIMITED. 4 PROVISIONS OF S. 28(II)(C) AS PER WHICH AMOUNTS REC EIVED FOR TERMINATION OF AN AGENCY WERE TAXABLE AS BUSINESS I NCOME. IN APPEAL CIT(A) HAS CONFIRMED THE DECISION OF THE AO. 4.2 THE CASE OF THE ASSESSEE IS THAT CUSTODIAL SERV ICE WAS ONE OF THE MAJOR ACTIVITIES OF THE ASSESSEE. IT HAS BEEN P OINTED OUT THAT OUT OF THE TOTAL BUSINESS RECEIPTS OF RS. 8.35 CROR ES IN 200001, FROM CUSTODIAL SERVICES WAS RS. 3.30 CRORES. THE AS SESSEE HAD CLOSED THESE SERVICES FROM 15TH MAY, 2001 AS SEBI D ID NOT ALLOW ANY FURTHER EXTENSION OF TIME. THE CLOSURE OF SUCH MAJOR ACTIVITY HAD IMPAIRED THE PROFIT EARNING APPARATUS AND THE C OMPENSATION RECEIVED WAS THEREFORE CAPITAL RECEIPT AND WAS NOT TAXABLE. REFERENCE HAS BEEN MADE TO JUDGMENT OF HONBLE SUPR EME COURT IN THE CASE OF KETTLEWELL BULLEN & CO. LTD. (SUPRA) . THE LEARNED AUTHORISED REPRESENTATIVE HAS ALSO ARGUED THAT THE ASSESSEE WAS NOT AN AGENT OF THE CLIENTS IN THE STRICT LEGAL SEN SE OF THE TERM. HE WAS DEALING WITH THE CLIENTS ON PRINCIPAL-TO-PRINCI PAL BASIS AND THEREFORE PROVISIONS OF S. 28(II)(C) WERE NOT APPLI CABLE IN RESPECT OF COMPENSATION RECEIVED. 4.3 THE ANSWER TO THE ISSUE RAISED BEFORE US BASICA LLY REQUIRES THE UNDERSTANDING OF THE TRUE NATURE OF THE RECEIPT IN THE HANDS OF THE ASSESSEE. NORMALLY, WHAT IS RECEIVED FOR LOSS OF CA PITAL OR LOSS OF SOURCE OF INCOME OR FOR TRANSFER OF A CAPITAL ASSET IS A CAPITAL RECEIPT AND WHAT IS RECEIVED AS A PROFIT IN A TRADI NG TRANSACTION OR RECEIVED FOR LOSS OF INCOME IS TAXABLE AS REVENUE R ECEIPT. WHETHER A PARTICULAR RECEIPT IS A REVENUE RECEIPT OR A CAPI TAL RECEIPT HAS ALWAYS BEEN A VEXED ISSUE. ITS TRUE NATURE WILL DEP END UPON FACTS AND CIRCUMSTANCES OF EACH CASE. IN CASE OF RECEIPTS ARISING FROM TERMINATION OF A CONTRACT, GUIDANCE IS AVAILABLE FR OM SEVERAL JUDGMENTS INCLUDING THE JUDGMENT OF APEX COURT. IN CASE, TERMINATION OF THE CONTRACT IS A NORMAL INCIDENT OF BUSINESS AND TERMINATION DOES NOT IMPAIR THE PROFIT EARNING STRU CTURE OF THE ASSESSEE, THE COMPENSATION FOR TERMINATION IS REVEN UE RECEIPT AS HELD BY HONBLE SUPREME COURT IN THE CASE OF KETTLE WELL BULLEN & CO. LTD. (SUPRA). BUT IN CASE, THE CONTRACT IS SO PIVOT TO THE BUSINESS STRUCTURE THAT TERMINATION IMPAIRS THE PRO FIT EARNING STRUCTURE OR RESULTS IN LOSS OF SOURCE OF ASSESSEE S INCOME, THE RECEIPT WILL BE A CAPITAL RECEIPT AS WAS HELD BY TH E APEX COURT IN THE SAID CASE. THERE IS ALSO A SPECIFIC PROVISION I .E., S. 28(II)(C) TO DEAL WITH THE TAXABILITY OF RECEIPT ON TERMINATION OF AN AGENCY. SUCH RECEIPTS ARE TAXABLE IRRESPECTIVE OF THE FACT WHETHER IT IS A CAPITAL RECEIPT OR REVENUE RECEIPT IN VIEW OF THE S PECIFIC ITA NOS.3961 & 3962/MUM/2010. M/S.IIT CORPORATE SERVICES LIMITED. 5 PROVISIONS OF THE SECTION MENTIONED ABOVE. BUT, THE PROVISIONS OF S.28(II)(C) ARE APPLICABLE ONLY IN CASE OF AN AGENC Y IN ITS STRICT LEGAL SENSE OF THE TERM. IT WILL NOT APPLY TO TERMI NATION OF ANY AGREEMENT/CONTRACT BUT ONLY TO AN AGENCY INVOLVING PRINCIPAL- AGENT RELATIONSHIP UNDER THE CONTRACT ACT. THIS VIE W IS SUPPORTED BY THE JUDGMENT OF HONBLE HIGH COURT OF BOMBAY IN THE CASE OF DHARUVALA BROS. (P) LTD. VS. CIT (1971) 80 ITR 213 (BOM) AND ALSO BY THE JUDGMENT OF HONBLE HIGH COURT OF MADRA S IN THE CASE OF CIT VS. SESHASAYEE BROS. (P) LTD. (1999) 151 CTR (MAD) 598 : (1999) 239 ITR 471(MAD). 4.4 IN THE BACKDROP OF THE ABOVE LEGAL POSITION, TR UE NATURE OF RECEIPT HAS TO BE ASCERTAINED AFTER CAREFUL EXAMINA TION OF THE TERMS AND CONDITIONS OF THE AGREEMENT OF THE ASSESS EE WITH CLIENTS AND THOSE OF THE MEMORANDUM OF AGREEMENT SIGNED BY THE ASSESSEE WITH DBA. A COPY OF A SAMPLE AGREEMENT WIT H THE CLIENT TATA MUTUAL FUND HAS BEEN FILED BY THE ASSESSEE PER USAL OF WHICH SHOWS THAT THE AGREEMENT WITH THE CLIENTS IS NOT FO R A FIXED PERIOD. ARTICLE VI(3) PROVIDES THAT THE AGREEMENT SHALL BE IN FORCE TILL IT IS TERMINATED AND ANY OF THE PARTIES TO THE AGREEMENT MAY TERMINATE THE AGREEMENT AT ANY TIME UPON 90 DAYS PRIOR NOTICE . FURTHER, IN CASE THE TERMINATION IS AT THE INSTANCE OF THE ASSE SSEE, THE CUSTODIAL ARRANGEMENT WITH THE ASSESSEE WILL CONTIN UE TILL A NEW CUSTODIAN IS APPOINTED WHICH IS TO BE DONE WITH THE CONSENT OF THE SEBI. IN CASE OF TERMINATION, THE CLIENT IS REQUIRE D TO REIMBURSE TO THE ASSESSEE OF ITS REASONABLE COST OF EXPENSES AND DISBURSEMENTS AS CUSTODIAN. THERE IS NO PROVISION FOR ANY COMPENS ATION TO BE PAID BY CLIENTS NOR ANY COMPENSATION HAS BEEN PAID AS THE AGREEMENT IN THIS CASE HAS NOT BEEN TERMINATED BY T HE CLIENTS. WHAT HAS HAPPENED IN THIS CASE IS THAT THE ASSESSEE SENSING THAT THE AGREEMENT WITH THE CLIENTS MAY COME TO END ON 1 5 TH MAY, 2001 DUE TO NON-FULFILMENT OF NET WORTH CRITERIA OF RS. 50 CRORES AS PER SEBI REGULATIONS, THE ASSESSEE HAS ENTERED I NTO AN AGREEMENT WITH DBA AS PER WHICH THE ASSESSEE WOULD SURRENDER ITS RIGHTS IN THE CUSTODIAL AGREEMENT IN RESPECT OF SELECTED CLIENTS AND PERSUADE THE CLIENT TO JOIN THE SERVICES OF DBA . THE NET WORTH OF THE ASSESSEE AS ON 31ST MARCH, 2001 WAS ONLY RS. 8.69 CRORES. 4.5 THE RIGHTS OF THE ASSESSEE IN THE CUSTODIAL AGR EEMENTS WERE NOT TRANSFERABLE. THE ASSESSEE HOWEVER COULD SURREN DER THE RIGHTS WHICH THEREAFTER COULD BE GIVEN TO SOME OTHER PARTY AS PER SEPARATE AGREEMENT WITH THE CLIENTS. DBA WILL NOT P AY ANY COMPENSATION ONLY FOR SURRENDER OF AGREEMENT WITH T HE CLIENTS BY ITA NOS.3961 & 3962/MUM/2010. M/S.IIT CORPORATE SERVICES LIMITED. 6 THE ASSESSEE BECAUSE AFTER SURRENDER BY THE ASSESSE E, THE CLIENTS ARE FREE TO JOIN ANY OTHER SERVICE PROVIDER. DBA WI LL GAIN ONLY IF THE ASSESSEE AFTER SURRENDERING THE RIGHT IN THE AG REEMENT PERSUADES THE CLIENTS TO JOIN ITS SERVICES. IT IS B ECAUSE OF THIS REASON THAT AN ELABORATE PROCEDURE HAS BEEN LAID DO WN IN THE MEMORANDUM OF ASSOCIATION DT. 19TH JULY, 2000 WITH DBA TO FACILITATE CONSENT OF THE CLIENT AND FOR EXECUTION OF AGREEMENT BY THE CLIENTS WITH DBA. IN TERMS OF CLS. 2 TO 5 OF PA RT A OF THE MEMORANDUM OF ASSOCIATION, ASSESSEE AND DBA WITHIN 30 DAYS OF EXECUTION OF AGREEMENT ARE REQUIRED TO JOINTLY MAKE ENDEAVOUR TO INTERACT WITH THE SELECTED CLIENTS BY JOINT CALLS/M EETINGS WITH A VIEW TO SEEKING THEIR CONSENT AND WITHIN 10 DAYS FR OM DATE OF JOINT INTERACTION WITH THE CLIENTS, ASSESSEE IS REQ UIRED TO MAKE ITS BEST ENDEAVOUR TO OBTAIN THE CONSENT FROM THE SELEC TED CLIENTS. THEREAFTER DUE DILIGENCE IS REQUIRED TO BE DONE BY DBA IN RESPECT OF CLIENT PORTFOLIO AND THIS HAS TO BE COMPLETED WI THIN 45 DAYS FROM THE DATE OF RECEIPT OF IN PRINCIPLE LETTER OF CONSENT FROM THE SELECTED CLIENTS AND WITHIN 30 DAYS FROM THE DATE O F COMPLETION OF DUE DILIGENCE, DBA IS REQUIRED TO MAKE ARRANGEMENT TO ENTER AGREEMENT WITH THE CLIENTS. THERE IS ALSO A PROCEDU RE LAID DOWN FOR PAYMENT OF TRANSACTION PRICE AS PER PART B OF A GREEMENT IN TERMS OF WHICH 25 PER CENT OF THE AMOUNT IS REQUIRE D TO BE PAID BY DBA ON EXECUTION OF MEMORANDUM OF ASSOCIATION; FURT HER 25 PER CENT ON RECEIPT OF IN PRINCIPLE LETTER OF CONSENT F ROM THE CLIENT AND BALANCE 50 PER CENT WITHIN 7 DAYS OF EXECUTION OF AGREEMENTS WITH CLIENTS. 5. IT IS THUS CLEAR THAT IT IS NOT A CASE OF COMPEN SATION PAID TO THE ASSESSEE BY THE CLIENT FOR TERMINATION OF THE AGREE MENT. THE CLIENTS HAVE NOT TERMINATED THE AGREEMENTS IN THIS CASE NOR MADE ANY PAYMENTS. THEREFORE THE JUDGMENTS RELATING TO T HE TREATMENT OF RECEIPT ARISING OUT OF TERMINATION OF AGENCY OR AGREEMENT WILL NOT BE APPLICABLE. IT IS A CASE OF VOLUNTARY SURREN DER OF THE RIGHT OF THE ASSESSEE IN THE AGREEMENT WITH THE CLIENTS AND SIMULTANEOUS EFFORTS MADE BY THE ASSESSEE FOR OBTAINING CONSENT OF THE CLIENTS FOR JOINING THE SERVICES OF DBA BY ENTERING INTO CU STODIAL SERVICE AGREEMENT WITH THE LATTER. IN OTHER WORDS, PAYMENT RECEIVED BY THE ASSESSEE IS FOR A SERVICE ARRANGEMENT AS PER WH ICH THE ASSESSEE SURRENDERS ITS RIGHTS IN THE CUSTODIAL AGREEMENT WI TH THE CLIENTS AND ENSURES THAT THESE RIGHTS ARE TRANSFERRED TO DB A BY CONVINCING THE CLIENTS. THE CL. (6) OF PART B OF TH E MEMORANDUM OF ASSOCIATION WITH DBA ALSO REFERS TO THE TRANSACT ION PRICE AS PAYMENT FOR SERVICE ARRANGEMENT WITH THE SELECTED C LIENTS. THE NET ITA NOS.3961 & 3962/MUM/2010. M/S.IIT CORPORATE SERVICES LIMITED. 7 EFFECT OF THE ENTIRE ARRANGEMENT WAS THAT THE ASSES SEE PARTED WITH ITS RIGHTS IN THE CUSTODIAL AGREEMENT WITH SELECTED CLIENTS IN FAVOUR OF DBA. THE RIGHT OF THE ASSESSEE IN THE CUSTODIAL AGREEMENT IS, NO DOUBT, AN ASSET TO THE ASSESSEE. BUT IN THIS CAS E, THE ASSET IS NOT OF ENDURING VALUE BECAUSE RIGHT OF THE ASSESSEE WAS TO COME TO AN END SHORTLY ON 15TH MAY, 2001 DUE TO SEBI REGULATIO NS. THE RIGHT OF THE ASSESSEE IN THE AGREEMENT WAS THUS FOR A LIM ITED PERIOD OF LESS THAN A YEAR. THE AMOUNT RECEIVED FOR PARTING WITH SUCH AN ASSET WHICH IS NOT OF AN ENDURING VALUE WOULD BE A REVENUE RECEIPT LIKE THE EXPENDITURE INCURRED ON ACQUIRING A TRADING ASSETS WHICH IS NOT OF AN ENDURING VALUE IS REVENUE EXPENDITURE . 7. WITH THE ABOVE MENTIONED FACTUAL MATRIX, THE A.O . PROCEEDED WITH THE PENALTY PROCEEDINGS U/S 271(1)(C) OF THE A CT AND ACCORDINGLY THE ASSESSEE WAS SHOW CAUSED TO EXPLAIN WHY PENALTY U/S 271(1)(C) OF THE ACT SHOULD NOT BE IMPOSED ON IT FOR CONCEALING PARTICULARS OF INCOME AND FILING OF INACCURATE PARTICULARS OF ITS INCOME TO THE EXTENT OF COMPENSATION SO RECEIVED. THE ASSESSEE VIDE LETT ER DATED 14.08.2006 REPLIED THAT THEY ARE IN PROCESS OF FILI NG APPEAL BEFORE THE TRIBUNAL [ TILL THAT DATE ONLY FIRST APPEAL WAS DEC IDED AGAINST THE ASSESSEEE ] AND REQUESTED TO KEEP THE PENALTY PROCE EDINGS IN ABEYANCE TILL THE DECISION OF THE TRIBUNAL. THE A.O . GAVE FURTHER OPPORTUNITY OF BEING HEARD. IN RESPONSE TO WHICH TH E ASSESSEE NEITHER FILED ANY EXPLANATION NOR ATTENDED THE PROCEEDINGS. THE A.O. WENT ON TO LEVY PENALTY U/S 271(1)(C) FOR FILING INACCURATE PARTICULARS OF INCOME FOR BOTH THE YEARS. THE ASSESSEE CARRIED THE MATTER BEFORE THE CIT(A), BUT WITHOUT ANY SUCCESS. AGGRIEVED, THE ASS ESSEE IS BEFORE US. ITA NOS.3961 & 3962/MUM/2010. M/S.IIT CORPORATE SERVICES LIMITED. 8 8. THE COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE LEVY OF PENALTY IS BAD IN LAW AS THE ASSESSEE HAS TRULY AND FULLY D ISCLOSED ALL MATERIAL FACTS RELATING TO THE COMPENSATION RECEIVED FROM DB A. AS THE ASSESSEE WAS UNDER A BONAFIDE BELIEF THAT THE SAID RECEIPTS WERE OF CAPITAL IN NATURE AND THEREFORE, NOT TAXABLE. ONLY BECAUSE THE CONTENTION OF THE ASSESSEE DID NOT FIND FAVOUR WITH THE TRIBUNAL IN QUANTUM PROCEEDINGS , THAT BY ITSELF WOULD NOT AMOU NT TO FILING OF INACCURATE PARTICULARS OR CONCEALING OF INCOME. THE COUNSEL ALSO ARGUED THAT THE TAXABILITY OF THE COMPENSATION AS R EVENUE RECEIPT IS A DEBATABLE ISSUE WHICH HAS ALSO BEEN ACCEPTED BY THE TRIBUNAL IN QUANTUM APPEAL AS OBSERVED AT PARA 4.3 PAGE 9 OF TH E QUANTUM APPEAL ORDER OF THE TRIBUNAL. PER CONTRA, THE DEPARTMENTAL REPRESENTATIVE RELIED UPON THE FINDINGS OF THE LOWER AUTHORITIES. 9. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED T HE ORDERS OF THE LOWER AUTHORITIES. THE WHOLE DISPUTE REVOLVES A ROUND WHETHER THE ASSESSEE HAS PROPERLY DISCLOSED ALL MATERIAL FA CTS RELATING TO THE TAXABILITY OF THE COMPENSATION IN ITS RETURN OF INC OME FILED FOR THE RELEVANT ASSESSMENT YEARS. ON A PERUSAL OF THE AUD ITED STATEMENT OF ACCOUNT OF THE ASSESSEE FOR THE YEAR ENDED 31.03.20 01, WE FIND THAT UNDER SCHEDULE K, WHICH IS NOTES OF ACCOUNT AT POIN T NO.5, THE AUDITOR HAS MADE THE FOLLOWING REMARKS :- DUE TO NEED FOR COMPLYING WITH THE REQUIREMENT OF MAINTAINING HIGH NET WORTH (MINIMUM ` 50 CRORES NET WORTH) UNDER SEBI (CUSTODIAN OF SECURITIES) REGULAT IONS, ITA NOS.3961 & 3962/MUM/2010. M/S.IIT CORPORATE SERVICES LIMITED. 9 1996 TO CONTINUE THE BUSINESS OF PROVIDING CUSTODIA L SERVICES, THE COMPANY IS IN PROCESS OF EFFECTIVELY TRANSFERRING THE SAID BUSINESS OF CUSTODIAL SERVICE S BY SHIFTING ITS MAJOR CUSTODIAN CLIENTS TO A THIRD PAR TY FOR AN AGREED COMPENSATION. DURING THE YEAR, A COMPENSATIO N AMOUNTING TO ` 3.69 CRORES (NET) HAS ACCRUED TO THE COMPANY ON ACCOUNT OF THIS ARRANGEMENT. THE COMPANY IS ADVISED THAT SUCH COMPENSATION, BEING IN THE NAT URE OF CAPITAL RECEIPT, CAN BE DIRECTLY CREDITED TO CAPITA L RESERVE. ACCORDINGLY, THE AMOUNT OF SUCH COMPENSATI ON HAS BEEN DIRECTLY CREDITED TO CAPITAL RESERVE ACCOU NT. 10. SIMILARLY, IN DIRECTORS REPORT AT POINT NO.3, THE DIRECTORS HAVE REMARKED AS UNDER :- ACTIVITIES (A) CUSTODIAL SERVICES THE REVENUE FROM CUSTODIAL ACTIVITY HAVE DECREASE D FROM ` 487 LAKHS TO ` 283 LAKHS, A DECLINE OF 42%, MAINLY ON ACCOUNT OF TRANSFER OF CLIENTS TO DEUTSCHE BANK. THE CONSIDERATION RECEIVED IN THIS RESPECT BEING OF CAP ITAL NATURE, HAS BEEN TREATED IN THE BOOKS AS CAPITAL RE SERVES. THE DEMAT SCENARIO IN THE INDIAN CAPITAL MARKET H AS INCREASED TO RISK AND HAS SUBSTANTIALLY REDUCED THE REVENUE GENERATION IN THE CUSTODIAL ACTIVITIES. 11. EXCEPT FOR THIS THERE IS NO OTHER MENTION OR DI SCLOSURE MADE BY THE ASSESSEE IN THE COMPUTATION OF INCOME EXHIBITED AT PAGES 11 AND 12 OF THE PAPER BOOK. ON THE CONTRARY, IN THE COMPU TATION OF INCOME FOR ASSESSMENT YEAR 2001-2002, WE FIND THAT UNDER T HE HEAD BUSINESS INCOME AT CLAUSE (B), THE ASSESSEE HAS S HOWN - PRINCIPAL COMPONENT OF LEASE RENT CONSIDERED AS ITEM OF CAPIT AL RECEIPT (SEE ITA NOS.3961 & 3962/MUM/2010. M/S.IIT CORPORATE SERVICES LIMITED. 10 NOTE 1 BELOW) AMOUNTING TO ` 18,03,355 AND UNDER THE HEAD NOTES AT PAGE 12 OF THE PAPER BOOK, THE ASSESSEE HAS MENT IONED- IN ASSESSMENT YEAR 1995-96, LEASE TRANSACTION WITH RAJ ASTHAN STATE ELECTRICITY BOARD HAVE BEEN TREATED BY DEPARTMENT A S A FINANCE TRANSACTION. AS PER STAND ADOPTED BY THE ASSESSING OFFICER IN THAT ASSESSMENT YEAR, PRINCIPAL COMPONENT AMOUNT INCLUDE D IN THE SAME IS TREATED AS AN ITEM OF CAPITAL RECEIPT AND EXCLUDED FROM BUSINESS INCOME. 12. WHEN THE ASSESSEE HAS BEEN SO SPECIFIC IN RESPE CT OF ONE ITEM, WHICH HE HAS TREATED AS CAPITAL RECEIPT AND ALSO GI VEN THE REASON WHY IT HAS TREATED THE AMOUNT AS CAPITAL RECEIPT, THE A SSESSEE COULD HAVE ALSO INCLUDED THE COMPENSATION SO RECEIVED IN ITS C OMPUTATION OF INCOME AND THEN COULD HAVE CLAIMED EXEMPTION FROM T AX. IT IS ALSO NOT KNOWN ON WHAT BASIS THE ASSESSEE HAS CLAIMED TH E COMPENSATION SO RECEIVED AS EXEMPT FROM TAX BECAUSE THE AUDITORS HAVE GIVEN A SIMPLE NOTE THAT THE COMPANY IS ADVISED THAT SUCH C OMPENSATION BEING IN THE NATURE OF CAPITAL RECEIPT CAN BE DIREC TLY BROUGHT TO THE CAPITAL RESERVE, WITHOUT GIVING ANY BASIS FOR SUCH OPINION. 13. ASSUMING, YET DENYING, THAT THIS IS THE PROPER DISCLOSURE, THEN EVERY ASSESSEE WILL CREDIT INCOME/ RECEIPTS DIRECTL Y TO ITS CAPITAL ACCOUNT AND CLAIM THAT IT HAS PROPERLY DISCLOSED TH E INCOME. WHEREAS THE REQUIREMENT IS THAT THERE SHOULD BE A PROPER DI SCLOSURE IN THE RETURN OF INCOME. WHEN THE RETURNS OF INCOME WERE F ILED IN PHYSICAL ITA NOS.3961 & 3962/MUM/2010. M/S.IIT CORPORATE SERVICES LIMITED. 11 FORMS, COMPUTATION OF INCOME, BEING PART OF THE RET URN OF INCOME WAS THE ONLY DOCUMENT IN WHICH THE ASSESSEE DEMONSTRATE D HOW IT HAS COMPUTED ITS INCOME UNDER VARIOUS TAXABLE HEADS OF INCOME AND PAID TAXES ACCORDINGLY. THEREFORE, WE CANNOT ACCEPT THE CONTENTION OF THE ASSESSEE THAT THERE WAS A PROPER DISCLOSURE. AS THE ASSESSEE HAS FAILED TO DISCLOSE THE COMPENSATION RECEIVED FROM DBA, IT IS A FIT CASE FOR THE LEVY OF PENALTY FOR CONCEALMENT OF INCOME AND A LSO FOR FILING OF INACCURATE PARTICULARS OF ITS INCOME. 14. IT IS CLEAR THAT THE ASSESSEE HAD FAILED TO MEN TION IN THE RETURN FILED THE DETAILS OF INCOME WHICH WAS CLAIMED AS EX EMPT. EVEN IF THE ASSESSEE HAD DECIDED TO TREAT THE COMPENSATION AS A CAPITAL RECEIPT, THE ASSESSEE SHOULD HAVE COMPUTED CAPITAL GAIN LIAB ILITY ON IT, OR AT LEAST SHOWN IT AS EXEMPT FROM TAX UNDER THE HEAD INCOME CLAIMED TO BE EXEMPT FROM TAX WHICH HE HAS NOT DONE. THE ASSESSEE, THEREFORE, FURNISHED INACCURATE PARTICULARS OF ITS INCOME AND GROSSLY FAILED TO SUBSTANTIATE THE BASIS ON WHICH THE SAID CLAIM OF EXEMPTION OF COMPENSATION RECEIVED FROM DBA. THE ASSESSEE HAS , THEREFORE, CONCEALED ITS INCOME AND ALSO FURNISHED INACCURATE PARTICULARS OF ITS INCOME. IN VIEW OF THE AFORESAID FACTS, THE LEVY OF PENALTY IS CONFIRMED. THE ARGUMENT OF THE COUNSEL THAT THE ITA T ITSELF HAS OBSERVED AT PARA 4.3 PAGE 9 OF THE QUANTUM APPEAL O RDER THAT THE ISSUE OF TAXABILITY IS A DEBATABLE ISSUE DOES NOT HOLD AN Y WATER. WE HAVE PERUSED THE ORDER OF THE TRIBUNAL. THIS IS WHAT THE TRIBUNAL HAS OBSERVED AT PARA 4.3 PAGE 9, AS UNDER: ITA NOS.3961 & 3962/MUM/2010. M/S.IIT CORPORATE SERVICES LIMITED. 12 WHETHER A PARTICULAR RECEIPT IS A REVENUE RECEIPT OR A CAPITAL RECEIPT HAS ALWAYS BEEN A VEXED ISSUE. ITS TRUE NATURE WILL DEPEND UPON FACTS AND CIRCUMSTANCES OF EACH CASE. IN CASE OF RECEIPTS ARISING FROM TERMINATION OF A CONTRACT, GUIDANCE IS AVAILABLE FROM SEVERAL JUDGME NTS INCLUDING THE JUDGMENT OF APEX COURT. IN CASE, TERMINATION OF THE CONTRACT IS A NORMAL INCIDENT OF BUSINESS AND TERMINATION DOES NOT IMPAIR THE PROFIT EARNING STRUCTURE OF THE ASSESSEE, THE COMPENSATION FOR TERMINATION IS REVENUE RECEIPT AS HELD BY HONBLE SUPREME COURT IN THE CASE OF KETTLEWELL BULLEN & CO . LTD. (SUPRA). BUT IN CASE, THE CONTRACT IS SO PIVOT TO THE BUSINESS STRUCTURE THAT TERMINATION IMPAIRS THE PRO FIT EARNING STRUCTURE OR RESULTS IN LOSS OF SOURCE OF A SSESSEES INCOME, THE RECEIPT WILL BE A CAPITAL RECEIPT AS WA S HELD BY THE APEX COURT IN THE SAID CASE. IN OUR CONSIDERATE VIEW THE OBSERVATIONS OF THE TRI BUNAL ARE SELF EXPLANATORY ON THE FACTS OF THE INSTANT CA SE. THE ASSESSEE HAS RELIED UPON VARIOUS JUDICIAL DECIS IONS, WHICH ARE CONSIDERED AS UNDER. (I) ITO V. CHHAIL BEHARI [(2011) 8 ITR 383] IN THAT CASE THE TRIBUNAL HAS SET ASIDE THE LEVY OF PENALTY U/S 271( 1)(C) ON THE GROUND THAT THE PENALTY WAS INITIATED FOR FILING IN ACCURATE PARTICULARS OF INCOME, BUT IT WAS LEVIED FOR CONCEA LMENT OF INCOME. WE DO NOT FIND ANY MERIT ON THE RELIANCE PLA CED ON THIS JUDGMENT BECAUSE THE ASSESSEE HAS NOT CONTENDED BEF ORE THE CIT(A) THIS ISSUE AS IS EVIDENT FROM THE GROUNDS OF APPEAL TAKEN BEFORE THE CIT(A) AS PER FORM NO.35 ON RECORD. EVEN BEFORE US, NO SUCH GROUND HAS BEEN TAKEN IN THE GROUNDS OF APPEAL ITA NOS.3961 & 3962/MUM/2010. M/S.IIT CORPORATE SERVICES LIMITED. 13 APPENDED IN FORM NO.36. ONLY DURING THE COURSE OF H IS ARGUMENTS THE COUNSEL RAISED THIS ISSUE FOR THE FIR ST TIME . A PERUSAL OF THE ASSESSMENT ORDER SHOW THAT THE AO HA S INITIATED PENALTY PROCEEDINGS U/S271[1][C] OF THE ACT READ WI TH EXPLANATION 1 , AND A PERUSAL OF THE PENALTY ORDER SHOW THAT THE AO HAS LEVIED PENALTY FOR FILING INACCURATE PARTICU LARS OF INCOME . THUS THERE IS NO VARIANCE IN THE INITIATIO N AND THE LEVY OF PENALTY . THOUGH THE CIT [A] AT PARA 5.1 PAGE 4 OF HIS APPELLATE ORDER HAS MENTIONED THE APPELLANT IS DE EMED TO HAVE CONCEALED THE PARTICULARS OF INCOME . THE CIT [ A ] HAS THE POWER OF ENHANCEMENT OF INCOME AND SO EQUALLY HE CA N ALSO MODIFY THE FINDINGS OF THE AO . (II) VANAIK INVESTORS LTD. V. ITO [(2006) 5 SOT 591 (DEL .)] IN THAT CASE THE ASSESSEE HAS CLAIMED BONUS SHARES SOLD AS EXEMPT FROM CAPITAL GAIN TAX. THE CLAIM WAS BASED O N SUPREME COURT DECISION IN B.C.SRINIVASA SETTY V. CIT [(1981) 128 ITR 294 (SC)] . THIS DECISION ALSO DO NOT FAVOUR THE FACTS OF THE INSTANT CASE AS THE ASSESSEE HAS NOWHERE GIVEN THE BASIS FOR CLAIMING THE EXEMPTION OF COMPENSATION RECEIVED AS CAPITAL RECEIPT , WHEREAS IN THE CASE RELIED UPON BY THE AS SESSEE THE BASIS FOR CLAIMING THE EXEMPTION WAS THE DECISION O F THE HONBLE SUPREME COURT . ITA NOS.3961 & 3962/MUM/2010. M/S.IIT CORPORATE SERVICES LIMITED. 14 (III) WALTER SALDHANA V. DCIT [(2011) 44 SOT 26 (MUM.)] A PERUSAL OF THE SAID DECISION SHOW THAT IN THAT CASE THE ASSESSEE VIOLATED THE PROVISIONS OF SECTION 94(7) BY NOT IGN ORING LOSSES WHILE COMPUTING SHORT TERM CAPITAL GAIN ON TRANSACT IONS RELATED TO SECTION 94(7). THE A.O. MADE ADDITION ONLY ON TH E BASIS OF MATERIAL AND INFORMATION FURNISHED BY THE ASSESSEE. THE TRIBUNAL CAME TO THE CONCLUSION THAT THE ASSESSEE H AS FURNISHED FULL DETAILS AND HAS NOT CONCEALED ANY PARTICULARS OF INCOME OR HAS FURNISHED ANY INACCURATE PARTICULARS OF INCOME. THE TRIBUNAL FURTHER POINTED OUT THAT THERE WAS NO SUCH SPECIFIC REQUIREMENT IN THE RETURN FORM APPLICABLE TO THE YE AR UNDER CONSIDERATION AND THEREFORE, CANCELLED THE PENALTY. HOWEVER, IN THE INSTANT CASE, WE FIND THAT THE ASSESSEE HAS NOT CLAIMED THE COMPENSATION BEING EXEMPT FROM TAX IN THE RETURN OF INCOME FILED BY IT. IT HAS SIMPLY CREDITED THE CAPITAL RES ERVE IN THE BALANCE SHEET AND BASED ON THE NOTE OF THE AUDITORS , IT TRIED TO CLAIM THE COMPENSATION SO RECEIVED BEING EXEMPT FRO M TAX, WHICH IT HAS GROSSLY FAILED IN THE QUANTUM PROCEEDI NGS. (IV) CIT V. RELIANCE PETRO PRODUCTS PVT. LTD. [(2010) 32 2 ITR 158 (SC)] IN THIS CASE THE HONBLE SUPREME COURT WHILE AFFIRMING THE DECISION OF THE HONBLE GUJARAT HIGH COURT CONFIRMING THE ORDER OF THE TRIBUNAL CANCELING PENA LTY IMPOSED ON AN ASSESSEE HELD AS FOLLOWS:- ITA NOS.3961 & 3962/MUM/2010. M/S.IIT CORPORATE SERVICES LIMITED. 15 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 T HE INCOME OF THE ASSESSEE. SECONDLY, THE ASSESSEE MUST HAVE FURN ISHED INACCURATE PARTICULARS OF HIS INCOME. THE MEANING OF THE WORD PARTICULARS USED IN SECTION 271(1)(C) WOULD EMBRA CE THE DETAILS OF THE CLAIM MADE. WHERE NO INFORMATION GIV EN IN THE RETURN IS FOUND TO BE INCORRECT OR INACCURATE, THE ASSESSEE CANNOT BE HELD GUILTY OF FURNISHING INACCURATE PART ICULARS. IN ORDER TO EXPOSE THE ASSESSEE TO PENALTY, UNLESS THE CASE IS STRICTLY COVERED BY THE PROVISION, THE PENALTY PROV ISION CANNOT BE INVOKED. BY NO STRETCH OF IMAGINATION CAN MAKING AN INCORRECT CLAIM TANTAMOUNT TO FURNISHING INACCURATE PARTICULARS. THERE CAN BE NO DISPUTE THAT EVERYTHING WOULD DEPEND UPON THE RETURN FILED BY THE ASSESSEE, BECAU SE THAT IS THE ONLY DOCUMENT WHERE THE ASSESSEE CAN FURNISH TH E PARTICULARS OF HIS INCOME. WHEN SUCH PARTICULARS ARE FOUND TO BE INACCURATE, THE LIABILITY WOULD ARISE. TO ATTRAC T PENALTY, THE DETAILS SUPPLIED IN THE RETURN MUST NOT BE ACCURATE , NOT EXACT OR CORRECT, NOT ACCORDING TO THE TRUTH OR ERRONEOUS. W HERE THERE IS NO FINDING THAT ANY DETAILS SUPPLIED BY THE ASSESSE E IN ITS RETURN ARE FOUND TO BE INCORRECT OR ERRONEOUS OR FALSE THE RE 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 INACCURATE PARTICULARS REG ARDING THE INCOME OF THE ASSESSEE. SUCH A CLAIM MADE IN THE RE TURN CANNOT AMOUNT TO FURNISHING INACCURATE PARTICULARS. (EMPHASIS GIVEN BY US) THE RATIO OF THE AFORE-MENTIONED CASE ALSO GOES AG AINST THE APPELLANT AS THE HONBLE SUPREME COURT HAS CLEARLY HELD THAT THE RETURN OF INCOME IS THE ONLY DOCUMENT WHERE THE ASSESSEE CAN FURNISH HIS PARTICULARS OF INCOME, WHEREAS IN T HE INSTANT ITA NOS.3961 & 3962/MUM/2010. M/S.IIT CORPORATE SERVICES LIMITED. 16 APPEAL, THE APPELLANT COMPANY HAS NOT DISCLOSED THE RECEIPT OF COMPENSATION RECEIVED FROM DBA IN ITS RETURN OF INC OME NOR IN THE COMPUTATION OF INCOME ACCOMPANIED WITH THE RETU RN OF INCOME. EVEN IN THE AUDIT REPORT, WE FIND THAT THE AUDITORS HAVE NOT GIVEN ANY BASIS FOR TREATING THE COMPENSATION R ECEIVED AS EXEMPT FROM TAX . 15. AFTER CONSIDERING THE FACTS AND CIRCUMSTANCES O F THE APPEAL UNDER CONSIDERATION AND ALSO DISTINGUISHING THE FAC TS OF THE CASES RELIED UPON BY THE COUNSEL FOR THE APPELLANT, WE DO NOT FIND ANY INFIRMITY OR ERROR IN THE ORDER OF THE CIT(A). WE, T HEREFORE, CONFIRM THE ORDER OF THE CIT(A). GROUND NO.1, WITH ALL ITS VARIANTS, OF APPEAL, IS DISMISSED. 16. IN THE RESULT, THE APPEALS FILED BY THE ASSESSE E FOR BOTH THE ASSESSMENT YEARS ARE DISMISSED. ORDER PRONOUNCED ON THIS 07 TH DAY OF NOVEMBER, 2012. 1 45, 6 5 1 7 SD/- SD/- (D.K.AGARWAL) (N.K.BILLAIYA) ' # ' # ' # ' # / JUDICIAL MEMBER ) # ) # ) # ) # / ACCOUNTANT MEMBER MUMBAI ; DATED : 7 TH NOVEMBER, 2012. DEVDAS* ITA NOS.3961 & 3962/MUM/2010. M/S.IIT CORPORATE SERVICES LIMITED. 17 1 /'389 !9,3 1 /'389 !9,3 1 /'389 !9,3 1 /'389 !9,3/ COPY OF THE ORDER FORWARDED TO : 1. -. / THE APPELLANT 2. /0-. / THE RESPONDENT. 3. : () / THE CIT(A)- 5, MUMBAI. 4. : / CIT 5. 9=7 /'3' , , / DR, ITAT, MUMBAI 6. 7> ? / GUARD FILE. / BY ORDER, 093 /'3 //TRUE COPY// @ @ @ @/ // /A B A B A B A B ( DY./ASSTT. REGISTRAR) , , , , / ITAT, MUMBAI