Case (Appeal) No.1464 of 2007 The Commissioner of Income Tax,Tamil Nadu-I, Madras v. M/s.Kamy Software Solutions (P) Ltd

In the High Court of Judicature at MadrasDated: 4.12.2007Coram:The Honourable Mr.Justice K.Raviraja PandianandThe Honourable Mrs.Justice Chitra VenkataramanTax Case (Appeal) No.1464 of 2007The Commissioner of Income Tax,Tamil Nadu-I, Madras. .. Appellant vs.M/s.Kamy Software Solutions (P) Ltd.,M5F, MIG Flats, Latice Bridge Road,Thiruvanmiyur, Chennai-600 041. .. RespondentTax Case (Appeal) against the order of the Income TaxAppellate Tribunal "B" Bench, Chennai, dated 16.2.2007 inI.T.A.No.1235/Mds/2002 & 101/Mds/2006 against the order of theCommissioner of Income Tax (Appeals)V, Chennai for the year of1997-98 dated 5.6.2000 in ITA.NO.195/99-2000 and the order of theCommissioner of Income Tax (Appeals)XI, Chennai dated 30.5.2002 inITA.NO.328/2001-02 against the order of the Deputy Commissioner ofIncome Tax Company circle I(3) Chennai-34 for the year of 1997-98dated 7.1.2000 in PA NO.GIR.NO.170K.For appellant : Mr.J.Naresh KumarJudgment(The Judgment of the Court was delivered by K.Raviraja Pandian,J)The appeal is against the order of the Tribunal inI.T.A.No..1235/Mds/2002 & 101/Mds/2006. The relevant assessmentyear is 1997-1998. 2. The assessee (respondent-Company) is dealing in softwareexport technical services related to software. The assesseeclaimed deduction under Section 80-HHE of the Income Tax Act(hereinafter referred to as 'the Act') in connection with theservices rendered for the development of software abroad. Duringthe course of assessment proceedings, in order to verify the claimof the assessee in regard to deduction under Section 80-HHE of theAct, a survey under Section 133-A of the Act was carried out in the https://hcservices.ecourts.gov.in/hcservices/ business premises of the assessee on 29.9.1998. During the courseof survey operations, the assessing officer found several agreementin regard to job placement and obtained copies of the documents. 3. The assessing officer, on the basis of the agreement, cameto the conclusion that the assessee was not engaged in the businessof providing technical services outside India in connection withthe development or production of computer software, but was only ahuman resource services and in that view of the matter, theassesssing officer held that the assessee was not entitled for thebenefit of deduction under Section 80-HHE of the Income Tax Act anddisallowed the claim of the assessee. 4. The Commissioner of Income Tax (Appeals) confirmed theaction of the assessing officer. That order has become final, asthe assessee has not agitated the matter any further.5. After the decision of the quantum appeal, the assessingofficer initiated penalty proceedings under Section 271(1)(c) ofthe Act on 19.1.2000 and imposed penalty. Against that order, theassessee preferred appeal before the Commissioner of Income Tax,who has confirmed the order of the assessing officer. Thecorrectness of the said order was carried on by way of furtherappeal to the Income Tax Appellate Tribunal by the assessee. TheTribunal held in favour of the assessee on the ground that there isno need to impose any penalty, as the assessee has never filedinaccurate particulars nor concealed the income and on that basis,the Tribunal allowed the appeal. Challenging the correctness of thesame, this appeal is before us by formulating the followingquestion of law:"Whether on the facts and in thecircumstances of the case, the Income TaxAppellate Tribunal was right in law in deletingthe penalty under Section 271(1)(c) of the Act,is valid in law?" 6. We have heard the learned Standing Counsel appearing onbehalf of the appellant-Revenue and perused the materials includingthe impugned order of the Tribunal.7. Before the Tribunal, learned counsel for the assessee hasfiled a copy of the Notification in No.11521, dated 26.9.2000 andargued that the Central Board of Direct Taxes allowed the deductionunder Section 80-HHE or under Section 10-A of the Act in regard tohuman resource services as mentioned in sub-clause (vii) of theNotification and subsequently, vide Circular No.3 of 2004, dated12.2.2004, the Board has clarified the position in favour of theassessee. The Tribunal has also extracted the Board's Circular,which reads as follows: https://hcservices.ecourts.gov.in/hcservices/ "Circular No.3 of 2004, dt.12th Feb. 2004Sub: Clarification regarding provisions ofsection 80HHE of the Income-tax Act, 1961The Board has received references seekingclarification on the period of applicability ofthe Explanation under Section 80HHE(1) of theIncome-tax Act, 1961. The Explanation states asunder-- "For the removal of doubts, it ishereby declared that the profits and gainsderived from on site development ofcomputer software (including services fordevelopment of software) outside Indiashall be deemed to be the profits andgains derived from the export of computersoftware outside India."1.1. The Explanation was inserted bythe Finance Act, 2001 with effect from 1stApril, 2001. However, as pointed out bythe Ministry of Law on various occasions,the use of the words "for the removal ofdoubts" in an Explanation normally impliesthat the Explanation is only clarificatoryin nature. As this Explanation underSection 80-HHE (1) only clarifies theexisting position of law, the Board are ofthe opinion that the Explanation will beconsidered to have effect from 1st April,1991, i.e the date on which section 80-HHEcame into force.2. The contents of this Circular maybe given wide publicity." 8. In view of Circular No.3 of 2004, dated 12.2.2004 and onthe facts of the case, the Tribunal has come to the conclusion thatthe assessee was under the bona-fide belief that the servicesrendered by the assessee-Company constitute technical services andthe assessee was entitled to deduction under Section 80-HHE of theAct. The Tribunal further recorded a clear and categoric finding tothe effect that the assessee never filed inaccurate particulars norconcealed particulars of income so as to come within the mischiefof Section 271(1)(c) of the Income Tax Act. 9. The very same provision, namely Section 80-HHE of the Actcame to be considered by the Supreme Court in the decision reported https://hcservices.ecourts.gov.in/hcservices/ in [ {2007} 292 ITR 11 (SC) ] (T.Ashok Pai vs. CIT). The SupremeCourt in that decision held as follows:"It is therefore, trite that if anexplanation given by the assessee with regardto the mistake committed by him has beentreated to be bona fide and it has been foundas of fact that he had acted on the basis ofwrong legal advice, the question of his failureto discharge his burden in terms of theExplanation appended to section 271(1)(c) ofthe Income-tax Act would not arise.In Dilip N. Shroff v. Joint CIT (Civilappeal arising out of SLP (C) No.26831/2004)delivered today (2007) 291 ITR 519 (SC), thisCourt observed (see page 546 of 291 ITR):"The expression 'conceal' is of greatimportance. According to Law Lexicon, theword 'conceal' means:'to hide or keep secret. The word'conceal' is con+celare which implies tohide. It means to hide or withdraw fromobservation; to cover or keep from sight;to prevent the discovery of; to withholdknowledge of. The offence of concealmentis, thus, a direct attempt to hide an itemof income or a portion thereof from theknowledge of the income-tax authorities.'In Webster's Dictionary, 'inaccurate'has been defined as:'not accurate', not exact or correct;not according to truth;; erroneous; as aninaccurate statement, copy or transcript."It signifies a deliberate act or omissionon the part of the assessee. Such deliberateact must be either for the purpose ofconcealment of income or furnishing ofinaccurate particulars. The term "inaccurate particulars" is notdefined. Furnishing of an assessment of valueof the property may not by itself be furnishingof inaccurate particulars. Even if theexplanations are taken recourse to, a findinghas to be arrived at having regard to clause(A) of Explanation 1 that the Assessing Officeris required to arrive at a finding that theexplanation offered by an assessee, in theevent he offers one was false. He must be foundto have failed to prove that such explanationis not only not bona fide but all the facts https://hcservices.ecourts.gov.in/hcservices/ relating to the same and material to the incomewere not disclosed by him. Thus, apart from hisexplanation being not bona fide, it should havebeen found as of fact that he has not disclosedall the facts which were material to thecomputation of his income.The explanation having regard to thedecisions of this court, must be preceded by afinding as to how and in what manner hefurnished the particulars of his income. It isbeyond any doubt or dispute that for the saidpurpose the Income-tax Officer must arrive athis satisfaction in this behalf. (See CIT v.Ram Commercial Enterprises Ltd. [2000] 246 ITR568 (Delhi) and Diwan Enterprises v. CIT [2000]246 ITR 571 (Delhi)).The order imposing penalty is quasi-criminal in nature and, thus, the burden lieson the Department to establish that theassessee had concealed his income. Since theburden of proof in penalty proceedings variesfrom that in the assessment proceeding, afinding in an assessment proceeding that aparticular receipt is income cannotautomatically be adopted, though a finding inthe assessment proceeding constitutes goodevidence in the penalty proceeding. In thepenalty proceedings, thus, the authorities mustconsider the matter afresh as the question hasto be considered from a different angle.It is now a well-settled principle of lawthat the more stringent the law, the morestrict a construction thereof would benecessary. Even when the burden is required tobe discharged by an assessee, it would not beas heavy as the prosecution. (See P.N.KrishnaLal v. Government of Kerala [1995] Supp 2 SCC187).The omission of the word "deliberate",thus, may not be of much significance.Section 271(1)(c) remains a penal statute.The rule of strict construction shall applythereto. The ingredients for imposing penaltyremain the same. The purpose of the Legislaturethat it is meant to be a deterrent to taxevasion is evidenced by the increase in thequantum of penalty, from 20 per cent. under the1922 Act to 300 per cent in 1985. https://hcservices.ecourts.gov.in/hcservices/ "Concealment of income" and "furnishing ofinaccurate particulars" carry differentconnotations. Concealment refers to adeliberate act on the part of the assessee. Amere omission or negligence would notconstitute a deliberate act of suppressio verior suggestio falsi.We may notice that in Addl. CIT v. JeevanLal Sah [1994] 205 ITR 244 this Court dealtwith the amendment of section 271(1)(c) made inthe year 1964 to hold (page 248):"Even after the amendment of 1964,the penalty proceedings, it is evident,continue to be penal proceedings.Similarly, the question whether theassessee has concealed the particulars ofhis income or has furnished inaccurateparticulars of his income continues toremain a question of fact. Whether theExplanation has made a difference is —while deciding the said question of factthe presumption created by it has to beapplied, which has the effect of shiftingthe burden of proof. The entire materialon record has to be considered keeping inmind the said presumption and a findingrecorded."The question came for consideration ofthis court yet again in K.C.Builders v. Asst.CIT [2004] 265 ITR 562; [2004] 2 SCC 731wherein it was held (page 569):"One of the amendments made to theabovementioned provisions is the omissionof the word 'deliberately' from theexpression 'deliberately furnishedinaccurate particulars of such income'.It is implicit in the word 'concealed'that there has been a deliberate act onthe part of the assessee. The meaning ofthe word 'concealment' as found inShorter Oxford English Dictionary, thirdedition, Volume I, is as follows:'In law, the intentional suppressionof truth or fact known, to the injury orprejudice of another.'The word 'concealment' inherentlycarried with it the element of mens rea.Therefore, the mere fact that some figure https://hcservices.ecourts.gov.in/hcservices/ or some particulars have been disclosedby itself, even if it takes out the casefrom the purview of non-disclosure, itcannot by itself take out the case fromthe purview of furnishing inaccurateparticulars. Mere omission from thereturn of an item of receipt does neitheramount to concealment nor deliberatefurnishing of inaccurate particulars ofincome unless and until there is someevidence to show or some circumstancesfound from which it can be gathered thatthe omission was attributable to anintention or desire on the part of theassessee to hide or conceal the income soas to avoid the imposition of taxthereon. In order that a penalty undersection 271(1)(iii) may be imposed, ithas to be proved that the assessee hasconsciously made the concealment orfurnished inaccurate particulars of hisincome."The said principle has been reiterated inVirtual Soft Systems Ltd. v. CIT [2007] 2Scale 612 (SC) : (2007) 289 ITR 83 (SC), whereit was held (see page 97 of 289 ITR):"24. Section 271 of the Act is apenal provision and there are wellestablished principles for theinterpretation of such a penal provision.Such a provision has to be construedstrictly and narrowly and not widely orwith the object of advancing the objectand intention of the Legislature."Referring to a large number of decisions, itwas furthermore observed: (see page 98 of289 ITR):"27. Every statutory provision forimposition of penalty has two distinctcomponents:(i) That which lays down theconditions for imposition of penalty.(ii) That which provides forcomputation of the quantum of penalty.Section 271(1)(c) and clause (iii)relate to the conditions for impositionof penalty, whereas, on the other hand, https://hcservices.ecourts.gov.in/hcservices/ Explanation 4 to section 271(1)(c)relates to the computation of thequantum of penalty.28. The provisions of section 271(1)(c)(iii) prior to April 1, 1976, andafter its amendment by the Taxation Laws(Amendment) Act, 1975 with effect fromApril 1, 1976, the later provisionsbeing applicable to the assessment yearin question, are substantially the sameexcept that in place of the word'income' in sub-clause (iii) to clause(c) of section 271 prior to itsamendment by the Taxation Laws(Amendment) Act, 1975, the expression'amount of tax sought to be evaded' havebeen substituted. Explanation 4inserted for the purpose of clause (iii)where the expression 'the amount of taxsought to be evaded', was inserted hadin fact made no difference in so far asthe main criteria, namely, absence oftax continued to exist, prior to orafter April 1, 1976, changing only themeasure or the scale as to the workingof the penalty which earlier was withreference to the 'income' and after theamendment related to the 'tax sought tobe evaded'. The sine qua non which wasthere prior to or after the amendment onApril 1, 1976, was the fact that theremust be a positive income resulting intax before any penalty could be leviedcontinued to exist. The penalty imposedwas in 'addition to any tax'. If therewas no tax, no penalty could be levied.The return filed declaring loss andassessment made at a reduced loss didnot warrant any levy of penalty withinthe meaning of section 271(1)(c)(iii)with or without Explanation 4." 10. Having regard to the findings by the ultimate factfinding authority that the assessee-Company has bona-fide beliefthat the services rendered by it would constitute technicalservices and such a bona-fide belief is also supported by the aboveclarification (Circular No.3 of 2004, dated 12.2.2004) issued bythe Central Board of Direct Taxes, and in the light of thecategorical exposition of law as to the scope and ambit of Section https://hcservices.ecourts.gov.in/hcservices/ 271-C of the Act in the above said judgment of the Supreme Court,the Revenue has not made out any case. We do not find anyillegality or irregularity in the impugned order of the Tribunal soas to entertain this appeal. The appeal is accordingly dismissed.Sd/-Asst. Registrar./true copy/Sub Asst. Registrar.csTo1. The Commissioner of Income Tax (Appeals) (V), 121, Mahatma Gandhi Road, Chennai-600 034.2. The Commissioner of Income Tax (Appeals) (XI), 121, Mahatma Gandhi Road, Chennai-600 034. 3. The Assistant Registrar, Income Tax Appellate Tribunal, "B" Bench, III Floor, Rajaji Bhavan, Besant Nagar, Chennai-600 090.4. The Commissioner of Income Tax, Tamil Nadu-I, Chennai. 5. The Deputy Commissioner of Income Tax Company Circle I (3), Chennai-34.1 cc to Ms. Pushy Sitaraman, Advocate, Sr. 71344Tax Case (Appeal) No.1464 of 2007 NSM (CO)kk 17/12