Assessee can not be prevented from claiming an income exempt merely because such income was wrongly offered in ITR which was not revised – ITAT
In a recent judgment, ITAT has set aside a case for fresh determination of taxability of receipts wrongly offered to tax in return of income.
ABCAUS Case Law Citation:
ABCAUS 3890 (2024) (03) ITAT
Important Case Laws relied upon by parties:
Excellence Pvt. Ltd. vs. CIT, 432 ITR 471 (SC)
CIT vs. Shelly Products (2003) 261 ITR 367 (SC)
S. R. Koshti vs. CIT (2005) 276 ITR 165 (Guj)
Ester Industries vs. CIT (2009) 185 TAXMAN 266 (Delhi)
CIT vs. Pruthvi Brokers & Shareholders (P.) Ltd. [2012] 349 ITR 336 (Bom)
In the instant case, the assessee had challenged the order passed by the Assessing Officer (AO) under section 143(3) read with 144C(13) of the Income Tax Act, 1961 (the Act) in pursuance of the directions issued by the Dispute Resolution Panel (DRP) under section 144C(5) of the Act.
The assessee challenged the correctness of the DRP directions and denial of relief from taxation on receipts arising from sale of software in the hands of non-resident assessee.
The assessee-company was incorporated in the United Kingdom and thus a non-resident assessee for the purposes of Indian Taxation. The assessee was engaged in providing software development services and sales & marketing support services to its group entities. The non-resident assessee had obtained certain receipts after deduction of tax from various customers in India which was stated to be sale proceeds of off-the-shelf software. Such receipts were offered to tax in India as ‘Royalty Income’ while filing its return of income.
In response to notice u/s 148 of the Act, the assessee took a stand that such receipts had been offered to tax in ITR as ‘income from royalty’ on a conservative basis. It was contended that such sale of software was for mere distribution/end use of customers which had not resulted in any transfer of any rights against such software and did not fall within the definition of royalty in terms of the relevant tax treaty.
It was contended that such receipts incorrectly reported as taxable income in ITR can not be regarded as income chargeable to tax in India in the absence of Permanent Establishment in India.
However, the AO was not satisfied with the contentions of the assessee and proposed the additions in the draft order u/s 144C(1) of the Act.
Aggrieved, the assessee referred the matter to DRP for appropriate directions against the draft order. The additional evidences filed by the assessee were taken on record by the DRP and the AO was directed to take these documents into this consideration and ascertain applicability of the judgment relied upon by the assessee after verification of facts.
On receipt of DRP directions, the AO passed impugned final assessment order but continued to deny the relief as claimed towards non taxability of receipts on sale of software as Royalty Income.
Before the Tribunal, the assessee submitted that it had offered the income in question to tax in its return of income under wrong belief owing non pronouncement of the judgement of the Hon’ble Supreme Court at the time of filing of ITR. However, it is incumbent upon AO to determine taxable income as per the provisions of law regardless of overstatement of income declared by the assessee under wrong belief.
Tax Authorities are required to ensure that only legitimate tax dues are collected
The Tribunal observed that it is trite that the authorities under the Act are under sacrosanct obligation to act in accordance with law. Tax can be collected only as provided under the Act. If an assessee, under a mistake, misconception or not being properly instructed is over assessed, the authorities under the Act are required to ensure that only legitimate tax dues are collected.
if a particular income is not taxable under the Act, it cannot be taxed on the basis of estoppel
The Tribunal further observed that the essence of the decisions are that mere admission on the part of the assessee with respect to an addition/disallowance in its original return or in revised return would not ipso facto bar an assessee from claiming an expense or disputing an addition if it is otherwise permissible under law. It is thus well settled that if a particular income is not taxable under the Act, it cannot be taxed on the basis of estoppel or any other equitable doctrine. The Revenue Authorities cannot enforce untenable actions of the assessee against it which led to declaration of income of higher amount incorrectly. It is thus open to assessee to show that it was overassessed under erroneous impression of law or facts even if it is attributable to the mistake of assessee.
The Tribunal opined that the factual matrix towards the nature and character of sale proceeds qua the underlying evidences did not appear to have been verified by the AO at any stage of the proceedings.
The Tribunal opined that it would be a fit case to remit the issue back to the file of AO and assessee to demonstrate that receipts from various customers in India arose on account of sale of software and does not give rise to any chargeable income in law. The assessee was given liberty to adduce such evidences as it may deem expedient to demonstrate that income arising on sale of software were wrongly reported as royalty income and is not chargeable to tax in India in terms of the provisions of the Act read with provisions of DTAA.
Thus, the issue was set aside to the file of the AO for fresh determination of taxability of impugned receipts offered in ITR and other customers included under the ITR in question in accordance with law
Accordingly, the appeal of the assessee was allowed.
Download Full Judgment Click Here >>
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