Penalty u/s 271(1)(c) Not Justified For Indian Overseas Bank’s Mistaken DTAA Claim on Hong Kong Income: Madras HC [Read Order]

In a recent ruling, the Madras High Court has held that a penalty under Section 271(1)(c) of the IncomeTax Act cannot be imposed on the Indian Overseas Bank for its mistaken claim of Double Taxation Avoidance Agreement (DTAA) benefits on income earned from its Hong Kong branch.

The dispute arose from assessment years 2006–07 and 2007–08, where the bank had claimed double taxation relief on income earned by its Hong Kong branch by invoking the India–China Double Taxation Avoidance Agreement (DTAA).

The appeal was filed by the revenue because the Income Tax Department (Commissioner of Income Tax, Chennai) disagreed with the ITAT’s decision to delete the penalty under Section 271(1)(c).

The counsel argued that the bank was fully aware of the position that the DTAA between India and China could not be extended to entities in Hong Kong, and hence the very premise of the claim was compromised, and that the bank knowingly made a wrongful claim, warranting a penalty for concealment of income.

On the other hand, the bank argued that the claim was made in bona fide belief, based on Hong Kong’s 1997 handover to China, and that there was no concealment or furnishing of inaccurate particulars.

After hearing both sides, the high court noted that Section 90 was amended only in 2009 to permit treaties with “specified territories” such as SARs, and India entered into a DTAA with Hong Kong only in 2018. Since the assessee had disclosed all particulars in its returns, the Court held that the conditions for penalty under Section 271(1)(c) were not satisfied.

Rejecting Revenue’s framing of the issue as an “inflated claim,” the Court clarified that the claim was erroneous but not deliberate. The substantial question of law was reframed accordingly and answered in favour of the assessee.

The bench of Dr Justice Anita Sumanth and Justice Mummineni Sudheer Kumar observed that “there is thus no merit in the argument of the Revenue that the levy of penalty under Section 271(1)(c) would stand triggered, merely on the making of a disallowance. If that were to be so, there would be no relevance of the requirement of ‘satisfaction’ of the Assessing Officer, as penalty would become leviable on the mere act of addition or disallowance in an assessment order. The provision does not support such a conclusion.”

Accordingly, the appeal was dismissed.

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