Taxpayer Excluded Income from Hong Kong Company Citing POEM: ITAT Holds Debatable Tax Position not 'Misreporting' [Read Order]

The Nagpur Bench of the Income Tax Appellate Tribunal (ITAT) held that a return revised on the basis of a bonafide and legally debatable interpretation of the Place of Effective Management (POEM) provisions cannot attract penalty for ‘misreporting of income’ under Section 270A(9) of the Income Tax Act, 1961.

The Tribunal accordingly quashed a 200% penalty levied against an assessee who excluded income received from a Hong Kong company wholly-owned by him.

Ajay Maheshwari had originally filed his return of income for Assessment Year 2017-18 declaring a total income of ₹2,84,83,930. He subsequently revised the return under Section 139(5), reducing declared income to ₹36,00,740, claiming that the difference of ₹2,48,83,196 was received from Oasis International HK Ltd. - a one-person company incorporated in Hong Kong of which he was the sole shareholder; the assessee held that such income was not taxable in India.

The assessee substantiated his position on the POEM provisions introduced under Section 6(3) with effect from April 1, 2017, and on CBDT Circular No. 08 of 2017 dated 23.02.2017, which clarified that POEM would not apply to foreign companies with a turnover or gross receipts of ₹50 crore or less.

The AO rejected the claim, added back the income in assessment, and levied a penalty of ₹1,79,64,198 at 200% under Section 270A(9)(a) for misrepresentation and suppression of facts. The CIT(A) confirmed the penalty, holding that the revised return was filed intentionally at the last moment to generate a refund of ₹95,53,990. A similar penalty of ₹1,76,75,522 was confirmed for AY 2018-19.

Also Read: "Mere Reference to Misreporting" Insufficient for Levy of Penalty: ITAT Quashes Rs. 1.22cr Penalty for Lack of Reasoning

The assessee submitted before ITAT that all material facts including income received from Oasis International HK Ltd., the shareholding pattern, nature of receipts and supporting documents were duly placed before the AO.

The assessee submitted that there was no suppression or misrepresentation of any kind, and that a difference of opinion on the taxability of income cannot attract a misreporting penalty.

The Senior Departmental Representative countered that the CBDT Circular addressed only the applicability of POEM to foreign companies and did not exempt the assessee from the taxability of income received from such an entity. The Revenue stood firm on its position that the assessee’s claim had no valid statutory basis, and that it amounted to a deliberate attempt to evade tax.

Judicial Member Pawan Singh and Accountant Member Khettra Mohan Roy observed that the assessee's revised return "emanated from a debatable and legally complex issue" involving POEM provisions that were nascent in AY 2017-18, with the binding nature of CBDT Circulars under Section 119 of the Act still evolving.

ITAT noted that the explanation furnished was "bona fide and legally plausible, arising out of an alleged error in the original return”. Importantly, ITAT noted that the rejection of a legal claim during assessment cannot lead to any inference of contumacious conduct or deliberate misrepresentation by the assessee.