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ITAT upholds penalty for concealment of income


The Mumbai Income-tax Appellate Tribunal (ITAT) has recently issued an important ruling in the case of Asia Pacific Performance SICAV (APP) upholding the levy of penalty for concealment of income and furnishing of inaccurate particulars. The taxpayer had wrongly set-off their exempt long-term capital losses (LTCL) against taxable long-term capital gains (LTCG). Taxand India discusses the background to the case. 

APP, a tax resident of Luxembourg, was registered with the securities and Exchange Board of India (SEBI) as a sub-account and was investing in Indian securities in accordance with the SEBI (Foreign Institutional Investors) Regulations 1995. In its Indian tax return for AY 2007-08 APP claimed a set off of LTCL of approximately Rs 10.6 million arising from the sale of shares on which securities transaction tax (STT) was paid, against LTCG earned on non-STT paid shares. LTCGs arising on the sale of shares on which STT has been paid is exempt from tax. However LTCGs arising on sale of shares on which STT is not paid (eg off market transactions) are taxable in the hands of FIIs / sub-accounts at 10%.  

APP’s case was selected for scrutiny assessment and the set-off of LTCL on STT paid shares against LTCG from non-STT paid shares was denied. APP did not appeal the disallowance before the appellate authorities. Thereafter the assessing officer also levied penalty on APP on the basis that APP had been unable to furnish a plausible explanation qua the legal claim made by it, as well as on the ground that it had failed to make a true and full disclosure of facts material to the computation of income.  

APP appealed against the penalty order and was granted relief by the first level appellate authority ie the Commissioner of Income-tax (Appeals). Aggrieved by the order of the CIT(A), the Indian Revenue authorities (IRA) preferred an appeal to the second level appellate authority, ie the ITAT against the order of the CIT(A). After considering APP’s contentions, the ITAT held that APP’s case was wholly unmaintainable.  

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Also published in Thomson Reuters' Taxnet Pro, 9 January 2013


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Taxand's Take

The ruling of the ITAT is an important one as it brings out the finer nuances as regards the levy of penalty by the IRA as well as on some of the procedural aspects that must be followed by taxpayers when their case has been selected for scrutiny audit proceedings.

In this case, the taxpayer seems to have adopted an aggressive tax position in its return of income ie the set-off of exempt losses against taxable income, which in turn opened it up to penalty proceedings. Therefore, it is imperative that tax positions adopted by a taxpayer should have a strong technical backing and should be discussed in detail with tax advisors so as to mitigate any penalty exposure. Taxpayers could also consider obtaining a technical opinion from their advisors and keep it on their files as a back-up.

Taxand's Take Author