Facts of the Case

The petitioner challenged orders dated 28 December 2021 and 24 January 2022 rejecting its applications under Section 270AA(4) of the Income Tax Act, 1961 seeking immunity from penalty. The petitioner also challenged notices issued under Section 270A for Assessment Years 2018–19 and 2019–20.

Earlier assessments had treated receipts from IT support services and software access provided to Indian entities as royalty taxable under Section 9(1)(vi) and Article 12 of the India-USA DTAA. The Assessing Officer initiated penalty proceedings on the ground of alleged under-reporting/misreporting of income.

Issues Involved

  1. Whether rejection of immunity under Section 270AA was valid when statutory conditions were satisfied.
  2. Whether penalty proceedings under Section 270A can be sustained without specifying whether the charge is under-reporting or misreporting.
  3. Whether vague show cause notices violate principles of natural justice.

Petitioner’s Arguments

The petitioner contended that it had fulfilled all conditions prescribed under Section 270AA(1), namely payment of tax and interest and non-filing of appeal. Therefore, the Assessing Officer was statutorily obligated to grant immunity unless the case fell within “misreporting” under Section 270A(9).

It was argued that neither the assessment orders nor the show cause notices recorded any finding of misreporting as defined in law. The notices merely alleged “under-reporting/misreporting” without specifying the applicable limb, rendering them invalid.

The petitioner further submitted that the taxability issue itself was debatable and later clarified by the Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd., negating any allegation of deliberate misreporting.

Respondent’s Arguments

The Revenue contended that although the notices used both expressions, the assessment orders made it clear that the case involved misreporting. Therefore, the petitioner had sufficient notice of the charge.

Court Order / Findings

  • Under Section 270AA(3), immunity must be granted if statutory conditions are satisfied and the case does not involve misreporting under Section 270A(9).
  • Under-reporting and misreporting are distinct legal concepts; only misreporting bars immunity.
  • Neither the assessment orders nor the notices identified any specific conduct falling within Section 270A(9).
  • Show cause notices alleging “under-reporting/misreporting” without clarity are legally defective.
  • Natural justice requires that the assessee be informed of the precise charge to enable an effective response.
  • The Revenue’s observation that payment of demand does not automatically entitle immunity misconstrued the statutory scheme.

Important Clarification

The judgment establishes that penalty proceedings must be founded on precise statutory grounds. Authorities cannot deny immunity or impose penalties based on vague allegations or interchangeable use of legal terms.

It also underscores that where taxability of income is a debatable legal issue, initiation of penalty for misreporting may not be justified.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1772177226_GECAPITALUSHOLDINGSINCVsDYCOMMISSIONEROFINCOMETAXINTERNATIONALTAXATIONCIRCLE131NEWDELHIANDORS.pdf 

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.