Learning from penalty proceedings in case of MS.Sania Mirza

[CA DEV KUMAR KOTHARI]

Relevant links and references:

The Commissioner of Income Tax Versus Ms. Sania Mirza  2013 (2) TMI 220 - ANDHRA PRADESH HIGH COURT

Price Waterhouse Coopers vs. CIT 2012 (9) TMI 775 - SUPREME COURT

Earlier Articles by author with beginning learning from … (can be easily searched by readers)

Exemption claimed with disclosure with bonafide belief:

Tax laws are very complex. Different views can prevail on some complex issues of taxability or exemption of particular receipts. Exemption can be on several grounds like ‘capital receipt’, ‘exempted income’,  ‘sum diverted before accrual’ ,’sum belonging to other persons’, ‘no net income’, ’ for ‘tax holiday’, ‘no taxable income’ for any other reasons.

We find many cases in which even judgments of the Supreme Court have been reconsidered by larger bench and view taken earlier by smaller bench has been changed. We also find dissenting orders, by ITAT members, and judges of High Courts and the Supreme Court.

This proves that tax laws are very complex and to presume that every citizen knows tax law, will be a total wrong approach. Benefit of doubt must be allowed in case of tax matters also, particularly when it relates to penalty and prosecution.

Disclosure must be made:

A disclosure about exemption claimed must be made in the Return of Income (ROI), or accompanying documents. In case there is no scope of disclosure in the  ROI, and in case any documents are not required to be filed with the return or in addition to  the return, then also assessee must disclose the fact that he has claimed exemption and the basis of such claim must be explained by way of letter or by filing hard copy of  ROI and related documents. The disclosure by assessee shall be considered as a discharge of his primary duty to make full and true disclosure. There will be no case of seek and hide or to disclose only if caught by taxman.

E-returns:

In case of E-returns of income (E-ROI) , there is no scope of explaining any contentious issue. Therefore, the assessee can make a disclosure about any contentious issue relating to exemptions claimed or relief claimed by him in the ROI.

Suggestions for E-ROI – to include a sheet for explanations

and claims for consideration by the Assessing Officer:

It is suggested that in E-ROI, also a separate word sheet can be provided in which the assessee can make disclosures and explanations about any contentious issues on which assessee has taken a view which is favorable to him. In case he want to make any  further claim, which is not made in the computation he can make such a claim for consideration of the AO.

Concealment of income- not when a disclosure has been made:

In case assessee do not disclose income or furnish an inaccurate particulars of income, then he can be liable to penalty under section 271.1.c of the Income-tax Act, 1961. However, when a disclosure has been made and explained, then penalty may not be leviable if the claim and explanation is bonafide and is due to complexity of law or due to different views possible etc.  

Case of Sania Mirza:

Sania MIrza is well known as a renowned professional international tennis player. She  received an award of ₹ 30.63  lakhs. This was disclosed in the statement of affairs filed with the ROI . This was not included in income  in P & L account and was also not  offered to tax in some other manner.

 The AO accepted the ROI u/s 143(1).

The AO later reopened the assessment u/s 147 at which stage the assessee offered the said amount to tax.

The AO & CIT levied penalty u/s 271(1)(c) on the ground that the assessee had furnished inaccurate particulars of her income and concealed her income.

It is observed from reported judgment that before the Assessing Officer, her Advocate/Chartered Accountant stated that the amount was shown in the capital account and was not shown as a capital receipt. But since the issue had arisen, it was being offered as taxable income.

(Per author: it appears that the assessee had offered the sum to tax, without any explanation about basis of claim for exemption and without any  protest or explanation for non inclusion in income).

On appeal, the Tribunal cancelled the penalty on the ground that a “bona fide mistake” had been made on her behalf by her Advocate/Chartered Accountant and there was no concealment of income nor a furnishing of inaccurate particulars.

On appeal by the department to the High Court,  the High Court also dismissed the appeal of revenue.

The High Court ruled and observed that the only error that seems to have been committed was that it was not shown as a capital receipt. But as soon as this was pointed out, the error was accepted and the amount was surrendered to tax. Therefore, there can be no penalty – and issue was decided in favor of assessee.

Learning from this case:

It appears that the statement of affairs that is balance sheet was filed with the ROI. The amount was shown in capital account, that means that the amount was treated as a ‘capital receipt’. The counsel of assessee must have explained the true nature of receipt  and  must have explained that it was a capital receipt or a receipt which was not liable to be included in the income. Perhaps in that case the receipt could be claimed as exempted receipt and the assessee could have tested her case on that score before appellate authorities/ courts. In that case perhaps the AO could have dropped penalty proceeding, or  CIT(A) could have deleted penalty, if it was levied by the AO.

The learning is that any claim must be made with some factual and legal basis and one must be ready to explain the same, so that one need not to withdraw the claim  just when even a preliminary occasion of enquiry arises. There must be firm conviction about the claim and its merits. Withdrawal of claim just on issue of a notice or on enquiry shows that casual approach was adopted at the time of filing of original return, revised return, and also by accepting the mistake in the claim made.

Therefore, any contentious claim must be explained in writing and there must be some effort to explain the same  even before filing of ROI,so as to enable tax payer to insist and contest his claim and also to make a case of bonafide case of claim.