Full Judgment Text
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CASE NO.:
Appeal (civil) 7115 of 2005
PETITIONER:
M/s Virtual Soft Systems Ltd
RESPONDENT:
Commissioner of Income Tax, Delhi-I
DATE OF JUDGMENT: 06/02/2007
BENCH:
ASHOK BHAN & DALVEER BHANDARI
JUDGMENT:
J U D G M E N T
With
C.A. No. 345 of 2006, C.A. No. 1340 of 2006, C.A. No. 3390 of
2006, C.A. No. 5219 of 2006 (@ SLP No. 13579 of 2006),
C.A. No. 5221 of 2006 (@ SLP No. 14629 of 2006] C.A. No.
5220 of 2006 (@ SLP No. 14720 of 2006] C.A. No. 5218
of 2006 (@ SLP No. 14726 of 2006) and C.A. No. 4367 of
2006
BHAN, J.
We propose to dispose of these appeals as has been done
by the High Court, by a common order, as the point involved
in all these appeals is the same.
Facts are taken from Civil Appeal No. 7115 of 2005.
Commissioner of Income Tax, Delhi-I, the respondent
herein, filed ITA No. 340 of 2004 in the High Court of Delhi
against the order passed by the Income Tax Appellate Tribunal
(for short "the Tribunal") under Section 260A of the Income
Tax Act. Assessee also filed ITA No\005. of 2004 being aggrieved
against a part of the order of the Tribunal. High Court allowed
the ITA No. 340 of 2004 filed by the Revenue and held that the
Tribunal was not right in deleting the penalty imposed under
Section 271(1)(c) of the Income Tax Act, 1961 (for short "the
Act") merely on the ground that the total income of the
assessee was assessed at a minus figure/loss. Tribunal had
allowed the assessee’s appeal remitting the penalty imposed by
the assessing officer under Section 271(1)(c) relating to the
assessment year 1996-97, relying upon the decision of the
Punjab High Court in CIT v. Prithipal Singh & Co., 183 ITR
69, which was affirmed by this Court in CIT v. Prithipal
Singh & Co., Civil Appeal No. 1961 of 1996 dated 27.07.2000,
reported in 249 ITR 670 (SC).
In the appeal filed by the Revenue in the High Court of
Delhi, the following two questions of law were framed:
" 1. Whether the ITAT was right in deleting the
penalty imposed under section 271(1)(c) of the
Income Tax Act, 1961 on the ground that the total
income of the assessee has been assessed at a minus
figure/loss?
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2. Whether the ITAT was justified in holding that
the judgments in Prithipal Singh’s case (183 ITR 69
and 249 ITR 670) will apply even after insertion of
Explanation 4 to Section 271(1)(c) of the Income
Tax Act, 1961 with effect from 1.4.1976?
FACTS (C.A. NO. 7115 OF 2005)
For the assessment year 1996-97, the assessee-appellant
returned an income of Rs. 1,32,44,507.29 subject to
depreciation. The depreciation claimed for the year was
Rs.1,47,97,995.01 computed as under:-
Depreciation for Assessment year
1996-97
Rs. 1,32,44,507.29
Unabsorbed depreciation for
Assessment Year 1995-96
Rs. 15,53,487.72
Total =
Rs. 1,47,97,995.01
Accordingly, the appellant filed a "nil" return and carried
forward the unabsorbed depreciation of Rs. 15,53,487.72
(Rs. 1,47,97,995.01 \026 Rs. 1,32,44,507.29 = Rs. 15,53,487.72)
to the following year. By the assessment order dated
30.03.1999, the Deputy Commissioner of Income-Tax assessed
the appellant’s income at a figure of Rs. 47,03,120.00. This
was because:
(i)
Disallowance of claim of
depreciation of purchase and
lease of cinematographic films
held to be bogus
Rs. 57,51,520.00
(ii)
Reduction of claim of
depreciation in respect of leasing
vehicles from 40% to 20%.
Rs. 10,28,462.00
(iii)
Unexplained share application
money added back as
unexplained cash credits under
Section 68
Rs. 19,16,000.00
(iv)
Lease rentals of cinematographic
films held to be bogus and
assessed as income from other
sources
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Rs. 63,43,750.00
The Commissioner of Income Tax set aside the order of
assessment and directed the Assessing Officer to frame a fresh
assessment and fresh proceedings concluded with an order of
assessment dated 19.03.2002 in which it was found that the
appellant had a loss of Rs. 11,02,255.00. It was because:
(i)
Since the leasing transactions in respect of
cinematograph films were found to be bogus and the
depreciation of Rs. 57,51,520.00 was not allowed, nor
could the lease rental of Rs. 63,43,750.00 be added as
income.
(ii)
Therefore, the Appellant’s income was reduced to
Rs. 68,00,757.00 (returned income, Rs. 1,32,44,507.00
\026 Rs. 63,43,750.00 = Rs. 68,00,757.00)
(iii)
The appellant was able to prove some sources of the
share application money and the amount of
Rs. 19,16,000.00 added back was reduced to
Rs. 1,15,000.00
(iv)
Adding the above amount, the Appellant’s income
became Rs. 69,15,757.00 (Rs. 68,00,757.00 +
Rs. 1,15,000.00 = Rs. 69, 15, 757.00)
(v)
Depreciation on leased vehicles claimed at 40% was
reduced to 20% (as in the original assessment) and an
amount of Rs. 10,28,462.00 was disallowed.
(vi)
Accordingly, against the total amount of depreciation
claimed at Rs. 1,47,97,994.00, an amount of
Rs. 67,79,982.00 ( Rs. 57,51,520.00 + Rs. 10,28,462.00
= Rs. 67, 79, 982.00) was disallowed.
(vii)
Therefore, the depreciation allowable was
Rs. 80,18,011.00 (Rs. 1,47,97,995.00 \026 Rs.
67,79,982.00 = Rs. 80,18,011.00)
(viii)
Making a deduction on account of depreciation as in
sub-Paragraph (vii) above, the Appellant was assessed at
a loss of Rs. 11,02,255.00 (Rs. 69,15,757.00) \026
Rs. 80,18,012.00 = - Rs. 11,02,255.00)
In this manner, the carry-forward loss of Rs.
15,53,487.72 originally claimed by the appellant was reduced
to Rs. 11,02,225.00.
By order dated nil September, 2002, the Deputy
Commissioner of Income Tax levied a penalty of Rs.
31,71,692.00. He distinguished the decision of the Punjab
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and Haryana High Court in Prithipal Singh’s case (supra),
which was affirmed by this Court on the ground that it related
to the assessment year 1971-72 when Explanation 4 to
Section 271(1)(c) had not been introduced. He concluded the
issue against the appellant on the basis of the decision of the
Karnataka High Court in P.R. Basavappa & Sons v. CIT, 243
ITR 776 (Karnataka). He added the amounts disallowed i.e.
Rs. 10,28,462.00, Rs. 57,51,520.00 and Rs. 1,15,000.00. He
concluded that by adding these figures the total amount of Rs.
68,94,982.00 was the income in respect of which inaccurate
particulars had been furnished. The tax was computed at Rs.
31,71,692.00. It was held that the tax sought to be evaded
was Rs. 31,71,692.00 and imposed penalty of Rs.
31,71,692.00 (100% of the tax). The Commissioner of Income
Tax confirmed the order of the assessing officer on
24.12.2002. The Tribunal by its order dated 11.05.2004
reversed the order of the Commissioner of Income Tax by
applying Prithipal Singh’s case (supra). Revenue filed an
appeal under Section 260A of the Act which was allowed by
the High Court by the impugned order.
The point involved before the High Court was, as to
whether penalty was leviable under Section 271 (1)(c)(iii) read
with Explanation 4 thereto which came on the statute book
w.e.f. 01.04.1976, in a case where the return filed was one of
loss and the assessment made by the assessing officer was at
a reduced amount of loss.
Revenue’s case before the High Court was that after
1.4.1976 Explanation 4 had made a material change and even
though no tax was payable, as a result of the assessment
framed at a loss, it will still fall under Section 271(1)(c)(iii)
attracting levy of penalty in so far as the effect of reduction of
loss from the returned loss, had resulted in concealment of
income, the assessee having filed inaccurate particulars of its
income in filing the loss return. In support of this proposition,
the Revenue placed reliance on the interpretation of
Explanation 4 which added the words "tax sought to be
evaded". Revenue’s contention was that Prithipal Singh’s case
(supra) decided by the Punjab and Haryana High Court
pertaining to the assessment year 1970-71 was prior to the
amendment of Finance Act, 1975 and therefore, was not
applicable. For the same reason, the decision of this Court in
affirming the decision of the Punjab and Haryana High Court
in Prithipal Singh’s case (supra) was also not applicable.
Revenue had also placed reliance on the decision of the
Karnataka High Court in P.R. Basavappa’s case (supra). In
this case Karnataka High Court distinguished the view taken
in Prithipal Singh’s case (supra) on facts stating that the said
decision related to the period prior to 1.4.1976 and therefore,
has no application as Explanation 4 inserted w.e.f. 1.4.1976 in
the statute book was not considered by the Punjab and
Haryana High Court.
The High Court answering the second question first,
concurred with the view taken by the Karnataka High Court
and dissented from the view taken by the Punjab and Haryana
High Court in Prithipal Singh’s case (supra), distinguishing the
same on facts stating that the said decision related to the
period prior to 1.4.1976 and therefore, had no application
because Explanation 4 inserted in Section 271 (1)(c) with effect
from 1.4.1976 in the statute was not considered by the Punjab
and Haryana High Court and for similar reason held that the
decision of this Court upholding the decision of the Punjab
and Haryana High Court in Prithipal Singh’s case (supra) was
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also not helpful to the assessee in such a case.
Answering the first question also against the assessee
and in favour of the Revenue, the High Court referred to some
illustrations in the impugned order and concluded that the
Tribunal was not right in deleting the penalty imposed under
Section 271(1)(c) of the Act, merely on the ground that the
total income of the assessee was assessed at a minus
figure/loss. In arriving at this decision on question no.1, the
Delhi High Court in the impugned order dissented from the
view taken by Madras High Court, reported as CIT v. C.R.
Niranjan, 187 ITR 280 (Madras), CIT v. N. Krishnan, 240 ITR
47 (Ker.). Reference was made to CIT v. S.V. Angidi Chettiar,
44 ITR 739 (SC) which referred to the expression "income tax"
this judgment being under Section 28(1)(c) of the Income Tax
Act, 1922, Dooars Tea Co. Ltd. v. Commissioner of
Agricultural Income-tax, West-Bengal, 44 ITR 6 (SC)
referring to the expression "total income", CIT (Central) Delhi
v. Harparshad & Co. P. Ltd., 99 ITR 118 (SC), again referring
to the expression word "total income". Reference is also made
to CIT v. J.H. Gotla, 156 ITR 323 (SC) for the proposition as
to whether word income would include loss. In this
connection, the High Court also referred to CIT, Bombay v.
Elphinstone Spinning & Weaving Mills Company Ltd., 40
ITR 142 (SC).
Section 271(1)(c) was again amended by the Finance Act,
2002. Subsequent amendment was brought to the notice of
the Bench hearing the Appeal. In the impugned order, the
High Court did not express any opinion and observed inter alia
that while the Revenue stated that the amendment brought
about by the Finance Act, 2002, w.e.f. 1.4.2003, was
declaratory in nature, therefore, retrospective in operation and
the submission on behalf of the assessee was that the same
being substantive in nature and being an amendment to the
statute could not be said to be operative retrospectively. The
High Court as stated above, did not express any opinion on
this aspect of the matter and held that for imposition of
penalty after 1.4.1976 it was not necessary that there must be
a positive income and the levy of tax, for the penalty to be
imposed under Section 271(1)(c) of the Act.
Learned counsels appearing in different appeals filed by
the assessee assailed the impugned judgment by contending
that provisions of Section 271 (1)(c)(iii) prior to 1.4.1976 and
after its amendment by the Finance Act, 1975 with effect from
1.4.1976, later provisions being applicable to the assessment
year in question, being substantially the same, the High Court
in the impugned order erred in distinguishing Prithipal Singh’s
case (supra), and taking a view contrary to the view taken in
the said case. They referred to a number of judgments of
various High Courts in support of their contention. According
to them even after 1.4.1976, if there is no positive income, no
taxes was leviable, and therefore penalty cannot be levied for
concealment of income. The view that with the insertion of
Explanation 4 w.e.f. 1.4.1976, penalty is leviable even in cases
where the return filed is of loss and assessment framed is also of loss,
as expressed by the Karnataka High Court in 243 ITR page 776,
P.R. Bassappa’s case (supra) and also by the Bombay High
Court in CIT v. Chemiequip Ltd., 265 ITR page 265 do not
lay down the correct law as these decisions run contrary to the
law laid down by this Court in CIT v. Prithipal Singh & Co.
(Supra). It is contended that the contrary view in any case, is of no
assistance to the Revenue as against large number of other decisions
of different High Courts. It was contended that it has been laid down
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by this Court in CIT v. Podar Cement Pvt. Ltd. & Ors., 226 ITR 625
at 648 that where various High Courts have taken different views on
a particular point, then that view which is in favour of the assessee
should be adopted.
It was contended that income will not include loss as income
means positive income on which tax is leviable which would not
include loss income as no tax would be payable on a loss income. In
the context of provisions of Section 271(1)(c), as it existed prior to
2002 amendment, in the absence of no tax, no penalty could be levied.
This submission is based with reference to the provisions contained
in Section 143 (1A) of the Act before its amendment which came on
the Statute in 1993 with retrospective effect from 1.4.1989. In support
of this contention, the asseessee invited our attention to the decisions
of various High Courts in Modi Cement Ltd. v. Union of India &
Ors., [193 ITR 91 (Del.)], Indo-Gulf Fertilizers and Chemicals
Corporation Ltd. v. Union of India & Anr., [195 ITR 485 (All.)] and
CIT v. Zam Zam Tanners, [279 ITR page 197 (All)].
Referring to the amendment carried in Section
271(1)(c)(iii) and Explanation 4 by the Finance Act, 2002
where the expression used in Explanation 4 "the amount of
tax sought to be evaded" has been amended providing
specifically that where the filing of return and the assessment
had the effect of reducing the loss would entail the penalty. It
is contended that the Legislature has now deliberately enacted
such provision to fill in the lacuna in law and also to put an
end to the controversy which existed between the High Courts
in interpreting the laws after 1.4.1976.
It was also contended that the view taken by the Bombay
High Court in CIT v. Chemiequpi Ltd. (supra) that the
amendment in Finance Act, 2002 is retrospective according to
them is bad in law. That the amendment is not clarificatory in
nature. That the penalty being penal, provisions could not be
brought on the statute book with retrospective effect.
As against this, the Counsel for the Revenue supported
the judgment for the reasons recorded in the impugned order.
We have heard the counsels for the parties at length.
Section 271 (1)(c) and the subsequent amendments carried out
in the said section with effect from 1.4.1976 (as amended by the
Taxation Laws (Amendment) Act, 1975) and the amendment by
Finance Act, 2002 (with effect from 1.4.2003) on the interpretation of
which the entire controversy in the present appeal rests are:-
"271. Failure to furnish returns, comply with
notices, concealment of income, etc.--(1) If
the income tax Officer or the Appellate
Assistant Commissioner in the course of any
proceedings under this Act, is satisfied that any
person--
(a) xxxxx; or
(b) xxxxx; or
(c) has concealed the particulars of his income
or furnished inaccurate particulars of such
income,
he may direct that such person shall pay by
way of penalty,--
(i) xxxxx
(ii) xxxxx
(iii) in the cases referred to in clause (c), in
addition to any tax payable by him, a sum
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which shall not be less than, but which shall
not exceed twice, the amount of the income in
respect of which the particulars have been
concealed or inaccurate particulars have been
furnished."
[Emphasis supplied]
Sub-clause (iii) of sub-section (1)(c) of Section 271
after its amendment with effect from 1.4.1976 and the
Explanation 4 added thereto read as under:-
"(iii) in the cases referred to in clause (c), in
addition to any tax payable by him, a sum
which shall not be less than, but which
shall not exceed twice, the amount of tax
sought to be evaded by reason of the
concealment of particulars of his income
or the furnishing of inaccurate particulars
of such income."
[Emphasis supplied]
"Explanation 4 : For the purposes of Clause
(iii) of this sub-section, the expression ’the
amount of tax sought to be evaded’,--
(a) in any case where the amount of income in
respect of which particulars have been
concealed or inaccurate particulars have been
furnished exceeds the total income assessed,
means the tax that would have been chargeable
on the income in respect of which particulars
have been concealed or inaccurate particulars
have been furnished had such income been the
total income;
(b) in any case to which Expln. 3 applies,
means the tax on the total income assessed;
(c) in any other case, means the difference
between the tax on the total income assessed
and the tax that would have been chargeable
had such total income been reduced by the
amount of income in respect of which
particulars have been concealed or inaccurate
particulars have been furnished."
[Emphasis supplied]
Sub-clause (iii) of Section 271(1)(c) after its amendment by
Finance Act, 2002 with effect from 1.4.2003 and the amendment to
clause (a) of Explanation 4 are reproduced below:-
"(iii) in the cases referred to in clause (c), in
addition to tax, if any, payable by him, a
sum which shall not be less than, but
which shall not exceed three times, the
amount of tax sought to be evaded by
reason of the concealment of particulars of
his income or the furnishing of inaccurate
particulars of such income."
"Explanation 4 : For the purposes of Clause
(iii) of this sub-section, the expression "the
amount of tax sought to be evaded",--
(a) in any case where the amount of income
in respect of which particulars have been
concealed or inaccurate particulars have
been furnished has the effect of reducing
the laws declared in the return or
converting that loss into income, means
the tax that would have been chargeable
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on the income in respect of which
particulars have been concealed or
inaccurate particulars have been
furnished had such income been the total
income;
[Emphasis supplied]
Section 271 of the Act is a penal provision and there are well
established principles for the interpretation of such a penal provision.
Such a provision has to be construed strictly and narrowly and not
widely or with the object of advancing the object and intention of the
legislature.
This Court as well as the various High Courts of the country
have consistently held that the statute creating the penalty is the first
and the last consideration and must be construed within the term and
language of the particular statute. In Bijaya Kumar Agarwala
v. State of Orissa, 1996 (5) SCC 1, it has been held by this Court in
para 17 and 18 as under:-
"17. Strict construction is the general rule of penal
statutes. Justice Mahajan in Tolaram Relumal v.
State of Bombay, AIR 1954 SC 496 at pages 498-
499, stated the rule in the following words:
"(I)f two possible and reasonable
constructions can be put upon a penal
provision, the court must lean towards
that construction which exempts the
subject from penalty rather than the one
which imposes penalty. It is not
competent to the court to stretch the
meaning of an expression used by the
Legislature in order to carry out the
intention of the Legislature."
18. The same principle was echoed in the
Judgment of the five Judge Bench in the case of
Sanjay Dutt v. State through C.B.I., 1994 (5) SCC
402, which approved an earlier expression of the
rule by us in Niranjan Singh Karam Singh
Punjabi v. Jitendra Bhimraj Bijjaya, 1990 (4) SCC
76, at page 86 para 8.
"Therefore, when a law visits a
person with serious penal consequences
extra care must be taken to ensure that
those whom the legislature did not intend
to be covered by the express language of
the statute are not roped in by stretching
the language of the law."
Keeping in view the rules of interpretation of
criminal statue and the language and intent of the
Order and the Act, we find ourselves in agreement
with the view expressed by Ranganath Misra, J. as
he then was, in Prem Bahadur v. State of Orissa,
1978 Cri. LJ 683, at page 685, para 4 :
"The Orissa Order does not make
possession without a licence an offence.
Storage, however, has been made an
offence. Between "possession" and
"storage" some elements may be common
and, therefore, it would be appropriate to
say that in all instances of storage there
would be possession. Yet, all possession
may not amount to storage. "Storage" in
the common parlance meaning connotes
the concept of continued possession.
There is an element of continuity of
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possession spread over some time and the
concept is connected with the idea of a
regular place of storage. Transshipment in
a moving vehicle would not amount to
storage within the meaning of the Orissa
Order."
To the similar effect, is the view taken by this Court and the
various High Courts in CIT v. Vegetable Products Limited [88 ITR
192, 195 (SC)], CWT v. Ram Narain Agrawal [106 ITR 965-968 (All.)],
Tolaram Relumal v. State of Bombay [AIR 1954 SC 496, at page 498],
TMT Thangalakshmi v. ITO [205 ITR 176 (Mad.)], CIT v. A.K. Das
[77 ITR 31, at page 52 (Cal.)], CIT v. T.V. Sundaram Iyengar & Sons
(P) Ltd. [101 ITR 764, at page 773 (SC)], Engineers Impex Pvt. Ltd. &
Others v. D.D. Sharma [244 ITR 247 (Del.)].
Every statutory provision for imposition of penalty has two
distinct components: -
(i) That which lays down the conditions for imposition of
penalty.
(ii) That which provides for computation of the quantum of
penalty.
Section 271(1)(c) and clause (iiii) relate to the conditions for
imposition of penalty, whereas, on the other hand , Explanation 4
to Section 271(1)(c) relates to the computation of the quantum of
penalty.
The provisions of Section 271(1)(c)(iii) prior to 1.4.1976,
and after its amendment by the Finance Act, 1975 with effect
from 1.4.1976, later provisions being applicable to the
assessment year in question, being substantially the same
except that in place of the word ’income’ in sub clause (iii) to
sub clause (c) of Section 271 prior to its amendment by
Finance Act, 1975, the expression "amount of tax sought to be
evaded" have been substituted. Explanation 4 inserted for the
purpose of clause (iii) where the expression "the amount of tax
sought to be evaded", was inserted had in fact made no
difference in so far as the main criteria, namely, absence of tax
continued to exist, prior to or after 1.4.1976, changing only
the measure or the scale as to the working of the penalty
which earlier was with reference to the ’income’ and after the
amendment related to the ’tax sought to be evaded’. The sine
qua non which was there prior or after the amendment on
1.4.1976 to the fact that there must be a positive income
resulting in tax before any penalty could be levied continued to
exist. The penalty imposed was in ’addition to any tax’. If
there was no tax, no penalty could be levied. The return filed
declaring loss and assessment made at a reduced loss did not
warrant any levy of penalty within the meaning of Section 271
(1)(c)(iii) with or without Explanation 4.
Contention of the appellant is supported by the decisions
of various High Courts reported in Prithipal’s case (supra), 183
ITR page 69 (P&H High Court, CIT v. Prithipal Singh & Co.)
affirmed by this Court in 249 ITR page 670 (SC), CIT v.
Prithipal Singh & Co., 171 CTR page 51 (P&H High Court,
CIT v. Virendra & Co.), 240 ITR page 47 (Kerala High Court,
CIT v. N. Krishnan), 259 ITR page 229 (Madras High Court,
Ramnath Goenka v. CIT), 276 ITR page 649 (M.P. High Court,
CIT v. Jabalpur Co-operative Milk Producers Union Ltd.),
279 ITR page 197 (Allahabad High Court, CIT v. Zam Zam
Tanners), 278 ITR page 140 (Calcutta High Court, CIT v. R.G.
Sales (P) Ltd.), all the aforesaid decisions support the
assessee’s contention that even after 1.4.1976 if there is no
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positive income, no taxes leviable, no penalty can be levied for
concealment of income.
Predominant majority of High Courts to which reference has
been made in the foregoing paragraph have taken the view that the
judgment in the Prithipal Singh’s case holds good in respect of
Section 271(1)(c) as it stood after the 1976 amendment and prior to
its amendment by Finance Act, 2002. Contrary view is expressed in: -
i. P.R. Basavappa & Sons v. CIT, 243 ITR 776 (Kar.) -
Karnataka High Court rejected assessee’s reference on the
sole ground that Prithipal’s case relates to assessment year
1970-71 and prior, therefore, to the 1976 amendment.
ii. CIT v. Chemiequip Ltd., 265 ITR 265 (Bomb.) \026 Bombay
High Court has held that after 1.4.1976, Explanation 4(a)
permits the charge on an assessee whose loss has been
reduced in assessment proceedings distinguishing Prithipal
Singh’s case and also refers to the amendment in Section
271(1)(c) by Finance Act, 2002. In this judgment, there is no
discussion or reasoning either on the scope of Section
271(1)(c) and Explanation 4(a) or the nature of 1976 or 2002-
2003 amendments.
It has been laid down in CIT v. Podar Cement (supra) , CIT v.
P.J. Chemicals, 210 ITR 830 (SC) and again in CIT v. Kerala State
Industrial Development Corporation Ltd., 233 ITR 197 (SC) that
where the predominant majority of the High Courts have taken
certain view of the interpretation of a certain provision, the Supreme
Court would lean in favour of the predominant view.
The contention advanced by the Ld. Counsel appearing for
assesses that when there is no tax, there cannot be any penalty, is
made with reference to the provisions contained in Section 143 (1A)
of the Act before its amendment which came on the statute in 1993
with retrospective effect from 1.4.1989. The Finance Act, 1993
amended Section 143 (1A) of the Act with retrospective effective from
1.4.1989 to specifically provide for levy of additional tax in a situation
where the loss declared by the assessee is reduced or is converted
into his income.
Section 143(1A) (before its amendment in 1993) was interpreted
by the following 3 decisions which include 2 of the Delhi High Court
itself. In Modi Cement Ltd. v. Union of India, 193 ITR 91 (Del.), it
was held as under: -
"\005.. What is important is that, as a result of the
adjustments carried out under sub-section (1) of section
143, the assessee became liable to pay some tax. Where,
as in the present case, after the adjustments under
section 143(1A) are carried out, the resultant figure is still
at a loss, the question of section 143(1A) applying does
not arise. As a result of adjustments carried out, no tax is
payable if the resultant figure is a loss and a question of
there being any further increase to this does not arise.
We are surprised that the Deputy Commissioner having
accepted a huge loss of Rs.1,32,97,22,383, still required
the assess to pay a sum of Rs.38,60,075. If the
interpretation sought to be put by the Department is
correct, then there would be a lot of force in the
contention of Shri Aggarwal, learned counsel for the
petitioner, that such a provision would be clearly
arbitrary and may even have to be struck down."
[Emphasis supplied]
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In Indo-Gulf Fertilizers and Chemicals Corporation Ltd. v.
Union of India, 195 ITR 485 (All.), it was held as under: -
"The language of the provision quoted above
itself shows that where "the total income" after
making adjustments under clause (a) of sub-section
(1) of section 143 of the Act exceeds the total income
declared in the return, in that event an order can be
passed levying additional income-tax. In a case like
the present one, there is no income shown in the
return but only losses are indicated. Adjustment
resulting in reduction of the amount of losses can,
by no stretch of imagination, be said to have
increased the "total income" declared in the return.
There is no dispute that in the return, only losses are
shown even after adjustment and if there is no
income, no tax or additional income-tax can be
charged. Therefore, it is immaterial that the amount
of losses are more or less. To elaborate further, it
may be pointed out that if no tax was chargeable on
the losses to the tune of rupees sixty-two crores odd,
as shown in the return submitted by the petitioner,
there would be no question of charging any
additional income-tax under section 143 (1A)(a) of
the Act, on the amount of reduced losses, i.e., rupees
fifty-eight crores odd. To put it plainly, if there is no
income, there would be no income-tax of any kind,
whether additional or by way of surcharge. Learned
counsel for the petitioner has rightly placed reliance
upon a case, Modi Cement Ltd. v. Union of India,
[1992] 193 ITR 91 (Delhi). In the said case, the order
passed under section 143 (1A)(a) of the Act was
quashed under similar circumstances where, after
adjustment, the assessee was still found to be in
losses."
[Emphasis supplied]
In J.K. Synthetics Ltd. v. ACIT, 200 ITR 584 (Del.), it was held
as under: -
"The income-tax is payable only on income
which in a business venture would imply profit
after deducting therefrom deductible expenses and
not loss. If after determining the liability of the
assessee after the process of adjustment, the net
result is still loss, there cannot be any question of
any further tax liability accruing and as such, no
tax would be payable much less any additional tax
on the amount by which the losses stood reduced."
[Emphasis supplied]
It was because of these decisions that section 143(1A) was
amended by the Finance Act, 1993 in exactly the same manner as the
Finance Act, 2002 amended Section 271(1)(c) and Explanation 4(a).
However, this amendment was retrospective with effect from
1.4.1989, not claiming to be declaratory or clarificatory.
Though the Legislature was conscious that the provisions of
Section 143 (1A) and 271 (1)(c) are pari materia and were similarly
interpreted by different High Courts, while Section 143(1A) was
amended by Finance Act, 1993 with retrospective effect from 1.4.1989,
the provisions of Section 271(1)(c) have been amended much later
by Finance Act, 2002 with prospective effect from 1.4.2003.
The two questions which arise in the present cases are, prior to
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the amendments by the Finance Act, 1992 with effect from 1.4.2003
(2003 amendment): -
i. What is meant by the words "in addition to any tax" in
the charging Section 271(1)(c)(iii)?
ii. What is meant by the term "total income" in
Explanation 4(a)?
Both these questions are fully answered by this Court in
Commissioner of Income Tax, Bombay City v. Elphinstone
Spinning and Weaving Mills Co. Ltd., 40 ITR 142 (SC).
Under the Finance Act, 1951, a provision was enacted to
discourage the declaration of dividend disproportionate to the
declared income. It provided that where the "total income" exceeded
the dividend by a certain amount, a rebate would be allowed, and
where the dividend exceeded the "total income" by such amount, "an
additional income tax" would be levied.
The facts of the case were: -
"During the calendar year 1950, the assessee
company had made a profit but the depreciation
allowance which it was entitled to under the
Income-tax Act came to Rs.7,84,063 thus converting
the profit into a loss of Rs.2,19,848 for income-tax
purposes, and the company was adjudged not to be
liable to income-tax for the relevant assessment year
1951-52. The company, however, declared dividends
in that year amounting to Rs.3,29,062 and the
question was whether this amount was "excess
dividend" within the meaning of paragraph B of
Part I of the First Schedule to the Finance Act, 1951,
and additional income-tax could be levied in respect
thereof:"
It was held by this Court that: -
"The word "additional" in the expression
"additional income-tax" must refer to a state of
affairs in which there has been a tax before."
and that:
"The words "charge on the total income" are not
appropriate to describe a case in which there is no
income or there is a loss."
These two findings conclude the two issues in paragraph (i)
and (ii) above in favour of the assessees’ contention in the present
batch of cases. It was noted by this Court that there was indeed a
lacuna in the statute but that Court could not depart from the rule of
literal construction: -
"There is no doubt that if the words of a taxing
statute fail, then so must the tax. The courts cannot,
except rarely and in clear cases, help the draftsmen
by a favourable construction. Here, the difficulty is
not one of inaccurate language only. It is really this
that a very large number of taxpayers are within the
words but some of them are not. Whether the
enactment might fail in the former case on some
other ground (as has happened in another case
decided today) is not a matter we are dealing with at
the moment. It is sufficient to say here that the
words do not take in the modifications which the
learned counsel for the appellant suggests. The
word "additional" in the expression "additional
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income-tax" must refer to a state of affairs in which
there has been a tax before. The words "charge on
the total income" are not appropriate to describe a
case in which there is no income or there is loss. The
same is the case with the expression "profit liable to
tax". The last expression "dividends payable out of
such profits" can only apply when there are profits
and not when there are no profits."
[Emphasis supplied]
This Court noted that the High Court allowed the assessee’s
reference (reluctantly) but from the plain language of the provision,
an assessee sustaining a loss could have no "total income": -
"It is clear that the Legislature had in mind the
case of persons paying dividends beyond a
reasonable portion of their income. A rebate was
intended to be given to those who kept within the
limit and an enhanced rate was to be imposed on
those who exceeded it. The law was calculated to
reach those persons who did the latter even if they
resorted to the device of keeping profits back in
one year to earn rebate to pay out the same profits
in the next. For this purpose, the profits of the
earlier years were deemed to be profits of the
succeeding years. So far so good. But the
Legislature failed to fit in the law in the scheme of
the Indian Income-tax Act under which and to
effectuate which the Finance Act is passed. The
Legislature used language appropriate to income,
and applied the rate to the "total income".
Obviously, therefore, the law must fail in those
cases where there is no total income at all, and the
courts cannot be invited to supply the omission by
the Legislature.
It is quite possible that the Legislature did
not contemplate the imposition of tax in
circumstances such as these, and we are not
prepared to read the proviso without the words
"on the total income" or after modifying this and
other expressions. The High Court has given
adequate reasons to show that these words are
quite inappropriate, where the total income, if it
can be described as income at all, is a loss. The
imposition of the additional income-tax is
conditioned by the existence of income and profits,
to the total of which income the rate is made
applicable. Unless some other amount, not strictly
income, is by law deemed to be income [see, for
example, Mc Gregor & Balfour Ltd. v.
Commissioner of Income-tax, (1959) 36 ITR 65] we
cannot improve the existing law by deeming it to
be so by our interpretation."
[Emphasis supplied]
The impugned judgment has erred in observing that in
Elphinstone case (supra): -
"The situation is different and the context is
different."
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The observations by this Court were not made in any special
context or in the face of a fiction created by the Finance Act, 1951. On
the contrary, the Act set out in the First Schedule as under: -
"For the purposes of this section and of the rates of
tax imposed thereby, the expression ’total income’
means total income as determined for the purposes
of income-tax or super-tax, as the case may be, in
accordance with the provisions of the Income Tax
Act\005"
In fact, it is the impugned Judgment which has isolated a
phrase in Elphinstone case and taken it out of context.
The ratio of Elphinstone case cannot be that a loss can be
described as total income. If it were so, this Court could not have
dismissed the appeal of the Revenue.
In CIT v. B.C. Srinivasa Setty, (supra), this Court reiterated the
principle that the charge and its computation were two parts of an
integral whole and concluded therefore, that if the computation
could not be done, the charge was not intended to apply. In this case,
the Court was concerned with the transfer of goodwill valued at
Rs.1,50,000 from a dissolved partnership to a newly constituted one.
Despite the fact that this Court found that goodwill was an "asset of
the business", it was held that the charge of capital gains could not be
levied because under section 48 (ii) required computing the gain by
deducting from the full value of the consideration received.
Applying Elphinstone case to the present case, it can be held: -
a. "Total income" can only connote a positive figure and prior to
the 2003 Amendment, Explanation 4(a) to Section 271(1)(c)
required the computation to be done with reference to "total
income".
b. The computation in the case of a loss making assesses, as in the
present case cannot be made.
c. The words "in addition to any tax payable" can only be
understood as the words "additional income-tax" were in
Elphinstone case where this Court held that these words pre-
suppose that tax was otherwise payable.
d. Conversely, even if the words "in addition to any tax payable"
are considered superfluous and must be ignored when
considering the case of a loss return, the computation cannot be
made because here there is no total income, and because the
computation cannot be made, the charge cannot be levied.
The judgment of this Court in Angidi Chettair’s case (supra)
relied upon by the Delhi High Court in its impugned judgment, has
been given in an entirely different statutory context and, therefore,
the ratio of that judgment is not at all applicable to the issue arising
for consideration in the present case. That judgment dealt with the
interpretation of section 28(1)(c) of the Income-tax Act, 1922. The
question which arose in that case was whether a penalty could be
imposed on a registered firm. The contention of the assessee was that
a registered firm was not liable to pay tax itself and that under the
statute as it then stood, the tax was payable only by the partners of
the registered firm and not by the registered firm itself. The Revenue
pointed out that if this contention of the assessee is accepted, then the
highly anomalous and totally unacceptable consequence that would
follow would be that no penalty could even be imposed on a
registered firm, even though this section itself expressly provided
that the penalty can be imposed on any ’person’ and ’person’
unquestionably included a registered firm. It was in this special and
extraordinary statutory context that this Court laid down that a
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penalty could be imposed on a registered firm even though the firm
was not liable to pay tax, or otherwise a portion of section 28 would
be rendered completely meaningless and infructuous. Further, in the
said case, this Court proceeded specifically on the footing that under
section 23(5) of the 1922 Act, a registered firm was liable to pay tax
but the tax due from the firm was collected from the partners. This
judgment has to be read in the special and extraordinary statutory
context of section 28 of the 1922 Act, the wording and phraseology of
which is very different from that of section 271 (1)(c)(iii) of the
Income-tax Act. The judgment in Angidi Chettiar’s case (supra)
cannot be relied upon for the purpose of construing section 271
(1)(c)(iii) of the Income-tax Act.
Prior to the amendment made to Section 271 by the Finance
Act, 2002, which came into operation on 1.4.2003, no penalty for
concealment could be imposed unless some tax was payable by the
assessee. In other words, if no tax was payable by the assessee, then
the question of imposition of penalty of concealment did not arise at
all. That position was changed for the first time only by the
amendment made by the Finance Act, 2002 with effect from 1.4.2003.
It is only by this amendment that the hitherto inseverable inter-
connection between the liability to pay tax and the imposition of
penalty was severed for the first time.
It may be noted that the amendment made to Section 271 by the
Finance Act, 2002 only stated that the amended provision would
come into force with effect from 1.4.2003. The statute nowhere stated
that the said amendment was either clarificatory or declaratory. On
the contrary, the statue stated that the said amendment would come
into effect on 1.4.2003 and therefore, would apply to only to future
periods and not to any period prior to 1.4.2003 or to any assessment
year prior to assessment year 2003-2004. It is the well settled legal
position that an amendment can be considered to be declaratory and
clarificatory only if the statue itself expressly and unequivocally
states that it is a declaratory and clarificatory provision. If there is no
such clear statement in the statute itself, the amendment will not be
considered to be merely declaratory or clarificatory.
Even if the statute does contain a statement to the effect that the
amendment is declaratory or clarificatory, that is not the end of the
matter. The Court will not regard itself as being bound by the said
statement made in the statute but will proceed to analyse the nature
of the amendment and then conclude whether it is in reality a
clarificatory or declaratory provision or whether it is an amendment
which is intended to change the law and which applies to future
periods. In this connection, see the following: -
1. Sakuru v. Tanaji, 1985 (3) SCC 590 at page 593-594.
2. Harding and another v. Commissioner of Stamps for
Queensland, 1898 Appeal Cases 769 at 775 to 776.
3. R. Rajagopal Reddy (Dead) by Lrs. and others v. Padmini
Chandrasekharan (Dead) by Lrs., 1995 (2) SCC page 630 at 646.
4. CIT v. Patel Brothers & Co. Ltd. & Ors., 215 ITR 165 (SC).
5. Sedco Forex International Drill Inc. & Ors. v. CIT & Anr.,
279 ITR 310 page 317.
In the present case, it is only in the Notes on Clauses relating to
2002 amendment that it has been stated that the said amendment is
clarificatory. There is no such mention of the said amendment being
clarificatory, anywhere in the statute itself. Such a statement in the
Notes on Clauses cannot possibly bind the Court when even a
statement in the statute itself is not regarded as binding or
conclusive. In the present case, the statute expressly states that the
amendment would take effect only from 1.4.2003. Consequently, this
amendment cannot possibly be applied to or in respect of any period
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prior to 1.4.2003.
Otherwise also, it has been consistently held that a provision
must be read subject to the rule that in the absence of an express
provision or clear implication, the Legislature does not intend to
attribute to the amending provision, a greater retrospectivity than is
expressly mentioned. It is settled law that a taxing provision
imposing liability is governed by the normal presumption that is not
retrospective. Reference made to the decisions in: -
i. S.S. Gadgil, ITO, Bombay v. Lal & Co., 53 ITR 231 (SC),
ii. K.M. Sharma v. ITO, 254 ITR 772 (SC),
iii. Gem Granites v. CIT , 271 ITR 322 (SC),
iv. Sedco Forex International Drill Inc. & Ors. v. CIT, 279 ITR
310 (SC).
There is nothing in the language of Section 271(1)(c) as
amended by the Finance Act, 2002 w.e.f. 1.4.2003 to suggest that the
amendment is retrospective. The amendment in clause (iii) and
simultaneously in Explanation 4(a) carried out enlarges the scope of
penalty under Section 271(1)(c) to include even cases where
assessment has been completed at loss. The same being in the nature
of a substantive amendment would be prospective, in the absence of
any indication to the contrary.
Explanation 4 to Section 271(1)(c) as it stood prior to its
amendment by the Finance Act, 2002, requires to be carefully
compared with the said Explanation as amended by the Finance Act,
2002. The comparison of the Explanation as it stood before 2002 and
after 2002 by itself shows clearly that it is only after the amendment
made by the Finance Act, 2002 that the Explanation dealt with the
situation of an assessee having returned a loss and where, even after
addition of concealed income by the assessee, the end result was still
an assessed loss. This situation was not dealt with at all by the
Explanation to Section 271(1)(c) as it stood prior to its amendment
by the Finance Act, 2002. Further, the plain reading of clause (a) of
Explanation 4 to section 271 as it stood prior to the 2002 amendment,
shows that this clause applied to a situation where an assessee has
returned a loss which by reason of the addition of the concealed
income thereto by the assessing officer, is converted into a positive
figure of the assessed income on which the assessee is required to pay
tax. In contrast, clause (c) of the said Explanation 4 applies only to a
situation where the assessee has returned a positive income, which
stands enhanced by reason of the concealed income added thereto by
the assessing officer in the assessment order. Consequently, both
under clause (a) and clause (c) of the said Explanation 4, the assessee
can be penalized only if he has a positive assessed income on which
tax is payable. The only difference between clause (a) and clause (c) is
that clause (a) applied to an assessee who had filed a loss return, and
clause (c) to an assessee who has filed a positive return. However,
the end result in both the cases was the same, i.e., a positive assessed
income on which the assessee was required to pay tax. It is this basic
condition precedent for the imposition of the penalty, i.e., existence of
liability to pay tax which existed prior to 2002, which has been done
away with for the first time by the Finance Act, 2002.
There is nothing in the language of Section 271(1)(c) as
amended by the Finance Act, 2002 w.e.f. 1.4.2003 to suggest that the
amendment is retrospective. The amendment in clause (iii) and
simultaneously in Explanation 4(a) carried out enlarges the scope of
penalty under Section 271(1)(c) to include even cases where
assessment has been completed at loss. The same being in the nature
of a substantive amendment would be prospective, in the absence of
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any indication to the contrary. The Finance Bill/Finance Act, 2002
brought about many amendments in the statute, some of which had
retrospective operation. The amendment in Section 271(1)(c) was
consciously made applicable w.e.f. 1.4.2003 and not with
retrospective date.
Next proposition is with reference to the amended provision of
law made by the Finance Act, 2002, where the expression used in
Explanation 4 "the amount of tax sought to be evaded" has been
deliberately amended providing specifically cases where the filing of
return and the assessment had the effect of reducing the loss declared
in the return or converting that losses into income. Taking support
from this amendment brought about in the statute with effect from
1.4.2003, it is contended that the Legislature has now deliberately
enacted such provision to fill in the lacuna in law and also to put an
end to the controversy which existed between the High Courts in
interpreting the laws after 1.4.1976. The amended provision of law is
not available prior to 1.4.2003, as the same is not enacted with
retrospective effect. That this amendment is declaratory and applies
to all pending cases, as held by the Bombay High Court in CIT v.
Chemiequip Ltd (supra), is untenable for the following reasons: -
(a) There is nothing in the statute to suggest to that effect. The
interpretation that it is clarificatory as per the notes on
clauses do not advance the Revenue’s case, because of its
specific omission to that effect. It is purely a case of
amendment to the statute;
(b) Amendment is not retrospective and there is no assumption
as to its retrospectivity. Retrospectivity has to be enacted
specifically in the fiscal statute and it is more so in the case
of penal provisions, otherwise it would be contradictory or
derogatory to Article 20 (1) of the Constitution. This Court
has held in Brij Mohan v. C.I.T., New Delhi, 120 ITR page 1,
that the law to be applied is the one in force on the first day
of accounting period. To this effect are the other decisions of
this Court reported as CIT v. Patel Brothers & Co. Ltd. &
Ors. , 215 ITR page 165 (SC). Allahabad High Court has also
taken same view in Zam Zam Tanners (supra). Notes on
clauses on the amendment introduced by the Finance Act,
2002 makes specific mention inter alia of the amendment to
be effective from 1.4.2003 of which the Bombay High Court
has failed to take notice in its judgment in CIT v.
Chemiequip Ltd (supra).
For the reasons stated above, the Appeals are accepted and the
impugned judgment is set aside, it is held that prior to its
amendment by Finance Act, 2002 in the absence of any positive
income and no tax being levied, penalty for concealment of income
could not be levied. The view taken by the Karnataka High Court in
P.R. Basavapaa & Sons v. CIT (supra) and CIT v. Chemiequip Ltd.
(supra), does not lay down the correct law.
The position stands altered after the amendment in law by the
amendment of Section 271(1)(c) and Explanation 4(a) by the
Finance Act, 2002 w.e.f. 1.4.2003.