REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 5065 OF 2008

(Arising out of SLP (C) No. 4379 of 2007)

Commnr. of Income Tax-I, Ahmedabad ...Appellant

Versus

Gold Coin Health Food Pvt. Ltd. ...Respondent

(With C.A. No. 5066 /2008 @ SLP (C) No. 14785/2007)

J U D G M E N T

Dr. ARIJIT PASAYAT, J.

1.Leave granted.

2.Expressing doubt about the correctness of the judgment

rendered by a Division Bench of this Court in Virtual Soft

Systems Ltd. V. Commissioner of Income Tax, Delhi (2007 (9)

SCC 665), a reference has been made by another Division

Bench by order dated 7.4.2008 to a larger Bench. The

question which was decided in Virtual’s case (supra) was as to

whether the penalty under Section 271 (1) (c) of the Income

Tax Act, 1961 (in short the ‘Act’) can be levied if the returned

income is a loss. This question has to be considered in the

background of the amendment made by Finance Act, 2002 (in

short ‘Finance Act’) w.e.f. 1.4.2003 in Explanation 4 to Section

271(1)(c)(iii) of the Act. In Virtual’s case (supra) the

department placed reliance on Notes on Clauses relating to

the aforesaid amendment to submit that the amendment was

clarificatory in nature and consequentially it was applicable

retrospectively. This argument was rejected by this Court in

para 52 of the judgment. The Division Bench while making

reference was of the view that the true effect of the

amendment was not considered, as it was prima facie of the

view that merely because the amendment was stated to take

effect from 1.4.2003 that cannot be a ground to hold that the

same did have the retrospective effect.

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3.Learned counsel for the appellant submitted that the

true scope and ambit of the amendment has been lost sight of

in Virtual Soft’s case (supra). It is submitted that the purpose

behind Section 271(1) (c) is to penalize the assessee for (a)

concealing particulars of the income; and/or (b) furnishing

inaccurate particulars of such income. Therefore, whether

income returned was a profit or loss was really of no

consequence. It is pointed out that prior to the amendment,

Section 271(1) (c)(iii) read as follows:

“(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 the income

in respect of which the particulars have been

concealed or inaccurate particulars have

been furnished.”

4.It was submitted that bare reading of the provision made

the position clear that it was not necessary that income tax

must be payable by the assessee as sine qua non for

imposition of penalty. The word ‘any’ made the position clear

that the penalty was in addition to any tax which may be paid

by the assessee. Therefore, even if no tax was payable, the

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penalty was leviable. It is in that context submitted that even

prior to the amendment it could not be read to mean that if no

tax was payable by the assessee because of filing a return

disclosing loss, the assessee is not liable to pay penalty even if

the assessee concealed and/or furnished inaccurate

particulars. Because some High Courts took the contradictory

view, the Parliament clarified the position by changing the

expression “any’ by “if any”. This was not a substantive

amendment which created a penalty for the first time. The

amendment by the Finance Act as specifically noted in the

Notes on Clauses makes the position clear that the

amendment was clarificatory in nature and would apply to all

assessments even prior to assessment year 2003-04.

5.Per contra, learned counsel for the assessees submitted

that the view expressed in Virtual’s case (supra) lays down the

correct principle in law. With reference to para 17 of the

judgment, it is submitted that the position was rightly noted

by various High Courts, more particularly, in Commissioner of

Income Tax v. Prithipal Singh & Co. (1990 (183) ITR 69). It is

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pointed out that the revenue’s appeal before this Court was

dismissed in Commissioner of Income Tax v. Prithipal Singh

and Ors. (2001 (249) ITR 670). It is submitted that there is

nothing in Section 271(1) (c) as amended by Finance Act to

suggest that the amendment is retrospective. The amendment

and the Explanation 4(a) carried out, enlarged the scope for

levying penalty under Section 271(1) (c) and, therefore, does

not operate retrospectively and is applicable only w.e.f.

1.4.2003. The relevant portion in the Finance Act relating to

amendment reads as follows:

“Section 271 of the Income Tax Act provides

that the assessing Officer or the Commissioner

(Appeals) shall levy penalty in cases of failure

to comply with certain notices issued in the

course of assessment proceedings and cases

in which particulars of income have been

concealed or inaccurate particulars furnished.

It is proposed to amend the section to

include a reference to the Commissioner as

being an authority who can initiate any levy

penalty under sub-section (1) of the said

section. Similar reference is proposed to be

made in Explanation 1 and Explanation 7 to

the said sub-section.

Amendment on similar lines is proposed

to be made in Section 18 of the Wealth Tax

Act.

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These amendments will take effect from

Ist June, 2002.

The existing provisions of clauses (ii) and

(iii) of sub-section (1) of the said section

provide for levy of the penalty specified therein

in addition to any tax payable.

It is proposed to amend the said clauses

to clarify that the penalty specified in them

can be levied even if no tax is payable on the

total income assessed.

The Bill further proposes to amend

Explanation 4 which defines the expression

‘the amount of tax sought to be evaded in

different circumstances, to clarify that in cases

where the income in respect of which

particulars have been concealed or inaccurate

particulars have been furnished has the effect

of reducing the loss declared in the return or

of converting the loss into income, the tax

sought to be evaded shall be the tax that

would have been chargeable on the amount of

such income as if it were the total income.

These amendments will take effect from

Ist April, 2003.”

6.It would be of some relevance to take note of what this

Court said in Virtual’s case (supra). Pointing out one of the

important tests at para 51 it was observed that even if the

statute does contain a statement to the effect that the

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amendment is clarificatory or declaratory, that is not the end

of the matter. The Court has to analyse the nature of the

amendment to come to a conclusion whether it is in reality a

clarificatory or declaratory provision. Therefore, the date from

which the amendment is made operative does not conclusively

decide the question. The Court has to examine the scheme of

the statute prior to the amendment and subsequent to the

amendment to determine whether amendment is clarificatory

or substantive.

7.In Reliance Jute and Industries Ltd. vs. Commissioner of

Income Tax, West Bengal (1979 (120) ITR 921) it was observed

by this Court that the law to be applied in income tax

assessments is the law in force in the assessment year unless

otherwise provided expressly or by necessary implication.

Before proceeding further, it will be necessary to focus on the

definition of the expression ‘income’ in the statute. Section 2

(24) defines ‘income’ which is an inclusive definition, and

includes losses i.e. negative profit. The position has been

elaborately dealt with by this Court in Commissioner of

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Income Tax (Central), Delhi v. Harprasad & Co. P. Ltd. (1975

(99) ITR 118). This Court held with reference to the charging

provisions of the statute that the expression ‘income’ should

be understood to include losses. The expression ‘profits and

gains’ refers to positive income whereas losses represent

negative profit or in other words minus income. This aspect

does not appear to have been noticed by the Bench in Virtual’s

case (supra). Reference to the order by this Court dismissing

the revenue’s Civil Appeal No.7961 of 1996 in Commissioner

of Income Tax v. Prithipal Singh and Co. is also not very

important because that was in relation to the assessment year

1970-71 when Explanation 4 to Section 271(1) ((c) was not in

existence. The view of this Court in Harprasad’s case (supra)

leads to the irresistible conclusion that income also includes

losses. Explanation 4 (a) as it stood during the period

1.4.1976 to 1.4.2003 has to be considered in the background.

8.It appears that what the Finance Act intended was to

make the position explicit which otherwise was implied. The

recommendations of the Wanchoo Committee pursuant to

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which Explanation 4(a) was inserted w.e.f. 1.4.1976 needs to

be noted. At para 2.74 it was noted as follows:

"2.74 We are not unaware that linking

concealment penalty to tax sought to be

evaded can, at times, lead to anomalies. We

would recommend that, in cases where the

concealed income is to be, set off against

losses incurred by an assessee under other

heads of income or against losses brought

forward from earlier years, and the total

income thus, gets reduced to a figure smaller

than the concealed income or even to a minus

figure, the tax sought to be evaded should be

calculated as if the concealed income were the

total income."

9.Reference to the Department Circular No.204 dated

24.7.1976 reported in 1977 (110) ITR 21 (St.) has also

substantial relevance. Same reads as follows:

"New Explanation 4 defines `the amount of tax

sought to be evaded'. According to the definition,

this expression will ordinarily mean 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. In a case,

however, where on setting off the concealed

income against any loss incurred by the

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assessee under other head of income or brought

forward from earlier years, the' total income is

reduced to a figure lower than the concealed

income or even to a minus figure, `the tax

sought to be evaded' will mean the tax

chargeable on the concealed income as if it were

the total income. Another exception to the

general definition of the expression `tax sought

to be evaded' given earlier is a case to which

Explanation 3 applies. Here, the tax sought to be

evaded will be the tax chargeable on the entire

total income assessed."

10.A combined reading of the Committee’s

recommendations and the Circular makes the position clear

that Explanation 4(a) to Section 271(1) (c) intended to levy the

penalty not only in a case where after addition of concealed

income, a loss returned, after assessment becomes positive

income but also in a case where addition of concealed income

reduces the returned loss and finally the assessed income is

also a loss or a minus figure. Therefore, even during the

period between 1.4.1976 to 1.4.2003 the position was that the

penalty was leviable even in a case where addition of

concealed income reduces the returned loss.

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11.When the word “income” is read to include losses as held

in Harprasad’s case (supra) it becomes crystal clear that even

in a case where on account of addition of concealed income

the returned loss stands reduced and even if the final

assessed income is a loss, still penalty was leviable thereon

even during the period 1.4.1976 to 1.4.2003. Even in the

Circular dated 24.7.1976, referred to above, the position was

clarified by Central Bureau of Direct Taxes (in short ‘CBDT’). It

is stated that in a case where on setting of the concealed

income against any loss incurred by the assessee under any

other head of income or brought forward from earlier years,

the total income is reduced to a figure lower than the

concealed income or even to a minus figure the penalty would

be imposable because in such a case “the tax sought to be

evaded” will be tax chargeable on concealed income as if it is

“total income”.

12.Law is well settled that the applicable provision would

be the law as it existed on the date of the filing of the return. It

is of relevance to note that when any loss is returned in any

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return it need not necessarily be the loss of the concerned

previous year. It may also include carried forward loss which

is required to be set up against future income under Section

72 of the Act. Therefore, the applicable law on the date of filing

of the return cannot be confined only to the losses of the

previous accounting years.

13.In Commissioner of Wealth Tax, Punjab, J & K,

Chandigarh, Patiala v. Yuvraj Amrinder Singh and Ors. (1985

(4) SCC 609) the relevance of Notes on Clauses was

highlighted. Para 15 reads as follows:

“15. The proviso to sub-clause (vi) has been

reproduced above. It has the effect of cutting

down the exemption contained in the sub-

clause to some extent. It commences with the

words “Provided that in the case of a policy of

insurance the premium or other payment

whereon is payable during a period of less than

10 years” and the argument is that the

italicized words suggest that the expression

“any policy of insurance” in the main sub-

clause must mean a policy based on human

life and that too where periodical premia are

payable and as such annuity on life which

consists of lump sum investment followed by

deferred annual or monthly payments is

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excluded. It is impossible to read the italicized

words in the proviso in this manner which has

the effect of unduly narrowing down the

expression “any policy of insurance” used in

the main sub-clause, which as indicated

earlier, is of very wide import covering all types

of insurance policies like life, marine, fire, etc.

In the first place the main provision [sub-

clause (vi)] was enacted in 1957 and continued

to operate for 17/18 years till March 31, 1975

without any qualification and as such it will be

absurd to attribute to the Legislature, because

of the insertion of the proviso (containing the

italicized words) in 1975, an intention of

having used the wide expression “any policy of

insurance” throughout all this period in a

narrow sense as suggested. Secondly, if the

main provision and the proviso are read

together the italicised words do not suggest

that any narrow construction, much less as

urged, was intended and to say so would be

missing the real object or purpose of the

proviso. In our view the proper way to read the

proviso would be to treat the main provision as

creating or granting an exemption and the

proviso carving out something from the

exemption. The main provision creates an

exemption in respect of the assessee’s “right or

interest in any policy of insurance” and the

proviso seeks to cut down that exemption to a

limited extent, namely whenever there is a

policy of insurance in respect whereof

periodical premia are payable for a duration of

less than 10 years, then in such a case a

proportionate exemption specified therein will

be available to the assessee irrespective of

what type of policy it is; the proviso has no

other effect. That such was the object or

purpose of inserting the proviso will be clear if

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regard is had to relevant part of Notes on

clauses accompanying the Bill and the

relevant portion of the speech of the Finance

Minister while introducing the Bill. We were

taken through the relevant portions of Notes

and clauses [vide 93 ITR 125 (Statutes)] and

the speech of the Hon’ble Finance Minister

while introducing the Bill [vide 93 ITR 74

(Statutes)] and in our view far from supporting

the contention of counsel for the Revenue

these lend support to the view which we have

just expressed. The relevant portion of “Notes

on clauses” states that, “under this

amendment (the insertion of proviso) the value

of the taxpayer’s right or interest in a policy of

insurance will be exempt from tax only if the

premia are payable over a period of ten years

or more. In cases where premia are payable

over a period of less than ten years, only a

proportionate amount of the value of the

taxpayer’s right or interest in the policy of

insurance will be exempt from wealth tax”. The

Finance Minister’s speech, though strictly not

relevant as an aid to construction,

substantially reiterates what has been stated

in the “Notes on clauses” accompanying the

Bill. On this account, therefore, there is no

warrant to put a narrow construction on the

expression “any policy of insurance” occurring

in sub-clause (vi) of Section 5(1).”

14.As noted by this Court in Commissioner of Income Tax,

Bombay and Ors. v. Podar Cement Pvt. Ltd. and Ors. (1997

(5) SCC 482) the circumstances under which the amendment

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was brought in existence and the consequences of the

amendment will have to be taken care of while deciding the

issue as to whether the amendment was clarificatory or

substantive in nature and, whether it will have retrospective

effect or it was not so.

15.In Principles of Statutory Interpretation, 11

th

Edn. 2008,

Justice G.P. Singh has stated the position regarding

retrospective operation of statutes as follows:

“The presumption against retrospective

operation is not applicable to declaratory

statutes. As stated in Craies and approved by

the Supreme Court: For modern purposes a

declaratory Act may be defined as an Act to

remove doubts existing as to the common law,

or the meaning or effect of any statute. Such

Acts are usually held to be retrospective. The

usual reason for passing a declaratory Act is to

set aside what Parliament deems to have been

a judicial error, whether in the statement of

the common law or in the interpretation of

statutes. Usually, if not invariably, such an

Act contains a preamble, and also the word

`declared' as well as the word 'enacted'.

But

the use of the words `it is declared' is not

conclusive that the Act is declaratory for these

words may, at times, be used to introduce new

rules of law and the Act in the latter case will

only be amending the law and will not

necessarily be retrospective. In determining,

therefore, the nature of the Act, regard must

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be had to the substance rather than to the

Corm. If a new Act is 'to explain' an earlier Act,

it would be without object unless construed

retrospective. An explanatory Act is generally

passed to supply an obvious omission or to

clear up doubts as to the meaning of the

previous Act. It is well settled that if a statute

is curative or merely declaratory of the

previous law retrospective operation is

generally intended. The language `shall be

deemed always to have meant' or 'shall be

deemed never to have included'' is declaratory,

and is in plain terms retrospective. In the

absence of clear words indicating that the

amending Act is declaratory, it would not be so

construed when the amended provision was

clear and unambiguous. An amending Act may

be purely clarificatory to clear a meaning of a

provision of the principal Act which was

already implicit. A clarificatory amendment of

this nature will have retrospective effect and,

therefore, if the principal Act was existing law

when the constitution came into force, the

amending Act also will be part of the existing

law.”

16.In Zile Singh v. State of Haryana and Ors. (2004 (8) SCC

1), it was observed as follows:

“13. It is a cardinal principle of construction

that every statute is prima facie prospective

unless it is expressly or by necessary

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implication made to have a retrospective

operation. But the rule in general is applicable

where the object of the statute is to affect

vested rights or to impose new burdens or to

impair existing obligations. Unless there are

words in the statute sufficient to show the

intention of the legislature to affect existing

rights, it is deemed to be prospective only

— “nova constitutio futuris formam imponere

debet non praeteritis” — a new law ought to

regulate what is to follow, not the past. (See

Principles of Statutory Interpretation by Justice

G.P. Singh, 9th Edn., 2004 at p. 438.) It is

not necessary that an express provision be

made to make a statute retrospective and the

presumption against retrospectivity may be

rebutted by necessary implication especially in

a case where the new law is made to cure an

acknowledged evil for the benefit of the

community as a whole (ibid., p. 440).

14. The presumption against retrospective

operation is not applicable to declaratory

statutes…. In determining, therefore, the

nature of the Act, regard must be had to the

substance rather than to the form. If a new Act

is “to explain” an earlier Act, it would be

without object unless construed

retrospectively. An explanatory Act is generally

passed to supply an obvious omission or to

clear up doubts as to the meaning of the

previous Act. It is well settled that if a statute

is curative or merely declaratory of the

previous law retrospective operation is

generally intended…. An amending Act may be

purely declaratory to clear a meaning of a

provision of the principal Act which was

already implicit. A clarificatory amendment of

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this nature will have retrospective effect (ibid.,

pp. 468-69).

15. Though retrospectivity is not to be

presumed and rather there is presumption

against retrospectivity, according to Craies

(Statute Law, 7th Edn.), it is open for the

legislature to enact laws having retrospective

operation. This can be achieved by express

enactment or by necessary implication from

the language employed. If it is a necessary

implication from the language employed that

the legislature intended a particular section to

have a retrospective operation, the courts will

give it such an operation. In the absence of a

retrospective operation having been expressly

given, the courts may be called upon to

construe the provisions and answer the

question whether the legislature had

sufficiently expressed that intention giving the

statute retrospectivity. Four factors are

suggested as relevant: (i) general scope and

purview of the statute; (ii) the remedy sought

to be applied; (iii) the former state of the law;

and (iv) what it was the legislature

contemplated. (p. 388) The rule against

retrospectivity does not extend to protect from

the effect of a repeal, a privilege which did not

amount to accrued right. (p.392)”

17.Above being the position, the inevitable conclusion is

that Explanation 4 to Section 271(1)(c) is clarificatory and not

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substantive. The view expressed to the contrary in Virtual’s

case (supra) is not correct.

18.So far as the appeal relating to SLP (C ) No.4379 of 2007

is concerned, it is to be noted that learned Solicitor General

has stated that even if the Department succeeds ultimately

before this Bench, they would not demand penalty from the

assessee in that case. Similar is the position in Civil Appeal

relating to SLP(C) No.14785 of 2007.

19.The appeals are disposed of.

………………………….J.

(Dr. ARIJIT PASAYAT)

…………………………J.

(P. SATHASIVAM)

………………………..J.

(AFTAB ALAM)

New Delhi,

August 18, 2008

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