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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.