2014 (2) TMI 750 - HC - Income Tax

High Court upholds penalty despite no positive income; clarifies Explanation 4(a) to Section 271.

The High Court held that the penalty imposition under section 271(1)(c) was justified despite the absence of positive income. The court determined that ... Penalty u/s 271(1)(c) of the Act – Applicability of CIT Vs. Prithiipal [2000 (7) TMI 75 - SUPREME Court] – Held that:- The decision in Commissioner Of Income Tax Vs. Gold Coin Health Food Pvt. Ltd. [2008 (8) TMI 5 - SUPREME COURT] followed – 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. The circular dated 24.7.1976 clarified that in a case where on setting off 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 – the Tribunal was not justified in relying on the judgment of CIT Vs. Prithiipal [2000 (7) TMI 75 - SUPREME Court] - The Explanation 4 (a) to Section 271 (1) (c) was calarificatory in nature hence, penalty was rightly imposed by the assessing officer – Decided in favour of Revenue. Issues:1. Interpretation of Explanation 4 to Section 271 of the Income Tax Act.2. Justification of penalty imposition under section 271(1)(c) in absence of positive income.Detailed Analysis:Issue 1: The main issue in this case revolves around the interpretation of Explanation 4 to Section 271 of the Income Tax Act. The appellant contested the imposition of penalty under section 271(1)(c) based on the applicability of the judgment in the case of Prithipal Singh & Co. The Tribunal had to determine whether the insertion of Explanation 4 to Section 271 with effect from 1.4.1976 affected the applicability of the aforementioned judgment. The Tribunal was also called upon to analyze whether the Explanation 4 to Section 271 was clarificatory in nature, as contended by the appellant.Issue 2: Another significant issue was the justification for imposing a penalty of Rs. 40,00000/- under section 271(1)(c) despite the absence of positive income. The appellant argued that since there was no positive income, the penalty imposition was not justified. The Commissioner Income Tax Appeals had allowed the appeal based on the judgment of the Punjab and Haryana High Court, which was affirmed by the apex Court. The Department appealed to the Tribunal, which dismissed the appeal relying on the apex Court's judgment.In the judgment, the High Court analyzed the relevant legal provisions and previous judgments, including the three Judges Bench Judgment of the apex Court in Commissioner of Income Tax Vs. Gold Coin Health Food P. Ltd. and subsequent judgments. The court highlighted the substitution of Explanation 4(a) to Section 271(1)(c) by the Finance Act w.e.f. 1.4.2003, which provided a specific definition for 'the amount of tax sought to be evaded.' The court extensively quoted the observations of the apex Court in Commissioner Of Income Tax Vs. Gold Coin Health Food Pvt. Ltd., emphasizing the definition of 'income' and the implications of Explanation 4(a) during the relevant period.The court also referenced the Wanchoo Committee's recommendations and a Department Circular from 1976 to elucidate the legislative intent behind Explanation 4(a). By examining the legislative history and the circular, the court concluded that the penalty was leviable even in cases where the addition of concealed income reduced the returned loss to a negative figure. The court emphasized that the applicable law at the time of filing the return should govern the penalty imposition, considering both current and carried forward losses.Ultimately, the High Court held that the Tribunal erred in relying on the judgment in CIT Vs. Prithipal Singh and Co. and concluded that the Explanation 4(a) to Section 271(1)(c) was clarificatory in nature. Therefore, the penalty imposition by the assessing officer was deemed justified. Following the precedent set by the apex Court in CIT Vs. Gold Coin Health Food P. Ltd., the court ruled in favor of the revenue and against the assessee, allowing the appeal accordingly.