2007 (2) TMI 147 - SC - Income Tax

Section 271(1)(c) penalty applies only when assessed income shows tax payable; 2002 amendment expanding liability is prospective

VIRTUAL SOFT SYSTEMS LTD. Versus COMMISSIONER OF INCOME-TAX

SC held that, as enacted before the Finance Act, 2002, Section 271(1)(c) and Explanation 4 permitted penalty for concealment only where assessed income ... Application of Explanation 4 inserted in Section 271 (1)(c) with effect from April 1, 1976 in the statute - Tax Liability Pre-Amendment - Imposition of penalty u/s 271(1)(c) - concealment or furnishing inaccurate particular - total income of the assessee has been assessed at a minus figure/loss - HELD THAT:- 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. April 1, 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. 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. April 1, 2003 and not with retrospective date. Taking support from this amendment brought about in the statute with effect from April 1, 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 April 1, 1976. The amended provision of law is not available prior to April 1, 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 [2003 (2) TMI 17 - BOMBAY HIGH COURT]. 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 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. April 1, 2003. Issues Involved: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.2. Whether the Income-tax Appellate Tribunal was justified in holding that the judgments in Prithipal Singh's case will apply even after the insertion of Explanation 4 to Section 271(1)(c) of the Income Tax Act, 1961 with effect from April 1, 1976.Issue-wise Detailed Analysis:Issue 1: Deletion of Penalty under Section 271(1)(c) due to Assessed LossThe 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 merely on the ground that the total income of the assessee was assessed at a minus figure/loss. The 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 on the decision of the Punjab High Court in CIT v. Prithipal Singh & Co., which was affirmed by the Supreme Court.The High Court referred to some illustrations 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. The High Court dissented from the view taken by the Madras High Court and Kerala High Court, and referred to various Supreme Court judgments to support its conclusion.Issue 2: Applicability of Prithipal Singh's Case Post-Insertion of Explanation 4The High Court 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, distinguishing the same on facts stating that the said decision related to the period prior to April 1, 1976 and therefore, had no application because Explanation 4 inserted in Section 271(1)(c) with effect from April 1, 1976 in the statute was not considered by the Punjab and Haryana High Court.The High Court held that for imposition of penalty after April 1, 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.Analysis of Arguments and Legal ProvisionsThe Supreme Court analyzed the provisions of Section 271(1)(c) and the subsequent amendments carried out in the said section with effect from April 1, 1976, and the amendment by Finance Act, 2002 with effect from April 1, 2003. The Court noted that the provisions of Section 271(1)(c)(iii) prior to April 1, 1976, and after its amendment by the Finance Act, 1975 with effect from April 1, 1976, were substantially the same, except for the substitution of the word 'income' with 'amount of tax sought to be evaded'.The Court emphasized 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. The Court held that prior to the amendment made to Section 271 by the Finance Act, 2002, no penalty for concealment could be imposed unless some tax was payable by the assessee. The Court noted that it was only by the amendment made by the Finance Act, 2002 with effect from April 1, 2003, that the hitherto inseverable inter-connection between the liability to pay tax and the imposition of penalty was severed for the first time.ConclusionThe Supreme Court concluded that prior to its amendment by the 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 Court held that the view taken by the Karnataka High Court in P.R. Basavapaa & Sons v. CIT and CIT v. Chemiequip Ltd. 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. April 1, 2003.