2007 (2) TMI 147 - SC - Income Tax

Supreme Court: Penalty for Concealment of Income Not Linked to Tax Liability Pre-Amendment

VIRTUAL SOFT SYSTEMS LTD. Versus COMMISSIONER OF INCOME-TAX

VIRTUAL SOFT SYSTEMS LTD. Versus COMMISSIONER OF INCOME-TAX - [2007] 289 ITR 83 (SC), 207 CTR 733, 2007 (2) SCR 289, 2007 (9) SCC 665, 2007 (3) JT 125, ... 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.