2008 (8) TMI 5 - SC - Income Tax

Penalty under s.271(1)(c) can be levied even if return shows loss; law fixed as on filing date

Commnr. of Income Tax-I, Ahmedabad Versus Gold Coin Health Food Pvt. Ltd.

SC held that penalty under s.271(1)(c) may be levied even where the return shows a loss, applying the law as it stood on the date of filing. The Court ... Scope for levying penalty under Section 271(1) (c) - Correctness of the judgment rendered by a Division Bench of this Court in Virtual Soft Systems Ltd. V. Commissioner of Income Tax [2007 (2) TMI 147 - SUPREME COURT] - Whether the penalty under Section 271 (1) (c) of the Income Tax Act, 1961 ('Act') can be levied if the returned income is a loss - HELD THAT:- 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 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 Explanation 4 to Section 271(1)(c) is clarificatory and not substantive – though penalty can be - Decision of division bench of apex court Virtual Soft Systems Ltd. V. CIT [2007 (2) TMI 147 - SUPREME COURT] overruled. - Decided in favor of revenue. Issues Involved:1. Correctness of the judgment in Virtual Soft Systems Ltd. v. Commissioner of Income Tax, Delhi.2. Applicability of penalty under Section 271(1)(c) of the Income Tax Act, 1961, when the returned income is a loss.3. Retrospective or prospective nature of the amendment made by the Finance Act, 2002, to Explanation 4 of Section 271(1)(c)(iii) of the Income Tax Act.Issue-wise Detailed Analysis:1. Correctness of the Judgment in Virtual Soft Systems Ltd. v. Commissioner of Income Tax, Delhi:The Supreme Court expressed doubt about the correctness of the judgment in Virtual Soft Systems Ltd. v. Commissioner of Income Tax, Delhi, which held that the penalty under Section 271(1)(c) could not be levied if the returned income was a loss. The Division Bench referred the matter to a larger Bench, questioning whether the amendment by the Finance Act, 2002, which took effect from 1.4.2003, was clarificatory and thus applicable retrospectively. The Court noted that the true effect of the amendment was not considered in Virtual's case, and merely stating that the amendment took effect from 1.4.2003 could not be a ground to hold that it was not retrospective.2. Applicability of Penalty Under Section 271(1)(c) When Returned Income is a Loss:The appellant argued that the purpose behind Section 271(1)(c) was to penalize the assessee for concealing particulars of income or furnishing inaccurate particulars, regardless of whether the returned income was a profit or loss. It was emphasized that the provision did not necessitate that income tax must be payable by the assessee as a sine qua non for the imposition of penalty. The word 'any' indicated that the penalty was in addition to any tax paid by the assessee, thus even if no tax was payable, the penalty was leviable. The Court noted that the amendment by the Finance Act was clarificatory and intended to apply to all assessments, even prior to the assessment year 2003-04.3. Retrospective or Prospective Nature of the Amendment Made by the Finance Act, 2002:The respondents contended that the amendment and Explanation 4(a) enlarged the scope for levying penalty under Section 271(1)(c) and thus should not operate retrospectively. However, the Court examined the scheme of the statute before and after the amendment, concluding that the amendment was clarificatory. The Court referred to various precedents and statutory interpretations to determine that the amendment was intended to clarify the existing law and thus had retrospective effect. The Court highlighted that the definition of 'income' in the statute, which includes losses, supports the view that penalty was leviable even if the returned income was a loss.Conclusion:The Supreme Court concluded that Explanation 4 to Section 271(1)(c) is clarificatory and not substantive, thereby having retrospective effect. The judgment in Virtual Soft Systems Ltd. was held to be incorrect. Consequently, the appeals were disposed of, with the Solicitor General stating that no penalty would be demanded from the assessees in the specific cases under consideration, even if the Department succeeded.