Whether the penalty under Section 271 (1) (c) of the Income Tax Act, 1961 (in short the `Act') can be levied if the returned income is a loss?

Honorable Supreme court ( in Commr. of Income Tax-I, Ahmedabad Versus Gold Coin Health Food Pvt. Ltd. reported 2008 -TMI - 30245 - SUPREME COURT)  held that Penalty can be levied even if returned income is a loss after amendment to section 271(1) by Finance Act, 2002 w.e.f. 1.3.2003 with retrospective effect.

Honorable Supreme court further held that Explanation 4 to Section 271(1)(c) is clarificatory and not substantive. But, on the issue of retrospectivity of the above amendment, apex court observed that,

        "This can be achieved by express enactment or by necessary implication from the language employed. If it is a necessary implication from the language employed that the legislature intended a particular section to have a retrospective operation, the courts will give it such an operation. In the absence of a retrospective operation having been expressly given, the courts may be called upon to construe the provisions and answer the question whether the legislature had sufficiently expressed that intention giving the statute retrospectivity. Four factors are suggested as relevant: (i) general scope and purview of the statute; (ii) the remedy sought to be applied; (iii) the former state of the law; and (iv) what it was the legislature contemplated. (p. 388) The rule against retrospectivity does not extend to protect from the effect of a repeal, a privilege which did not amount to accrued right."

Therefore, as per the decision, the amendment relating to penalty under the amended provision in case of loss return has retrospective effect.

Accordingly, the decision in the matter of VIRTUAL SOFT SYSTEMS LTD. Versus COMMISSIONER OF INCOME-TAX reported in 2008 -TMI - 2873 - SUPREME COURT OF INDIA overruled.

In the matter of Virtual Soft System Ltd. (supra), division bench of Apex Court held that:

     "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."

 

Penalty under Section 271(1)(c) can be imposed despite a loss return after the provision's retrospective amendment clarification. Penalty under Section 271(1)(c) may be levied even where the returned income is a loss, because the Finance Act, 2002 amendment operates retrospectively; Explanation 4 is clarificatory, and the amendment overruled the earlier precedent that barred penalty in the absence of positive returned income.