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Penalty: Concealment of income - Loss-assessed - Law applicable
November, 23rd 2007

CIT vs Chirag Metal Rolling Mills (P) Ltd.
Citation 163 Taxman 471
Penalty: Concealment of income - Loss-assessed - Law applicable

The assessment made was a loss though after reducing the loss declared. No penalty for concealment was leviable. The amendment to Expln.4 of s.27(1)(c) w.e.f. 1 April 2003 was not applicable not being retrospective in operation.

High Court of Madhya Pradesh

CIT vs Chirag Metal Rolling Mills (P) Ltd.

IT Appeal Nos. 17, 18, 26, 27, 31, 32, 112, 140, 170, 180 and 183 of 2006, 20 and 25 of 2007

S.K. Kulshrestha and J.K. Maheshwari, JJ

21 March 2007

Veena Mandlik for the Appellant


S.K. Kulshrestha, J. - In the above appeals, same/similar question of law is involved which reads as under :

"Whether the Tribunal was justified in holding that no case for penalty under section 271(1)(c) is made out, without appreciating in its right perspective the impact of its Explanation 4 appended to the said section".

2. For the purpose of this decision, facts are being taken from ITA No. 17/2006. In respect of the assessment year 1994-95, the respondent filed a return of income on 30-11-1995 declaring total income as Nil. On completion of the assessment under section 143(3) of the Income-tax Act, 1961 at loss after addition made by the Assessing Officer, penalty proceedings under section 271(1)(c) were initiated. Accordingly, a show cause notice was issued to the respondent-assessee as to why the penalty be not levied. The respondent-assessee filed reply but the Assessing Officer, after considering all the facts and circumstances of the case, levied penalty under section 271(1)(c) amounting to Rs. 9,00,000. On appeal, the Commissioner of Income-tax, however, set aside the penalty and ITAT on further appeal, has upheld the order passed by the CIT(A) and dismissed the departmental appeal.

3. In the context of the above facts, the department contends that after amendment of Explanation 4 to section 271(1)(c) of the Act, penalty was leviable even in cases where after making addition of the income concealed, the return was Nil or loss.

4. Learned counsel for the appellant-revenue submits that after amendment, Explanation 4 to section 271(1)(c) of the Act is only clarificatory and, therefore, in view of the provision made by the said Explanation, levy of penalty should have been sustained by the Commissioner of Income-tax and the Income-tax Appellate Tribunal. Learned counsel, however, does not dispute that in the case of Virtual Soft Systems Ltd. v. CIT [2007] 289 ITR 831, the Supreme Court has interpreted the impact of the said Explanation and observed that the Explanation amended in the year 2002 by the Finance Act, 2002 with effect from 1-4-2003 is not retrospective and the penalty levied for the earlier years in the case of "loss return" or Nil income, cannot be sustained on the ground that the said Explanation is retrospective.

5. Learned counsel, however, still urges that Explanation 4, after its amendment in the year 2002 is only clarificatory and, therefore, would apply to all cases considered and disposed of after the date of the amendment. Section 271(1)(c) refers to the satisfaction of the Assessing Officer or the Commissioner (Appeals) or the Commissioner of Income-tax in course of proceedings that the assessee has concealed particulars of his income or furnished inaccurate particulars of such income, he may direct that such person shall pay by way of penalty the sums as mentioned in clauses (ii) and (iii). Explanation 4 after its amendment by the Finance Act, 2002 with effect from 1-4-2003, also provides for levy of penalty on the tax that would have been chargeable on the income in respect of which particulars have been concealed or inaccurate particulars have been furnished had such income been total income. Explanation 4 reads as under :

"Explanation 4.-For the purposes of clause (iii) of this sub-section, the expression 'the amount of tax sought to be evaded,'-

(a) in any case where the amount of income in respect of which particulars have been concealed or inaccurate particulars have been furnished has the effect of reducing the loss declared in the return or converting that loss into income, means the tax that would have been chargeable on the income in respect of which particulars have been concealed or inaccurate particulars have been furnished had such income been the total income;

(b) in any case to which Explanation 3 applies, means the tax on the total income assessed;

(c) in any other case, means the difference between the tax on the total income assessed and the tax that would have been chargeable had such total income been reduced by the amount of income in respect of which particulars have been concealed or inaccurate particulars have been furnished."

6. From a perusal of the above Explanation, it is luculent that it does not provide for application of the Explanation retrospectively. Since the provision is not retrospective, it cannot be said that it is clarificatory.

7. In view of the fact that the Supreme Court in Virtual Soft Systems Ltd.'s case (supra) has already considered the effect of the Explanation 4 (supra), and the fact that it has been made effective prospectively from 1-4-2003, there can be no doubt that the Explanation is prospective in its application and is not explanatory, as contended by the learned counsel. In view of the above decision of the Supreme Court, in Virtual Soft Systems Ltd.'s case (supra) all these appeals raising the question with regard to the retrospectivity of the Explanation and that the Explanation is clarificatory, are dismissed with no order as to costs.

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