The Supreme Court has held that Income Tax department cannot impose any penalty on an assesses in the absence of any positive income and tax liability prior to the amendment by Finance Act 2002.

"Prior to the amendment by the Finance Act 2002, in the absence of any positive income and no tax being levied, penalty for concealment of income cannot be levied," a bench of Justice Ashok Bhan and Justice Dalveer Bhandari said.

According to the court, there was nothing in the language of Section 271(1)(C) as amended by the Finance Act 2002 with effect from April 1, 2003 to suggest that the amendment was retrospective.

The amendment enlarged the scope of the penalty to include even cases where assessment had been completed at loss, it added.

"The same being in the nature of a substantive amendment would be prospective, in the absence of any indication to the contrary," the bench said.

The statute creating the penalty is the first and last consideration and must be construed within the term and language of the particular statute, it added.

With this judgement the apex court has set aside the Delhi High Court order that held that the income tax tribunal was not right in deleting the penalty imposed on virtual soft systems under Section 271(1)(C) merely on the ground that the total income of the assessee was assessed at a minus figure/loss.

The High Court had held that it was not necessary that there must be a positive income and the levy of tax for imposition of penalty under Section 271(1)(C) of the Income Tax Act after April 1, 1976.