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Levy of additional tax - Deduction in loss
May, 17th 2008

HC (Rajasthan)

DCIT and Anr. vs Rajasthan State Electricity Board and Rajasthan State Electricity Board vs UOI and Anr.

Citation 299 ITR 253 
 
Levy of additional tax - Deduction in loss

In view of retrospective amendment of s.143(1A) the additional tax under s.143(1A) could be levied even in a case of reduction of loss returned.

High Court of Rajasthan

DCIT and Anr. vs Rajasthan State Electricity Board

D. B. Civil Special Appeal (Writ) No. 837 of 1993

And

Rajasthan State Electricity Board vs UOI and Anr.

D. B. Civil Writ Petition No. 1503 of 1995

Shiv Kumar Sharma and Mahesh Chandra Sharma, JJ

13 November 2007

R B. Mathur for the Commissioner
N.M. Ranka with Rajkumar Yadav for the Assessee

JUDGMENT

The judgment of the court was delivered by

Shiv Kumar Sharma, J Special Appeal No. 837 of 1993 arises from the judgment dated January 19, 1993, of the learned single judge on a writ petition. The writ petition was made absolute and the Revenue is in appeal. In D. B. Writ Petition No. 1503 of 1995, the assessee challenged the constitutional validity of section 143(1A) of the Income-tax Act, 1961 (for short "the I. T. Act").

The writ petitioner-assessee had returned a net loss. After adjustments had been made by the taxing authorities under the provisions of section 143(1)(a) the assessment of loss stood reduced. The taxing authorities under the provisions of section 143(1A) sought to levy additional tax upon the assessee in this behalf and this was challenged in the writ petition.

Section 143(1)(a), (1A) of the Income-tax Act (retrospectively amended in 1993) reads as under :

"143.(1)(a) Where a return has been made under section 139, or in response to a notice under sub-section (1) of section 142,

(i) if any tax or interest is found due on the basis of such return, after adjustment of any tax deducted at source, any advance tax paid and any amount paid otherwise by way of tax or interest, then, without prejudice to the provisions of sub-section (2), an intimation shall be sent to the assessee specifying the sum so payable, and such intimation shall be deemed to be a notice of demand issued under section 156 and all the provisions of this Act shall apply accordingly ; and

(ii) if any refund is due on the basis of such return, it shall be granted to the assessee :

Provided that in computing the tax or interest payable by, or refundable to, the assessee, the following adjustments shall be made in the income or loss declared in the return, namely :

(i) any arithmetical errors in the return, accounts or documents accompanying it shall be rectified ;

(ii) any loss carried forward, deduction, allowance or relief, which, on the basis of the information available in such return, accounts or documents, is prima facie admissible but which is not claimed in the return, shall be allowed ;

(iii) any loss carried forward, deduction, allowance or relief claimed in the return, which, on the basis of the information available in such return, accounts or documents, is prima facie inadmissible, shall be disallowed :

Provided further that where adjustments are made under the first proviso, an intimation shall be sent to the assessee, notwithstanding that no tax or interest is found due from him after making the said adjustments :

Provided also that an intimation for any tax or interest due under this clause shall not be sent after the expiry of two years from the end of the assessment year in which the income was first assessable.

(b) Where, as a result of an order made under sub-section (3) of this section or section 144 or section 147 or section 154 or section 155 or section 250 or section 254 or section 260 or section 262 or section 263 or section 264, or any order of settlement made under sub-section (4) of section 245D relating to any earlier assessment year and passed subsequent to the filing of the return referred to in clause (a), there is any variation in the carry forward loss, deduction, allowance or relief claimed in the return, and as a result of which,

(i) if any tax or interest is found due, an intimation shall be sent to the assessee specifying the sum so payable, and such intimation shall be deemed to be a notice of demand issued under section 156 and all the provisions of this Act shall apply accordingly, and

(ii) if any refund is due, it shall be granted to the assessee : Provided that an intimation for any tax or interest due under this clause shall not be sent after the expiry of four years from the end of the financial year in which any such order was passed.

(c) Where the assessee is a partner of a firm or a member of an association of persons or body of individuals and as a result of the adjustments made under the first proviso to clause (a) of sub-section (1) in the income or loss declared in the return made by the firm, association or body, as the case may be, or as a result of an order made under sub-section (3) of this section or section 144 or section 147 or section 154 or section 155 or sub-section (1) or sub-section (2) or sub-section (3) or sub-section (5) of section 185 or sub-section (1) or sub-section (2) of section 186 or section 250 or section 254 or section 260 or section 262 or section 263 or section 264, or any order of settlement made under sub-section (4) of section 245D, passed subsequent to the filing of the return referred to in clause (a), there is any variation in his share in the income or loss of the firm, association or body, as the case may be, or in the manner of inclusion of his share in the returned income, then,

(i) if any tax or interest is found due, an intimation shall be sent to the assessee specifying the sum so payable, and such intimation shall be deemed to be a notice of demand issued under section 156 and all the provisions of this Act shall apply accordingly, and

(ii) if any refund is due, it shall be granted to the assessee :

Provided that an intimation for any tax or interest due under this clause shall not be sent after the expiry of four years from the end of the financial year in which any such adjustments were made or any such order was passed.

(1A)(a) Where, in the case of any person, the total income, as a result of the adjustments made under the first proviso to clause (a) of sub-section (1), exceeds the total income declared in the return by any amount, the Assessing Officer shall,

(i) further increase the amount of tax payable under sub-section (1) by an additional income-tax calculated at the rate of twenty per cent. of the tax payable on such excess amount and specify the additional income-tax in the intimation to be sent under sub-clause (i) of clause (a) of sub-section (1) ;

(ii) where any refund is due under sub-section (1), reduce the amount of such refund by an amount equivalent to the additional income-tax calculated under sub-clause (i).

(b) where as a result of an order under section 154 or section 250 or section 254 or section 260 or section 262 or section 263 or section 264, the amount on which additional income-tax is payable under clause (a) has been increased or reduced, as the case may be, the additional income-tax shall be increased or reduced accordingly, and

(i) in a case where the additional income-tax is increased, the Assessing Officer shall serve on the assessee a notice of demand under section 156 ;

(ii) in a case where the additional income-tax is reduced, the excess amount paid, if any, shall be refunded.

Explanation.For the purpose of this sub-section 'tax payable on such excess amount' means,

(i) in any case where the amount of adjustments made under the first proviso to clause (a) of sub-section (1) exceed the total income, the tax that would have been chargeable had the amount of the adjustments been the total income ;

(ii) in any other case, the difference between the tax on the total income and the tax that would have been chargeable had such total income been reduced by the amount of adjustments."

A look at the substituted sub-section (1A) demonstrates that even where the loss declared by an assessee had been reduced by reason of adjustments made under sub-section (1)(a) the provisions of sub-section (1A) would apply.

Preliminary objection:

The assessee raised a preliminary objection in regard to the maintainability of appeal. It was canvassed that the assessee is a public undertaking of which 100 per cent. shareholding is with the State of Rajasthan. Since clearance of the High Powered Committee set up by the Central Government was not taken by the Revenue the appeal is incompetent and not maintainable. Reliance is placed on Mahanagar Telephone Nigam Ltd. v. Chairman, CBDT [2004] 267 ITR 647 (SC) ; State of Rajasthan v. ITAT [2003] 259 ITR 686 (Raj) ; Union of India v. State of Rajasthan [2002] 127 STC 142 (Raj) ; CIT v. Delhi Tourism and Transportation Development Corporation Ltd. [2005] 274 ITR 35 (Delhi) ; Union of India through Central Organisation Railway v. Union of India Through Secretary, Ministry of Finance [2006] 285 ITR 362 (All) ; Etah Gramin Bank v. CIT [2007] 290 ITR 636 (All) and CIT v. Neyveli Lignite Corporation Ltd. [2007] 293 ITR 362 (Mad).

Since this appeal is pending for adjudication for the last 14 years we now cannot ask the assessee to seek clearance of the High Powered Committee set up by the Central Government. The preliminary objection thus fails and stands rejected.

Submission of the Revenue (appellant) :

The grounds of attack on behalf of the Revenue as argued by learned counsel Mr. R. B. Mathur may be summarised as under :

(i) The main dispute pertains to the interpretation of the provisions of section 143(1A) existing at the relevant time and clause (a)(i) and (ii) which were inserted, substituted by the Finance Act, 1993, with retrospective effect from April 1, 1989, the matter pertains to the assessment year 1991-92.

(ii) The learned single judge allowed the writ petition following the Judgment of the Delhi High Court reported in Modi Cement Ltd. v. Union of India [1992] 193 ITR 91. The said judgment was considered and overruled by the apex court in Asst. CIT v. J. K. Synthetics Ltd. [2001] 251 ITR 200 and observed as under (page 203) :

'The substituted sub-section (1A), therefore, made it clear that even where the loss declared by an assessee had been reduced by reason of adjustments made under sub-section (1)(a), the provisions of sub-section (1A) would apply. This being a retrospective amendment, it covers the controversy in this appeal and, therefore, the appeal would have to be decided in favour of the Revenue.'

The judgment of the three-judge Bench of the apex court had reservations about the correctness of the judgment of the two-judge Bench in the case of Hindustan Electro Graphites Ltd. [2000] 243 ITR 48 (SC).

(iii) The Madhya Pradesh High Court Division Bench comprising of the hon'ble Chief Justice Shri A. K. Mathur (as his Lordship then was) has upheld the validity of section 143(1A)(a)(B) of the Act in the judgment in Sanctus Drugs Pharmaceuticals P. Ltd. v. Union of India [1997] 225 ITR 252 (MP) and observed that in the cases of loss the deduction of loss will be added to the income of the assessee. Therefore, it is not loss which is being sought to be taxed, but it is the income sought to be taxed. The judgment of the Madhya Pradesh High Court has not been reversed till date and is applicable.

Submission of the assessee (respondent) :

While supporting the impugned order of the learned single judge learned senior counsel Shri N. M. Ranka has made the following submissions :

(i) The provision has been made retrospective with effect from April 1, 1989, and such penal clause cannot be inserted with retrospective effect.

(ii) To hold the assessee guilty and to subject him to the additional tax on account of fiscal statute, being given retrospective effect will be unfair and unjust (vide CIT v. Hindustan Electrographite Ltd. [1998] 229 ITR 16 (MP).

(iii) Reliance is also placed on Star India P. Ltd. v. CCE [2006] 280 ITR 321 (SC) ; National Agricultural Co-operative Marketing Federation of India Ltd. v. Union of India [2003] 260 ITR 548 (SC) ; Rai Ramkrishna v. State of Bihar [1963] 50 ITR 171 (SC) ; AIR 1963 SC 1667 ; Supreme Court Employees Welfare Association v. Union of India, AIR 1990 SC 334.

Having analysed the submissions we find that the learned single judge in the impugned judgment drew conclusions after placing reliance on the ratio indicated in Modi Cement Ltd. v. Union of India [1992] 193 ITR 91 (Delhi). This judgment was considered by the Supreme Court in Asst. CIT v. J. K. Synthetics Ltd. [2001] 251 ITR 200 and it was observed as under (page 203) :

"The substituted sub-section (1A), therefore, made it clear that even where the loss declared by an assessee had been reduced by reason of adjustments made under sub-section (1)(a), the provisions of sub-section (1A) would apply. This being a retrospective amendment, it covers the controversy in this appeal and, therefore, the appeal would have to be decided in favour of the Revenue."

The apex court further indicated that CIT v. Hindustan Electro Graphites Ltd. [2000] 243 ITR 48 was the case in which the return filed by the assessee was correct by reason of the law as it stood when the return was filed. A retrospective amendment of section 28 of the Income-tax Act rendered that return incorrect. An adjustment in the return was made under sub-section (1) of section 143 and, therefore, the provisions of subsection (1A) were sought to be invoked. This was challenged and the High Court upheld the challenge, as did the Supreme Court. It took the view that the additional tax under sub-section (1A) bore the imprint of a penalty and no penalty could be levied because the return filed by the assessee was correct when it was filed. The Supreme Court had reservations about the correctness of Hindustan Electro Graphites Ltd. [2000] 243 ITR 48, principally because the assessee in that case had not challenged the provisions of sub-section (1A).

Constitutional validity of section 143(1A)(a)(B) of the Income-tax Act was challenged in Sanctus Drugs Pharmaceuticals P. Ltd. v. Union of India [1997] 225 ITR 252 (MP). The Division Bench (headed by the hon'ble Chief Justice A. K. Mathur, as his Lordship then was) held that entry 82, List I, of the Seventh Schedule to the Constitution of India, empowers Parliament to enact the law on income-tax and when Parliament is competent to enact the law prospectively, it can also lay down the law retrospectively. Under section 143(1A), prior to the amendment by the Finance Act, 1993, with effect from April 1, 1989, what was being taxed was the difference between the income declared in the return and the income determined as a result of adjustments under section 143(1)(a). But now, the actual reduction in the loss has been directly made taxable at 20 per cent. of the tax payable as if such difference were the total income, as additional tax. The incidence of tax is not on the loss. This device to check evasion of tax by clever taxpayers. Hence, it is of compensatory nature. Thus, there is no unconstitutionality in section 143(1A)(a)(B) of the Income-tax Act.

Their Lordships of the Supreme Court in Rai Ramkrishna v. State of Bihar [1963] 50 ITR 171 (SC) ; AIR 1963 SC 1667, indicate as under (page 179) :

"... the Legislative power conferred on the appropriate Legislatures to enact law in respect of topics covered by the several entries in the three Lists can be exercised both prospectively and retrospectively. Where the Legislature can make a valid law, it may provide not only for the prospective operation of the material provisions of the said law, but it can also provide for the retrospective operation of the said provisions."

A close look at the statutory provision under challenge, demonstrates that it is not penal in nature. It is the device to check evasion of tax. It is no doubt true that a power under a taxing statute can be assailed if it is found to be arbitrary or lays down unreasonable restriction upon the freedom of trade but in the instant matter the restriction has been made for justifiable reason in order to check the evasion of tax. We agree with the view expressed by the Division Bench in Sanctus Drugs Pharmaceuticals P. Ltd. [1997] 225 ITR 252 (MP), that by the insertion of this provision in the Income-tax Act the assessee may not be able to evade tax by resorting to the method of showing loss first and then reducing the loss. We thus hold that the provision is compensatory in nature.

For these reasons we dispose of the instant matters in the following terms :

"(i) The appeal of the Revenue is allowed and the impugned judgment dated January 19, 1993, stands set aside.

(ii) The writ petition of the assessee is dismissed and we hold that there is no unconstitutionality in section 143(1A)(a)(B) of the Income-tax Act.

(iii) There shall be no order as to costs."

 
 
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