REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 5065 OF 2008
(Arising out of SLP (C) No. 4379 of 2007)
Commnr. of Income Tax-I, Ahmedabad ...Appellant
Versus
Gold Coin Health Food Pvt. Ltd. ...Respondent
(With C.A. No. 5066 /2008 @ SLP (C) No. 14785/2007)
JUDGMENT
Dr. ARIJIT PASAYAT, J.
1. Leave granted.
2. Expressing doubt about the correctness of the judgment
rendered by a Division Bench of this Court in Virtual Soft
Systems Ltd. V. Commissioner of Income Tax, Delhi (2007 (9)
SCC 665), a reference has been made by another Division
Bench by order dated 7.4.2008 to a larger Bench. The
question which was decided in Virtual's case (supra) was as to
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. This question has to be considered in the
background of the amendment made by Finance Act, 2002 (in
short `Finance Act') w.e.f. 1.4.2003 in Explanation 4 to Section
271(1)(c)(iii) of the Act. In Virtual's case (supra) the
department placed reliance on Notes on Clauses relating to
the aforesaid amendment to submit that the amendment was
clarificatory in nature and consequentially it was applicable
retrospectively. This argument was rejected by this Court in
para 52 of the judgment. The Division Bench while making
reference was of the view that the true effect of the
amendment was not considered, as it was prima facie of the
view that merely because the amendment was stated to take
effect from 1.4.2003 that cannot be a ground to hold that the
same did have the retrospective effect.
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3. Learned counsel for the appellant submitted that the
true scope and ambit of the amendment has been lost sight of
in Virtual Soft's case (supra). It is submitted that the purpose
behind Section 271(1) (c) is to penalize the assessee for (a)
concealing particulars of the income; and/or (b) furnishing
inaccurate particulars of such income. Therefore, whether
income returned was a profit or loss was really of no
consequence. It is pointed out that prior to the amendment,
Section 271(1) (c)(iii) read as follows:
"(iii) In the cases referred to in Clause (c), in
addition to any tax payable by him, a sum
which shall not be less than, but which shall
not exceed twice, the amount of the income
in respect of which the particulars have been
concealed or inaccurate particulars have
been furnished."
4. It was submitted that bare reading of the provision made
the position clear that it was not necessary that income tax
must be payable by the assessee as sine qua non for
imposition of penalty. The word `any' made the position clear
that the penalty was in addition to any tax which may be paid
by the assessee. Therefore, even if no tax was payable, the
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penalty was leviable. It is in that context submitted that even
prior to the amendment it could not be read to mean that if no
tax was payable by the assessee because of filing a return
disclosing loss, the assessee is not liable to pay penalty even if
the assessee concealed and/or furnished inaccurate
particulars. Because some High Courts took the contradictory
view, the Parliament clarified the position by changing the
expression "any' by "if any". This was not a substantive
amendment which created a penalty for the first time. The
amendment by the Finance Act as specifically noted in the
Notes on Clauses makes the position clear that the
amendment was clarificatory in nature and would apply to all
assessments even prior to assessment year 2003-04.
5. Per contra, learned counsel for the assessees submitted
that the view expressed in Virtual's case (supra) lays down the
correct principle in law. With reference to para 17 of the
judgment, it is submitted that the position was rightly noted
by various High Courts, more particularly, in Commissioner of
Income Tax v. Prithipal Singh & Co. (1990 (183) ITR 69). It is
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pointed out that the revenue's appeal before this Court was
dismissed in Commissioner of Income Tax v. Prithipal Singh
and Ors. (2001 (249) ITR 670). It is submitted that there is
nothing in Section 271(1) (c) as amended by Finance Act to
suggest that the amendment is retrospective. The amendment
and the Explanation 4(a) carried out, enlarged the scope for
levying penalty under Section 271(1) (c) and, therefore, does
not operate retrospectively and is applicable only w.e.f.
1.4.2003. The relevant portion in the Finance Act relating to
amendment reads as follows:
"Section 271 of the Income Tax Act provides
that the assessing Officer or the Commissioner
(Appeals) shall levy penalty in cases of failure
to comply with certain notices issued in the
course of assessment proceedings and cases
in which particulars of income have been
concealed or inaccurate particulars furnished.
It is proposed to amend the section to
include a reference to the Commissioner as
being an authority who can initiate any levy
penalty under sub-section (1) of the said
section. Similar reference is proposed to be
made in Explanation 1 and Explanation 7 to
the said sub-section.
Amendment on similar lines is proposed
to be made in Section 18 of the Wealth Tax
Act.
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These amendments will take effect from
Ist June, 2002.
The existing provisions of clauses (ii) and
(iii) of sub-section (1) of the said section
provide for levy of the penalty specified therein
in addition to any tax payable.
It is proposed to amend the said clauses
to clarify that the penalty specified in them
can be levied even if no tax is payable on the
total income assessed.
The Bill further proposes to amend
Explanation 4 which defines the expression
`the amount of tax sought to be evaded in
different circumstances, to clarify that in cases
where the 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
of converting the loss into income, the tax
sought to be evaded shall be the tax that
would have been chargeable on the amount of
such income as if it were the total income.
These amendments will take effect from
Ist April, 2003."
6. It would be of some relevance to take note of what this
Court said in Virtual's case (supra). Pointing out one of the
important tests at para 51 it was observed that even if the
statute does contain a statement to the effect that the
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amendment is clarificatory or declaratory, that is not the end
of the matter. The Court has to analyse the nature of the
amendment to come to a conclusion whether it is in reality a
clarificatory or declaratory provision. Therefore, the date from
which the amendment is made operative does not conclusively
decide the question. The Court has to examine the scheme of
the statute prior to the amendment and subsequent to the
amendment to determine whether amendment is clarificatory
or substantive.
7. In Reliance Jute and Industries Ltd. vs. Commissioner of
Income Tax, West Bengal (1979 (120) ITR 921) it was observed
by this Court that the law to be applied in income tax
assessments is the law in force in the assessment year unless
otherwise provided expressly or by necessary implication.
Before proceeding further, it will be necessary to focus on the
definition of the expression `income' in the statute. Section 2
(24) defines `income' which is an inclusive definition, and
includes losses i.e. negative profit. The position has been
elaborately dealt with by this Court in Commissioner of
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Income Tax (Central), Delhi v. Harprasad & Co. P. Ltd. (1975
(99) ITR 118). This Court held with reference to the charging
provisions of the statute that the expression `income' should
be understood to include losses. The expression `profits and
gains' refers to positive income whereas losses represent
negative profit or in other words minus income. This aspect
does not appear to have been noticed by the Bench in Virtual's
case (supra). Reference to the order by this Court dismissing
the revenue's Civil Appeal No.7961 of 1996 in Commissioner
of Income Tax v. Prithipal Singh and Co. is also not very
important because that was in relation to the assessment year
1970-71 when Explanation 4 to Section 271(1) ((c) was not in
existence. The view of this Court in Harprasad's case (supra)
leads to the irresistible conclusion that income also includes
losses. Explanation 4 (a) as it stood during the period
1.4.1976 to 1.4.2003 has to be considered in the background.
8. It appears that what the Finance Act intended was to
make the position explicit which otherwise was implied. The
recommendations of the Wanchoo Committee pursuant to
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which Explanation 4(a) was inserted w.e.f. 1.4.1976 needs to
be noted. At para 2.74 it was noted as follows:
"2.74 We are not unaware that linking
concealment penalty to tax sought to be
evaded can, at times, lead to anomalies. We
would recommend that, in cases where the
concealed income is to be, set off against
losses incurred by an assessee under other
heads of income or against losses brought
forward from earlier years, and the total
income thus, gets reduced to a figure smaller
than the concealed income or even to a minus
figure, the tax sought to be evaded should be
calculated as if the concealed income were the
total income."
9. Reference to the Department Circular No.204 dated
24.7.1976 reported in 1977 (110) ITR 21 (St.) has also
substantial relevance. Same reads as follows:
"New Explanation 4 defines `the amount of tax
sought to be evaded'. According to the definition,
this expression will ordinarily mean 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. In a case,
however, where on setting off the concealed
income against any loss incurred by the
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assessee under other head of income or brought
forward from earlier years, the' total income is
reduced to a figure lower than the concealed
income or even to a minus figure, `the tax
sought to be evaded' will mean the tax
chargeable on the concealed income as if it were
the total income. Another exception to the
general definition of the expression `tax sought
to be evaded' given earlier is a case to which
Explanation 3 applies. Here, the tax sought to be
evaded will be the tax chargeable on the entire
total income assessed."
10. A combined reading of the Committee's
recommendations and the Circular makes the position clear
that Explanation 4(a) to Section 271(1) (c) intended to levy the
penalty not only in a case where after addition of concealed
income, a loss returned, after assessment becomes positive
income but also in a case where addition of concealed income
reduces the returned loss and finally the assessed income is
also a loss or a minus figure. Therefore, even during the
period between 1.4.1976 to 1.4.2003 the position was that the
penalty was leviable even in a case where addition of
concealed income reduces the returned loss.
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11. When the word "income" is read to include losses as held
in Harprasad's case (supra) it becomes crystal clear that even
in a case where on account of addition of concealed income
the returned loss stands reduced and even if the final
assessed income is a loss, still penalty was leviable thereon
even during the period 1.4.1976 to 1.4.2003. Even in the
Circular dated 24.7.1976, referred to above, the position was
clarified by Central Bureau of Direct Taxes (in short `CBDT'). It
is stated that in a case where on setting of the concealed
income against any loss incurred by the assessee under any
other head of income or brought forward from earlier years,
the total income is reduced to a figure lower than the
concealed income or even to a minus figure the penalty would
be imposable because in such a case "the tax sought to be
evaded" will be tax chargeable on concealed income as if it is
"total income".
12. 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
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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.
13. In Commissioner of Wealth Tax, Punjab, J & K,
Chandigarh, Patiala v. Yuvraj Amrinder Singh and Ors. (1985
(4) SCC 609) the relevance of Notes on Clauses was
highlighted. Para 15 reads as follows:
"15. The proviso to sub-clause (vi) has been
reproduced above. It has the effect of cutting
down the exemption contained in the sub-
clause to some extent. It commences with the
words "Provided that in the case of a policy of
insurance the premium or other payment
whereon is payable during a period of less than
10 years" and the argument is that the
italicized words suggest that the expression
"any policy of insurance" in the main sub-
clause must mean a policy based on human
life and that too where periodical premia are
payable and as such annuity on life which
consists of lump sum investment followed by
deferred annual or monthly payments is
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excluded. It is impossible to read the italicized
words in the proviso in this manner which has
the effect of unduly narrowing down the
expression "any policy of insurance" used in
the main sub-clause, which as indicated
earlier, is of very wide import covering all types
of insurance policies like life, marine, fire, etc.
In the first place the main provision [sub-
clause (vi)] was enacted in 1957 and continued
to operate for 17/18 years till March 31, 1975
without any qualification and as such it will be
absurd to attribute to the Legislature, because
of the insertion of the proviso (containing the
italicized words) in 1975, an intention of
having used the wide expression "any policy of
insurance" throughout all this period in a
narrow sense as suggested. Secondly, if the
main provision and the proviso are read
together the italicised words do not suggest
that any narrow construction, much less as
urged, was intended and to say so would be
missing the real object or purpose of the
proviso. In our view the proper way to read the
proviso would be to treat the main provision as
creating or granting an exemption and the
proviso carving out something from the
exemption. The main provision creates an
exemption in respect of the assessee's "right or
interest in any policy of insurance" and the
proviso seeks to cut down that exemption to a
limited extent, namely whenever there is a
policy of insurance in respect whereof
periodical premia are payable for a duration of
less than 10 years, then in such a case a
proportionate exemption specified therein will
be available to the assessee irrespective of
what type of policy it is; the proviso has no
other effect. That such was the object or
purpose of inserting the proviso will be clear if
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regard is had to relevant part of Notes on
clauses accompanying the Bill and the
relevant portion of the speech of the Finance
Minister while introducing the Bill. We were
taken through the relevant portions of Notes
and clauses [vide 93 ITR 125 (Statutes)] and
the speech of the Hon'ble Finance Minister
while introducing the Bill [vide 93 ITR 74
(Statutes)] and in our view far from supporting
the contention of counsel for the Revenue
these lend support to the view which we have
just expressed. The relevant portion of "Notes
on clauses" states that, "under this
amendment (the insertion of proviso) the value
of the taxpayer's right or interest in a policy of
insurance will be exempt from tax only if the
premia are payable over a period of ten years
or more. In cases where premia are payable
over a period of less than ten years, only a
proportionate amount of the value of the
taxpayer's right or interest in the policy of
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