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From the Courts »
 Reliance Communications Ltd vs. DDIT (ITAT Mumbai)
  Sushila Devi vs. CIT (Delhi High Court)
 Ashok Prapann Sharma vs. CIT (Supreme Court)a
  Vatsala Shenoy vs. JCIT (Supreme Court)
  Vatsala Shenoy vs. JCIT (Supreme Court)
 M.K.Overseas Pvt. Ltd. Vs. Pr.Commissioner Of Income Tax-06
 Arshia Ahmed Qureshi Vs. Pr. Commissioner Of Income Tax-21
 CHAUDHARY SKIN TRADING COMPANY Vs. PR. COMMISSIONER OF INCOME TAX-21
  Sushila Devi vs. CIT (Delhi High Court)
  Vatsala Shenoy vs. JCIT (Supreme Court)
 Deputy Director Of Income Tax Vs. Virage Logic International

"Penalty to be levied on loss to loss cases, Virtual Soft overrulled" SC
August, 20th 2008

                                       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.

 

 

 

 

                                   2


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

 

                                3


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

 

                               4


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.

 

                              5


                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

 

                              6


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

 

                              7


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

 

                             8


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

 

                              9


          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.

 

 

 

 

                              10


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

 

                                11


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

 

                               12


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

 

                    13


          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

          insurance will be exempt from wealth tax". The

          Finance Minister's speech, though strictly not

          relevant    as   an     aid   to     construction,

          substantially reiterates what has been stated

          in the "Notes on clauses" accompanying the

          Bill. On this account, therefore, there is no

          warrant to put a narrow construction on the

          expression "any policy of insurance" occurring

          in sub-clause (vi) of Section 5(1)."

 

 

 

14.   As noted by this Court in Commissioner of Income Tax,

 

Bombay and Ors. v. Podar Cement Pvt. Ltd. and Ors. (1997

 

(5) SCC 482) the circumstances under which the amendment

 

 

                              14


was brought in existence and the consequences of the

 

amendment will have to be taken care of while deciding the

 

issue as to whether the amendment was clarificatory or

 

substantive in nature and, whether it will have retrospective

 

effect or it was not so.

 

15.   In Principles of Statutory Interpretation, 11th Edn. 2008,

 

Justice   G.P.   Singh     has   stated   the   position   regarding

 

retrospective operation of statutes as follows:

 

 

           "The    presumption     against    retrospective

           operation is not applicable to declaratory

           statutes. As stated in Craies and approved by

           the Supreme Court: For modern purposes a

           declaratory Act may be defined as an Act to

           remove doubts existing as to the common law,

           or the meaning or effect of any statute. Such

           Acts are usually held to be retrospective. The

           usual reason for passing a declaratory Act is to

           set aside what Parliament deems to have been

           a judicial error, whether in the statement of

           the common law or in the interpretation of

           statutes. Usually, if not invariably, such an

           Act contains a preamble, and also the word

           `declared' as well as the word 'enacted'. But

           the use of the words `it is declared' is not

           conclusive that the Act is declaratory for these

           words may, at times, be used to introduce new

           rules of law and the Act in the latter case will

           only be amending the law and will not

           necessarily be retrospective. In determining,

           therefore, the nature of the Act, regard must

 

                                 15


           be had to the substance rather than to the

           Corm. If a new Act is 'to explain' an earlier Act,

           it would be without object unless construed

           retrospective. An explanatory Act is generally

           passed to supply an obvious omission or to

           clear up doubts as to the meaning of the

           previous Act. It is well settled that if a statute

           is curative or merely declaratory of the

           previous law retrospective operation is

           generally intended. The language `shall be

           deemed always to have meant' or 'shall be

           deemed never to have included'' is declaratory,

           and is in plain terms retrospective. In the

           absence of clear words indicating that the

           amending Act is declaratory, it would not be so

           construed when the amended provision was

           clear and unambiguous. An amending Act may

           be purely clarificatory to clear a meaning of a

           provision of the principal Act which was

           already implicit. A clarificatory amendment of

           this nature will have retrospective effect and,

           therefore, if the principal Act was existing law

           when the constitution came into force, the

           amending Act also will be part of the existing

           law."

 

 

 

 

16.   In Zile Singh v. State of Haryana and Ors. (2004 (8) SCC

 

1), it was observed as follows:

 

 

 

           "13. It is a cardinal principle of construction

           that every statute is prima facie prospective

           unless it is expressly or by necessary

 

                                  16


implication made to have a retrospective

operation. But the rule in general is applicable

where the object of the statute is to affect

vested rights or to impose new burdens or to

impair existing obligations. Unless there are

words in the statute sufficient to show the

intention of the legislature to affect existing

rights, it is deemed to be prospective only

-- "nova constitutio futuris formam imponere

debet non praeteritis" -- a new law ought to

regulate what is to follow, not the past. (See

Principles of Statutory Interpretation by Justice

G.P. Singh, 9th Edn., 2004 at p.       438.) It is

not necessary that an express provision be

made to make a statute retrospective and the

presumption against retrospectivity may be

rebutted by necessary implication especially in

a case where the new law is made to cure an

acknowledged evil for the benefit of the

community as a whole (ibid., p.        440).

14. The presumption against retrospective

operation is not applicable to declaratory

statutes.... In determining, therefore, the

nature of the Act, regard must be had to the

substance rather than to the form. If a new Act

is "to explain" an earlier Act, it would be

without       object      unless        construed

retrospectively. An explanatory Act is generally

passed to supply an obvious omission or to

clear up doubts as to the meaning of the

previous Act. It is well settled that if a statute

is curative or merely declaratory of the

previous law retrospective operation is

generally intended.... An amending Act may be

purely declaratory to clear a meaning of a

provision of the principal Act which was

already implicit. A clarificatory amendment of

 

 

 

                    17


          this nature will have retrospective effect (ibid.,

          pp. 468-69).

 

 

          15. Though retrospectivity is not to be

          presumed and rather there is presumption

          against retrospectivity, according to Craies

          (Statute Law, 7th Edn.), it is open for the

          legislature to enact laws having retrospective

          operation. 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. (p.392)"

 

 

 

 

17.   Above being the position, the inevitable conclusion is

 

that Explanation 4 to Section 271(1)(c) is clarificatory and not

 

 

 

 

                              18


substantive. The view expressed to the contrary in Virtual's

 

case (supra) is not correct.

 

 

 

18.   So far as the appeal relating to SLP (C ) No.4379 of 2007

 

is concerned, it is to be noted that learned Solicitor General

 

has stated that even if the Department succeeds ultimately

 

before this Bench, they would not demand penalty from the

 

assessee in that case. Similar is the position in Civil Appeal

 

relating to SLP(C) No.14785 of 2007.

 

 

 

19.   The appeals are disposed of.

 

 

 

 

                                       ...............................J.

                                       (Dr. ARIJIT PASAYAT)

 

 

                                       ..............................J.

                                       (P. SATHASIVAM)

 

 

                                       .............................J.

                                       (AFTAB ALAM)

 

New Delhi,

August 18, 2008

 

 
 
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