Penalty – u/s. 271(1)(c) – Penalty cannot be imposed on the additions made under the normal provisions of the Act when the income is assessed u/s. 115JB –SLP dismissed.

For the assessment year 2001-02 the respondent- assessee had filed return declaring loss at Rs.43.47 crore. Thereafter, the revised return exhibiting the income at Rs.3,86,82,128/- was filed under the provisions of section 115JB. The assessment order was framed by the Assessing Officer u/s. 143(3) at a loss of Rs.36.95 crore as per normal provisions and at book profits at Rs.4,01,63,180/- u/s. 115 JB of the Act. While doing so, various additions were made by the Assessing Officer including the following:-

a. In so far the claim of depreciation was concerned, the Assessing Officer disallowed the depreciation to the extent of Rs.32,51,906/-.

b. The addition towards the provident fund of Rs.3,030/- treating the same as income, was also made on the ground that this contribution was made belatedly by the assessee.

c. The Assessing Officer also disallowed deduction u/s. 80HHC of the Act on the ground that the assessee had not adjusted the loss incurred on manufactured and traded goods exported out of India against incentives and had claimed deduction u/s. 80HHC of the Act on 90% of the incentives.

These additions were upheld by the CIT(A).

While drawing the assessment order, the Assessing Officer also directed that penalty proceedings be initiated against the assessee by issuing a show cause notice u/s. 271(1)(c) of the Act. The show cause notice was thus given to the respondent-assessee, who submitted its reply thereto. However, the Assessing Officer was not convinced with the reply and thus, passed the order dated 28th September, 2007 imposing a penalty of Rs.90,97,415/- in respect of the aforesaid three additions, holding that the assessee had furnished inaccurate particulars of the income which fell within the purview of the section 271(1)(c) of the Act and Explanation 1 thereto.

The assessee preferred an appeal, which was allowed by the CIT (A), who set aside the penalty order. The Income Tax Appellate Tribunal affirmed the order of the CIT(A) maintaining that no penalty could have been imposed upon the assessee under the given circumstances.

On further appeal by the revenue, the Delhi High Court [ITXA No.1420 of 2009 dated 26/8/2010] observed that the judgment of the Supreme Court in Gold Coin’s has clarified that even if there are losses in a particular year, penalty can be imposed as even in that situation there can be a tax evasion. As per section 271(1)(c), the penalty can be imposed when any person has concealed the particulars of his income or furnished incorrect particulars of the income. Once this condition is satisfied, quantum of penalty is to be levied as per clause (3) of section 271(1) (c), which stipulates that the penalty shall not exceed three times “the amount of tax sought to be evaded”. The expression “the amount of tax sought to be evaded” is clarified and explained in Explanation 4 thereto, as per which it has to have the effect of reducing the loss declared in the return or converting that loss into income.

The question, however according to the High Court, in the present case, was as to whether furnishing of such wrong particulars had any effect on the amount of tax sought to be evaded. The High Court held that under the scheme of the Act, the total income of the assessee is first computed under the normal provisions of the Act and tax payable on such total income is compared with the prescribed percentage of the ‘book profits’ computed u/s. 115JB of the Act. The higher of the two amounts is regarded as total income and tax is payable with reference to such total income. If the tax payable under the normal provisions is higher, such amount is the total income of the assessee, otherwise, ‘book profits’ are deemed as the total income of the appellant in terms of section 115JB of the Act.

In the present case, the income computed as per the normal procedure was less than the income determined by legal fiction, namely ‘book profits’ u/s. 115JB of the Act. On the basis of normal provision, the income was assessed in the negative i.e. at a loss of Rs.36,95,21,018. On the other hand, assessment u/s. 115 JB of the Act resulted in calculation of profit at Rs.4,01,63,180.

The income of the assessee was thus assessed u/s. 115 JB and not under the normal provisions.

According to the High Court, judgment in the case of Gold Coin (supra), did not deal with such a situation. What was held by the Supreme Court in that case was that, even if in the income tax return filed by the assessee losses are shown, penalty could still be imposed in a case where on setting off the concealed income against any loss incurred by the assessee under other head of income or brought forward from earlier years, the total income was reduced to a figure lower than the concealed income or even a minus figure. The Supreme Court was of the opinion that the tax sought to be evaded would mean the tax chargeable, not as if it were the total income. Once this rationale to Explanation 4 given by the Supreme Court is applied in the present case, it would be difficult to sustain the penalty proceedings. Reason was simple. No doubt, there was concealment but that had its repercussions only when the assessment was done under the normal procedure. The assessment as per the normal procedure was, however, not acted upon. On the contrary, it was the deemed income assessed u/s. 115 JB of the Act which had become the basis of assessment as it was the higher of the two. Tax was thus paid on the income assessed u/s. 115 JB of the Act. Hence, when the computation was made u/s. 115 JB of the Act, the aforesaid concealment had no role to play and was totally irrelevant. Therefore, the concealment did not lead to tax evasion at all.

The Supreme Court dismissed the Special Leave Petition filed by the revenue against the aforesaid order of the Delhi High Court. CIT v. Nalwa Sons Investment Ltd.