Closements
Introduction :
1.1 If the assessee has concealed particulars of his income
or furnished inaccurate particulars of such income, a penalty u/s.271(1)(c)
(Concealment Penalty) can be imposed under the Income-tax Act (the Act). The
amount of such Concealment Penalty shall not be less than 100% (or more than
300%) of the amount of tax sought to be evaded (‘the tax on concealed income’).
1.2 The expression, ‘the amount of tax sought to be evaded’ (i.e.,
‘the tax on concealed income’) is defined in Explanation 4 to S. 271(1)(c),
which, inter alia, effectively provided (before amendment w.e.f. A.Y.
2003-2004) that the same represents the difference between the tax on assessed
income and the tax on returned income (assuming that the difference between the
returned income and the assessed income is treated as concealed income). This
explanation, inter alia, also provided that when concealed income exceeds
the total income, then the tax that would have been chargeable on concealed
income as if such concealed income is the total income of the assessee, is
treated as ‘tax on concealed income’. This explanation was inserted w.e.f.
1-4-1976 (hereinafter, the same is referred to as the said Explanation).
1.3 As there was difference of opinion amongst the High
Courts on the issue that if the income disclosed in the return as well as the
income assessed is in negative (even after making certain
additions/disallowances), whether Concealment Penalty can be imposed or not. An
appropriate amendment was made to take care of such situation u/s.271(1)(c) as
well as in the said Explanation by the Finance Act, 2002 w.e.f. A.Y. 2003-2004
(hereinafter, such amended provisions are referred to as post-amendment
provisions and the earlier provisions are referred to as pre-amended
provisions). These amendments made by the Finance Act, 2002 are referred to as
Amendment of 2002. The post-amendment provisions made the position explicitly
clear that Concealment Penalty can be imposed even if income assessed is
negative and the assessee is not liable to pay any income-tax.
1.4 In the context of pre-amended provisions, the issue
referred to in para 1.3 above was decided by the Apex Court in the case of
Virtual Soft Systems Limited (289 ITR 83), wherein the Court took the view that
Concealment Penalty cannot be imposed in a case where the assessment has
resulted into loss where the assessee is not liable to pay any tax and the
Amendment of 2002 was applicable w.e.f. 1-4-2003 (i.e., A.Y. 2003-2004)
and the same is not clarificatory/declaratory in nature and hence the same is
prospective. This judgment has been considered in this column in the April, 2007
issue of the Journal.
1.5 The correctness of the judgment of the Apex Court in the
case of Virtual Soft Systems Limited (supra) was doubted by another Bench
of the Apex Court and hence the issue decided therein came up for
reconsideration before a larger Bench (three Judges) of the Apex Court in the
case of Gold Coin Health Food P. Limited, wherein the earlier judgment has been
overruled. Though this judgment will affect only the cases governed by the
pre-amended provisions (i.e., up to A.Y. 2002-03), considering its
importance and the fact that there may be many pending matters involving this
issue in respect of that period, it is thought fit to consider the same in this
column.
CIT v. Gold Coin Health Food P. Ltd.,
304 ITR 308 (SC) :
2.1 In the above case, the larger Bench of the Apex Court was
constituted to consider the correctness of the judgment of the Division Bench of
the Apex Court in the case of Virtual Soft Systems Limited (supra) and to
decide whether Concealment Penalty can be imposed in case of reduction in loss
under the pre-amended provisions. In that case, the Department had placed
reliance on Notes of Clauses relating to the Amendment of 2002 to contend that
the said amendment was clarificatory in nature and consequently it was
applicable retrospectively. This argument was rejected by the Court. Another
Division Bench, which doubted the correctness of the said judgment, noted that
the Division Bench in the case of Virtual Soft Systems Limited (supra)
had rejected this argument, but it was of the view that the true effect of the
Amendment of 2002 was not considered in that case, 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 the ground to hold that the same did not have a
retrospective effect.
2.2 On behalf of the Department, it was, inter alia,
contended that the purpose behind making the provisions relating to Concealment
Penalty is to penalise the assessee for (a) concealing particulars of income;
and/or (b) furnishing inaccurate particulars of such income, and hence, whether
the assessee’s income was a profit or loss was really of no consequence. It was
further contended that the word ‘any’ used in the expression in addition to ‘any
tax payable’ found in the provision makes the position clear that the penalty
was in addition to any tax and even if no tax was payable, the penalty was
leviable. The Amendment of 2002 was made to clarify this position as some High
Courts took a contrary view. This was not a substantive amendment which created
penalty for the first time. Even Notes on Clauses make the position clear that
the amendment was clarificatory in nature and would apply to all assessments
even prior to A.Y. 2003-04.
2.3 On the other hand, on behalf of the assessee, it was,
inter alia, contended that the judgment in the case of Virtual Soft Systems
Limited (supra) lays down the correct principle in law and that position
was rightly noted by various High Courts, more particularly by the Punjab &
Haryana High Court in the case of Prithipal Singh and Co. (183 ITR 69) and the
Department’s appeal against this judgment was dismissed by the Apex Court (249
ITR 670). It was further contended that the Amendment of 2002 enlarged the scope
of levying Concealment Penalty and therefore, does not operate retrospectively
and is applicable only w.e.f. 1-4-2003. It was also pointed out that the
memorandum explaining the provisions of the Finance Bill, 2002 also states that
this amendment will take effect from 1-4-2003.
2.4 After considering the arguments advanced on behalf of both the parties, the Court noted that in the judgment in the case of Virtual Soft Systems Limited (supra), it was also observed that even if the statute does contain a statement to the effect that the amendment is clarificatory or declaratory, that is not the end of the matter. The Court has also to analyse the nature of the amendment to decide whether, in reality, it is clarificatory or declaratory. Hence, the date from which the amendment is made operative does not conclusively decide the issue. The Court also noted the judgment of the Apex Court in the case of Reliance Jute and Industries Limited (120ITR 921) wherein, it was observed 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.
2.5 The Court then stated that it will be necessary to focus on the definition of the term ‘income’, which is inclusively defined in S. 2(24) and includes losses, i.e., negative profits. Having stated so, the Court drew support from the judgment of the Apex Court in the case of Harprasad & Co. P. Ltd. (99 ITR 118) and observed as under (page 313) :
“…. 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 (2007) 9 SCC 665. Reference to the order by this Court dismissing the Revenue’s Civil Appeal No. 7961 of 1996 in CIT v. Prithipal Singh and Co. is also not very important because that was in relation to the A.Y. 1970-71 when Explanation 4 to S. 271(1)(c) was not in existence. The view of this Court in Harprasad’s case leads to the irresistible conclusion that income also includes losses. Explanation 4(a) as it stood during the period April 1, 1976 to April 1, 2003 has to be considered in the background.”
2.6 The Court then stated that it appears that what the Amendment of 2002 intended was to make the position explicit, which otherwise was implied. For this, the Court noted the following recommendation of Wanchoo Committee pursuant to which a relevant portion of the said explanation was inserted w.e.f. 1-4-1976 (page 313) :
“We are not unaware that linking concealment penalty to tax sought to be evaded can, at times, lead to some 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.”
2.7 Referring to the Circular No. 204, dated 24-7-1976, issued by the CBDT explaining the provisions along with which the said Explanation was introduced, the Court noted that in the said Circular also it is stated that even if the total income is reduced to the minus figure, ‘the tax on concealed income’ still means the tax chargeable on the concealed income as if it were the total income. The Court, then, observed as under (page 314) :
“A combined reading of the Committee’s recommendation and the Circular makes the position clear that Explanation 4(a) to S. 271(I)(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 minus figure. Therefore, even during the period between April 1, 1976 and April 1, 2003, the position was that the penalty was leviable even in a case where addition of concealed income reduces the returned loss.”
2.8 Considering the relevance of the Notes on Clauses, while interpreting the provisions on such issues, the Court stated that the same are relevant and for that drew support from the judgment of the Apex Court in the case of Yuvraj Amarinder Singh (156 ITR 525). The Court also noted the judgment of the Apex Court in the case of Poddar Cement P. Ltd. (226 ITR 625), wherein it was stated that the circumstances under which the amendment was brought in existence and 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 not. The Court then referred to various judgments of the Apex Court, in which the Court has considered cardinal principle of construction that every statute is prima facie prospective, unless it is expressly or by necessary implication made to have a retrospective operation. In these judgments, it was also made clear that the presumption against retrospective operation is not applicable to declaratory statutes.
2.9 Having referred to the principles and tests to be applied to determine whether a particular amendment is to be regarded as clarificatory or substantive in nature or whether it will have retrospective effect or not, the Court finally overruled the view of the Division Bench in the case of Virtual Soft Systems Limited (supra) and held as under (page 318) :
“The above being the position, the inevitable conclusion is that Explanation 4 to S. 271(I)(c) is clarificatory and not substantive. The view expressed to the contrary in Virtual’s case (2007) 9 SCC 665 is not correct.”
Conclusion:
3.1 In view of the above judgment of the larger Bench of the Apex Court, reversing the judgment of the division bench of the Apex Court in the case of Virtual Soft Systems Limited (supra), the position now emerges is that, under the pre-amended provisions also, the Concealment Penalty can be imposed even in a case where the assessment has resulted into reduction in loss and there is no tax payable by the assessee.
3.2 From the above judgment, it also appears that for the purpose of determining the nature of amendment (i.e., whether the same is clarificatory or substantive in nature), the position as existed before the amendment and the purpose for which the amendment is made is very relevant.
