CBDT’s instructions being ignored? : Section 119(1) 

Article by T. N. Pandey The author is a former chairman of CBDT, appeared in The Business Line

Levying penalty in loss cases : Section 271(1)(C) 

The issue of whether penalty will be attracted for concealment even though no tax is payable has been finally settled by the Supreme Court.

Remember the raging judicial controversies about levying penalty for concealment in cases where the return declares a loss and not a positive income. The assessing officer (AO) re-computes the loss and arrives at a lower figure of loss than claimed in the return. Will the provisions for levy of concealment apply in this case?

Several changes

The law regarding concealment penalty has undergone several significant changes. Explanation 4 was introduced in Section 271(1) (c) of the Income-Tax Act, 1961 w.e.f. April 1, 1976. The Revenue thought that after this material change, penalty will be attracted for concealment even though no tax was payable.

The effect of reduction of loss from the returned loss resulted in concealment of income and the taxpayer was to be penalised for filing inaccurate particulars of income. Explanation 4 added the word “tax sought to be evaded”.

The Supreme Court had ruled in the Pritipal Singh (249 ITR 670) case that penalty was not leviable in loss cases. That was a case concerning the assessment year 1970-71. Controversy arose among various High Courts about the interpretation to be placed on the amended provision of the law after April 1, 1976.

The Karnataka and Punjab and Haryana High Courts thought that penalty was leviable in loss cases. The Madras High Court took the opposite view. Section 271(1)(c) was again amended by the Finance Act, 2002 to get rid of all controversies.

Prior to the 2002 amendment, ‘total income’ can only connote a positive figure. Explanation 4 to Section 271(1)(c) required the computation to be done with reference to ‘total income’. The computation in the case of a loss making assessee cannot be made and the words “in addition to any tax payable” can only be understood as presupposing the tax was otherwise payable.

Since computation will not result in a positive figure, the charge cannot be levied. The sin qua non was the existence of a positive income resulting in tax before any penalty can be levied. Penalty is in “addition to any tax”. If there was no tax, no penalty can be levied. The amendment of 2002 provided specifically that where the filing of the return and the assessment had the effect of reducing the loss, concealment penalty will arise. The amendment was carried out to put an end to the judicial controversy.

Prospective, retrospective

Controversy however arose on the question whether the amendment of 2002 was prospective or retrospective. The Bombay High Court held that the amendment of 2002 was only clarificatory and applied to all pending proceedings on or after the amendment. The case before the Bombay High Court related to assessment year (AY) 1988-89.

According to the Bombay High Court, the amendment of 2002 ensured that where the amount of income in respect of which particulars have been concealed has the effect of reducing the loss declared in the return, then, the amount of tax sought to be evaded shall be the tax that would have been chargeable on the amount of such income as if such income was the total income.

The Bombay High Court took support for its views from the Notes on Clauses in the Finance Bill, 2002 declaring that the amendment was clarificatory. Penalty was considered leviable in loss cases also.

The matter did not end there. If it is only a clarificatory amendment, it will have to apply retrospectively. The Supreme Court considered the issue in detail in Virtual Soft Systems Ltd vs CIT (289 ITR 83).

It considered the conflicting views among various High Courts. It held that the Bombay HC view was untenable. At that time, according to the Supreme Court, there was nothing in the statute to suggest that the 2002 amendment was declaratory and applied to all pending cases. It was purely a case of amendment to the statute. There is no assumption as to its retrospectivity.

Retrospectivity has to be enacted specifically in the fiscal statute and more so in the case of penal provisions. Otherwise, it would be contradictory or derogatory to Article 20 (1) of the Constitution.

Notes on clauses on the amendment specifically mentioned that the amendment would take effect from April 1, 2003. In this view of the matter, the Supreme Court overruled the Bombay HC view.

Not substantive

If you thought that the controversy had finally ended, you are mistaken. In another case, the Supreme Court itself had second thoughts about is judgment in the Virtual Soft case. The matter was referred to a larger Bench of the Supreme Court, which considered the issue in greater detail in the Gold Coin Health Food Ltd case.

It ruled that the amendment made by the Finance Act, 2002 to Section 271(1)(c) was clarificatory and not substantive. The purpose of the amendment was to penalise the assessee for concealing income or furnishing inaccurate particulars.

It was immaterial whether the return showed profit or loss. The amendment made by the Finance Act, 2002 was applicable retrospectively.