# "" v. COMMISSIONER OF INCOME TAX, DELHI- I

- **Citation:** [2007] 2 S.C.R. 289
- **Court:** Supreme Court of India
- **Decided:** 2007-02-06
- **Case number:** Civil Appeal No. 7115 of2005
- **Bench:** Ashok Bhan, Dal Veer Bhandari
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/v-commissioner-of-income-tax-delhi-i-22487
- **Pages:** 26

## Headnote

B
Income Tax Act, 196/_:_section 27/(/)(c) as amended by Finance Act,
1975 and Finance Act, 2002-Loss returned by Assessee-Quantum of loss
reduced on assessment-Liability to penalty for concealment of income or c
furnishing inaccurate particulars of income-Held, assessees are not liable
to penalty for assessment years falling before the introduction of the amendment
in the section by Finance Act, 2002-Amendment is not clarificatory as it is
not specifically stated in the statute and hence it applies prospectively and
not retrospectively.
D
The question involved in the appeals is whether an assessee is liable to
\
penalty under section 271(1) (c) of the Income Tax Act, 1961 for concealing
income or for furnishing inaccurate particulars of such income in a case
1
where a return declaring loss was filed and was assessed finally at a reduced
amount of loss.
E
The appllants-assessees contended that if there is no positive income
and no tax is chargeable, penalty cannot be levied for concealment or
furnishing inaccurate particulars of income under section 27l(l)(c) of the
Act; that the levy of penalty with the insertion of Explanation 4 to the Section
w.e.f 1.4.1976 is contrary to the law laid down by this Court in C/Tv. Prithipal F
Singh & Co., 249 ITR 670 SC; that where majority of the High Courts have
taken a view in favour.ofassessees, then that view must be adopted; that the
amendment in Section 271(1) (c) (iii) and Explanation 4 thereto by the Finance
Act, 2002 is not clarificatory in nature and hence does not apply
restrospectively; and that the retrospective effect could not be brought in a
penal provision.
G
pi·
Allowing the appeals, the Court.
. .:_,.
\
HELD:l.1. The Provisions :>fSection 271(1) (c) (iii) of the Income Tax
Act before and after amendment by the Finance Act, 1975 are substantially
289
H
290
SUPREME COURT REPORTS (2007] 2 S.C.R.
A the same. Absence of tax continued to exist changing only the measure or the
scale as to the working of the penalty which earlier was with reference to the
'income' and after the amendment related to the 'tax sught to be evaded'. The
sine qua non, which was there prior or after the amendment on l.4.1976 to
the fact that there must be a positive income resulting in tax before any penalty
B could be levied, continued to exist. The penalty imposed was in 'addition to
any tax'. If there was no tax, no penalty could be levied. The return filed
declaring loss and assessment made at a reduced loss did not warrant any
levy of penalty within the meaning of Section 271(1) (c) (iii) with or without
Explanation 4 to the Section. [Para 2811303-A-DI
C
C!Tv. Prithipa/ Singh & Co., 249 ITR 670 SC, relied on.
C!Tv. Prithipa/ Singh & Co., 183 ITR 69 (P & H ); C!Tv. Virendra &
Co., 171CTR51 (P & H ); C/Tv. N. Krishnan, 240 rrff 47 _(Ker); Ramnath
Goenka v. CIT. 259 ITR 229 (Mad.); CIT v. Jaba/pur Co-operative Milk
Producers Uni0t1 Ltd., 276 ITR 49 (MP); C!Tv. Zam Zam Tanners, 279 ITR
D 197 (All) and CITv. R.G. Sales (P) Ltd., 278 rrR. 140 (Cal), referred to.
1.2. "Total income" under the Income Tax Act, 1961 can only connote
a positive figure and prior to amendment made by Finance Act, 2002,
Explanation 4(a) to Section 271(1) (c) of the Act required the computation to
be done with reference to "total income". The computation in the case of a
E loss making assesses cannot be made. The words "in addition to any tax
payable" can only be understood as the words "additional income-tax" presuppose that tax was otherwise payable. Conversely, even if the words "in
addition to any tax payable" are considered superfluous and must be ignored
when considering the case of a loss return, the computation cannot be made
.,..
I
F because here there is no total income, and because the computation cannot be
made the charge cannot be levied. [Para 481 [309-G-H; 310-A-BJ
.r
G
CIT, Bombay v. Elphinstone Spinning & Weaving Mills Company Ltd.,
40 ITR 142 (SC), relied on.
CITv. S. V. Angidi Chettiar, 44 ITR 739 (SC), disting

## Text

_Characters 0–39,975 of 60,762. This is a partial read: ask again with offset=39975 for what follows._

MIS VIRTUAL SOFT SYSTEMS LTD .
A
. ""
v.
COMMISSIONER OF INCOME TAX, DELHI- I
FEBRUARY 6, 2007
[ASHOK BHAN AND DAL VEER BHANDARI, JJ.]
B
Income Tax Act, 196/_:_section 27/(/)(c) as amended by Finance Act,
1975 and Finance Act, 2002-Loss returned by Assessee-Quantum of loss
reduced on assessment-Liability to penalty for concealment of income or c
furnishing inaccurate particulars of income-Held, assessees are not liable
to penalty for assessment years falling before the introduction of the amendment
in the section by Finance Act, 2002-Amendment is not clarificatory as it is
not specifically stated in the statute and hence it applies prospectively and
not retrospectively.
D
The question involved in the appeals is whether an assessee is liable to
\
penalty under section 271(1) (c) of the Income Tax Act, 1961 for concealing
income or for furnishing inaccurate particulars of such income in a case
1
where a return declaring loss was filed and was assessed finally at a reduced
amount of loss.
E
The appllants-assessees contended that if there is no positive income
and no tax is chargeable, penalty cannot be levied for concealment or
furnishing inaccurate particulars of income under section 27l(l)(c) of the
Act; that the levy of penalty with the insertion of Explanation 4 to the Section
w.e.f 1.4.1976 is contrary to the law laid down by this Court in C/Tv. Prithipal F
Singh & Co., 249 ITR 670 SC; that where majority of the High Courts have
taken a view in favour.ofassessees, then that view must be adopted; that the
amendment in Section 271(1) (c) (iii) and Explanation 4 thereto by the Finance
Act, 2002 is not clarificatory in nature and hence does not apply
restrospectively; and that the retrospective effect could not be brought in a
penal provision.
G
pi·
Allowing the appeals, the Court.
. .:_,.
\
HELD:l.1. The Provisions :>fSection 271(1) (c) (iii) of the Income Tax
Act before and after amendment by the Finance Act, 1975 are substantially
289
H
290
SUPREME COURT REPORTS (2007] 2 S.C.R.
A the same. Absence of tax continued to exist changing only the measure or the
scale as to the working of the penalty which earlier was with reference to the
'income' and after the amendment related to the 'tax sught to be evaded'. The
sine qua non, which was there prior or after the amendment on l.4.1976 to
the fact that there must be a positive income resulting in tax before any penalty
B could be levied, continued to exist. The penalty imposed was in 'addition to
any tax'. If there was no tax, no penalty could be levied. The return filed
declaring loss and assessment made at a reduced loss did not warrant any
levy of penalty within the meaning of Section 271(1) (c) (iii) with or without
Explanation 4 to the Section. [Para 2811303-A-DI
C
C!Tv. Prithipa/ Singh & Co., 249 ITR 670 SC, relied on.
C!Tv. Prithipa/ Singh & Co., 183 ITR 69 (P & H ); C!Tv. Virendra &
Co., 171CTR51 (P & H ); C/Tv. N. Krishnan, 240 rrff 47 _(Ker); Ramnath
Goenka v. CIT. 259 ITR 229 (Mad.); CIT v. Jaba/pur Co-operative Milk
Producers Uni0t1 Ltd., 276 ITR 49 (MP); C!Tv. Zam Zam Tanners, 279 ITR
D 197 (All) and CITv. R.G. Sales (P) Ltd., 278 rrR. 140 (Cal), referred to.
1.2. "Total income" under the Income Tax Act, 1961 can only connote
a positive figure and prior to amendment made by Finance Act, 2002,
Explanation 4(a) to Section 271(1) (c) of the Act required the computation to
be done with reference to "total income". The computation in the case of a
E loss making assesses cannot be made. The words "in addition to any tax
payable" can only be understood as the words "additional income-tax" presuppose that tax was otherwise payable. Conversely, even if the words "in
addition to any tax payable" are considered superfluous and must be ignored
when considering the case of a loss return, the computation cannot be made
.,..
I
F because here there is no total income, and because the computation cannot be
made the charge cannot be levied. [Para 481 [309-G-H; 310-A-BJ
.r
G
CIT, Bombay v. Elphinstone Spinning & Weaving Mills Company Ltd.,
40 ITR 142 (SC), relied on.
CITv. S. V. Angidi Chettiar, 44 ITR 739 (SC), distinguished.
Dooars Tea Co. Ltd. v. Commissioner of Agricultural Income Tax, West
Bengal, 44 ITR 6 (SC); CIT (Central) Delhi v. Harparshad & Co. P. Ltd., 99
...... ,-
ITR 118 (SC); C!Tv . .J.H. Got/a, 156 ITR 323 (SC), referred to.
H
Modi Cement Ltd. v. Union of India & Ors., 193 ITR 91 (Cal); Inda-
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'
~
-1
VIRTUAL SOFT SYSTEMS LTD. i·. COMMNR. OF INCOME TAX, DELHI
291
,. Gulf Fertilizers & Chemicals Corporation Ltd. v. Union of India & Anr., 195
ITR 485 (All); JK. Synthetics Ltd. v. ACIT, 200 ITR 584 (Del); C.R. Niranjan
187 ITR 280 (Mad) and C/Tv. N. Krishnan, 240 ITR 47 (Ker), referred to.
1.3. Only after the amendment made by the Finance Act, 2002, the
Explanation 4 of Section 271(1) (c) dealt with the situation of an assessee
having returned a loss and where even after addition of concealed income by
the assessee, the end result was still an assessed loss. This situation was not
dealt with at all by the Explanation to section 271(1) (c) prior to its amendment
by the Finance Act, 2002. [Para 56) (312-G)
P.R. Basavappa & Sons v. CIT, 243 ITR 776 (Kar)] and CIT v.
Chemiequip Ltd, 265 ITR 265 (Born), overruled.
2.1. Section 271 of the Income Tax Act, 1961, being a penal provision,
,
hai to be construed strictly and narrowly and not widely or with the object of
advancing the object and intention of the Legislature. [Para 24] (301-D)
'
Bijaya Kumar Agarwala v. State of Qrissa, (1996] 5 SCC 1; CIT v.
Vegetable Products Limited, 88 ITR 192 (SC); Tolaram Relumal v. State of
Bombay, AIR (1954) SC 496 and C/Tv. TV. Sundaram Iyengar & Sons (P)
Ltd., 101 ITR 764 (SC), referred to.
CWTv. Ram Narain Agrawal, 106 ITR 965 (All); TMT Thangalakshmi
v. /TO, 205 ITR 176 (Mad); C/Tv. A.K Das, 77 ITR 31 (Cal) and Engineers
lmpex Pvt. Ltd. & Ors. v. D.D. Sharma, 244 ITR 247 (Del), referred to.
2.2. Where the predominant majority of the High Courts have taken a
certain view of the interpretation of a certain provision, the Supreme Court
would lean in favour of the predominant view. [Para 31) (304-D]
C/Tv. Podar Cement Pvt. Ltd & Ors. 226 ITR 625 (SC); C/Tv. P.l.
Chemicals 210 ITR 830 (SC) and C/Tv. Kera/a State Industrial Development
Corporation Ltd., 233 ITR 197 (SC), referred to.
A
B
c
D
E
F
2.3. The amendment made to Section 271 of the Income Tax Act, 1961 G
by the Finance Act, 2002 only stated that the amended provision would come
into force with effect from 1.4.2003. The Statute nowhere stated that the said
a1,11endment was either clarificatory or declaratory An amendment Can be
considered to be declaratory and clarificatory only if the statue itself expressly
and unequivocally states that it is a declaratory and clarificatory provision. If H
292
SUPREME COURT REPORTS [2007)2 S.C.R.
A there is no such clear statement in the statue itself, the amendment w~I not
be considered to be merely declaratory or clarificatory. A statement in the
Notes on Clauses cannot possibly bind the Court when even a statement in
the statute itself is not regarded as binding or conclusive. [Paras 51 and 53[
(311-B-H; 312-A[
B
Sakuru v. Tanaji, [ 1985( 3 SCC 590; Harding & Anr. v. Commissioner
of Stamps for Queensland, (1898) Appeal Cases 769; B. Rajagopal Reddy
(Dead) by Lrs. & Ors. v. Padmini Chandrasekharan (Dead) by Lrs., (1995) 2
SCC 630; CITv. Patel Brothers & Co. Ltd. & Ors., 215 ITR 165 (SC) and
Sedco Forex International Drill Inc. & Ors. v. CIT & Anr., 279 ITR 310 (SC),
C referred to.
2.4. In the absence of an express provision or clear implication, the
Legislature does not intend to attribute to the amending provision, a greater
retrospectivity than is expressly mentioned. A taxing provision imposing
liability is governed by the normal presumption that is not retrospective. There
D is nothing in the language of Section 271(1) (c) as amended by the Finance
Act, 2002 w.e.f. 1.4.2003 to suggest that the amendment is retrospective. The
same being in the nature of a substantive amendment would be prospective, in
the absence of any indication to the contrary. (Paras 54 and 55) (312-B-E[
S.S. Gadgil, ITO, Bombay v. Lal & Co., 53 ITR 231 SC; KM Sharma v.
E ITO, 254 ITR 772 SC; Gem Granites v. CIT, 221 ITR 322 SC and Brij Moh.::m
v. CIT, New Delhi, 120 ITR 1 SC, referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 7115 of2005.
From the Judgment and final Order dated 29.7.2005 of the High Court
F of Delhi at New Delhi in LT.A. No. 340/2004.
WITH
C.A. No. 345 of2006, C.A. No. 1340 of2006, C.A. No. 3390 of2006, C.A.
No. 5219 of2006, C.A. No. 5221 of2006, C.A. No. 5220 of2006, C.A. No. 5218
G of2006 and C.A. No. 4367 of2006
S. Ganesh, K. Radhakrishnan, D.N. Sawhney, M.P. Rastogi, K.N. Ahuja,
'
Harinder Mohan Singh, P.N. Monga, S.S. Ray, Manu Monga, Rakhi Ray,
,>n
Bhargava V. Desai, Rahul Gupta, B.V. Desai, Kavita Jha, Vinay Yaish, Rahul
Gupta, Rahul Yadav, K.K. Senthilvelan, Gaurav Dhingra, Arijit Prasad,
H Chidananda, B.V. Balaram Das, Vivek Kohli, SubramoniumPrasad and Gopal
VIRTUAL SOFT SYSTEMS LTD. v. COMMNR OF INCOME TAX, DELHI [BHAN, J.] 293
-~
Krishnan R for the appearing parties.
A
The Judgment of the Court was delivered by
BHAN, J. I. We propose to dispose of these appeals as has been done
by the High Court, by a common order, as the point involved in all these
appeals is the same.
B
2. Facts are taken from Civil Appeal No. 7115 of2005.
~·
3. Commissioner of Income Tax, Delhi-I, the respondent herein, filed IT A
No. 340 of 2004 in the High Court of Delhi against the order passed by the
Income Tax Appellate Tribunal (for short "the Tribunal") under Section 260A c
of the Income Tax Act. Assessee also filed IT A No .... of 2004 being aggrieved
against a part of the order of the Tribunal. High Court allowed the IT A No.
340 of 2004 filed by the Revenue and held that the Tribunal was not right in
deleting the penalty imposed under Section 27l(l)(c) oft,he Income Tax Act,
1961 (for short "the Act") merely on the ground that the total income of the D
assessee was assessed at a minus figure/loss. Tribunal had allowed the
assessee's appeal remitting the penalty imposed by the assessing officer
'\
under Section 271(1)(c) relating to the assessment year 1996-97, relying upon
-(
the decision of the Punjab High Court in CIT v. Prithipal Singh & Co., 183
!TR 69, which was affirmed by this Court in CIT v. Prithipal Singh & Co.,
Civil Appeal No. 1961of1996 dated 27.07.2000, reported in 249 !TR 670 (SC). E
4. In the appeal filed by the Revenue in the High Court of Delhi, the
following two questions of law were framed:
"I. Whether the IT AT was right in deleting the penalty imposed under
section 271(1)(c) of the Income Tax Act, 1961 on the ground that the F
-1
total income of the assessee has been assessed at a minus figure/
loss?
2. Whether the IT AT was justified in holding that the judgments in
Prithipal Singh 's case (183 !TR 69 and 249 !TR 670) will apply even
after insertion of Explanation 4 to Section 271 (I)( c) of the Income Tax G
Act, 1961 with effect from 1.4.1976?
'
~
FACTS (C.A. NO. 7115 OF 2005)
- -~,
5. For the assessment year 1996-97, the assessee-appellant returned an
income of Rs. 1,32,44,507 .29 subject to depreciation. The depreciation claimed H
294
SUPREME COURT REPORTS (2007] 2 S.C.R.
A for the year was Rs.1,47,97,995.01 computed as under:-
,,....
Depreciation for Assessment year
Rs. 1,32,44,507 .29
1996-97
' .
Unabsorbed depreciation for
Rs. 15,53,487.72
B Assessment Year 1995-96
Total =Rs. 1,47,97,995.0100
6. Accordingly, the appellant filed a "nil" return and carried forward the
unabsorbed depreciation of Rs. 15,53,487.72 (Rs. 1,47,97,995.01 = Rs.
·~
'<::;'
c 1,32,44,507.29 =Rs. 15,53,487.72) to the following year. By the assessment
order dated 30.03.1999, the Deputy Commissioner oflncome-Tax assessed the
appellant's income at a figure of Rs. 47,03,120.00. This was because:
(i)
Disallowance of claim of
Rs. 57,51,520.00
D
depreciation of purchase and
lease of cinematographic films
held to be bogus
)
(ii)
Reduction of claim of
Rs. 10,28,462.00
y
depreciation in respect of leasing
E
vehicles from 40% to 20%.
(iii) Unexplained share application
Rs. 19,16,000.00
money added back as unexplained
cash credits under Section 68
F
(iv) Lease rentals of cinematographic
Rs. 63,43,750.00
films held to be bogus and
assessed as income from other
sources
G
7. The Commissioner of Income Tax set aside the order of assessment
and directed the Assessing Officer to frame a fresh assessment and fresh
proceedings concluded with an order of assessment dated 19.03.2002 in which
it was found that the appellant had a loss of Rs. 11,02,255.00. It was because:
> -
(i)
Since the leasing transactions in respect of cinematograph films
H
were found to be bogus and the depreciation of Rs. 57,51,520.00
y·,,
VIRTUAL SOFT SYSTEMS LTD. v. COMMNR. OF INCOME TAX, DELHI [BHAN, J.] 295
was not allowed, nor could the lease rental of Rs. 63,43,750.00 be A
-4:'
added as income.
(ii)
Therefore, the Appellant's income was reduced to Rs. 68,00,757.00
(returned income, Rs. 1,32,44,507.00 = Rs. 63,43,750.00 = Rs.
68,00,757.00)
(iii) The appellant was able to prove some sources of the share B
application money and the amount of Rs. 19,16,000.00 added back
was reduced to Rs. 1, 15,000.00
'>'.'.
(iv) Adding the above amount, the Appellant's income became Rs.
~·
69,15,757.00 (Rs. 68,00,757.00 +Rs. 1,15,000.00 =Rs. 69, 15, 757.00) c
(v)
Depreciation on leased vehicles.claimed at 40% was reduced to
20% (as in the original assessment) and an amount of Rs.
I 0,28,462.00 was disallowed.
·-
(vi) Accordingly, against the total amount of depreciation claimed at
Rs. 1,47,97,994.00, an amount of Rs. 67,79,982.00 (Rs. 57,51,520.00 D
+Rs. 10,28,462.00 =Rs. 67, 79, 982.00) was disallowed.
"i..
(vii) Therefore, the depreciation allowable was Rs. 80, 18,011.00 (Rs.
1,47,97,995.00 =Rs. 67,79,982.00 =Rs. 80,18,011.00)
-r
(viii) Making a deduction on account of depreciation as in subParagraph (vii) above, the Appellant was assessed at a loss of E
Rs. 11,02,255.00 (Rs. 69,15,757.00)- Rs. 80,18,012.00 = - Rs.
11,02,255.00)
8. In this manner, the carry-forward loss of Rs. 15,53,487.72 originally
claimed by the appellant was reduced to Rs. 11,02,225.00.
F
'
9. By order dated nil September, 2002, the Deputy Commissioner of
Income Tax levied a penalty of Rs. 31,71,692.00. He distinguished the decision
of the Punjab and Haryana High Court in Prithipal Singh 's case (supra),
which was affirmed by this Court on the ground that it related to the
assessment year 1971-72 when Explanation 4 to Section 271 (I)( c) had not
G
been introduced. He concluded the issue against the appellant on the basis
~-
of the decision of the Kamataka High Court in P.R. Basavappa & Sons v. CIT,
•.)..
243 !TR 776 (Kamataka). He added the amounts disallowed i.e. Rs. 10,28,462.00,
-....
Rs. 57,51,520.00 and Rs. I, 15,000.00. He conclt;,ied that by adding these
figures the total amount of Rs. 68,94,982.00 was the income in respect of
which inaccurate particulars had been furnished. The tax was computed at H
296
SUPREME COURT REPORTS [2007] 2 S.C.R.
A Rs. 31, 71,692.00. It was held that the tax sought to be evaded was Rs.
31, 71,692.00 and imposed penalty of Rs. 31,71,692.00 ( 100% of the tax). The
Commissioner of Income Tax confirmed the order of the assessing officer on
24.12.2002. The Tribunal by its order dated 11.05.2004 reversed the order of
the Commissioner of Income Tax by applying Prithipal Singh 's case (supra).
B Revenue filed an appeal under Section 260A of the Act which was allowed
by the High Court by the impugned order.
I 0. The point involved before the High Court was, as to whether
penalty was leviable under Section 271 (lXc)(iii) read with Explanation 4
thereto which came on the statute book w .e.f. 01.04.1976, in a case where the
c return filed was one of loss and the assessment made by the assessing officer
was at a reduced amount of loss.
11. Revenue's c~.se before the High Court was that after 1.4.1976
Explanation 4 had made a material change and even though no tax was
payable, as a result of the assessment framed at a loss, it will still fall under
D Section 271 (I)( c )(iii) attracting levy of penalty in so far as the effect of
reduction of loss from the returned loss, had resulted in concealment of
income, the assessee having filed inaccurate particulars of its income in filing
the loss return. In support of this proposition, the Revenue placed reliance
on the interpretation of Explanation 4 which added the words "tax sou_ght to
E
be evaded". Revenue's contention was that Prithipal Singh 's case (supra)
decided by the Punjab and Haryana High Court pertaining to the assessment
year 1970-71 was prior to the amendment ofFinance Act, 1975 and therefore,
was not applicable. For the same reason, the decision of this Court in affirming
the decision of the Punjab and Haryana High Court in Prithipal Singh 's case
(supra) was also not applicable. Revenue had also placed reliance on the
F decision of the Karnataka High Court in P.R. Basavappa 's case (supra). In this
case Karnataka High Court distinguished the view taken in Prithipal Singh 's
case (supra) on facts stating that the said decision related to the period prior
to 1.4.1976 and therefore, has no application as Explanation 4 inserted w.e.f.
1.4.1976 in the statute book was not considered by the Punjab and Haryana
G
High Court.
12. The High Court answering the second question first, concurred with
the view taken by the Karnataka High Court and dissented from the view
taken by the Punjab and Haryana High Court in Prithipal Singh 's ca•e
(supra), distinguishing the same on facts stating that the said decision related
H to the period prior to 1.4.1976 and therefore, had no application because
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.,
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,
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VIRTUAL SOFT SYSTEMS LTD. '" COMMNR OF INCOME TAX, DELHI [BHAN, J.] 297
~
Explanation 4 inserted in Section 271(1)(c) with effect from 1.4.1976 in the A
statute was not considered by the Punjab and Haryana High Court and for
similar reason held that the decision of this Court upholding the decision of
the Punjab and Haryana High Court in Prithipal Singh 's case (supra) wes also
not helpful to the assessee in such a case.
13. Answering the first question also against the assessee and in favour B
of the Revenue, the High Court referred to some illustrations in the impugned
order and concluded that the Tribunal was not right in deleting the penalty
x
imposed under Section 271 (I)( c) of the Act, merely on the ground that the
7'
total income of the assessee was assessed at a minus figure/loss. In arriving
/
at this decision on question no. I, the Delhi High Court in the impugned order c
dissented from the view taken by Madras High Court, reported as CITv. C.R.
Niranjan, 187 ITR 280 (Madras), CIT v. N. Krishnan, 240 ITR 47 (Ker.).
--
Reference was made to CIT v. S. V. Angidi Chettiar, 44 ITR 739 (SC) which
referred to the expression 'income tax" this judgment being under Section
28(1)(c) of the Income Tax Act, 1922, Dooars Tea Co. Ltd. v. Commissioner
of Agricultural Income-tax, West-Bengal, 44 ITR 6 (SC) referring to the D
expression "total income", CIT (Central) Delhi v. Harparshad & Co. P. Ltd.,
"<.
99 ITR 118 (SC), again referring to the expression word "total income".
~
Reference is also made to CIT v. J.H. Got/a, 156 ITR 323 (SC) for the
proposition as to whether word income would include loss. In this connection,
the High Court also referred to CIT, Bombay v. Elphinstone Spinning & E
Weaving Mills Company Ltd., 40 ITR 142 (SC).
14. Section 271(1)(c) was again amended by the Finance Act, 2002.
Subsequent amendment was brought to the notice of the Bench hearing the
Appeal. In the impugned order, the High Court did not express any opinion
~
and observed inter alia that while the Revenue stated that the amendment F
brought about by the Finance Act, 2002, w.e.f. 1.4.2003, was declaratory in
nature, therefore, retrospective in operation and the sabmission on behalf of
the assessee was that the same being substantive in nature and being an
amendment to the statute could not be said to be operative retrospectively.
The High Court as stated above, did not express any opinion on this aspect
G
of the matter and held that for imposition of penalty after 1.4.1976 it was not
.•.
A
necessary that there must be a positive income and the levy of tax, for the
penalty to be imposed under Section 271(1)(c) of the Act.
15. Learned counsels appearing in different appeals filed by the assessee
assailed the impugned judgment by contending that provisions of Section H
·\j
298
SUPREME COURT REPORTS [2007] 2 S.C.R.
A 27l(l)(c)(iii) prior to 1.4.1976 and after its amendment by the Finance Act, 1975
with effect from 1.4.1976, later provisions being applicable to the assessment
year in question, being substantially the same, the High Court in the impugned
order erred in distinguishing Prithipal Singh 's case (supra), and taking a view
contrary to the view taken in the said case. They referred to a number of
B
judgments of various High Courts in support of their contention. According
to them even after 1.4.1976, if there is no positive income, no taxes was
leviable, and therefore penalty cannot be levied for concealment of income.
The view that with the insertion of Explanation 4 w.e.f. 1.4.1976, penalty is
leviable even in cases where the return filed is of loss and assessment framed
~
is also of loss, as expressed by the Karnataka High Court in 243 ITR page
c 776, P.R. Bassappa 's case (supra) and also by the Bombay High Court in CIT
v. Chemiequip Ltd., 265 ITR page 265 do not lay down the correct law as
these decisions run contrary to the law laid down by this Court in CIT v.
Prithipal Singh & Co. (Supra). It is contended that the contrary view in any
case, is of no assistance to the Revenue as against large number of other
D
decisions of different High Courts. It was contended that it has been laid
down by this Court in CIT v. Podar Cement Pvt. Ltd. & Ors., 226 ITR 625
at 648 that where various High Courts have taken different views on a
..-
particular point, then that view which is in favour of the assessee should be
adopted.
y
E
16. It was contended that income will not include loss as income means
positive income on which tax is leviable which would not include loss income
as no tax would be payable on a loss income. In the context of provisions
of Section 271 (I)( c ), as it existed prior to 2002 amendment, in the absence of
no tax, no penalty could be levied. This submission is based with reference
to the provisions contained in Section 143 (IA) of the Act before its amendment
F which came on the Statute in 1993 with retrospective effect from 1.4.1989. In
support of this contention, the asseessee invited our attention to the decisions
of various High Courts in Modi Cement Ltd. v. Union of India & Ors., 193
ITR 91 (Del.), Indo-Gulf Fertilizers and Chemicals Corporation Ltd. v. Union
of India & Anr., 195 ITR 485 (All.) and CITv. Zam Zam Tanners, 279 ITR page
G 197 (All).
>-
17. Referring to the amendment carried in Section 271 (I)( c )(iii) and
~
Explanation 4 by the Finance Act, 2002 where the expression used in Explanation
4 "the amount of tax sought to be evaded" has been amended providing
specifically that where the filing of return and the assessment had the effect
H of reducing the loss would entail the penalty. It is contended that the
;
VIRTUAL SOFT SYSTEMS LTD. v. COMMNR. OF INCOME TAX, DELHI [BHAN, J.) 299
--- 4
Legislature has now deliberately enacted such provision to fill in the lacuna A
in law and also to put an end to the controversy which existed between the
High Courts in interpreting the laws after 1.4. 1976.
18. It was also contended that the view taken by the Bombay High
Court in CIT v. Chemiequpi Ltd. (supra) that the amendment in Finance Act,
2002 is retrospective according to them is bad in law. That the amendment is B
not clarificatory in nature. That the penalty being penal, provisions .could not
be brought on the statute book with retrospective effect.
'r
~
19. As against this, the Counsel for the Revenue supported the judgment
for the reasons recorded in the impugned order.
c
20. We have heard the counsels for the parties at length.
~-
;....·
21. Section 271(1)(c) and the subsequent amendments carried out in the
said section with effect from IA.1976 (as amended by the Taxation Laws
(Amendment) Act, 1975) and the al'lendment by Finance Act, 2002 (with effect D
from 1.4.2003) on the interpretation of which the entire controversy in the
·-..,
present appeal rests are:-
-v
"271. Failure to furnish returns, comply with notices, concealment of
income, etc.-(!) If the Income tax Officer or the Appellate Assistant
Commissioner in the course of any proceedings under this Act, is E
satisfied that any person-
(a) xxxxx; or
,.,..
(b) xxxxx; or
~
( c) has concealed the particulars of his income or furnished inaccurate F
particulars of such income,
he may direct that such person shall pay by way of penalty,-
(i)xxxxx
<
(ii)xxxxx
G
.>L_
A
(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
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SUPREME COURT REPORTS [2007] 2 S.C.R.
A
been furnished. "
[Emphasis supplied]
22. Sub-clause (iii) of sub-section (I)( c) of Section 271 after its amendment
with effect from 1.4.1976 and the Explanation 4 added thereto read as under:-
B
"(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 tax sought to be evaded
by reason of the concealment of particulars of his income or the
-r
furnishing of inaccurate particulars of such income."
'
c
[Emphasis supplied]
"Explanation 4 : For the purposes of Clause (iii) of this sub-section,
the expression "the amount of tax sought to be evaded',-
D
(a) in any case where the amount of income in respect of which
partici.lars have been concealed or inaccurate particulars have been
furnished exceeds the total income assessed, means the tax that would
have been chargeable on the income in respect of which particulars
_,.
have been concealed or inaccurate particulars have been furnished
y
had such income been the total income;
E
(b) in any case to which Expln. 3 applies, means the tax on the total
income assessed;
(c) in any other case, means the difference between the tax on the
total income assessed and the tax that would have been chargeable
F
had such total income been reduced by the amount of income in
respect of which particulars have been concealed or inaccurate
'11
particulars have been furnished."
[Emphasis supplied]
G
23. Sub-clause (iii) of Section 271(1}(c) after its amendment by Finance
Act, 2002 with effect from 1.4.2003 and the amendment to clause (a) of
Explanation 4 are reproduced below:-
,;..
$4
"(iii) in the cases referred to in clau~e ( c ), in addition to tax, if any,
payable by him, a sum which shall not be less than, but which
H
shall not exceed three times, the amount of tax sought to be
-j,
VIRTUAL SOFT SYSTEMS LTD. v. COMMNR OF INCOME TAX, DELHI [BHAN, J.) 30 J
evaded by reason of the concealment of particulars of his income A
or the furnishing of inaccurate particulars of such income."
"Explanation 4 : For the purposes of Clause (iii) of this sub-section,
the expression "the amount of tax sought to be evaded",-
(a)
in any case where the amount of income in respect of which B
particulars have been concealed or inaccurate particulars have
been furnished has the effect of reducing the laws declared in
the return or converting that loss into income, means the tax
that would have been chargeable on the income in respect of
which particulars have been concealed or inqccurate particulars
have been furnished had such income been the total income; C
[Emphasis supplied]
24. Section 271 of the Act is a penal provision and there are well
established principles for the interpretation of such a penal provision. Such
a provision has to be construed strictly and narrowly and not widely or with D
the object of advancing the object and intention of the legislature.
25. This Court as well as the various High Courts of the country have
1
consistently held that the statute creating the penalty is the first and the last
consideration and must be construed within the term and language of the
particular statute. In Bijaya Kumar Agarwala v. State ofOrissa, [1996] 5 SCC E
1, it has been held by this Court in paras 17 and 18 as under:-
"17. Strict construction is the general rule of penal statutes. Justice
Mahajan in Tolaram Re/umal v. State of Bombay, AIR (1954) SC 496
at pages 498-499, stated the rule in the following words:
"(I)f two possible and reasonable constructions can be put upon
a penal provision, the court must lean towards that construction
which exempts the subject from penalty rather than the one
which imposes penalty. It is not competent to the court to stretch
the meaning of an expression used by the Legislature in order to
F
carry out the intention of the Legislature."
G
18. The same principle was echoed in the Judgment of the five Judge
Bench in the case of Sanjay Dutt v. State through C.B.J., [1994] 5 SCC
402, which approved an earlier expression of the rule by us in Niranjan
Singh Karam Singh Punjabi v. Jitendra Bhimraj Bijjaya, [1990] 4
sec 76, at page 86 para 8.
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302
SUPREME COURT REPORTS [2007] 2 S.C.R.
A
"Therefore, when a law visits a person with serious penal
consequences extra care must be taken to ensure that those
whom the legislature did not intend to be covered by the express
language of the statute are not roped in by stretching the language
of the law."
B
Keeping in view the rules of interpretation of criminal statue and the
language and intent of the Order and the Act, we find ourselves in
agreement with the view expressed by Ranganath Misra, J. as he then
was, in Prem Bahadur v. State ofOrissa, 1978 Cri. LJ 683, at page 685,
para 4:
c
D
E
"The Orissa Order does not make possession without a licence
an offence. Storage, however, has been made an offence. Between
"possession" and "storage" some elements may be common and,
therefore, it would be appropriate to say that in all instances of
storage there would be possession. Yet, all possession may not
amount to storage. "Storage" in the common parlance meaning
connotes the concept of continued possession. There is an
element of continuity of possession spread over some time and
the concept is connected with the idea of a regular place of
storage. Transshipment in a moving vehicle would not amount to
storage within the meaning of the Orissa Order."
26. To the similar effect, is the view taken by this Court and the various
High Courts in C!Tv. Vegetable Products Limited, 88 ITR 192, 195 SC, CWT
v. Ram Narain Agrawal, I 06 ITR 965-968 (All.), Tolaram Relumal v. State of
Bombay, AIR (1954) SC 496, at page 498, TMT Thanga/akshmi v. ITO, 205 ITR
176 Mad., CJTv. A.K. Das, 77 ITR 31, at page 52 (Cal.), CITv. T. V. Sundaram
p Iyengar & Sons (P) Ltd., 101 ITR 764, at page 773 (SC) and Engineers lmpex
Pvt. Ltd. & Ors. v. D.D. Sharma, 244 !TR 247 (Del.).
27. Every statutory provision for imposition of penalty has two distinct
components: -
G
(i)
That which lays down the conditions for imposition of penalty.
H
(ii)
That which provides for computation of the quantum of penalty.
Section 271(l)(c) and clause (iii) relate to the conditions for imposition of
penalty, whereas, on the other hand, Explanation 4 to Section 27l(l)(c) relates
to the computation of the quantum of penalty.
y
y
I·
VIRTUAL SOFT SYSiEMS LTD. v. COMMNR OF INCOME TAX, DELHI [BHAN, 1.l 303
28. The provisions of Section 271(I)(c)(iii) prior to 1.4.1976, and after its A
amendment by the Finance Act, 1975 with effect from 1.4.1976, later provisions
being applicable to the assessment year in question, being substantially the
same except that in place of the word "income" in sub clause (iii) to sub
clause (c) of Section 271 prior to its amendment by Finance Act, 1975, the
expression "amount of tax sought to be evaded" have been substituted. B
Explanation 4 inserted for the purpose of clause (iii) where the expression othe
amount of tax sought to be evaded", was inserted had in fact made no
difference in so far as the main criteria, namely, absence of tax continued to
exist, prior to or after 1.4.1976, changing only the measure or the scale as to
the working of the penalty which earlier was with reference to the "income" and
after the amendment related to the "tax sought to be evaded." The sine qua C
non which was there prior or after the amendment on 1.4.1976 to the fact that
there must be a positive income resulting in tax before any penalty could be
· · levied continued to exist. The penalty imposed was :n "addition to any tax.
If there was no tax, no penalty could be levied. The return filed declaring loss
and assessment made at a reduced loss did not warrant any levy of penalty
within the meaning of Section 271 (I)( c )(iii) with or without Explanation 4.
D
29. Contention of the appellant is supported by the decisions of various
High Courts reported in Prithipal 's case (supra), 183 ITR page 69 (P&H High
Court, C/Tv. Prithipal Singh & Co.) affirmed by this Court in 249 ITR page
670 (SC), CIT v. Prithipal Singh & Co., 171 CTR page 51 (P&H High Court, E
CIT v. Virendra & Co., 240 ITR page 47 (Kerala High Court, CJT.v. N.
Krishnan, 259 ITR page 229 (Madras High Court, Ramnath Goenka v. CJD,
276 ITR page 649 (M.P. High Court, CIT v. Jabalpur Co-operative Milk
Producers Union Ltd., 279 ITR page 197 (Allahabad High Court, C!Tv. Zam
Zam Tanners, 278 ITR page 140 (Calcutta High Court, C!Tv. R.G. Sales (P)
Ltd, all the aforesaid decisions support the assessee's contention that even F
after 1.4.1976 if there is no positive income, no taxes leviable, no penalty can
be levied for concealment of income.
30. Predominant majority of High Courts to which reference has been
made in the foregoing paragraph have taken the view that the judgment in
the Prithipal Singh's case holds good in respect of Section 271(l)(c) as it G
stood after the 1976 amendment and prior to its amendment by Finance Act,
2002. Contrary view is expressed in: -
i.
P.R. Basavappa & Sons v. CIT, 243 !TR 776 (Kar.) - Kamataka
High Court rejected assessee' s reference on the sole ground that
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304
SUPREME COURT REPORTS (2007] 2 S.C.R.
A
Prithipa/ 's case relates to assessment year 1970-71 and prior,
therefore, to the 1976 amendment.
~-
II.
CIT v. Chemiequip Ltd., 265 !TR 265 (Bomb.}-Bombay High
Court has held that after 1.4.1976, Explanation 4(a) permits the
charge on an assessee whose loss has been reduced in
B
assessment proceedings distinguishing Prithipa/ Singh 's case
and also refers to the amendment in Section 271(1)(c) by Finance
Act, 2002. In this judgment, there is no discussion or reasoning
either on the scope of Section 271(l)(c) and Explanation 4(a) or
the nature of I 976 or 2002-2003 amendments.
c
31. It has been laid down in CIT v. Podar Cement (supra), CIT v. P.J.
Chemicals, 210 ITR 830 (SC) and again in CIT v. Kera/a State Industrial
Development Corporation Ltd., 233 !TR 197 (SC) that where the predominant
majority of the High Courts have taken certain view of the interpretation of
a ct~rtain provision, the Supreme Court would lean in favour of the predominant
D
view.
32. The contention advanced by the Ld. Counsel appearing for assesses
that when there is no tax, there cannot be any penalty, is made with reference
;y
to the provisions contained in Section 143(1A) of the Act before its amendment
y
which came on the statute in 1993 with retrospective effect from 1.4.1989. The
E Finance Act, 1993 amended Section 143(1A) of the Act with retrospective
effective from 1.4.1989 to specifically provide for levy of additional tax in a
situation where the loss declared by the assessee is reduced or is converted
into his income.
33. Section 143(1A) (before its amendment in 1993) was interpreted by
F the following 3 decisions which include 2 of the Delhi High Court itself. In
r
Modi Cement Ltd. v. Union of India, 193 ITR 91 (Del.), it was held as under:-
" ..... What is important is that, as a result of the adjustments carried
out under sub-section (1) of section 143, the assessee became liable
to pay some tax. Where, as in the present case, after the adjustments
G
under section 143(1 A) are carried out, the resultant figure is still at
a loss, the question of section 143(1A) applying does not arise. As
a result of adjustments carried out, no tax is payable if the resultant
\-:
figure is a loss and a question of there being any further increase
to this does not arise. We are surprised that the Deputy Commissioner
H
having accepted a huge loss of Rs.1,32,97,22,383, still required the
...__
VIRTUAL SOFT SYSTEMS LTD. v. COMMNR. OF INCOME TAX, DELHI [BHAN, J.] 305
assess to pay a sum of Rs.38,60,075. If the interpretation sought to A
be put by the Department is correct, then there would be a lot of
force in the contention of Shri Aggarwal, learned counsel for the
petitioner, that such a provision would be clearly arbitrary and may
even have to be struck down. "
[Emphasis supplied] B
34. In Inda-Gulf Fertilizers and Chemicals Corporation Ltd v. Union
of India, 195 ITR 485 (All.), it was held as under: -
"The language of the provision quoted above itself shows that
where "the total income" after making adjustments under clause (a) of C
sub-section (I) of section 143 of the Act exceeds the total income
declared in the return, in that event an order can be passed levying
additional income-tax. In a case like the present one, there is no
income shown in the return but only losses are indicated Adjustment
resulting in reduction of the amount of losses can, by no stretch of D
imagination, be said to have increased the "total income" declared
in the return. There is no dispute that in the return, only losses are
shown even after adjustment and if there is no income, no tax or
additional income-tax can be charged. Therefore, it is immaterial that
the amount of losses are more or less. To elaborate further, it may be
pointed out that if no tax was chargeable on the losses to the tune E
of rupees sixty-two crores odd, as shown in the return submitted by
the petitioner, there would be no question of charging any additional
income-tax under section 143(1A)(a) of the Act, on the amount of
reduced losses, i.e., rupees fifty-eight crores odd. To put it plainly, if
there is no income, there would be no income-tax of any kind, whether
additional or by way of surcharge. Learned counsel for the petitioner F
has rightly placed reliance upon a case, Modi Cement Ltd. v. Union
of India, ( 1992) 193 !TR 91 (Delhi). In the said case, the order passed
under section 143(1A)(a) of the Act was quashed under similar
circumstances where, after adjustment, the assessee was still found to
be in losses."
[Emphasis supplied]
35. In JK. Synthetics L:'d. v. ACIT, 200 ITR 584 (Del.), it was held as
under: -
G
H
306
A
B
SUPREME COURT REPORTS [2007] 2 S.C.R.
"The income-tax is payable only on income which in a business
venture would imply profit after deducting therefrom deductible
expenses and not loss. If after determining the liability of the assessee
after the process of adjustment, the net result is still loss, there
cannot be any question of any further tax liability accruing and as
such, no tax would be payable much less any additional tax on the
amount by which the losses stood reduced. "
[Emphasis supplied]
36. It was because of these decisions that section 143(1A) was amended
by the Finance Act, 1993 in exactly the same manner as the Finance Act, 2002
C amended Section 271(1 )(c) and Explanation 4(a).