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TMI Blog2005 (7) TMI 60X X X X Extracts X X X X X X X X Extracts X X X X ..... tax Act, 1961 on the ground that the total income of the assessee has been assessed at a minus figure/loss? (2) Whether the Income-tax Appellate Tribunal was justified in holding that the judgments in Prithipal Singh's case ([1990] 183 ITR 69 (P&H) and [2001] 249 ITR 670 (SC)) will apply even after insertion of Explanation 4 to section 271(1)(c) of the Income-tax Act, 1961 with effect from April 1, 1976?" Facts and question 2: To supply some factual content it would be sufficient for us to refer to the facts in the case of I.T.A. No. 205/01. For the assessment year 1989-90 the assessee filed its return of income showing a loss of Rs. 2.36 crores and the assessment was completed at a loss of Rs. 1.21 crores. The Assessing Officer initiated penalty proceedings for concealment of income. After considering the response to the notices for the penalty proceedings, the Assessing Officer fixed a penalty of Rs. 1.68 crores. On appeal, the Commissioner of Income-tax (Appeals) confirmed the penalty to the extent of Rs. 56.01 lakhs and cancelled the balance amount. Both the assessee and the Revenue, approached the Income-tax Appellate Tribunal by way of separate appeals. These appeals were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of income as the assessee had furnished inaccurate particulars of its income. He computed the assessee's income at Rs. 1,47,978 and, in the course of the assessment proceedings, started penalty proceedings under section 271(1)(c) of the Act. The assessee went in appeal to the Appellate Assistant Commissioner against the order of the Income-tax Officer and the Appellate Assistant Commissioner determined the loss at Rs. 34,164 against the returned loss of Rs. 3,35,830. In the penalty proceedings, the Inspecting Assistant Commissioner (Central), Ludhiana, imposed a penalty of Rs. 3,50,000 for concealment. The assessee went in appeal to the Income-tax Appellate Tribunal which was allowed holding that no penalty could be imposed upon the assessee when it had returned a loss and it had also been assessed finally on a loss figure. Ultimately, a reference was made to the Punjab and Haryana High Court which was disposed of by the decision in Prithipal Singh [1990] 183 ITR 69. The court held: "Penalty imposed is paid in addition to the tax payable. When there is no tax payable, the question of any penalty does not arise. In fact, evasion of tax is the sine qua non for imposition of penalty. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he circumstances of the case, the Appellate Tribunal has acted rightly in law in holding that the provisions of the Explanation to section 271(1)(c) will not be attracted to the present case. The word 'income' occurring in clause (c) and (iii) of section 271(1) of the Act refers to positive income only and that no penalty could be levied against the assessee." Being aggrieved by this decision, the Revenue went up in appeal before the Supreme Court which disposed of the same (CIT v. Prithipal Singh and Co. [2001] 249 ITR 670) by the following order: "We have heard learned counsel and find that, on the facts of this case, no interference is called for. The civil appeal is dismissed. No order as to costs." It is pertinent to note that the assessment year involved in Prithipal Singh's case [1990] 183 ITR 69 was 1970-71, much before the 1976 amendment came into force on April 1, 1976, whereunder Explanation 4 was added to section 271(1) of the Act. And, although there is mention of this Explanation 4 in Prithipal Singh [1990] 183 ITR 69 (P&H) it did not arise consideration therein as the relevant assessment year was 1970-71 when this Explanation 4 was not even in the statute book. So ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble." Of course, when these observations were made, the Supreme Court order dismissing the appeal in Prithipal Singh [2001] 249 ITR 670 had not come. But, as indicated above the passing of the Supreme Court order did not alter the position that in Prithipal Singh's case [2001] 249 ITR 670 (SC) the said Explanation 4 did not at all come up for interpretation. This being the position, the answer to question No. 2 has to be in the negative. Before parting with the discussion of the Prithipal Singh cases [1990] 183 ITR 69 (P&H) and [2001] 249 ITR 670 (SC), we would like to comment on another aspect of the matter. If we closely examine the decision in Prithipal Singh [1990] 183 ITR 69 (P&H) we find that the court also decided the case on the merits with regard that existence of "concealment" as an issue of fact. This becomes clear from the following observations: "As is obvious from annexure 'B', the assessee was assessed finally at a loss figure amounting to Rs. 34,164 as pointed out at page 33 of the record. Thus, there was no income and so the motive to avoid tax during the year in question is completely missing. May be, it may give a benefit to the assessee in the coming year as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y been assessed under the Indian Income-tax Act, 1922 (11 of 1922), or under this Act, fails, without reasonable cause, to furnish within the period specified in sub-clause (iii) of clause (a) of sub-section (1) of section 153 a return of his income which he is required to furnish under section 139 in respect of any assessment year commencing on or after the first day of April, 1974, and, until the expiry of the period aforesaid, no notice has been issued to him under sub-section (2) of section 139 or section 148 and the Assessing Officer or the Deputy Commissioner (Appeals) or the Commissioner (Appeals) is satisfied that in respect of such assessment year such person has taxable income, then, such person shall, for the purposes of clause (c) of this sub-section, be deemed to have concealed the particulars of his income in respect of such assessment year, notwithstanding that such person furnishes a return of his income at any time after the expiry of the period aforesaid in pursuance of a notice under section 148. Explanation 4:- For the purpose 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 incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the entire taxable income is deemed to be the concealed income as the returned income is taken to be zero, notwithstanding the fact that a return may in fact be filed after the stipulated date. Clause (c) of Explanation 4 is the residual clause and deals with all cases of concealed income which do not fall under clause (a) or (b). Let us examine as to under what conditions each of the three clauses would be attracted. For this purpose let us use a little symbology and some mathematics. Let x be the extent of concealed income; y represents total income assessed and z stands for returned income or declared income. Because concealed income is the difference between total income assessed and returned income we get the following equation: x = y - z (Concealed income = total income assessed - returned/declared income) Clause (a) applies to situations where the concealed income exceeds the total income assessed, or where x - y > 0. This can only happen if z is negative. This is so because, from the above equation we can derive the following equation: x-y = - z And, if x - y > 0 it means that - z > 0 (because x - y = - z) and, that can only happen if z < 0 (i.e., there is a nega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p; -60 60 100 50 -50 50 90 50 -40 40 80 50 -30 30 70 50 -20 20 60 50 -10 10 50 50 &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otal income assessed (y). That only happens when the declared or returned income is negative or a loss. As the following Table (Table 2) demonstrates, it does not matter whether the total income assessed (y) is positive or negative; as long as the returned income (z) is negative and it is less than the total income assessed (y), the concealed income (x) is positive and it is in excess of the total income assessed (see the x-y column; it is 100 throughout). Table 2 ------------------------------------------------------ Difference between Concealed Total income Returned concealed income income assessed income and total income &n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; 100 110 10 -100 100 120 20 -100 100 130 30 -100 100 140 40 -100 100 150 50 -100 100 160 60 -100 100 170 &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the computation is easily done. If the intention of the Legislature was to shut out penalties in cases where the total income assessed was not positive, it would have not provided for such possibilities by specifying cases under different categories where the concealed income exceeds the total income assessed [clause (a)] and where the concealed income is equal to or less than the total income assessed [clause (c)]. Clause (c) of Explanation 4 applies only to cases where the total income assessed would be positive. Therefore, it would not be possible to hold that under clause (a) the Legislature did not contemplate the imposition of penalty where the total income assessed was not a positive figure. The special case of clause (b) of Explanation 4 essentially means a situation where z = 0 and, when this happens the entire total income assessed has to be taken to be the concealed income. This is clear from the aforementioned equation: x = y-z if z = 0, then, substituting for z, the equation becomes : x = y - 0 which implies that x = y (i.e., concealed income = total income assessed). The following Table (Table 3) makes it clear that where the returned income (z) = 0, the conceale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 50 50 0 0 60 60 0 0 70 70 0 0 80 80 0 0 90 90 0 0 100 100 0 0 110 &n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of which particulars have been concealed or inaccurate particulars have been furnished. Simply stated it means the difference between the tax on total income assessed (y) and the tax calculated on the returned income (z). The following Table (Table 4) which pertains to cases under clause (c) of Explanation 4 would enable us to understand this better. Take the case where the returned income is 110 and the total income assessed is 210. In such a situation, the "amount of tax sought to be evaded", would be the difference between the tax on 210(y) and the tax on 110(z). To take this example further, let us assume a flat tax rate of 10%. The tax on 210 would be 21 and the tax on 110 would be 11. Accordingly, the "amount of tax sought to be evaded" would be the difference between 21 and 11, which comes to 10. The penalty, therefore, in this case could range from 10 to 20 (being twice the "amount of tax sought to be evaded"). Table 4 ------------------------------------------------------ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; -70 100 180 80 -80 100 190 90 -90 100 200 100 -100 100 210 110 -110 100 220 120 -120 100 230 130 -130 100 240 140 &nb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ification made by the Legislature is between cases where the returned income is negative [clause (a)] and where the returned income is greater than or equal to zero [clause (b)]. And, of course, the special case of clause (b). The meaning of the provisions and in particular Explanation 4 is very clear. In our view, the legislative intent, and, that is what we are to gather, is that in respect of imposition of a penalty for concealment, the issue of the total assessed income being positive or negative does not arise at all. We may note that there is also a logical explanation for not excluding the cases of concealed income from the imposition of penalty where the returned and assessed incomes are both negative. Let us take an example. Assume that the returned income is a loss of Rs. 3 crores and the assessed total income is a loss figure of Rs. 1 crore because of a concealed income of Rs. 2 crores. If the view expressed by the respondents were to be accepted then no penalty could be imposed although concealed income of Rs. 2 crores has been unearthed. Now, let us take the case of an assessee who returned an income of Rs. 2 lakhs and upon assessment it was increased to Rs. 2.10 lakh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istrict Magistrate, Thana, AIR 1957 SC 23, 26 and CIT v. Venkateswara Hatcheries P. Ltd. [1999] 237 ITR 174 (SC); [1999] 3 SCC 632. Looking at the said provisions including the said Explanation 4, it does appear to us that the expression "in addition to any tax payable" merely signifies that the penalty payable is over and above any tax that may be payable. It does not mean that tax being payable is a condition precedent for the penalty being payable. It was agreed by all counsel appearing for the respondents that where the total income assessed was positive and there was concealed income found, penalty was imposable. In fact, it was argued by them and in particular by Mr. Ajay Vohra that a case of change from a higher loss to a lower loss would not be covered under the said Explanation 4, but a case where a returned loss is transformed into an assessed positive income would fall under the said Explanation 4. Now, let us take an example of such a nature. Let us assume that the returned income was a loss of Rs. 1 crore and the total income assessed was Rs. 100. Here, no tax would be payable as the total income assessed of Rs. 100 is way below the taxable limit. Yet, the concealment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome tax payable by the assessee before penalty could be imposed is wholly unwarranted. The futility of the assumption is exhibited by the terms of clause (b). Penalty may be imposed for failure to comply with the notice under sub-section (4) of section 22 or sub-section (2) of section 23 even if the assessee has no assessable income. To the imposition of a penalty, liability to pay tax by the person against whom the penalty is sought to be imposed is therefore not a condition precedent." We may note that learned counsel appearing for the respondents spent a great degree of time attempting to show that "income" does not refer to loss unless otherwise specifically mentioned. They referred to the definitions of "income" and "total income" under sections 2(24) and 2(45) (respectively) of the Act. Many decisions were referred to. Under section 2(24) of the Act, "income" has been given an inclusive meaning. It includes items such as profits and gains, dividends, capital gains, value of perquisites etc. Section 2(45) of the Act, defines "'total income' to mean the total amount of income referred to in section 5, computed in the manner laid down in this Act". Section 5 with some differenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Agrl. I.T. [1962] 44 ITR 6 (SC) and Reserve Bank of India v. Peerless General Finance and Investment Co. Ltd. [1987] 61 Comp Cas 663 (SC); [1987] 1 SCC 424. Now, various provisions were pointed out by learned counsel for the respondents where the words "income or loss" were used. This was in an attempt to show that where the Legislature intended, it used both the words and where it did not, it referred only to income or only to loss. As indicated above, the total amount of income can be a loss. The general meaning therefore ascribed to "total income" includes both income or loss. Specific mention of both "income or loss" in a provision must be seen in the context of that provision. Taking the textual and contextual meaning of "total income" appearing in clause (a) of Explanation 4 to section 271(1) of the Act, we find that the meaning is the same - it includes both a positive figure as well as a negative figure. The Supreme Court in the case of CIT v. Harprasad and Co. P. Ltd. [1975] 99 ITR 118 had occasion to consider, inter alia, the terms "income" and "total income" in the context of the scheme of the 1922 Act. The Supreme Court considered section 2, clause (15) of the 1922 Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is not necessary to specify whether total income assessed refers to positive income or negative income (loss). Therefore, the text as well as the context requires us to construe "total income" appearing in clause (a) of Explanation 4 to section 271(1) as including loss also. Several decisions were cited by the respondents on this aspect. However, there was none which could persuade us to take a different view. Some of those decisions require to be dealt with as specific arguments were raised based on them. In CIT v. C.R. Niranjan [1991] 187 ITR 280 (Mad) it was held: "The relevant words are 'the amount of income'. The word 'income' has been defined under section 2(24) of the Income-tax Act, 1961. It is an inclusive definition and it takes into its fold not only the real income, but also such items which are not income in the natural sense of the word. Even in section 4, which is a charging section, nowhere is it stated that income includes loss. It is also significant to note that wherever it is necessary to consider loss as income, the Act specifically stated so, as can be seen from Explanation 2 to section 64. On the other hand, in sections 271(1)(c) and 271(1)(iii), nowher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counsel for one of the respondents, urged with a great degree of vehemence that the decision of the Supreme Court in the case of CIT v. Elphinstone Spg. and Wvg. Mills Co. Ltd. [1960] 40 ITR 142, clinched the issue that "total income" did not include "loss". As such, it would be necessary to examine whether this contention is legitimate. Straightaway, we may say that this Supreme Court decision is not apposite to the present appeals. The context of the expression "total income" in that decision is entirely different. The Supreme Court was considering the Finance Act, 1951. Section 2(7) of that Act provided that "for the purposes of this section and of the rates of tax imposed thereby, the expression 'total income' means total income as determined for the purposes of income-tax or super-tax, as the case may be, in accordance with the provisions of the Income-tax Act". This is entirely different from the definition in section 2(45) of the Act. Moreover, the issue before the Supreme Court was whether additional-tax could be charged when there was no taxable income. The court held that "if there is no income, there is no question of applying a rate to the 'total income' and no income- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , they submitted, that the amendments could not have retrospective operation. They relied upon CWT v. Ram Narain Agrawal [1977] 106 ITR 965 (All); CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC); K.M. Sharma v. ITO [2002] 254 ITR 772 (SC); Brij Mohan v. CIT [1979] 120 ITR 1 (SC); Gem Granites v. CIT [2004] 271 ITR 322 (SC); CCE v. Elgi Equipments Ltd. [2001] 9 SCC 601; [2001] 128 ELT 52 (SC); B.N. Sharma v. CIT [1997] 226 ITR 442 (SC). However, we need not be drawn into this discussion as we have arrived at our conclusions indicated above without considering these amendments. Hence, answering question No. 1 in favour of the Revenue, we hold that the Income-tax Appellate Tribunal was not right in deleting the penalty imposed under section 271(1)(c) of the Income-tax Act, 1961 merely on the ground that the total income of the assessee has been assessed at a minus figure/loss. Question 2 has already been answered in the negative by us. In all these appeals the Income-tax Appellate Tribunal decided against the Revenue and in favour of the assessee without going into the merits of the question in each case so as to return a positive finding of fact that the assessee in each case ..... X X X X Extracts X X X X X X X X Extracts X X X X
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