TMI Blog2005 (7) TMI 60X X X X Extracts X X X X X X X X Extracts X X X X ..... JUDGMENT The judgment of the court was delivered by Badar Durrez Ahmed J.-" ... if life is not logic, income-tax is much less so ..." This batch of appeals under section 260A of the Income-tax Act, 1961 (hereinafter referred to as "the Act") arises out of separate orders of the Income-tax Appellate Tribunal (hereinafter referred to as "the ITAT") in different matters. However, the questions and issues involved are common and, therefore, we are disposing of all these appeals by this common judgment. At the commencement of the hearing, it was agreed upon by all learned counsel appearing in these appeals that I.T.A. No. 205/01 shall be taken as the lead case and be representative of the other cases. The questions which need to be answered in these appeals are: "(1) Whether the Income-tax Appellate Tribunal was right in deleting the penalty imposed under section 271(1)(c) of the Income-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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... smissed. In the result, the appeal filed by the assessee is allowed and that of the Revenue is dismissed." Clearly, the Income-tax Appellate Tribunal deleted the penalty thinking that the decisions in Prithipal Singh's case of the Punjab and Haryana High Court [1990] 183 ITR 69 and of the Supreme Court [2001] 249 ITR 670 were applicable and that the decision of the Karnataka High Court in P.R. Basavappa and Sons v. CIT [2000] 243 ITR 776 was not. To fully appreciate the scope and ambit of the questions raised in these appeals it would be necessary to examine what was exactly decided in the two Prithipal Singh cases and in what context those decisions were rendered. In CIT v. Prithipal Singh and Co. [1990] 183 ITR 69 (P H) the assessee, for the assessment year 1970-71, filed its return declaring loss of Rs. 3,35,830. The Income-tax Officer found that it was a case of concealment and suppression 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 As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per final assessment, he need not file a return. A person who sustains a loss, however, may file a return in view of sub-section (3) of section 139 of the Act if he wants to claim that the loss or any part thereof should be carried forward. The penal provisions of section 271(1)(c), therefore, are attracted only in the case of an assessee having positive income and not loss, as the question of concealment of income to avoid payment of tax would arise only in the former case. Penalty is a deterrent measure to prevent evasion of tax and when there was no tax payable, there could not be any such evasion so as to provide a scope for levying any penalty. In the present case, only the loss has been reduced and it cannot be said that the assessee had suppressed any income which would have attracted liability to tax. The question of imposition of penalty, therefore, did not arise. Thus, on the facts and in the 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 posi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would not entail otherwise. We agree with the Karnataka High Court's observation in P.R. Basavappa [2000] 243 ITR 776 to the following effect: "It is contended that income in section 271(1)(c) should be of positive figure. In CIT v. Prithipal Singh and Co. [1990] 183 ITR 69, the Punjab and Haryana High Court held that the income as envisaged in section 271(1)(c) means positive income. If the loss declared has been reduced penalty under section 271(1)(c) cannot be levied. This decision is in respect of the assessment year 1970-71, i.e., before the insertion of the above Explanation and hence cannot help the case of the assessee. For the same reason the decisions given in CIT v. India Sea Foods [1976] 105 ITR 708 (Ker), assessment year 1968-69; CIT v. C.R. Niranjan [1991] 187 ITR 280 (Mad), assessment year 1969-70 and CIT v. Jaora Oil Mill [1981] 129 ITR 423 (MP), assessment year 1968-69, are not applicable." 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] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... existing one. However, we are concerned with the post-1976 and pre-2003 position. The relevant provisions of section 271 as it stood then are as under: "271. Failure to furnish returns, comply with notices, concealment of income, etc.-(1) If the Income-tax Officer or the Appellate Assistant Commissioner in the course of any proceedings under this Act, is satisfied that any person ... (c) has concealed the particulars of his income or furnished inaccurate particulars of such income, he may direct that such person shall pay by way of penalty-, ... (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 furnishing of inaccurate particulars of such income: ... Explanation 3:- Where any person who has not previously 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 require ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hall be 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 furnishing of inaccurate particulars of such income. Now, the expression "the amount of tax sought to be evaded" is not to be considered in general terms because a specific meaning has been ascribed to it by the said Explanation 4. This Explanation 4 deals with three different and distinct situations under clauses (a), (b) and (c) thereof. Clause (a) of Explanation 4 pertains to a situation where the amount of income in respect of which particulars have been concealed or inaccurate particulars have been furnished (hereinafter referred to as "concealed income") exceeds the total income assessed. Clause (b) of Explanation 4 deals with a situation where Explanation 3 applies. By virtue of Explanation 3, since no return is filed before a specified date, 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -30 10 50 40 -40 0 50 50 -50 -10 50 60 -60 -20 50 70 -70 -30 50 80 -80 -40 50 90 -90 -50 50 100 -100 ------------------------------------------------------ Looking at the Table, one can immediately discern that the moment z becomes positive (or greater than 0), x-y becomes negative which means that x no longer exceeds y. But, clause (a) of Explanation 4 applies only to cases where the concealed income (x) exceeds the total 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 -------------------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alty is triggered under the first limb, there is no reference to whether the total income assessed is positive or negative. And, in so far as the second limb is concerned, this is absolutely irrelevant as the computation of the fictional "amount of tax sought to be evaded" can be easily done in either case. There is another way to look at the issue. This much is clear from the discussion above that clause (a) of Explanation 4 applies only to a situation where the returned income (z) is negative (a loss). The returned income could be -1 or -10000 or -100,00,000 ... So, situations, where the total income assessed (y) could be negative or positive, exist. And, under both situations, 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by, all those cases other than where z 0. Therefore, clause (c) applies where the returned income is zero or more. We have already seen that where the returned income is negative or less than 0, clause (a) is applicable. In cases falling under clause (c), the expression "amount of tax sought to be evaded" means the difference between the tax on the total income assessed (y) and the tax that would have been chargeable had such total income been reduced by the amount of income In respect 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. Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use (b), would apply in the special case specified under Explanation 3. All the present appeals are in respect of cases falling under clause (a) of Explanation 4. The assessees (respondents) in all these appeals want us to read clause (a) as excluding those cases where, although the returned income is negative and there is established concealment, the total income assessed is negative and no tax is payable thereon. We are afraid, we do not discern any such intention on the part of the Legislature in making any such exception. On the contrary, the only classification 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned such as section 271A (failure to keep, maintain or retain books of account, documents, etc.), 271B (failure to get accounts audited), 271F (penalty for failure to furnish return of income) etc. Therefore, as a general statement it cannot be said- "when there is no tax payable, the question of any penalty does not arise." The context of the words must be seen. We agree with the contention of Mr. Sanjiv Khanna, learned counsel for the Revenue, that words must be construed in the context in which they appear. He placed reliance on Shamrao Vishnu Parulekar v. District 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by him, a sum not exceeding one and a half times the amount of the income-tax and super-tax, if any, which would have been avoided if the income as returned by such person had been accepted as the correct income." When it was argued before the Supreme Court in the case of CIT v. S.V. Angidi Chettiar [1962] 44 ITR 739 that use of the expression "any tax" meant that some tax must be payable before a penalty could be imposed, it repelled the same and held: "The assumption that the expression 'any tax' used in section 28(1) is intended to indicate that there must be some 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to carry forward and for which he has filed a return under section 139(3) of the Act. So, even if we go by the definition, if the totalling of the income results in a negative figure (a loss), it would still be regarded as "total income". We may also note the opening words of section 2 of the Act-"In this Act, unless the context otherwise requires". The context in which the expression "total income" is used is also of vital importance. This is the legislative mandate. But, even if any authorities were needed for this proposition we have Dooars Tea Co. Ltd. v. Commr. of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o charge." Again, in CIT v. J.H. Gotla [1985] 156 ITR 323, the Supreme Court observed: "It can be accepted without much doubt that income would include loss." It must also be remembered that we have already held that for the purposes of imposition of penalty under section 271(1)(c) of the Act, it is not at all necessary that any tax is payable on the total income assessed. If it were linked to the payment of tax then it would be relevant to differentiate between positive income or negative income (loss). But, as penalty is not linked to the factum of payment of tax, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of tax sought to be evaded". This is an expression which has been ascribed a fictional meaning under Explanation 4 to section 271(1). It does not refer to the actual tax payable. It refers to the tax "that would have been chargeable" on the concealed income had such concealed income been the total income. So, even if there is no tax payable on the actual total income, the "amount of tax sought to be evaded" is easily quantifiable as also pointed out by us above. We are, therefore, unable to agree with the conclusion in N. Krishnan [1999] 240 ITR 47 (Ker). Mr. Sawhney, learned 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese provisions would show that the penalty for concealment of income was clearly imposable in a situation where there is a declared loss and discovery of concealment results in a reduced assessed loss. He placed reliance on CIT v. Podar Cement P. Ltd. [1997] 226 ITR 625 (SC); Allied Motors P. Ltd. v. CIT [1997] 224 ITR 677 (SC) and Brij Mohan Das Laxman Das v. CIT [1997] 223 ITR 825 (SC). On the other hand, counsel for the respondents argued that the amendments would not apply. They submitted that these amendments, though styled as declaratory, were, in fact, substantive. Accordingly, 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 q ..... X X X X Extracts X X X X X X X X Extracts X X X X
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