REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.    5065      OF 2008 (Arising out of SLP (C) No. 4379 of 2007)  

Commnr. of Income Tax-I, Ahmedabad ...Appellant

Versus

Gold Coin Health Food Pvt. Ltd. ...Respondent

(With C.A. No.      5066 /2008 @ SLP (C) No. 14785/2007)

J U D G M E N T

Dr. ARIJIT PASAYAT, J.

1. Leave granted.  

2. Expressing doubt about the correctness of the judgment

rendered  by  a  Division  Bench  of  this  Court  in  Virtual  Soft

Systems Ltd. V. Commissioner of Income Tax, Delhi  (2007 (9)

SCC 665),  a  reference  has  been  made  by  another  Division

Bench  by  order  dated  7.4.2008  to  a  larger  Bench.  The

question which was decided in Virtual’s case (supra) was as to

whether the penalty under Section 271 (1) (c) of the Income

Tax Act, 1961 (in short the ‘Act’) can be levied if the returned

income is a loss. This question has to be considered in the

background of the amendment made by Finance Act, 2002 (in

short ‘Finance Act’) w.e.f. 1.4.2003 in Explanation 4 to Section

271(1)(c)(iii)  of  the  Act.  In  Virtual’s case  (supra)  the

department placed reliance  on Notes  on Clauses  relating to

the aforesaid amendment to submit that the amendment was

clarificatory in nature and consequentially  it  was applicable

retrospectively.  This argument was  rejected by this Court in

para 52 of the judgment.  The Division Bench while  making

reference  was  of  the  view  that  the  true  effect  of  the

amendment was not considered, 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 a ground to hold that the

same did have the retrospective effect.  

2

3. Learned  counsel  for  the  appellant  submitted  that  the

true scope and ambit of the amendment has been lost sight of

in Virtual Soft’s case (supra). It is submitted that the purpose

behind Section 271(1) (c) is to penalize the assessee  for (a)

concealing  particulars  of  the  income;  and/or  (b)  furnishing

inaccurate  particulars  of  such  income.  Therefore,  whether

income  returned  was  a  profit  or  loss  was  really  of  no

consequence.   It is pointed out that prior to the amendment,

Section 271(1) (c)(iii) read as follows:

“(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 been furnished.”

4. It was submitted that bare reading of the provision made

the position clear that it was not necessary that income tax

must  be  payable  by  the  assessee  as  sine  qua  non  for

imposition of penalty. The word ‘any’ made the position clear

that the penalty was in addition to any tax which may be paid

by the assessee.  Therefore, even if no tax was payable, the

3

penalty was leviable. It is in that context submitted that even

prior to the amendment it could not be read to mean that if no

tax  was payable  by  the  assessee  because  of  filing a return

disclosing loss, the assessee is not liable to pay penalty even if

the  assessee  concealed  and/or  furnished  inaccurate

particulars.  Because some High Courts took the contradictory

view,  the  Parliament  clarified  the  position  by  changing  the

expression  “any’  by  “if  any”.  This  was  not  a  substantive

amendment  which created  a  penalty  for  the  first  time.  The

amendment  by the  Finance  Act  as specifically  noted in the

Notes  on  Clauses   makes  the  position  clear   that  the

amendment was clarificatory in nature and would apply to all

assessments even prior to assessment year 2003-04.  

5. Per contra, learned counsel for the assessees submitted

that the view expressed in Virtual’s case (supra) lays down the

correct  principle  in  law.  With  reference  to  para  17  of  the

judgment, it is submitted that the position was rightly noted

by various High Courts, more particularly, in Commissioner of

Income Tax v.  Prithipal Singh & Co. (1990 (183)  ITR 69). It is

4

pointed out that the revenue’s appeal before this Court was

dismissed in  Commissioner of Income Tax v.  Prithipal Singh

and Ors. (2001 (249) ITR 670).  It is submitted that there is

nothing in Section 271(1) (c) as amended by Finance Act to

suggest that the amendment is retrospective. The amendment

and the Explanation 4(a) carried out, enlarged the scope for

levying penalty under Section 271(1) (c) and, therefore, does

not  operate  retrospectively  and  is  applicable  only  w.e.f.

1.4.2003. The relevant portion in the Finance Act relating to

amendment reads as follows:

“Section 271 of  the Income Tax Act provides that the assessing Officer or the Commissioner (Appeals) shall levy penalty in cases of failure to  comply  with certain  notices  issued  in  the course  of  assessment  proceedings  and cases in  which  particulars  of  income  have  been concealed or inaccurate particulars furnished.

It  is  proposed  to  amend  the  section  to include  a  reference  to  the  Commissioner  as being an authority who can initiate  any levy penalty  under  sub-section  (1)  of  the  said section.  Similar  reference  is  proposed  to  be made in Explanation 1 and Explanation 7 to the said sub-section.

Amendment on similar lines is proposed to be  made in Section 18 of  the Wealth Tax Act.

5

These  amendments will  take effect  from Ist June, 2002.

The existing provisions of clauses (ii) and (iii)  of  sub-section  (1)  of  the  said  section provide for levy of the penalty specified therein in addition to any tax payable.

It is proposed to amend the said clauses to  clarify  that  the  penalty  specified  in  them can be levied even if no tax is payable on the total income assessed.

The  Bill  further  proposes  to  amend Explanation  4  which  defines  the  expression ‘the  amount  of  tax  sought  to  be  evaded  in different circumstances, to clarify that in cases where  the  income  in  respect  of  which particulars have been concealed or inaccurate particulars  have been furnished has the effect of reducing the loss declared in the return or of  converting  the  loss  into  income,  the  tax sought  to  be  evaded  shall  be  the  tax  that would have been chargeable on the amount of such income as if it were the total income.

These  amendments will  take effect  from Ist April, 2003.”   

6. It would be of some relevance to take note of what this

Court said in  Virtual’s case (supra). Pointing out one of the

important tests at para 51 it  was observed that even if  the

statute  does  contain  a  statement  to  the  effect  that  the

6

amendment is clarificatory or declaratory, that is not the end

of  the  matter.  The  Court  has  to  analyse  the  nature  of  the

amendment to come to a conclusion whether it is in reality a

clarificatory or declaratory provision. Therefore, the date from

which the amendment is made operative does not conclusively

decide the question. The Court has to examine the scheme of

the  statute  prior to  the  amendment  and subsequent  to  the

amendment to determine whether amendment is clarificatory

or  substantive.   

7. In Reliance Jute and Industries Ltd. vs. Commissioner of

Income Tax, West Bengal (1979 (120) ITR 921) it was observed

by  this  Court  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.

Before proceeding further,  it will be necessary to  focus on the

definition of the expression ‘income’ in the statute. Section 2

(24)  defines  ‘income’  which  is  an  inclusive  definition,  and

includes  losses  i.e.  negative  profit.  The  position  has  been

elaborately  dealt  with  by  this  Court  in  Commissioner  of

7

Income Tax (Central), Delhi v. Harprasad & Co. P. Ltd. (1975

(99) ITR 118). 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 (supra).  Reference to the order by this Court  dismissing

the revenue’s Civil Appeal No.7961 of 1996  in Commissioner

of  Income  Tax v.  Prithipal  Singh and Co.   is  also  not  very

important because that was in relation to the assessment year

1970-71 when Explanation 4 to Section 271(1) ((c) was not in

existence. The view of this Court in  Harprasad’s case (supra)

leads to the irresistible  conclusion that income also includes

losses.  Explanation  4  (a)  as  it  stood  during  the  period

1.4.1976 to 1.4.2003 has to be considered in the background.  

8. It  appears that what the Finance Act  intended was to

make the position explicit which otherwise was implied. The

recommendations  of  the  Wanchoo   Committee  pursuant  to

8

which Explanation 4(a) was inserted w.e.f. 1.4.1976 needs to

be noted. At para 2.74 it was noted as follows:

"2.74  We  are  not  unaware  that  linking concealment  penalty  to  tax  sought  to  be evaded  can,  at  times,  lead to  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."

9. Reference  to  the  Department  Circular  No.204  dated

24.7.1976  reported  in  1977  (110)  ITR  21  (St.)  has  also

substantial relevance. Same reads as follows:  

"New Explanation 4 defines `the amount of tax sought to be evaded'. According to the definition, this  expression  will  ordinarily  mean  the difference between the tax on the total  income assessed  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.  In  a  case, however,  where  on setting  off  the  concealed income against  any  loss  incurred  by  the

9

assessee under other head of income or brought forward from earlier  years,  the'  total  income is reduced  to  a  figure  lower  than  the  concealed income  or even  to  a  minus  figure,  `the  tax sought  to  be  evaded'  will mean  the  tax chargeable on the concealed income as if it were the  total  income. Another  exception  to  the general definition of the expression `tax sought to  be  evaded'  given  earlier  is  a  case  to  which Explanation 3 applies. Here, the tax sought to be evaded will be the tax chargeable on the entire total income assessed."

10. A  combined  reading  of  the  Committee’s

recommendations and the Circular makes the position clear

that Explanation 4(a) to Section 271(1) (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  a  minus  figure.  Therefore,  even  during  the

period between 1.4.1976 to 1.4.2003 the position was that the

penalty  was  leviable  even  in  a  case  where  addition  of

concealed income reduces the returned loss.

10

11. When the word “income” is read to include losses as held

in Harprasad’s case (supra) it becomes  crystal clear  that even

in a case where on account of addition of concealed income

the  returned  loss  stands  reduced  and  even  if  the  final

assessed income is a loss, still  penalty was leviable thereon

even  during  the  period  1.4.1976  to  1.4.2003.  Even  in  the

Circular dated 24.7.1976, referred to above, the position was

clarified by Central Bureau of Direct Taxes (in short ‘CBDT’). It

is  stated  that  in  a  case  where  on  setting  of  the  concealed

income against any loss incurred by the assessee under any

other head of income or brought forward from earlier years,

the  total  income  is  reduced  to  a  figure  lower  than  the

concealed income or even to a minus figure the penalty would

be imposable  because in such a case “the tax sought to be

evaded” will be tax chargeable on concealed income as if it is

“total income”.  

12. Law is well  settled that the applicable  provision would

be the law as it existed on the date of the filing of the return. It

is of relevance to note that when any loss is returned in any

11

return  it need not necessarily be the loss of the concerned

previous year.  It may also include carried forward loss which

is required to be set up against future income under Section

72 of the Act. Therefore, the applicable law on the date of filing

of  the  return  cannot  be  confined  only  to  the  losses  of  the

previous accounting years.  

13. In  Commissioner  of  Wealth  Tax,  Punjab,  J  &  K,

Chandigarh, Patiala v. Yuvraj Amrinder Singh and Ors. (1985

(4)  SCC  609)  the  relevance  of  Notes  on  Clauses  was

highlighted. Para 15 reads as follows:

“15. The proviso  to sub-clause (vi)  has been reproduced above. It has the effect of cutting down  the  exemption  contained  in  the  sub- clause to some extent. It commences with the words “Provided that in the case of a policy of insurance  the  premium  or  other  payment whereon is payable during a period of less than 10  years”  and  the  argument  is  that  the italicized  words  suggest  that  the  expression “any  policy  of  insurance”  in  the  main  sub- clause must mean a policy based on human life and that too where periodical  premia are payable  and  as  such  annuity  on  life  which consists of lump sum investment followed by deferred  annual  or  monthly  payments  is

12

excluded. It is impossible to read the italicized words in the proviso in this manner which has the  effect  of  unduly  narrowing  down  the expression “any policy  of  insurance”  used  in the  main  sub-clause,  which  as  indicated earlier, is of very wide import covering all types of insurance policies like life, marine, fire, etc. In  the  first  place  the  main  provision  [sub- clause (vi)] was enacted in 1957 and continued to operate for 17/18 years till March 31, 1975 without any qualification and as such it will be absurd to attribute to the Legislature, because of the insertion of the proviso (containing the italicized  words)  in  1975,  an  intention  of having used the wide expression “any policy of insurance”  throughout  all  this  period  in  a narrow  sense  as  suggested.  Secondly,  if  the main  provision  and  the  proviso  are  read together  the  italicised  words  do  not  suggest that  any  narrow  construction,  much  less  as urged, was intended and to say so would be missing  the  real  object  or  purpose  of  the proviso. In our view the proper way to read the proviso would be to treat the main provision as creating  or  granting  an  exemption  and  the proviso  carving  out  something  from  the exemption.  The  main  provision  creates  an exemption in respect of the assessee’s “right or interest  in  any  policy  of  insurance”  and  the proviso seeks to cut down that exemption to a limited  extent,  namely  whenever  there  is  a policy  of  insurance  in  respect  whereof periodical premia are payable for a duration of less  than  10  years,  then  in  such  a  case  a proportionate exemption specified therein will be  available  to  the  assessee  irrespective  of what  type  of  policy  it  is;  the  proviso  has no other  effect.  That  such  was  the  object  or purpose of inserting the proviso will be clear if

13

regard  is  had  to  relevant  part  of  Notes  on clauses  accompanying  the  Bill  and  the relevant portion of the speech of the Finance Minister  while  introducing  the  Bill.  We  were taken through the relevant  portions of  Notes and clauses [vide 93 ITR 125 (Statutes)]  and the  speech  of  the  Hon’ble  Finance  Minister while  introducing  the  Bill  [vide  93  ITR  74 (Statutes)] and in our view far from supporting the  contention  of  counsel  for  the  Revenue these lend support to the view which we have just expressed. The relevant portion of “Notes on  clauses”  states  that,  “under  this amendment (the insertion of proviso) the value of the taxpayer’s right or interest in a policy of insurance will be exempt from tax only if the premia are payable over a period of ten years or  more.  In  cases  where  premia  are  payable over  a  period  of  less  than ten  years,  only  a proportionate  amount  of  the  value  of  the taxpayer’s  right  or  interest  in  the  policy  of insurance will be exempt from wealth tax”. The Finance Minister’s speech, though strictly not relevant  as  an  aid  to  construction, substantially  reiterates what has been stated in  the  “Notes  on  clauses”  accompanying  the Bill.  On  this  account,  therefore,  there  is  no warrant to put a narrow construction on the expression “any policy of insurance” occurring in sub-clause (vi) of Section 5(1).”

14. As noted by this Court in Commissioner of Income Tax,

Bombay and Ors. v.  Podar Cement Pvt. Ltd. and  Ors. (1997

(5) SCC 482) the circumstances under which the amendment

14

was  brought  in  existence  and  the  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  it was not so.  

15. In Principles of Statutory Interpretation, 11th Edn. 2008,

Justice  G.P.  Singh  has  stated  the  position  regarding

retrospective operation of statutes as follows:

“The  presumption  against  retrospective operation  is  not  applicable  to  declaratory statutes. As stated in Craies and approved by the  Supreme  Court:  For  modern  purposes  a declaratory  Act  may be  defined  as an Act  to remove doubts existing as to the common law, or the meaning or effect  of any statute. Such Acts are usually held to be retrospective. The usual reason for passing a declaratory Act is to set aside what Parliament deems to have been a judicial  error,  whether  in the  statement  of the  common  law  or  in  the  interpretation  of statutes.  Usually,  if  not  invariably,  such  an Act  contains  a  preamble,  and  also  the  word `declared'  as  well  as  the  word 'enacted'. But the  use  of  the  words  `it  is  declared'  is  not conclusive that the Act is declaratory for these words may, at times, be used to introduce new rules of law and the Act in the latter case will only  be  amending  the  law  and  will  not necessarily  be  retrospective.  In  determining, therefore,  the nature of the Act, regard must

15

be  had  to  the  substance  rather  than to  the Corm. If a new Act is 'to explain' an earlier Act, it  would  be  without  object  unless  construed retrospective.  An explanatory Act is generally passed  to  supply  an  obvious  omission  or  to clear  up  doubts  as  to  the  meaning  of  the previous Act. It is well settled that if a statute is  curative  or  merely  declaratory  of  the previous  law  retrospective  operation  is generally   intended.  The  language  `shall  be deemed  always  to  have  meant'  or  'shall  be deemed never to have included'' is declaratory, and  is  in  plain  terms  retrospective.  In  the absence  of  clear  words  indicating  that  the amending Act is declaratory, it would not be so construed  when  the  amended  provision  was clear and unambiguous. An amending Act may be purely clarificatory to clear a meaning of a provision  of  the  principal  Act  which  was already implicit. A clarificatory amendment of this nature will have retrospective effect and, therefore, if the principal Act was existing law when  the  constitution  came  into  force,  the amending Act also will be part of the existing law.”  

16. In Zile Singh v. State of Haryana and Ors. (2004 (8) SCC

1), it was observed as follows:

“13. It is a cardinal principle of construction that  every  statute  is  prima  facie  prospective unless  it  is  expressly  or  by  necessary

16

implication  made  to  have  a  retrospective operation. But the rule in general is applicable where  the  object  of  the  statute  is  to  affect vested rights or to impose new burdens or to impair  existing  obligations.  Unless  there  are words  in  the  statute  sufficient  to  show  the intention  of  the  legislature  to  affect  existing rights,  it  is  deemed  to  be  prospective  only —  “nova  constitutio  futuris  formam  imponere debet non  praeteritis”  — a new law ought  to regulate  what is to follow, not the past.  (See Principles of Statutory Interpretation by Justice G.P. Singh, 9th Edn., 2004 at p. 438.)  It  is not  necessary  that  an  express  provision  be made to make a statute retrospective and the presumption  against  retrospectivity  may  be rebutted by necessary implication especially in a case where the new law is made to cure an acknowledged  evil  for  the  benefit  of  the community as a whole (ibid., p. 440). 14. The  presumption  against  retrospective operation  is  not  applicable  to  declaratory statutes….  In  determining,  therefore,  the nature of the Act, regard must be had to the substance rather than to the form. If a new Act is  “to  explain”  an  earlier  Act,  it  would  be without  object  unless  construed retrospectively. An explanatory Act is generally passed  to  supply  an  obvious  omission  or  to clear  up  doubts  as  to  the  meaning  of  the previous Act. It is well settled that if a statute is  curative  or  merely  declaratory  of  the previous  law  retrospective  operation  is generally intended…. An amending Act may be purely  declaratory  to  clear  a  meaning  of  a provision  of  the  principal  Act  which  was already implicit. A clarificatory amendment of

17

this nature will have retrospective effect (ibid., pp. 468-69).

15. Though  retrospectivity  is  not  to  be presumed  and  rather  there  is  presumption against  retrospectivity,  according  to  Craies (Statute  Law,  7th  Edn.),  it  is  open  for  the legislature to enact laws having retrospective operation.  This  can  be  achieved  by  express enactment  or  by  necessary  implication  from the  language  employed.  If  it  is  a  necessary implication from the  language  employed  that the legislature intended a particular section to have a retrospective operation, the courts will give it such an operation. In the absence of a retrospective operation having been expressly given,  the  courts  may  be  called  upon  to construe  the  provisions  and  answer  the question  whether  the  legislature  had sufficiently expressed that intention giving the statute  retrospectivity.  Four  factors  are suggested  as  relevant:  (i)  general  scope  and purview of the statute; (ii) the remedy sought to be applied; (iii) the former state of the law; and  (iv)  what  it  was  the  legislature contemplated. (p. 388)  The  rule  against retrospectivity does not extend to protect from the effect of a repeal, a privilege which did not amount to accrued right. (p.392)”

17. Above  being  the  position,  the  inevitable  conclusion  is

that Explanation 4 to Section 271(1)(c)  is clarificatory and not

18

substantive.  The view expressed  to the contrary in  Virtual’s

case (supra) is not correct.  

18. So far as the appeal relating to SLP  (C ) No.4379 of 2007

is concerned, it is to be noted that learned Solicitor General

has stated that even if  the Department  succeeds  ultimately

before this Bench, they would  not demand penalty from the

assessee in that case. Similar is the position in Civil Appeal

relating to SLP(C) No.14785 of 2007.

19. The appeals are disposed of.  

………………………….J. (Dr. ARIJIT PASAYAT)

…………………………J. (P. SATHASIVAM)

………………………..J. (AFTAB ALAM)

New Delhi, August 18,  2008

19

20