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CASE NO.: Appeal (civil)  7115 of 2005

PETITIONER: M/s Virtual Soft Systems Ltd

RESPONDENT: Commissioner of Income Tax, Delhi-I

DATE OF JUDGMENT: 06/02/2007

BENCH: ASHOK BHAN & DALVEER BHANDARI

JUDGMENT: J U D G M E N T

With C.A. No. 345 of 2006, C.A. No. 1340 of 2006, C.A. No. 3390 of  2006, C.A. No.   5219  of 2006 (@ SLP No. 13579 of 2006),  C.A. No. 5221 of 2006 (@ SLP No. 14629 of 2006] C.A. No.                   5220 of 2006 (@ SLP No. 14720 of 2006] C.A. No. 5218                   of 2006 (@ SLP No. 14726 of 2006) and  C.A. No. 4367 of   2006  

BHAN, J.

       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.         Facts are taken from Civil Appeal No. 7115 of 2005.          Commissioner of Income Tax, Delhi-I, the respondent  herein,  filed ITA 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 of the Income  Tax Act.  Assessee also filed ITA No\005. of 2004 being aggrieved  against a part of the order of the Tribunal.  High Court allowed  the ITA No. 340 of 2004 filed by the Revenue and held that the  Tribunal was not right in deleting the penalty imposed under  Section 271(1)(c) of the Income Tax Act, 1961 (for short "the  Act") merely on the ground that the total income of the  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 ITR  69, which was affirmed by this Court in CIT v.  Prithipal  Singh & Co., Civil Appeal No. 1961 of 1996 dated 27.07.2000,  reported in 249 ITR 670 (SC).    In the appeal filed by the Revenue in the High Court of  Delhi, the following two questions of law were framed:

" 1.  Whether the ITAT 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?

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2.  Whether the ITAT was justified in holding that  the judgments in Prithipal Singh’s case (183 ITR 69  and 249 ITR 670) will apply even after insertion of  Explanation 4 to Section 271(1)(c) of the Income  Tax Act, 1961 with effect from 1.4.1976?

FACTS (C.A. NO. 7115 OF 2005)

       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 for the year was               Rs.1,47,97,995.01 computed as under:-

Depreciation for Assessment year   1996-97

Rs. 1,32,44,507.29 Unabsorbed depreciation for  Assessment Year 1995-96

Rs.    15,53,487.72  Total = Rs. 1,47,97,995.01

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 \026 Rs. 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 of Income-Tax assessed  the appellant’s income at a figure of Rs. 47,03,120.00.  This  was because: (i)

Disallowance of claim of  depreciation of purchase and  lease of cinematographic films  held to be bogus

Rs. 57,51,520.00 (ii) Reduction of claim of  depreciation in respect of leasing  vehicles from 40% to 20%.

Rs. 10,28,462.00 (iii) Unexplained share application  money added back as  unexplained cash credits under  Section 68

Rs. 19,16,000.00 (iv) Lease rentals of cinematographic  films held to be bogus and  assessed as income from other  sources

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Rs. 63,43,750.00

       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 were found to be bogus and the  depreciation of Rs. 57,51,520.00 was not allowed, nor  could the lease rental of Rs. 63,43,750.00 be 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  \026 Rs. 63,43,750.00 = Rs. 68,00,757.00)

(iii) The appellant was able to prove some sources of the  share 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)

(v) Depreciation on leased vehicles claimed at 40% was  reduced to 20% (as in the original assessment) and an  amount of Rs. 10,28,462.00 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 + Rs. 10,28,462.00  = Rs. 67, 79, 982.00) was disallowed.

(vii) Therefore, the depreciation allowable was                          Rs. 80,18,011.00 (Rs. 1,47,97,995.00 \026 Rs.  67,79,982.00 = Rs. 80,18,011.00)

(viii) Making a deduction on account of depreciation as in  sub-Paragraph (vii) above, the Appellant was assessed at  a loss of Rs. 11,02,255.00 (Rs. 69,15,757.00) \026                  Rs. 80,18,012.00 = - Rs. 11,02,255.00)

       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.

       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

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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(1)(c) had not been introduced.  He concluded the  issue against the appellant on the basis of the decision of the  Karnataka High Court in P.R. Basavappa & Sons v. CIT, 243  ITR 776 (Karnataka).  He added the amounts disallowed i.e.  Rs. 10,28,462.00, Rs. 57,51,520.00 and Rs. 1,15,000.00.  He  concluded 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 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).  Revenue filed an  appeal under Section 260A of the Act which was allowed by  the High Court by the impugned order.

       The point involved before the High Court was, as to  whether penalty was leviable under Section 271 (1)(c)(iii) read  with Explanation 4 thereto which came on the statute book  w.e.f. 01.04.1976, in a case where the return filed was one of  loss and the assessment made by the assessing officer was at  a reduced amount of loss.   

       Revenue’s case 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 Section 271(1)(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 sought to 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 of Finance 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 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 High Court.  

       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 case (supra), distinguishing the  same on facts stating that the said decision related to the  period prior to 1.4.1976 and therefore, had no application  because Explanation 4 inserted in Section 271 (1)(c) with effect  from 1.4.1976 in the 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) was

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also not helpful to the assessee in such a case.  

       Answering the first question also against the assessee  and in favour 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 imposed under  Section 271(1)(c) of the Act, merely on the ground that the  total income of the assessee was assessed at a minus  figure/loss.  In arriving at this decision on question no.1, the  Delhi High Court in the impugned order dissented from the  view taken by Madras High Court, reported as CIT v. 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 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. Gotla, 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 & Weaving Mills Company Ltd., 40  ITR 142 (SC).   

       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 brought  about by the Finance Act, 2002, w.e.f. 1.4.2003, was  declaratory in nature, therefore, retrospective in operation and  the submission 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 of the matter and held that for imposition of  penalty after 1.4.1976 it was not 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.   

       Learned counsels appearing in different appeals filed by  the assessee assailed the impugned judgment by contending  that provisions of Section 271 (1)(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 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 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 decisions  of different High Courts. It was contended that it has been laid down

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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.

       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(1)(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 (1A) of the Act before its amendment 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  CIT v. Zam Zam Tanners, [279 ITR page 197 (All)].            Referring to the amendment carried in Section  271(1)(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 of reducing the loss would entail the penalty. It  is contended that the Legislature has now deliberately enacted  such provision to fill in the lacuna 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.

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 not clarificatory in  nature. That the penalty being penal, provisions could not be  brought on the statute book with retrospective effect.

       As against this, the Counsel for the Revenue supported  the judgment for the reasons recorded in the impugned order.

       We have heard the counsels for the parties at length.

       Section 271 (1)(c) and the subsequent amendments carried out  in the said section with effect from 1.4.1976 (as amended by the  Taxation Laws (Amendment) Act, 1975) and the amendment by  Finance Act, 2002 (with effect from 1.4.2003) on the interpretation of  which the entire controversy in the present appeal rests are:-

"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-- (a) xxxxx; or (b) xxxxx; or (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,-- (i) xxxxx (ii) xxxxx (iii) in the cases referred to in clause (c), in  addition to any tax payable by him, a sum

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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."                                                          [Emphasis supplied]

       Sub-clause (iii) of sub-section (1)(c) of Section 271  after its amendment with effect from 1.4.1976 and the  Explanation 4 added thereto read as under:- "(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."                                                         [Emphasis supplied] "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 particulars 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 had such income been the  total income; (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  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."                                                         [Emphasis supplied]

       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:-

"(iii)  in the cases referred to in clause (c), in  addition to tax, if any, payable by him, a  sum which shall not be less than, but  which shall not exceed three times, 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 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 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

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on the income in respect of which  particulars have been concealed or  inaccurate particulars have been  furnished had such income been the total  income;                                                         [Emphasis supplied]         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 the object of advancing the object and intention of the  legislature.   

       This Court as well as the various High Courts of the country  have 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 of Orissa, 1996 (5) SCC 1, it has been held by this Court in  para 17 and 18 as under:-

"17. Strict construction is the general rule of penal  statutes. Justice Mahajan in Tolaram Relumal 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 carry out the  intention of the Legislature." 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.I., 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) SCC  76, at page 86 para 8. "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." 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 of Orissa,  1978 Cri. LJ 683, at page 685, para 4 : "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

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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."

       To the similar effect, is the view taken by this Court and the  various High Courts in CIT v. Vegetable Products Limited [88 ITR  192, 195 (SC)], CWT v. Ram Narain Agrawal [106 ITR 965-968 (All.)],  Tolaram Relumal v. State of Bombay [AIR 1954 SC 496, at page 498],  TMT Thangalakshmi v. ITO [205 ITR 176 (Mad.)], CIT v. A.K. Das  [77 ITR 31, at page 52 (Cal.)], CIT v. T.V. Sundaram Iyengar & Sons  (P) Ltd. [101 ITR 764, at page 773 (SC)], Engineers Impex Pvt. Ltd. &  Others v. D.D. Sharma [244 ITR 247 (Del.)].

       Every statutory provision for imposition of penalty has two  distinct components: - (i)     That which lays down the conditions for imposition of  penalty. (ii)    That which provides for computation of the quantum of  penalty.

Section 271(1)(c) and clause (iiii) relate to the conditions for  imposition of penalty, whereas, on the other hand , Explanation 4  to Section 271(1)(c) relates to the computation of the quantum of  penalty.

The provisions of Section 271(1)(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  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.  Explanation 4 inserted for the  purpose of clause (iii) where the expression "the 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 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 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.

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, CIT v. 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,  CIT v. Virendra & Co.), 240 ITR page 47 (Kerala High Court,  CIT v. N. Krishnan), 259 ITR page 229 (Madras High Court,  Ramnath Goenka v. CIT), 276 ITR page 649 (M.P. High Court,  CIT v. Jabalpur Co-operative Milk Producers Union Ltd.),  279 ITR page 197 (Allahabad High Court, CIT v. Zam Zam  Tanners), 278 ITR page 140 (Calcutta High Court, CIT v. R.G.  Sales (P) Ltd.), all the aforesaid decisions support the  assessee’s contention that even after 1.4.1976 if there is no

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positive income, no taxes leviable, no penalty can be levied for  concealment of income.

       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(1)(c) as it 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 ITR 776 (Kar.) -  Karnataka High Court rejected assessee’s reference on the  sole ground that Prithipal’s case relates to assessment year  1970-71 and prior, therefore, to the 1976 amendment. ii.     CIT v. Chemiequip Ltd., 265 ITR 265 (Bomb.) \026 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 assessment proceedings distinguishing Prithipal  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(1)(c) and Explanation 4(a) or the nature of 1976 or 2002- 2003 amendments.

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. Kerala State  Industrial Development Corporation Ltd., 233 ITR 197 (SC) that  where the predominant majority of the High Courts have taken  certain view of the interpretation of a certain provision, the Supreme  Court would lean in favour of the predominant view.

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 to the provisions contained in Section 143 (1A)  of the Act before its amendment which came on the statute in 1993  with retrospective effect from 1.4.1989. The 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.  

Section 143(1A) (before its amendment in 1993) was interpreted  by the following 3 decisions which include 2 of the Delhi High Court  itself. In Modi Cement Ltd. v. Union of India, 193 ITR 91 (Del.), it  was held as under: -

"\005.. 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 under  section 143(1A) 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 having  accepted a huge loss of Rs.1,32,97,22,383, still required  the assess to pay a sum of Rs.38,60,075. If the  interpretation sought to 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]

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In Indo-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 sub-section  (1) 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 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 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 has rightly placed reliance  upon a case, Modi Cement Ltd. v. Union of India,  [1992] 193 ITR 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]

In J.K. Synthetics Ltd. v. ACIT, 200 ITR 584 (Del.), it was held  as under: - "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]

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 amended Section 271(1)(c) and Explanation 4(a).  However, this amendment was retrospective with effect from  1.4.1989, not claiming to be declaratory or clarificatory.

Though the Legislature was conscious that the provisions of  Section 143 (1A) and 271 (1)(c) are pari materia and were similarly  interpreted by different High Courts, while Section 143(1A) was  amended by Finance Act, 1993 with retrospective effect from 1.4.1989,  the provisions of Section 271(1)(c) have been amended much later  by Finance Act, 2002 with prospective effect from 1.4.2003.

The two questions which arise in the present cases are, prior to

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the amendments by the Finance Act, 1992 with effect from 1.4.2003  (2003 amendment): -

i.      What is meant by the words "in addition to any tax" in  the charging Section 271(1)(c)(iii)? ii.     What is meant by the term "total income" in  Explanation 4(a)? Both these questions are fully answered by this Court in  Commissioner of Income Tax, Bombay City v. Elphinstone  Spinning and Weaving Mills Co. Ltd., 40 ITR 142 (SC).

       Under the Finance Act, 1951, a provision was enacted to  discourage the declaration of dividend disproportionate to the  declared income. It provided that where the "total income" exceeded  the dividend by a certain amount, a rebate would be allowed, and  where the dividend exceeded the "total income" by such amount, "an  additional income tax" would be levied.  

The facts of the case were: - "During the calendar year 1950, the assessee  company had made a profit but the depreciation  allowance which it was entitled to under the  Income-tax Act came to Rs.7,84,063 thus converting  the profit into a loss of Rs.2,19,848 for income-tax  purposes, and the company was adjudged not to be  liable to income-tax for the relevant assessment year  1951-52. The company, however, declared dividends  in that year amounting to Rs.3,29,062 and the  question was whether this amount was "excess  dividend" within the meaning of paragraph B of  Part I of the First Schedule to the Finance Act, 1951,  and additional income-tax could be levied in respect  thereof:"

       It was held by this Court that: -         "The word "additional" in the expression  "additional income-tax" must refer to a state of  affairs in which there has been a tax before."

and that: "The words "charge on the total income" are not  appropriate to describe a case in which there is no  income or there is a loss."

       These two findings conclude the two issues in paragraph (i)  and (ii) above in favour of the assessees’ contention in the present  batch of cases. It was noted by this Court that there was indeed a  lacuna in the statute but that Court could not depart from the rule of  literal construction: -

"There is no doubt that if the words of a taxing  statute fail, then so must the tax. The courts cannot,  except rarely and in clear cases, help the draftsmen  by a favourable construction. Here, the difficulty is  not one of inaccurate language only. It is really this  that a very large number of taxpayers are within the  words but some of them are not. Whether the  enactment might fail in the former case on some  other ground (as has happened in another case  decided today) is not a matter we are dealing with at  the moment. It is sufficient to say here that the  words do not take in the modifications which the  learned counsel for the appellant suggests. The  word "additional" in the expression "additional

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income-tax" must refer to a state of affairs in which  there has been a tax before. The words "charge on  the total income" are not appropriate to describe a  case in which there is no income or there is loss. The  same is the case with the expression "profit liable to  tax". The last expression "dividends payable out of  such profits" can only apply when there are profits  and not when there are no profits."

                                                       [Emphasis supplied]

       This Court noted that the High Court allowed the assessee’s  reference (reluctantly) but from the plain language of the provision,  an assessee sustaining a loss could have no "total income": -

"It is clear that the Legislature had in mind the  case of persons paying dividends beyond a  reasonable portion of their income. A rebate was  intended to be given to those who kept within the  limit and an enhanced rate was to be imposed on  those who exceeded it. The law was calculated to  reach those persons who did the latter even if they  resorted to the device of keeping profits back in  one year to earn rebate to pay out the same profits  in the next. For this purpose, the profits of the  earlier years were deemed to be profits of the  succeeding years. So far so good. But the  Legislature failed to fit in the law in the scheme of  the Indian Income-tax Act under which and to  effectuate which the Finance Act is passed. The  Legislature used language appropriate to income,  and applied the rate to the "total income".  Obviously, therefore, the law must fail in those  cases where there is no total income at all, and the  courts cannot be invited to supply the omission by  the Legislature.                 It is quite possible that the Legislature did  not contemplate the imposition of tax in  circumstances such as these, and we are not  prepared to read the proviso without the words  "on the total income" or after modifying this and  other expressions. The High Court has given  adequate reasons to show that these words are  quite inappropriate, where the total income, if it  can be described as income at all, is a loss. The  imposition of the additional income-tax is  conditioned by the existence of income and profits,  to the total of which income the rate is made  applicable. Unless some other amount, not strictly  income, is by law deemed to be income [see, for  example, Mc Gregor & Balfour Ltd. v.  Commissioner of Income-tax, (1959) 36 ITR 65] we  cannot improve the existing law by deeming it to  be so by our interpretation."

                                                       [Emphasis supplied]

       The impugned judgment has erred in observing that in  Elphinstone case (supra): - "The situation is different and the context is  different."

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       The observations by this Court were not made in any special  context or in the face of a fiction created by the Finance Act, 1951. On  the contrary, the Act set out in the First Schedule as under: -

"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\005"

       In fact, it is the impugned Judgment which has isolated a  phrase in Elphinstone case and taken it out of context.

       The ratio of Elphinstone case cannot be that a loss can be  described as total income. If it were so, this Court could not have  dismissed the appeal of the Revenue.

       In CIT v. B.C. Srinivasa Setty, (supra), this Court reiterated the  principle that the charge and its computation were two parts of an  integral whole and concluded therefore, that if the computation  could not be done, the charge was not intended to apply. In this case,  the Court was concerned with the transfer of goodwill valued at  Rs.1,50,000 from a dissolved partnership to a newly constituted one.  Despite the fact that this Court found that goodwill was an "asset of  the business", it was held that the charge of capital gains could not be  levied because under section 48 (ii) required computing the gain by  deducting from the full value of the consideration received.                  Applying Elphinstone case to the present case, it can be held: -

a.      "Total income" can only connote a positive figure and prior to  the 2003 Amendment, Explanation 4(a) to Section 271(1)(c)  required the computation to be done with reference to "total  income". b.      The computation in the case of a loss making assesses, as in the  present case cannot be made. c.      The words "in addition to any tax payable" can only be  understood as the words "additional income-tax" were in  Elphinstone case where this Court held that these words pre- suppose that tax was otherwise payable. d.      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 because here there is no total income, and because the  computation cannot be made, the charge cannot be levied.

The judgment of this Court in Angidi Chettair’s case (supra)  relied upon by the Delhi High Court in its impugned judgment, has  been given in an entirely different statutory context and, therefore,  the ratio of that judgment is not at all applicable to the issue arising  for consideration in the present case. That judgment dealt with the  interpretation of section 28(1)(c) of the Income-tax Act, 1922. The  question which arose in that case was whether a penalty could be  imposed on a registered firm. The contention of the assessee was that  a registered firm was not liable to pay tax itself and that under the  statute as it then stood, the tax was payable only by the partners of  the registered firm and not by the registered firm itself. The Revenue  pointed out that if this contention of the assessee is accepted, then the  highly anomalous and totally unacceptable consequence that would  follow would be that no penalty could even be imposed on a  registered firm, even though this section itself expressly provided  that the penalty can be imposed on any ’person’ and ’person’  unquestionably included a registered firm. It was in this special and  extraordinary statutory context that this Court laid down that a

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penalty could be imposed on a registered firm even though the firm  was not liable to pay tax, or otherwise a portion of section 28 would  be rendered completely meaningless and infructuous. Further, in the  said case, this Court proceeded specifically on the footing that under  section 23(5) of the 1922 Act, a registered firm was liable to pay tax  but the tax due from the firm was collected from the partners. This  judgment has to be read in the special and extraordinary statutory  context of section 28 of the 1922 Act, the wording and phraseology of  which is very different from that of section 271 (1)(c)(iii) of the  Income-tax Act. The judgment in Angidi Chettiar’s case (supra)  cannot be relied upon for the purpose of construing section 271  (1)(c)(iii) of the Income-tax Act.

       Prior to the amendment made to Section 271 by the Finance  Act, 2002, which came into operation on 1.4.2003, no penalty for  concealment could be imposed unless some tax was payable by the  assessee. In other words, if no tax was payable by the assessee, then  the question of imposition of penalty of concealment did not arise at  all. That position was changed for the first time only by the  amendment made by the Finance Act, 2002 with effect from 1.4.2003.  It is only by this amendment that the hitherto inseverable inter- connection between the liability to pay tax and the imposition of  penalty was severed for the first time.

       It may be noted that the amendment made to Section 271 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 amendment was either clarificatory or declaratory. On  the contrary, the statue stated that the said amendment would come  into effect on 1.4.2003 and therefore, would apply to only to future  periods and not to any period prior to 1.4.2003 or to any assessment  year prior to assessment year 2003-2004. It is the well settled legal  position that 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 there is no  such clear statement in the statute itself, the amendment will not be  considered to be merely declaratory or clarificatory.  

       Even if the statute does contain a statement to the effect that the  amendment is declaratory or clarificatory, that is not the end of the  matter. The Court will not regard itself as being bound by the said  statement made in the statute but will proceed to analyse the nature  of the amendment and then conclude whether  it is in reality a  clarificatory or declaratory provision or whether it is an amendment  which is intended to change the law and which applies  to future  periods. In this connection, see the following: - 1.      Sakuru v. Tanaji, 1985 (3) SCC 590 at page 593-594. 2.       Harding and another v. Commissioner of Stamps for  Queensland,  1898 Appeal Cases 769 at 775 to 776. 3.      R. Rajagopal Reddy (Dead) by Lrs. and others v. Padmini                 Chandrasekharan (Dead) by Lrs., 1995 (2) SCC page 630 at 646. 4.      CIT v. Patel Brothers & Co. Ltd. & Ors., 215 ITR 165 (SC). 5.        Sedco Forex International Drill Inc. & Ors. v. CIT & Anr.,            279 ITR 310 page 317.

In the present case, it is only in the Notes on Clauses relating to  2002 amendment that it has been stated that the said amendment is  clarificatory. There is no such mention of the said amendment being  clarificatory, anywhere in the statute itself. Such 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. In the present case, the statute expressly states that the  amendment would take effect only from 1.4.2003. Consequently, this  amendment cannot possibly be applied to or in respect of any period

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prior to 1.4.2003.  

Otherwise also, it has been consistently held that a provision  must be read subject to the rule that 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. It is settled law that a taxing provision  imposing liability is governed by the normal presumption that is not  retrospective. Reference made to the decisions in: -

i.      S.S. Gadgil, ITO, Bombay v. Lal & Co., 53 ITR 231 (SC), ii.     K.M. Sharma v. ITO, 254 ITR 772 (SC), iii.    Gem Granites v. CIT , 271 ITR 322 (SC), iv.     Sedco Forex International Drill Inc. & Ors. v. CIT, 279 ITR       310 (SC).

There 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 amendment in clause (iii) and  simultaneously in Explanation 4(a) carried out enlarges the scope of  penalty under Section 271(1)(c) to include even cases where  assessment has been completed at loss. The same being in the nature  of a substantive amendment would be prospective, in the absence of  any indication to the contrary.

Explanation 4 to Section 271(1)(c) as it stood prior to its  amendment by the Finance Act, 2002, requires to be carefully  compared with the said Explanation as amended by the Finance Act,  2002. The comparison of the Explanation as it stood before 2002 and  after 2002 by itself shows clearly that it is only after the amendment  made by the Finance Act, 2002 that the Explanation 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) as it stood prior to its amendment  by the Finance Act, 2002. Further, the plain reading of clause (a) of  Explanation 4 to section 271 as it stood prior to the 2002 amendment,  shows that this clause applied to a situation where an assessee has  returned a loss which by reason of the addition of the concealed  income thereto by the assessing officer, is converted into a positive  figure of the assessed income on which the assessee is required to pay  tax. In contrast, clause (c) of the said Explanation 4 applies only to a  situation where the assessee has returned a positive income, which  stands enhanced by reason of the concealed income added thereto by  the assessing officer in the assessment order. Consequently, both  under clause (a) and clause (c) of the said Explanation 4, the assessee  can be penalized only if he has a positive assessed income on which  tax is payable. The only difference between clause (a) and clause (c) is  that clause (a) applied to an assessee who had filed a loss return, and  clause (c) to an assessee who has filed  a positive return.  However,  the end result in both the cases was the same, i.e., a positive assessed  income  on which the assessee was required to pay tax. It is this basic  condition precedent for the imposition of the penalty, i.e., existence of  liability  to pay tax which existed prior to 2002, which has been done  away with for the first time by the Finance Act, 2002.

There 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 amendment in clause (iii) and  simultaneously in Explanation 4(a) carried out enlarges the scope of  penalty under Section 271(1)(c) to include even cases where  assessment has been completed at loss. The same being in the nature  of a substantive amendment would be prospective, in the absence of

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any indication to the contrary. The Finance Bill/Finance Act, 2002  brought about many amendments in the statute, some of which had  retrospective operation. The amendment in Section 271(1)(c) was  consciously made applicable w.e.f. 1.4.2003 and not with  retrospective date. Next proposition is with reference to the amended provision of  law made by the Finance Act, 2002, where the expression used in  Explanation 4 "the amount of tax sought to be evaded" has been  deliberately amended providing specifically cases where the filing of  return and the assessment had the effect of reducing the loss declared  in the return or converting that losses into income. Taking support  from this amendment brought about in the statute with effect from  1.4.2003, it is contended that the Legislature has now deliberately  enacted such provision to fill in the lacuna 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. The amended provision of law is  not available prior to 1.4.2003, as the same is not enacted with  retrospective effect. That this amendment is declaratory and applies  to all pending cases, as held by the Bombay High Court in CIT v.  Chemiequip Ltd (supra), is untenable for the following reasons: - (a)     There is nothing in the statute to suggest to that effect. The  interpretation that it is clarificatory as per the notes on  clauses do not advance the Revenue’s case, because of its  specific omission to that effect. It is purely a case of  amendment to the statute; (b)     Amendment is not retrospective and there is no assumption  as to its retrospectivity. Retrospectivity has to be enacted  specifically in the fiscal statute and it is more so in the case  of penal provisions, otherwise it would be contradictory or  derogatory to Article 20 (1) of the Constitution. This Court  has held in Brij Mohan v. C.I.T., New Delhi, 120 ITR page 1,  that the law to be applied is the one in force on the first day  of accounting period. To this effect are the other decisions of  this Court reported as CIT v. Patel Brothers & Co. Ltd. &  Ors. , 215 ITR page 165 (SC).  Allahabad High Court has also  taken same view in Zam Zam Tanners (supra). Notes on  clauses on the amendment introduced by the Finance Act,  2002 makes specific mention inter alia of the amendment to  be effective from 1.4.2003 of which the Bombay High Court  has failed to take notice in its judgment in CIT v.  Chemiequip Ltd (supra). For the reasons stated above, the Appeals are accepted and the  impugned judgment is set aside, it is held that prior to its  amendment by Finance Act, 2002 in the absence of any positive  income and no tax being levied, penalty for concealment of income  could not be levied.  The view taken by the Karnataka High Court in  P.R. Basavapaa & Sons v. CIT (supra) and CIT v. Chemiequip Ltd.  (supra), does not lay down the correct law. The position stands altered after the amendment in law by the  amendment of Section 271(1)(c) and Explanation 4(a) by the  Finance Act, 2002 w.e.f. 1.4.2003.