2007 Supreme(SC) 140

2007(1) Supreme 978
SUPREME COURT OF INDIA
(From Delhi High Court)
Ashok Bhan and Dalveer Bhandari, JJ.
M/s Virtual Soft Systems Ltd.—Appellant
versus
Commissioner of Income Tax, Delhi-I—Respondent
Civil Appeal No. 7115 of 2005
With
Civil Appeal 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
Decided on 6-2-2007
Counsel for the Parties :
For the Appearing Parties : S. Ganesh, K. Radhakrishnan, Sr. Advocate, D.N. Sawhney, M.P. Rastogi, K.N. Ahuja, Harinder Mohan Singh, P.N. Monga, S.S. Ray, Manu Monga, Ms. Rakhi Ray, Bhargava V. Desai, Rahul Gupta, B.V. Desai, Ms. Kavita Jha, Vinay Vaish, Rahul Gupta, Rahul Yadav, K.K. Senthilvelan, Gaurav Dhingra, Arijit Prasad, Chidananda, B.V. Balaram Das, Vivek Kohli, Subramonium Prasad and Gopal Krishnan R., Advocates.

IMPORTANT POINT
Prior to amendment of Section 271(1)(c) of the Income Tax Act by the Finance Act, 2002, in the absence of any positive income and no tax being levied, penalty for concealment of income could not be levied.

Headnote:Income Tax Act, 1961—Section 271(1)(c) As Amended w.e.f. 1-4-1976 and by the Finance Act, 2002 w.e.f. 1-4-2003—Levy of penalty when total income of assessee assessed at a minus figure/loss—Assessment year 1996-97—Prior to amendment of Section 271(1)(c) 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—For the assessment year 1996-97, assessee returned an income of Rs. 1,32,44,507.29 subject to depreciation—Depreciation claimed for the year was Rs. 1,47,97,995.01—According, assessee filed a ‘nil’ return and carried forward the unabsorbed depreciation of Rs. 15,53,487.72 to the following year—Commissioner of Income Tax set aside order of assessment and directed the Assessing Officer to frame a fresh assessment—On re-assessment, carry forward loss of Rs. 15,53,487.72 originally claimed by assessee was reduced to Rs. 11,02,225.00—Deputy Commissioner of Income Tax levied a penalty of Rs. 31,71,692.00—High Court confirmed the order—Whether before the amendment of 2002, return filed declaring loss and assessment made at a reduced loss did warrant any levy of penalty within the meaning of Section 271(1)(c)(iii) with or without Explanation 4—(No)—Provisions of Section 271(1)(c) As Amended by Finance Act, 2002 with prospective effect from 1-4-2003 include even cases where assessment has been completed at loss —Levy of penalty in case of appellant assessee is not justified.

       Held : 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.(Para 22)

       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.(Para 53)

       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. 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.(Para 54)

       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. (Para 56)

       (ii) Income Tax Act, 1961—Section 271(1)(c) As Amended by the Finance Act, 2002 w.e.f. 1-4-2003—Prospective effect—Amendment in Section 271(1)(c) consciously made applicable w.e.f. 1-4-2003 and not with retrospective effect.

       Held : (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.(Para 55)

       (iii) INTERPRETATION OF STATUTES—Penal Provisions—Rule of Strict Construction—Statute creating the penalty is the first and the last consideration and must be construed within the term and language of the particular statute—Income Tax Act, 1961—Section 271.(Para 23)

       (iv) INTERPRETATION OF STATUTES—Amendment of Act—Declaratory or clarificatory—Determination of—An amendment can be considered to be declaratory and clarificatory only if the statute itself expressly and unequivocally states that it is a declaratory and clarificatory provision—However, 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.

       Held : 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.(Paras 48, 49)

       (v) INTERPRETATION OF STATUTES—Amendments—Nature of, declaratory or clarificatory—Statement in the Notes on clauses cannot possibly bind the Court—Even a statement in the statute itself is not regarded as binding or conclusive.(Para 50)