Important Point
Explanation 4 of Section 271 (1) (c) (iii) of the Income Tax Act is clarificatory and not substantive.

Judgment

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,1 (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.

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 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.,2 (1990 (183) ITR 69). It is pointed out that the revenue’s appeal before this Court was dismissed in Commissioner of Income Tax v. Prithipal Singh and Ors.,3 (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 S