Petition(s) for Special Leave to Appeal (Civil) No(s).18564/2011
(From the judgement and order dated 26/08/2010 in ITA No.1420/2009 of The HIGH COURT OF DELHI AT N. DELHI)
Facts of the case:
“271. Failure to furnish returns, comply with notices, concealment of income, etc.
(1) If the Assessing Officer or the Commissioner (Appeals) or the Commissioner in the course of any proceedings under this Act, is satisfied that any person-
He may direct that such person shall pay by way of penalty,-
xxx xxx xxx
(iii) in the cases referred to in clause (c) or clause (d), 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 fringe benefits or the furnishing of inaccurate particulars of such income or fringe benefits.
xxx xxx xxx
Explanation4- 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 particulars have been concealed or
inaccurate particulars have been furnished has the effect of reducing the loss declared in the return or converting that loss into income, 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 Explanation 3 applies, means the tax on the total income assessed as reduced by the amount of advance tax, tax deducted at source, tax collected at source and self-assessment tax paid before the issue of notice under Section 148;
(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
xxx xxx xxx”
14. Mr. Vohra argued that even if the penalty was to be imposed on the alleged concealment of income by the assessee or in respect of income in which inaccurate particulars have been furnished, the quantum of penalty is quantified with reference to the amount of tax sought to be evaded. His explanation was that the tax sought to be evaded would be the difference between the tax due on the income assessed and the tax that would have been chargeable had such total income been reduced by the amount of concealed income. Thus, the penalty is levied on the basis of tax on the difference between the income assessed and the income returned.
15. On this principle, the penalty could not be imposed in the present case as the assessee had paid the tax at deemed income under Section 115 JB of the Act, which income was more than the income assessed as per normal procedure. The Scheme of the Act is that if the tax payable under normal procedure is higher, such amount is taxable income of the appellant; otherwise book profits are deemed as the total income of the assessee in terms of Section 115 JB of the Act. He thus submitted that once „book profits‟ are, by a legal fiction, deemed to be total income of the assessee, such deeming fiction must be taken to its logical conclusion. As a necessary corollary, in such a case where income of an assessee company is finally assessed at „book profits‟ by deeming the same to be total income of the assessee, penalty
imposable under Section 271(1) (c) of the Act could only be levied in respect of any adjustment/addition/disallowance made while computing such „book profits‟. In such a situation, the revenue cannot be allowed to impose penalty with reference to the additions/ disallowances made while computing normal income since such income pales into insignificance, both for the purpose of imposition of tax and all logical consequences
following thereon.
16. In nut shell, his submission was that when the tax was imposed and calculated under the Act on the deemed income under Section 115JB of the Act, for the purposes of the imposition of penalty the department could not revert back to the normal income as it would lead to an absurd situation of two different incomes of the same person for the same assessment year. Further more, when the income tax is paid on the „book profits‟ by a legal fiction, such legal fiction has to be taken to its logical conclusion. He referred to the following decisions in support of his submissions:-
(i) A.S. Glittre Vs. CIT, 225 ITR 739 @ 744
(ii) M. Venugoal Vs. Divisional Manager, LIC of India, AIR 1994 SC 1343, 1347-48
(iii) UOI Vs. Jalyan Udyog, AIR 1994 SC 88, 96-97
(iv) Builders Association of India Vs. UOI, 73 STC 370 at 400 (SC)
17. Ms. Bansal countered the aforesaid arguments of Mr. Vohra by submitting that the Supreme Court had now made it clear in CIT Vs. Gold Coin Health Care Limited that even where the assessed income and returned income both are at loss, penalty can be levied under Section 271 (1) (c) of the Act. Her submission was that no restricted meaning can be given to the term “amount of tax sought to be evaded”. Where the loss has been determined by the AO at a figure less than the returned income then it would amount to concealment of income and the tax on the said amount would be treated as the amount of tax sought to be evaded.
18. Ms. Bansal justified the penalty by arguing that as per the provisions of Section 115 JB of the Act where the book profit is determined at a figure higher than the returned figure, then the penalty could be levied, because as per the provisions of Section 115 JB (5) save as otherwise provided in this Section, all other provisions of the Act shall apply to the assessee and therefore, penalty is leviable with respect to book profits. CIT (A) has observed in para 2.6 of his order that as regards disallowance of depreciation of Rs. 32,51,906/- and disallowance of Rs. 3,030/- under Section 2 (24) (x), there is no need of adjudication because the same have not been considered while computing the income u/s 115 JB of the Act, it had been considered while computing loss under regular provisions of the Act and thereafter, (CIT (A) had considered merits of the case. Thus CIT (A) has not given any finding as to whether penalty could be levied on the income/loss as per the normal provisions of the Act when positive book profit is determined u/s 115JB of the Act.
19. However, it is to be stated that as per the scheme under Section 115JB, AO could not have made addition with respect to depreciation and disallowance under Section 2 (24) (x) because as per the judgment of Supreme Court I the case of Apollo Tyres Limited( 255 ITR 273) Balance Sheet prepared by the assessee as per Schedule VI of the Companies Act is sacrosanct, and the AO cannot tamper with the net profit declared in such Profit & Loss A/c. Therefore, AO could not have tampered with the figure of depreciation as claimed by the assessee as per the Companies Act, may be WDV method or straight line method or any other method.
20. We have considered the rival submissions. Judgment of the Supreme Court in Gold Coin’s (supra) clarifies that even if there are losses in a particular year, penalty can be imposed as even in that situation there can be a tax evasion. As per Section 271 (1) (c), the penalty can be imposed when any person has concealed the particulars of his income or furnished incorrect particulars of the income. Once this condition is satisfied, quantum of penalty is to be levied as per clause (3) of Section 271 (1) ( c) which stipulates that the penalty shall not exceed three times “ the amount of tax sought to be evaded”. The expression “the amount of tax sought to be evaded” is clarified and explained in Explanation 4 thereto, as per which it has to have the effect of reducing the loss declared in the return or converting that loss into income. It is in this context that in Gold Coins (supra) the Supreme Court explained the legal position as under:-
“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 defined „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 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.
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, aloss 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. 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 off 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”.
22. In the present case, the income computed as per the normal procedure was less than the income determined by legal fiction namely „book profits‟ under Section 115 JB of the Act. On the basis of normal provision, the income was assessed in the negative i.e. at a loss of Rs. 369521018. On the other hand, assessment under Section 115 JB of the Act resulted in calculation of profits at Rs. 40163180.
23. In view thereof, in conclusion, the assessment order records as follows:-
“Assessed at Rs. 40163180 u/s 115 JB, being higher
of two. Interest u/s 234B and 234C has been charged
as per the provisions of Income Tax Act, 1961.
Penalty proceedings u/s 271 (1) © of the Income Tax
Act, 1961 have been initiated. Issue necessary forms.”
25. Judgment in the case of Gold Coins (supra), obviously, does not deal with such a situation. What is held by the Supreme Court in that case is that even if in the income tax return filed by the assessee losses are shown, penalty can still be imposed in a case where on setting off the concealed income against any loss incurred by the 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 a minus figure. The court was of the opinion that „the tax sought to be evaded‟ will mean the tax chargeable not as if it were the total income. Once, we apply this rationale to Explanation 4 given by the Supreme Court, in the present case, it will be difficult to sustain the penalty proceedings. Reason is simple. No doubt, there was concealment but that had its repercussions only when the assessment was done under the normal procedure. The assessment as per the normal procedure was, however, not acted upon. On the contrary, it is the deemed income assessed under Section 115 JB of the Act which has become the basis of assessment as it was higher of the two. Tax is thus paid on the income assessed under Section 115 JB of the Act. Hence, when the computation was made under Section 115 JB of the Act, the aforesaid concealment had no role to play and was totally irrelevant. Therefore, the concealment did not lead to tax evasion at all.
26. The upshot of the aforesaid discussion would be to sustain the order of the Tribunal, though on different grounds. Therefore, while we do not agree with the reasoning and approach of the Tribunal, for our reasons disclosed above, we are of the opinion that penalty could not have been imposed even in respect of claim of depreciation made by the assessee. This appeal is accordingly dismissed.
(From the judgement and order dated 26/08/2010 in ITA No.1420/2009 of The HIGH COURT OF DELHI AT N. DELHI)
Facts of the case:
- Ld. AO levied penalty u/s 271(1)(c) for filling inaccurate particulars of Income due to additions made to total income under normal provisions on account of :
- Claiming Depreciation on asset acquired on last day where the same could not be substantiated by appellant of having been used on that day.
- Disallowance for late payment of PF
- Disallowance of deduction u/s 80HHC for not including loss on manufactured and traded goods exported out of India against incentives and had claimed deduction under Section 80HHC of the Act on 90% of the incentives.
- CIT (A) and ITAT set aside the penalty order on merits of the case.
- Department filed appeal u/s 260A against the orders of the court and argued the case on merits.
12. Mr. Vohra, the learned counsel appearing for the assessee, however, gave a totally a different twist to the matter by predicating his submission on Section 115JB of the Act. His contention was that as per Explanation 4 of Section 271 (1) (c) of the Act, the penalty is levied with respect to the amount of tax sought to be evaded. According to him since the amount of tax had been paid by the assessee under Section 115JB of the Act, no penalty could be levied in respect of the additions/disallowances made by the A.O.
13. Before we proceed to take note of further argument on this point, we reproduce the relevant provision of Section 271 (1) (c) of the Act:-
“271. Failure to furnish returns, comply with notices, concealment of income, etc.
(1) If the Assessing Officer or the Commissioner (Appeals) or the Commissioner in the course of any proceedings under this Act, is satisfied that any person-
xxx xxx xxx
(c) has concealed the particulars of his income or furnished inaccurate particulars of such income, or
(c) has concealed the particulars of his income or furnished inaccurate particulars of such income, or
xxx xxx xxx
He may direct that such person shall pay by way of penalty,-
xxx xxx xxx
xxx xxx xxx
Explanation4- 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 particulars have been concealed or
inaccurate particulars have been furnished has the effect of reducing the loss declared in the return or converting that loss into income, 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 Explanation 3 applies, means the tax on the total income assessed as reduced by the amount of advance tax, tax deducted at source, tax collected at source and self-assessment tax paid before the issue of notice under Section 148;
(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
xxx xxx xxx”
14. Mr. Vohra argued that even if the penalty was to be imposed on the alleged concealment of income by the assessee or in respect of income in which inaccurate particulars have been furnished, the quantum of penalty is quantified with reference to the amount of tax sought to be evaded. His explanation was that the tax sought to be evaded would be the difference between the tax due on the income assessed and the tax that would have been chargeable had such total income been reduced by the amount of concealed income. Thus, the penalty is levied on the basis of tax on the difference between the income assessed and the income returned.
15. On this principle, the penalty could not be imposed in the present case as the assessee had paid the tax at deemed income under Section 115 JB of the Act, which income was more than the income assessed as per normal procedure. The Scheme of the Act is that if the tax payable under normal procedure is higher, such amount is taxable income of the appellant; otherwise book profits are deemed as the total income of the assessee in terms of Section 115 JB of the Act. He thus submitted that once „book profits‟ are, by a legal fiction, deemed to be total income of the assessee, such deeming fiction must be taken to its logical conclusion. As a necessary corollary, in such a case where income of an assessee company is finally assessed at „book profits‟ by deeming the same to be total income of the assessee, penalty
imposable under Section 271(1) (c) of the Act could only be levied in respect of any adjustment/addition/disallowance made while computing such „book profits‟. In such a situation, the revenue cannot be allowed to impose penalty with reference to the additions/ disallowances made while computing normal income since such income pales into insignificance, both for the purpose of imposition of tax and all logical consequences
following thereon.
16. In nut shell, his submission was that when the tax was imposed and calculated under the Act on the deemed income under Section 115JB of the Act, for the purposes of the imposition of penalty the department could not revert back to the normal income as it would lead to an absurd situation of two different incomes of the same person for the same assessment year. Further more, when the income tax is paid on the „book profits‟ by a legal fiction, such legal fiction has to be taken to its logical conclusion. He referred to the following decisions in support of his submissions:-
(i) A.S. Glittre Vs. CIT, 225 ITR 739 @ 744
(ii) M. Venugoal Vs. Divisional Manager, LIC of India, AIR 1994 SC 1343, 1347-48
(iii) UOI Vs. Jalyan Udyog, AIR 1994 SC 88, 96-97
(iv) Builders Association of India Vs. UOI, 73 STC 370 at 400 (SC)
17. Ms. Bansal countered the aforesaid arguments of Mr. Vohra by submitting that the Supreme Court had now made it clear in CIT Vs. Gold Coin Health Care Limited that even where the assessed income and returned income both are at loss, penalty can be levied under Section 271 (1) (c) of the Act. Her submission was that no restricted meaning can be given to the term “amount of tax sought to be evaded”. Where the loss has been determined by the AO at a figure less than the returned income then it would amount to concealment of income and the tax on the said amount would be treated as the amount of tax sought to be evaded.
18. Ms. Bansal justified the penalty by arguing that as per the provisions of Section 115 JB of the Act where the book profit is determined at a figure higher than the returned figure, then the penalty could be levied, because as per the provisions of Section 115 JB (5) save as otherwise provided in this Section, all other provisions of the Act shall apply to the assessee and therefore, penalty is leviable with respect to book profits. CIT (A) has observed in para 2.6 of his order that as regards disallowance of depreciation of Rs. 32,51,906/- and disallowance of Rs. 3,030/- under Section 2 (24) (x), there is no need of adjudication because the same have not been considered while computing the income u/s 115 JB of the Act, it had been considered while computing loss under regular provisions of the Act and thereafter, (CIT (A) had considered merits of the case. Thus CIT (A) has not given any finding as to whether penalty could be levied on the income/loss as per the normal provisions of the Act when positive book profit is determined u/s 115JB of the Act.
19. However, it is to be stated that as per the scheme under Section 115JB, AO could not have made addition with respect to depreciation and disallowance under Section 2 (24) (x) because as per the judgment of Supreme Court I the case of Apollo Tyres Limited( 255 ITR 273) Balance Sheet prepared by the assessee as per Schedule VI of the Companies Act is sacrosanct, and the AO cannot tamper with the net profit declared in such Profit & Loss A/c. Therefore, AO could not have tampered with the figure of depreciation as claimed by the assessee as per the Companies Act, may be WDV method or straight line method or any other method.
20. We have considered the rival submissions. Judgment of the Supreme Court in Gold Coin’s (supra) clarifies that even if there are losses in a particular year, penalty can be imposed as even in that situation there can be a tax evasion. As per Section 271 (1) (c), the penalty can be imposed when any person has concealed the particulars of his income or furnished incorrect particulars of the income. Once this condition is satisfied, quantum of penalty is to be levied as per clause (3) of Section 271 (1) ( c) which stipulates that the penalty shall not exceed three times “ the amount of tax sought to be evaded”. The expression “the amount of tax sought to be evaded” is clarified and explained in Explanation 4 thereto, as per which it has to have the effect of reducing the loss declared in the return or converting that loss into income. It is in this context that in Gold Coins (supra) the Supreme Court explained the legal position as under:-
“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 defined „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 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.
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, aloss 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. 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 off 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”.
21. The question, however, in the present case, would be, as to whether furnishing of such wrong particulars had any the effect on the amount of tax sought to be evaded. Under the scheme of the Act, the total income of the assessee is first computed under the normal provisions of the Act and tax payable on such total income is compared with the prescribed percentage of the „book profits‟ computed under section 115JB of the Act. The higher of the two amounts is regarded as total income and tax is payable with reference to such total income. If the tax payable under the normal provisions is higher, such amount is the total income of the assessee, otherwise, „book profits‟ are deemed as the total income of the appellant in terms of Section 115JB of the Act.
22. In the present case, the income computed as per the normal procedure was less than the income determined by legal fiction namely „book profits‟ under Section 115 JB of the Act. On the basis of normal provision, the income was assessed in the negative i.e. at a loss of Rs. 369521018. On the other hand, assessment under Section 115 JB of the Act resulted in calculation of profits at Rs. 40163180.
23. In view thereof, in conclusion, the assessment order records as follows:-
“Assessed at Rs. 40163180 u/s 115 JB, being higher
of two. Interest u/s 234B and 234C has been charged
as per the provisions of Income Tax Act, 1961.
Penalty proceedings u/s 271 (1) © of the Income Tax
Act, 1961 have been initiated. Issue necessary forms.”
24. The income of the assessee was thus assessed under Section 115 JB and not under the normal provisions. It is in this context that we have to see and examine the application of Explanation 4.
25. Judgment in the case of Gold Coins (supra), obviously, does not deal with such a situation. What is held by the Supreme Court in that case is that even if in the income tax return filed by the assessee losses are shown, penalty can still be imposed in a case where on setting off the concealed income against any loss incurred by the 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 a minus figure. The court was of the opinion that „the tax sought to be evaded‟ will mean the tax chargeable not as if it were the total income. Once, we apply this rationale to Explanation 4 given by the Supreme Court, in the present case, it will be difficult to sustain the penalty proceedings. Reason is simple. No doubt, there was concealment but that had its repercussions only when the assessment was done under the normal procedure. The assessment as per the normal procedure was, however, not acted upon. On the contrary, it is the deemed income assessed under Section 115 JB of the Act which has become the basis of assessment as it was higher of the two. Tax is thus paid on the income assessed under Section 115 JB of the Act. Hence, when the computation was made under Section 115 JB of the Act, the aforesaid concealment had no role to play and was totally irrelevant. Therefore, the concealment did not lead to tax evasion at all.
26. The upshot of the aforesaid discussion would be to sustain the order of the Tribunal, though on different grounds. Therefore, while we do not agree with the reasoning and approach of the Tribunal, for our reasons disclosed above, we are of the opinion that penalty could not have been imposed even in respect of claim of depreciation made by the assessee. This appeal is accordingly dismissed.
