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2005 (7) TMI 84 - HC - Income TaxPenalty - Whether the Tribunal was justified in confirming the view taken by the Commissioner of Income-tax (Appeals) holding that sub-clause (a) of Explanation 4 appended to section 271(1)(c) of the Income-tax Act, 1961, was applicable only if there was a positive income of an assessee and not applicable where even as a result of the detection of concealment or furnishing of inaccurate particulars of income, loss shown by such assessee got reduced or waived off? - Amended clause (iii) of Explanation 4 by the Finance Act, 2002, with effect from April 1, 2003, is prospective in nature and does not apply to the years in consideration. The amendment does not speak that it is clarificatory in nature - We answer the question referred to us in the affirmative, i.e., in favour of the assessee and against the Revenue.
Issues Involved:
1. Applicability of sub-clause (a) of Explanation 4 to section 271(1)(c) of the Income-tax Act, 1961. 2. Levy of penalty under section 271(1)(c) in cases of assessed loss or nil income. 3. Interpretation of "income" under section 271(1)(c) and its implications on penalty provisions. Issue-wise Detailed Analysis: 1. Applicability of Sub-clause (a) of Explanation 4 to Section 271(1)(c) of the Income-tax Act, 1961: The primary question referred to the court was whether sub-clause (a) of Explanation 4 appended to section 271(1)(c) applies only if there is a positive income of an assessee and not in cases where the loss shown by the assessee is reduced or waived off due to detection of concealment or furnishing of inaccurate particulars of income. 2. Levy of Penalty under Section 271(1)(c) in Cases of Assessed Loss or Nil Income: The court examined whether penalty provisions under section 271(1)(c) are attracted when the income assessed results in a loss or nil income. The Tribunal had upheld the Commissioner of Income-tax (Appeals)' decision that penalty provisions are not attracted in such cases, citing various precedents: - Star Galvanizers v. Asstt. CIT [1990] 38 TTJ 12 (Bombay Bench) - Mutual Plastics v. Twelth ITO [1989] 80 CTR (Tribunal) 45 (Bombay Bench) - H.T. Power Structures (P) Ltd. v. Asstt. CIT [1993] 45 ITD 571 (Ahmedabad Bench) - Indo-German Electricals v. ITO [1992] 41 ITD 445 (Jaipur Bench) - Indo-Gulf Fertilizers and Chemicals Corporation Ltd. v. Union of India [1992] 195 ITR 485 (Allahabad High Court) These cases consistently held that the word "income" means positive income and does not include a loss. Therefore, no penalty can be levied under section 271(1)(c) if the assessed income is nil or a loss. 3. Interpretation of "Income" under Section 271(1)(c) and its Implications on Penalty Provisions: The court reviewed the interpretation of "income" under section 271(1)(c) and its implications on the penalty provisions. The standing counsel for the Revenue argued that the concealed income is relevant for penalty purposes, even if the returned income was a loss or nil. They relied on the decision of the Karnataka High Court in P.R. Basavappa and Sons v. CIT [2000] 243 ITR 776, which held that income includes loss and penalty is imposable if the loss declared is reduced. The assessee's counsel argued that "income" refers to positive income, and unless actual tax is evaded, penalty should not be levied. They supported their argument with several decisions, including: - CIT v. Harprasad and Co. P. Ltd. [1975] 99 ITR 118 (SC) - CIT v. India Sea Foods [1976] 105 ITR 708 (Ker) - CIT v. Rowther Brothers [1979] 119 ITR 353 (Ker) - Samunder Bhan Sadh v. CIT [1991] 188 ITR 638 (All) - CIT v. Prithipal Singh and Co. [2001] 249 ITR 670 (SC) - Henri Isidore v. CIT [1999] 240 ITR 247 (Mad) The court noted that the amendment to section 271(1)(c) by the Finance Act, 2002, effective from April 1, 2003, clarified that penalty is leviable even if the income assessed is a loss. However, this amendment is prospective and does not apply to earlier years. Conclusion: The court concluded that the word "income" in section 271(1)(c) refers to positive income. Therefore, penalty provisions under section 271(1)(c) are not applicable in cases where the assessed income is nil or a loss. The court affirmed the Tribunal's decision and held that the amendment by the Finance Act, 2002, is prospective and not applicable to the assessment year in question. The question referred was answered in the affirmative, in favor of the assessee, and against the Revenue.
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