2015 (3) TMI 854 - SC - Income Tax

Validity of the retrospective amendment to Section 143(1A) - whether the retrospective effect given to the amendment would be arbitrary and unreasonable inasmuch as the provision, being a penal provision, would operate harshly on assessees who have made a loss instead of a profit, the difference between the loss showed in the return filed by the assessee and the loss assessed to income tax having to bear an additional income tax at the rate of 20%? - Held that - Object of Section 143(1A) is the prevention of evasion of tax. By the introduction of this provision, persons who have filed returns in which they have sought to evade the tax properly payable by them is meant to have a deterrent effect and a hefty amount of 20% as additional income tax is payable on the difference between what is declared in the return and what is assessed to tax. In the present case as well, all assessees were put on notice in 1989 itself that the expression income contained in Section 143 (1A) would be wide enough to include losses also. That being the case, on facts here there is in fact no retrospective imposition of additional tax - such tax was imposable on losses as well from 1989 itself. Even on a reading of Section 143 1(a) which is referred to in Section 143 (1A), a loss is envisaged as being declared in a return made under Section 139. It is clear, therefore, that the retrospective amendment made in 1993 would only be clarificatory of the position that existed in 1989 itself. Taking a cue from the Varghese case 1981 (9) TMI 1 - SUPREME Court , we therefore, hold that Section 143 (1A) can only be invoked where it is found on facts that the lesser amount stated in the return filed by the assessee is a result of an attempt to evade tax lawfully payable by the assessee. The burden of proving that the assessee has so attempted to evade tax is on the revenue which may be discharged by the revenue by establishing facts and circumstances from which a reasonable inference can be drawn that the assessee has, in fact, attempted to evade tax lawfully payable by it. Subject to the aforesaid construction of Section 143 (1A), we uphold the retrospective clarificatory amendment of the said Section and allow the appeals. The judgments of the Division Bench of the Gauhati High Court, to held that the retrospective effect given to the amendment would be arbitrary and unreasonable inasmuch as the provision, being a penal provision, would operate harshly on assessee are set aside.

Issues Involved:
1. Constitutional validity of the retrospective amendment to Section 143(1A) of the Income Tax Act, 1961.
2. Interpretation of the term "income" within Section 143(1A).
3. Application of Section 143(1A) to both profits and losses.
4. Retrospective effect and its implications on assessees.
5. Burden of proof on the revenue to establish tax evasion.

Detailed Analysis:

1. Constitutional Validity of the Retrospective Amendment to Section 143(1A):
The primary issue was whether the retrospective amendment to Section 143(1A) of the Income Tax Act, 1961, was constitutionally valid. The Gauhati High Court had previously held that the retrospective effect was arbitrary and unreasonable, especially since the provision was penal in nature and would harshly affect assessees who declared a loss. However, other High Courts, including Kerala, Madhya Pradesh, Rajasthan, Karnataka, and Madras, upheld the retrospective operation of the same provision. The Supreme Court ultimately upheld the retrospective clarificatory amendment, stating that it was intended to prevent tax evasion and was not inherently arbitrary or unreasonable.

2. Interpretation of the Term "Income" within Section 143(1A):
The term "income" as used in Section 143(1A) was scrutinized. The Court referred to the inclusive definition of "income" in Section 2(24) of the Income Tax Act, which encompasses both profits and losses. The Court cited precedents, including *Commissioner of Income Tax Central, Delhi v. Harprasad & Company Pvt. Ltd.* and *CIT Joint Commissioner of Income Tax, Surat v. Saheli Leasing & Industries Ltd.*, affirming that "income" includes losses, thus supporting the view that Section 143(1A) applies to both profits and losses.

3. Application of Section 143(1A) to Both Profits and Losses:
The retrospective amendment clarified that Section 143(1A) applied to cases where the declared loss was reduced or converted into income due to adjustments. The Court noted that the provision aimed to deter tax evasion by imposing an additional tax of 20% on the difference between the declared and assessed income, which included cases of declared losses being adjusted.

4. Retrospective Effect and Its Implications on Assessees:
The Court examined whether the retrospective amendment imposed an undue burden on assessees. The amendment was introduced to address judicial pronouncements that had excluded losses from the scope of Section 143(1A). The Supreme Court held that the retrospective amendment was merely clarificatory and did not impose a new tax liability but clarified the existing legal position from 1989.

5. Burden of Proof on the Revenue to Establish Tax Evasion:
The Court emphasized that Section 143(1A) should be applied only to cases of tax evasion. Citing *K.P. Varghese v. ITO*, the Court ruled that the burden of proving tax evasion lies with the revenue. The revenue must establish that the lesser amount stated in the return was an attempt to evade tax lawfully payable. The Court held that Section 143(1A) could only be invoked where there was evidence of an attempt to evade tax, ensuring that honest assessees were not unfairly penalized.

Conclusion:
The Supreme Court upheld the retrospective amendment to Section 143(1A) as constitutionally valid, clarifying that it applied to both profits and losses. The Court emphasized that the provision aimed to prevent tax evasion and placed the burden of proof on the revenue to establish any attempt by the assessee to evade tax. The judgments of the Gauhati High Court were set aside, and the appeals were allowed without any order as to costs.

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