2007 (11) TMI 125 - HC - Income Tax

Constitutionality of section 143(1A)(a)(B) This section provide that where the loss declared had been reduced by assessee by reason of adjustments, additional tax can be levied under sub-section (1A) impugned provision is valid as it is not penal in nature but compensatory in nature - It is the device to check evasion of tax - by the insertion of this provision, the assessee may not be able to evade tax by resorting to the method of showing loss first and then reducing the loss

Issues Involved:
1. Maintainability of the Revenue's appeal.
2. Interpretation and retrospective application of section 143(1A) of the Income-tax Act, 1961.
3. Constitutional validity of section 143(1A) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Maintainability of the Revenue's Appeal:
The assessee raised a preliminary objection regarding the maintainability of the appeal, arguing that the appeal was incompetent and not maintainable because the assessee is a public undertaking wholly owned by the State of Rajasthan, and the Revenue did not seek clearance from the High Powered Committee set up by the Central Government. The assessee relied on several judgments, including Mahanagar Telephone Nigam Ltd. v. Chairman, CBDT, and State of Rajasthan v. ITAT. However, the court rejected this preliminary objection, noting that the appeal had been pending for 14 years and it was not feasible to ask the assessee to seek clearance at this stage.

2. Interpretation and Retrospective Application of Section 143(1A) of the Income-tax Act, 1961:
The main dispute centered on the interpretation of section 143(1A) of the Income-tax Act, especially after its retrospective amendment by the Finance Act, 1993, with effect from April 1, 1989. The Revenue argued that the learned single judge erred in relying on the Delhi High Court's judgment in Modi Cement Ltd. v. Union of India, which was later overruled by the Supreme Court in Asst. CIT v. J. K. Synthetics Ltd. The Supreme Court had clarified that the substituted sub-section (1A) applied even when the loss declared by an assessee was reduced due to adjustments made under sub-section (1)(a). This retrospective amendment covered the controversy in the appeal, thus favoring the Revenue. The Madhya Pradesh High Court in Sanctus Drugs Pharmaceuticals P. Ltd. v. Union of India upheld the validity of section 143(1A), stating that the provision aimed to tax the income and not the loss, and was compensatory in nature.

3. Constitutional Validity of Section 143(1A) of the Income-tax Act, 1961:
The assessee challenged the constitutional validity of section 143(1A), arguing that a penal clause could not be inserted with retrospective effect. The assessee cited several judgments, including CIT v. Hindustan Electrographite Ltd. and Star India P. Ltd. v. CCE, to support the contention that retrospective penal provisions were unfair and unjust. However, the court found that the provision was not penal but compensatory, designed to check tax evasion by preventing taxpayers from showing losses initially and then reducing them. The court agreed with the Madhya Pradesh High Court's view in Sanctus Drugs Pharmaceuticals P. Ltd., which held that Parliament could enact laws retrospectively and that section 143(1A) was a valid exercise of legislative power aimed at preventing tax evasion.

Conclusion:
The court concluded that:
1. The Revenue's appeal was allowed, and the impugned judgment dated January 19, 1993, was set aside.
2. The writ petition of the assessee was dismissed, and it was held that there was no unconstitutionality in section 143(1A)(a)(B) of the Income-tax Act.
3. No order as to costs was made.

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