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TMI Blog2022 (3) TMI 1134X X X X Extracts X X X X X X X X Extracts X X X X ..... on the latter income, at which income the same was assessed u/s. 143(3) on 16.12.2010. Subsequently, it was observed that prior period income of Rs. 6636.02 lacs, credited to the profit and loss account and duly returned as income for the year, was at net of prior period expenditure for Rs. 238.29 lacs, which was accordingly disallowed, assessing the income (under the regular provisions) at (-) Rs. 1,06,68,638 vide order u/s. 147 r/w s. 143(3) dated 21.3.2016. The same was further modified u/s.154 (on 11.01.2017) to bring on record the income under Minimum Alternate Tax (MAT) regime at Rs. 817.29 lacs, which income had remained unchanged. The said reassessment and modification were not challenged in appeal', attaining finality. 2.2 In the penalty proceedings, initiated on 21.3.2016, the assessee's explanation (dated 24.8.2016/PB pg. 93) of it being a Government company, which cannot, therefore, be attributed with the intent of concealing income, and that it had in fact incurred a loss for the* relevant year, was not found satisfactory by the Assessing Officer (AO). He, accordingly, levied penalty u/s. 271(1)(c) on the sum of Rs. 2,38,29,432 assessed on 21.3.2016 at the min ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... position, has issued a Circular (No. 25/2015, dated 3.12.2015/copy on record), stating so, and with reference to the amendment to Explanation 4 to section 271(1)(c) - which defines the term 'the amount of tax sought to be evaded' occurring in section 271(1)(c), by Finance Act, 2016, w.e.f. 01.04 2016, whereby the tax assessed under MAT provisions is also sought to be provided for the purpose of reckoning tax sought to be evaded, clarified that prior to 01.4.2016 no appeal be filed or pressed in such cases. 4. We have heard the parties, and perused the material on record. 4.1 The relevant part of the Board Circular 25/2015 reads as under: '3. In this context, Hon'ble Delhi High Court in its judgment dated 26.8.2010 in ITA No.1420 of 2009 in the case of Nalwa Sons Investment Ltd. held that when the tax payable on income computed under normal procedure is less than the tax payable under the deeming provisions of Section 115JB of the Act, then penalty under section 271(1)(c) of the Act could not be imposed with reference to additions/disallowances made under normal provisions. The judgment has attained finality. 4. Subsequently, the provisions of Explanation 4 to sub-sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Investment Ltd. (supra), the Bench had inquired if any SLP had been admitted against it, and if so, its status, inasmuch as dismissal of the SLP by a speaking order would imply a confirmation of the decision relied upon, while, on the contrary, its admission would suggest that the same cannot be relied upon (Kunhayammed & Ors. vs. State of Kerala [2000] 245 ITR 360 (SC)). Though the order dismissing the SLP (not quoted in the Board Circular), was not filed by Sh. Bardia, to practically the same effect is the acceptance by the Revenue of the decision in Nalwa Sons Investment Ltd. (supra) as final, issuing instructions to its' officers not to file or press an appeal for period prior to 01.04.2016, i.e., the date from which the substituted Explanation 4 (by Finance Act, 2015) comes into effect prospectively. This would imply AY 2016-17 onwards, or the previous year commencing 01.4.2015 (refer para 4 of the Circular). This is as with effect from the said, latter date, the substituted Explanation 4, which clarifies the issue in the matter, becomes operative. 4.2 It is well-settled that the law applicable for the levy of penalty u/s. 271(1)(c) is that as obtaining on the date of f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peals) or the Principal Commissioner to be false, or (B) such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed. (emphasis, ours) Explanation 1 to section 271(1)(c) deems concealment of particulars of income where the conditions set out in clause (A) or clause (B) of the said Explanation 1 are not met. The assessee stating of prior period expenses being not liable to be disallowed inasmuch as prior period income had been assessed for the current year, overlooks the fact that the expenditure can be allowed only in the computation of income for a particular previous year, so that expenditure relating to a preceding year/s gets ousted for being allowed at the threshold. That income, in the computation of which the expenditure is to be allowed, is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ictional High Court in S.S. Ratanchand Bholanath v. CIT [1994] 210 ITR 682 (MP). Further, where the expenditure is in terms of the relevant contract, its non-approval, being a matter internal to the assessee, may not be of any consequence for determining the accrual of the said expenditure. Further, even so, in case of a doubt or dispute, of which there is no whisper, a provision for expenditure, on the basis of the information available as at the date of the closure of accounts, i.e., as to the conditions as at the end of the relevant year, is to be made under the mercantile system of accounting, which the assessee is admittedly following. The booking of expenditure, adjusting the provision made, would be made in accounts on the resolution of the conflict. The assessee's case is sans any factual basis. That being the case, i.e., as to the facts and law, even an allowance of the prior period expenses for the preceding years may not be of much consequence, as it does not alter the settled law, only on the basis of which an assessment is to be made and, besides, on facts, the assessee may have been able to prove the facts for those years, while for the current year, as afore-stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d income for the relevant year. The claim, though confirmed for disallowance by the Tribunal, had been allowed by it for AY 2000-01, and admitted in appeal by the High Court for the current year. It was under these facts and circumstances that the Hon'ble Court held that penalty would not follow only because the claim was not sustainable in law, with no details of the expenditure claimed being stated inaccurately. If not so read or understood, it would mean that one could claim any, including admittedly impermissible expenditure, as (say) personal expenditure (not being a contractual obligation incurred for business purposes), as a deductible business expense, and no penalty would arise where the particulars of the personal expenditure claimed, viz. 'marriage expenses', are truthfully reported in the financial accounts, rubbishing the settled law in the matter, and making travesty of all law, reason and justice. Any non-admissible claim, as long as it is stated as such in the return, could be claimed with impunity, and would, for the reason of it being stated correctly, attract no penalty. The said decision must thus necessarily receive a balanced and reasonable interpr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I to 3 Explanation 4.-For the purpose 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 which 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.' (emphasis, supplied) A bare reading of sec. 271(1)(c) along with sec. 271( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3-314), it clarified that the same was only with a view to provide for penalty where the returned loss was reduced, even getting converted thereby into a positive income, so that in either case penalty was to be reckoned with reference to the amount of tax chargeable on the income, particulars in respect of which had been concealed or inaccurately furnished, as if it was the 'total income', giving thus a specific meaning and value to the said term. We may reproduce the relevant part thereof as under: (pg. 314) '10. A combined reading of the Committee's recommendations and the Circular makes the position clear that Expln. 4(a) to s. 271(1)(c) intended to levy the penalty not only in a case where after addition of concealed income, a loss 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 1st April, 1976 to 1st April, 2003 the position was that the penalty was leviable even in a case where addition of concealed income reduces the returned loss. 11. When the word "income" is read ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty' bear no relation to each other, or that the penalty could be levied de hors the tax on the relevant income; the sole basis for the latter being only the evasion of the former, as signified by the words 'by reason of' in section 271(1)(iii), providing the rationale for reckoning the penalty with reference to the tax chargeable on the relevant income. What is being sought to be clarified though is that the same is not to be understood to imply a one-to-one correspondence between the tax chargeable on the relevant income and an increase in the assessee' tax liability for the relevant year. A direct correspondence between the two may not be established, and a tax implication of the relevant income is sufficient. The law presumes the nexus, so that the conditions required for such reduction in or evasion of tax to materialize, which may only be in future, are regarded as satisfied. It is this rational nexus that gets lost or compromised where tax, though payable under the regular provisions, being lower than that payable under MAT, gets paid under the latter. The tax payable under either set of provisions being in a positive sum, the increased tax (due to the relevan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he concealed income 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 115JB 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 115JB of the Act. Hence, when the computation was made under s. 115JB 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.' (emphasis, supplied) In a case of reduction in loss, as in the instant case, no tax under the regular provisions irrespective of the adjustment thereunder in assessment, is payable, which fact is however irrelevant in view of Explanation 4(a), as further clarified by the Apex Court in Gold Coin Health Foods (supra). This would be the case irrespec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax mitigation, and for which the assessee would have, but for its' default having been detected and neutralized in assessment, stood to gain in terms of reduction of tax by way of carry forward of loss to that extent. The vital condition aforesaid, therefore, cannot be said to be met in such a case for the entire relevant income of Rs. 12 lacs, the deemed total income under Explanation 4(a), and with reference to which the tax sought to be evaded is to be worked out. Continuing further, a confusion could also- again absent in the instant case, arise where adjustments on account of relevant income are made in both assessments, i.e., under the normal and the special provisions, inasmuch as the same would lead to two amounts of tax sought to be evaded in terms of Explanation 4(a), i.e., prior to amendment by Finance Act, 2015, which specifies the said term for the limited purpose of s. 271(1)(iii). The deeming of book-profit as 'total income' u/s. 115-JB is only for determining the tax liability for the relevant year, and serves no other purpose. It is notable that the amendment of 2015 makes no change in the 'total income' as defined u/s. 2(45), or as referred ..... 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