The Supreme Court reversed the order of Guahati High Court - definition of “income” in Section 2(24) of the Act is an inclusive one and includes losses also - upheld the clarificatory amendment of Section 143(1A) to be retrospective - the object of Section 143(1A) is the prevention of evasion of tax - provision should apply only to tax evaders - the burden is on the revenue to demonstrate that the assessee has so attempted to evade tax
Commissioner of Income-tax, Guahati & Ors. vs. M/s Sati Oil Udyog Ltd. & Anr.
[Civil Appeal No. 9135 of 2003]
Facts of the case
- The assessee in its annual return for assessment years 1989-1990 and 1991-1992 showed a loss. By assessment order, the Assessing Officer (‘AO’) levied an additional tax under Section 143(1A). Being aggrieved by such order, the assessee filed two separate writ petitions to challenge the constitutional vires of section 143(1A) and consequentially prayed for quashing of the order.
- Sub-section (1A) was introduced in section 143 of the Act by the Direct Tax Laws (Amendment) Act, 1989, w.e.f. 1st April, 1989, and it read as follows :
“(a) Where, in the case of any person, the total income, as a result of the adjustments made under the first proviso to clause (a) of sub-section (1), exceeds the total income declared in the return by any amount, the AO shall, -
(i) Further increase the amount of tax payable under sub-section (1) by an additional income-tax calculated at the rate of twenty per cent of the tax payable on such excess amount and specify the additional income-tax in the intimation to be sent under sub-clause (i) to clause (a) of sub-section (1)…”
- Thereafter, the Delhi High Court held in Modi Cement Ltd. vs. Union of India (1992) 193 ITR 91 and J. K. Synthetics Ltd. vs. Asst. CIT (1993) 200 ITR 584 (Del) and others, that the said sub-section (1A) of section 143 of the Act did not apply where, after the adjustments made by the AO, the assessee declared loss in return of income, and was reduced or was converted into income
- Thereafter, the Finance Act, 1993, clause (a) of sub-section (1A) of section 143 of the Act was substituted with retrospective effect from 1st April, 1989, levying additional tax not only in cases where as a result of adjustments made by the AO, the income declared by any person in the return was increased, but also in cases where loss declared by such person in the return was reduced or was converted into income
- The question of challenging the constitutional validity of the provisions of section 143(1A) was raised before the Hon’ble Gauhati High Court
- The Hon’ble Gauhati High Court observed that ‘the levy of such additional income-tax was not really a tax on the excess loss / reduced income declared by the assessee but was a punishment on the assessee for not declaring the loss / income in the return correctly and it was in the nature of a penalty though named as additional income-tax’.
- The Hon’ble Gauhati High Court reasoned that if an assessee is aggrieved by any adjustment in the intimation sent under section 143(1) of the Act, he can always file an appeal or revision against the said intimation and in case the adjustments made by the AO are altered in such an appeal or revision, the additional income-tax levied under sub-section (1A) of section 143 of the Act will accordingly be altered. Based on such reasoning, the Hon’ble Gauhati High Court held that the provisions of section 143(1A) were not unreasonable or arbitrary and not violative of Article 14 of the Constitution
- However, it was observed by the Hon’ble Gauhati High Court that prior to the amendment, even where return of loss was found to be incorrect, the assessee was not exposed to any penalty or prosecution in the absence of mens rea, whereas, retrospective amendment from 1st April, 1989, has done away completely with the element of mens rea for the purpose of imposing additional income-tax by way of penalty and has imposed a strict liability on the assessee
- Thus, Hon’ble Gauhati High Court held that the retrospective operation of the impugned amendment by the Finance Act, 1993, was therefore, unreasonable and arbitrary and ultra vires Article 14 of the Constitution
- It may be mentioned at the outset that the same provision in its retrospective operation had been upheld by the Kerala, Madhya Pradesh, Rajasthan, Karnataka and Madras High Courts
Key observations and decision of the Hon’ble Supreme Court
- The object of Section 143(1A) is the prevention of evasion of tax, i.e. 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 returned and assessed income
- A plain reading of the provision as it originally stood refers to ‘the total income’. It is settled law that at least since 1975 the word ‘income’ would include within it, both profits as well as losses. The same was accepted by the Hon’ble Supreme Court in the case of Joint Commissioner of Income-tax vs. Saheli Leasing & Industries Ltd., (2010) 6 SCC 384
- Even in the Circular dated 24-7-1976, the above position was clarified by the Central Board of Direct Taxes
- 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 that ‘income’ would include within it both profits as well as losses would only be clarificatory of the position that existed in 1989 itself
- The object of section 143(1A) is the prevention of tax evasion. Read literally, both honest assessee and tax evaders are caught within its net.
- Following the decision of Hon’ble Supreme Court in the case of K.P. Varghese vs. ITO (1982) 1 SCR 629, it was thus held 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
Based on the above, the Hon’ble Supreme Court upheld the retrospective clarificatory amendment of Section 143(1A) and set aside the judgments of the Division Bench of the Gauhati High Court.
This judgement once again reiterates the principle that amendments which are clarificatory in nature, are to be read retrospectively, because they only clarify the position of the legislation as it existed from that time onwards.
However, this does not affect the principle laid down by the five member constitutional bench in the case of Vatika Township Private Limited (Civil Appeal No.8750 of 2014) which observed that ‘…..legislations which modified accrued rights or which impose obligations or impose new duties or attach a new disability have to be treated as prospective….’. Thus, the substantive amendments would have to be looked at differently than clarificatory amendments.
Further, the Hon’ble Supreme Court has observed in the present case that ‘ ….we feel that since the provision has the deterrent effect of preventing tax evasion, it should be made to apply only to tax evaders….’, and the burden is on the revenue to demonstrate that the assessee has so attempted to evade tax. These observations would be important when interpreting penal provisions of fiscal laws.