INCOME TAX ACT, 1961

Penalty under section 271(1)(c)- Applicability of Explanation 4-No levy of penalty on loss return

Assessee-company filed return of loss and AO made assessment at reduced amount of loss. Despite this he levied penalty upon the assessee-company under section 271(1)(c) on the ground that the assessee had furnished inaccurate particulars of its income. CIT(A) upheld the penalty. Tribunal was of view that the judgment of Punjab & Haryana High Court in CIT v. Prithipal Singh & Co. [1990] 183 ITR 69 and decision of Supreme Court in CIT v. Prithipal Singh & Co. [2001] 249 ITR 670 / 118 Taxman 330 would apply even after insertion of Explanation 4 to section 271(1)(c) with effect from 1-4-1976 and deleted the penalty on the ground that total income of the assessee was assessed at loss. Revenue held that amendment brought with effect from 1-4-2003 was declaratory in nature, therefore, retrospective in operation. The assessee submitted that the same being substantive in nature and being an amendment to the statute could not be said to be operative retrospectively. The High Court held that for imposition of penalty after 1-4-1976 it was not necessary that there must be a positive income and the levy of tax, for the penalty to be imposed under section 271(1)(c). Held:Section 271 is a penal provision and there are well established principles for the interpretation of such a penal provision. Such a provision has to be construed strictly and narrowly and not widely or with the object of advancing the object and intention of the Legislature. [Para 20]

The provisions of section 271(1)(c)(iii) prior to 1-4-1976, and after its amendment with effect from 1-4-1976, latter provisions being applicable to the relevant assessment year, being substantially the same except that in place of the word income in sub-clause (iii) to sub-clause (c) of section 271(1) prior to its amendment by Finance Act, 1975, the expression amount of tax sought to be evaded have been substituted. Explanation 4 inserted for the purpose of clause (iii) where the expression the amount of tax sought to be evaded, was inserted had in fact made no difference insofar as the main criteria, namely, absence of tax continued to exist, prior to or after 1-4-1976, changing only the measure or the scale as to the working of the penalty which earlier was with reference to the income and after the amendment related to the tax sought to be evaded. The sine qua non which was there prior or after the amendment on 1-4-1976 to the fact that there must be a positive income resulting in tax before any penalty could be levied continued to exist. The penalty imposed was in addition to any tax. If there was no tax, no penalty could be levied. The return filed declaring loss and assessment made at a reduced loss did not warrant any levy of penalty within the meaning of section 271(1)(c)(iii ) with or without Explanation 4. [Para 24]