By TIOL News Service

NEW DELHI, MAR 24, 2015: THE issue before the Bench is - Whether the provisions of Sec 143(1A) can be invoked only where it is found that there is an attempt to evade tax. And YES is the answer.

Facts of the case

The assessee in its annual return for assessment years 1989-1990 and 1991-1992 showed a loss of Rs.1,94,13,440/- and Rs.1,80,22,480/- respectively. By an assessment order, the Assessing Officer levied an additional tax under Section 143 (1A) of Rs.5,62,490/- and Rs.8,09,290/- respectively for the two assessment years. The assessee filed writ petitions to declare the provisions of Section 143 (1A) as ultra vires and consequentially prayed for the quashing of the order dated 14.12.1992. The Single Judge who heard the two petitions upheld Section 143 (1A) as amended in 1993 prospectively but held that insofar as it operated with effect from 1989 on losses made by companies, the section was arbitrary and unreasonable and would, therefore, have to be struck down. The Division Bench agreed with the Single Judge and dismissed the two writ appeals before it.

In appeal before the Apex Court the Additional Solicitor General of India stated that the amendment made to Section 143 (1A) with retrospective effect was merely clarificatory and that even without such amendment, the same position would obtain qua losses as would obtain qua profits inasmuch as the expression "income" would comprehend both profits as well as losses. He cited a number of judgments. On being questioned by the Bench about the true construction of Section 143(1A), he very fairly submitted that since the object of Section 143(1A) was to prevent tax evasion, the said Section would have to be read in the light of the aforesaid object. Despite being served, none appeared for the assessee.

Held that,

++ on a cursory reading of the provision, it is clear that the 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;

++ a plain reading of the provision as it originally stood refers to "the total income".

++ the Additional Solicitor General is right in referring to the definition of "income" in Section 2(24) of the Income Tax Act, 1995 and drawing our attention to the fact that the said definition is an inclusive one. Further, it is settled law at least since 1975 that the word "income" would include within it both profits as well as losses. This is clear from Commissioner of Income Tax Central, Delhi v. Harprasad & Company Pvt. Ltd. 2002-TIOL-209-SC-IT-LB, paragraph 17 of which lays down the law;

++ this judgment has subsequently been followed in several judgments. The fairly recent judgment of this Court in CIT Joint Commissioner of Income Tax, Surat v. Saheli Leasing & Industries Ltd. 2010-TIOL-37-SC-IT-LB referred to the aforesaid judgment;

++ 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;

++ the Addl SG also cited before us the judgment of Shiv Dutt Rai Fateh Chand v. Union of India 2002-TIOL-417-SC-CT. In this judgment, the validity of the retrospective amendment of Section 9(2A) of the Central Sales Tax Act was in question. This Court held that the imposition of penalty by a tax authority is a civil liability, though penal in character. For that reason alone, retrospective imposition of a penalty would not be hit by Article 20(1) of the Constitution which concerns itself with penalties that are levied by criminal statutes;

++ 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;

++ we have already stated in our judgment that the object of Section 143 (1A) is the prevention of tax evasion. Read literally, both honest asessees and tax evaders are caught within its net. An interesting example of such a case is contained in Commissioner of Income Tax, Bhopal v. Hindustan Electro Graphites, Indore 2002-TIOL-865-SC-IT. On facts, the assessee had filed its return of income in which it showed that it had received a certain sum by way of cash compensatory support. Under the law as was then in force, the said amount was not taxable and, therefore, not included in the return. Subsequently, such cash assistance was made taxable retrospectively. Section 143 (1A) was pressed into service by the Department;

++ in the present case, the question that arises before us is also as to whether bonafide assessees are caught within the net of Section 143 (1A). We hasten to add that unlike in J.K. Synthetics case, Section 143 (1A) has in fact been challenged on Constitutional grounds before the High Court on the facts of the present case. This being the case, we feel that since the provision has the deterrent effect of preventing tax evasion, it should be made to apply only to tax evaders. In support of this proposition, we refer to the judgment in K.P. Varghese v. ITO 2002-TIOL-128-SC-IT;

++ on a strictly literal interpretation of Section 52 (2), the moment the fair market value of a capital asset by an assessee exceeds the full value of the consideration declared by the assessee, in an amount of not less than 15% of the value declared, the full value for the consideration for such capital asset shall be taken to be the fair market value. A strictly literal reading would take into the tax net persons who have entered into bonafide transactions where the full value of the consideration for the transfer is correctly declared by the assessee;

++ taking a cue from the Varghese case, 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 are set aside.

(See 2015-TIOL-28-SC-IT)