Deputy Commissioner of Income Tax (Assessment) vs Ashok Paper Mills Ltd. Commissioner of Income Tax and Others Vs Sati Oil Udyog Ltd. and Another

D. Biswas, J.—The above two writ appeals and the connected Income Tax appeals preferred by the Revenue are being disposed of by this common judgment.

In C. R. Nos. 2072 of 1993 and 2089 of 1993( Sati Oil Udyog Ltd. and Another Vs. Commissioner of Income Tax and Others, ),the petitioners challenged the constitutional vires of Section 143(1A) of the Income Tax Act, 1961. The learned single judge by a common judgment dated June 12, 1998, disposed of the civil rules holding, inter alia, that the provisions in Sub-section (1A)(a) of Section 143 of the Income Tax Act, 1961, substituted by the Finance Act, 1993, are constitutionally valid, but the retrospective operation given to the provisions therein that additional Income Tax is to be imposed where the loss declared by an assessee is reduced as a result of adjustment is ultra vires the Constitution. The learned single judge holding thus, quashed the orders/intimations issued by the Revenue imposing additional Income Tax under the aforesaid sub-section.

We have heard Mr. K. P. Sharma, learned counsel for the Revenue, and Dr. A. K. Saraf, learned senior counsel for the respondents. The Revenue has preferred the appeals challenging the decision of the learned single judge to the effect that an additional Income Tax could not be levied/imposed with retrospective effect, i.e., from April 1, 1989.

There being no challenge to the decision of the learned single judge about the constitutional validity of the provisions of Sub-section (1A)(a) of Section 143, this court is only required to deal with the second limb of the order related to the retrospectivity of the provisions of the aforesaid sub-section substituted by the Finance Act, 1993. In order to appreciate this question, it is necessary to place hereinafter the facts which eventually culminated in the above two writ petitions.

In C. R. No. 2072 of 1993, the writ petitioner as assessee filed a return on December 27, 1989, indicating a total loss of Rs. 1,94,13,440 inclusive of the loss sustained in the current year to the tune of Rs. 79,36,126 and unabsorbed loss of the previous year of Rs. 1,14,77,316. The Deputy Commissioner of Income Tax, Guwahati, sent an intimation dated February 14, 1990, accepting the said return showing a total loss of Rs. 1,94,13,440 along with information that an amount of Rs. 6,035 was refundable to the assessee. But the said decision was unsettled by the notice dated October 20, 1992, issued u/s 154/155 of the Act wherein it was stated that the earlier intimation dated February 14, 1990, required amendment for a mistake apparent on the record in allowing depreciation u/s 32 of the Act. The assessee, in his reply dated November 25, 1992, and during the course of hearing, submitted that the depreciation amount of Rs. 49,78,225 claimed in the return be restricted to Rs. 1,08,267 as the plant and machinery were not put to use during the period under assessment. The assessee further pleaded that they still suffered loss and no Income Tax was required to be paid by them much less the additional tax under the amended provisions of Section 143. The Assessing Officer by order dated December 14, 1992, reduced the depreciation to the extent of Rs. 48,69,988 but rejected the assessee''s contention that additional tax could not be levied under the aforesaid section since such tax is leviable only when Income Tax is payable on the total income after adjustment. Aggrieved by the order of rejection, the assessee filed the civil rule for declaring the provisions of Section 143(1A)(a) ultra vires and for quashing the order of rejection dated December 14, 1992, imposing an additional tax of Rs. 5,62,480. The same assessee in C. R. No. 2089 of 1993 challenged the imposition of additional tax of Rs. 8,09,290 levied u/s 143(1A) of the Act on similar grounds for the assessment year 1991-92.

The answer to the question raised in the Income Tax appeals will follow the decisions in the writ appeals. The questions are related to the correctness and validity of the decision of the Revenue relying upon the decision of this court recorded by the learned single judge in Civil Rules Nos. 2072 of 1993 and 2089 of 1993 see Sati Oil Udyog Ltd. and Another Vs. Commissioner of Income Tax and Others, . Hence, for brevity, these are not quoted herein.

Sub-section (1A) was introduced by the Direct Tax Laws (Amendment) Act, 1989. It provided for levy of additional Income Tax at 20 per cent, where the total income of an assessee as a result of adjustment made under the first proviso to Clause (a) of Sub-section (1) exceeds the total income declared in the return. The provision of this new sub-section did not contemplate any tax on loss. The said provision was amended by the Finance Act of 1993 substituting Sub-clause (ii) of Clause (a) of Sub-section (1A) of Section 143 whereby additional tax has been levied even on loss worked out by the Assessing Officer after adjustment. Sub-section (1A) after the amendment of 1993 reads as follows :

"(a) Where as a result of the adjustments made under the first proviso to Clause (a) of Sub-section (1),--

(i) the income declared by any person in the return is increased ; or (ii) the loss declared by such person in the return is reduced or is converted into income, the Assessing Officer shall,--

(A) in a case where the increase in income under Sub-clause (i) of this clause has increased the total income of such person, further increase the amount of tax payable under Sub-section (1) by an additional Income Tax calculated at the rate of twenty per cent, on the difference between the tax on the total income so increased and the tax that would have been chargeable had such total income been reduced by the amount of adjustments and specify the additional Income Tax in the intimation to be sent under Sub-clause (i) of Clause (a) of Sub-section (1) ;

(B) in a case where the loss so declared is reduced under Sub-clause (ii) of this clause or the aforesaid adjustments have the effect of converting that loss into income, calculate a sum (hereinafter referred to as additional income tax) equal to twenty per cent, of the tax that would have been chargeable on the amount of the adjustments as if it had been the total income of such person and specify the additional Income Tax so calculated in the intimation to be sent under Sub-clause (i) of Clause (a) of Sub-section (1) ;

(C) where any refund is due under Sub-section (1), reduce the amount of such refund by an amount equivalent to the additional Income Tax calculated under Sub-clause (A) or Sub-clause (B), as the case may be."

The amendment of Sub-clause (ii) of Clause (a) of Sub-section (1 A) of Section 143 by the Finance Act of 1993 provided for levy of additional Income Tax with retrospective effect even where the loss declared by an assessee is further reduced by reason of adjustment made under Sub-section (1A). According to the learned single judge, the element of mens rea for the purpose of imposition of additional Income Tax has been made irrelevant and it has been imposed as strict liability even on loss suffered in order to prevent incorrect declaration in the return. The levy of this additional Income Tax despite the terminology, carries with it the imprint of penalty. On this ground the learned single judge concluded that the retrospective operation thereof levying additional Income Tax for the period when it was not so taxable is arbitrary and ultra vires the provisions of article 14 of the Constitution.

Dr. Saraf, learned senior counsel for the assessee, referred to a decision of the Supreme Court in Commissioner of Income Tax Vs. Hindustan Electro Graphites Ltd., . The case before the Supreme Court was that the asses-see-company did not reflect the cash compensatory support received by it in the return filed on December 29, 1989. The law in force at that time did not provide the cash compensatory support as taxable and, hence, it was not included by the assessee. Subsequently, the Finance Act, 1990, introduced a new Section 28(iii)(b) in the Income Tax Act, whereby cash compensatory support was made taxable. The Assessing Officer treated the assessee''s income from compensatory support as additional income under Sub-section (1A) of Section 143 of the Income Tax Act and levied tax at higher rate on the additional income and also charged interest u/s 234. The Revenue contended before the Supreme Court that once the Assessing Officer found that the assessee has not shown the cash compensatory support in his return, the levy of higher rate on additional income is justified. The Supreme Court rejected the contention of the Revenue holding as follows (page 52) :

"We have to consider if the stand of the Revenue is valid or will it not lead to unjust results for the assessee. The Revenue says u/s 143(1A), the Assessing Officer has no choice and he has to levy additional tax once he finds that the assessee has not shown the amount of the cash compensatory support in his return, whatever the reason be. The assessee contends it is something which is most improper and against the settled principles . . .

The case before us does not represent even a bona fide mistake. In fact it is not a case where under some mistaken belief the assessee did not disclose the cash compensatory support received by it which he could offer to tax. It is true that income by way of cash compensatory support became taxable retrospectively with effect from April 1, 1967, but that was by amendment of Section 28 by the Finance Act of 1990 which amendment could not have been known before the Finance Act came into force. Levy of additional tax bears all the characteristics of penalty. Additional tax was levied as the assessee did not in his return show the income by way of cash compensatory support. The Assessing Officer on that account levied additional Income Tax. No additional tax would have been leviable on the cash compensatory support if the Finance Act, 1990, had not so provided even though retrospectively. The assessee could not have suffered additional tax but for the Finance Act of 1990. After he had filed his return of income, which was correct as per law on the date of filing of the return, it was thereafter that the cash compensatory support also came within the sway of Section 28. When additional tax has the imprint of penalty, the Revenue cannot be heard to say that the levy of additional tax is automatic u/s 143(1A) of the Act. If additional tax could be levied in such circumstances, it will be punishing the assessee for no fault of his. That cannot ever be the legislative intent. It shocks the very conscience if in the circumstances Section 143(1A) could be invoked to levy the additional tax. The following observations by the Constitution Bench of this court in PANNALAL BINJRAJ AND ANOTHER Vs. THE UNION OF INDIA AND OTHERS. (AND OTHER CASES)., , 597 are apt :

''A humane and considerate administration of the relevant provisions of the Income Tax Act would go a long way in allaying the apprehensions of the assessees and if that is done in the true spirit, no assessee will be in a position to charge the Revenue with administering the provisions of the Act with "an evil eye and unequal hand" ''."

It would appear from the aforesaid judgment that the levy of additional Income Tax in the circumstances of the aforesaid case carries with it the imprint of penalty and the levy of the additional tax is not automatic u/s 143(1A). The ratio available in this judgment, in the given circumstances of the case at hand, lead to the same conclusion. This judgment of the Supreme Court has been taken into consideration the judgment in Assistant Commissioner of Income Tax Vs. J.K. Synthetics Ltd., , delivered by a larger Bench. The Supreme Court in this judgment held as follows (page 203):

"The substituted Sub-section (1A), therefore, made it clear that even where the loss declared by an assessee had been reduced by reason of adjustments made under Sub-section (1)(a), the provisions of Sub-section (1A) would apply. This being a retrospective amendment, it covers the controversy in this appeal and, therefore, the appeal would have to be decided in favour of the Revenue.

Learned counsel for the assessee, however, relied upon the judgment of a Bench of two learned judges of this court in Commissioner of Income Tax Vs. Hindustan Electro Graphites Ltd., . This was a case in which the return that the assessee had filed was correct by reason of the law as it stood when the return was filed. A retrospective amendment of Section 28 of the Act rendered that return incorrect. An adjustment in the return was made under Sub-section (1) of Section 143 and, therefore, the provisions of Sub-section (1A) were sought to be invoked. This was challenged and the High Court upheld the challenge, as did this court. It took the view that the additional penalty under Sub-section (1A) bore the imprint of a penalty and no penalty could be levied because the return filed by the assessee was correct when it was filed.

This judgment has no application to the facts of the present case for the reason that it is nobody''s case that a retrospective amendment has rendered a correct return filed by the assessee incorrect. The question here is only whether a loss which is reduced by reason of the application of the provisions of Sub-section (1)(a) falls within the ambit of Sub-section (1A).

We should add that we have reservations about the correctness of the judgment in Commissioner of Income Tax Vs. Hindustan Electro Graphites Ltd., principally because the assessee in that case had not challenged the provisions of Sub-section (1A)."

Mr. K. P. Sharma, learned counsel for the Revenue, with reference to the observation in paras. 4 and 7 submitted that the Supreme Court has not deprecated the retrospectivity of the amendment made in 1993. The observation in the aforesaid judgment, in our opinion, will have to be read as a whole. What is stated in para. 4 is that the controversy of that case was squarely covered because the provisions of the Act were given retrospective effect. This does not mean that the Supreme Court extended support to the retrospective amendment imposing penalty. In the concerned writ petitions the assessee has challenged the provisions of Sub-section (1A). Although the learned single judge upheld the legislative competence of such a legislation he had not approved of the retrospective operation because of the penal nature ingrained in the process of imposition of additional Income Tax. We have no reason to disagree with the reasoned decision of the learned single judge. The act or omission for which no additional Income Tax was payable as per law in force at a given time cannot be subjected to additional taxation with retrospective effect. We are unable to persuade ourselves to propound a view other than the above known concept specially when the imprint of penalty is ex facie visible in the amended provision.

Consequently the Writ Appeals Nos. 365 of 1998 and 345 of 1998 are hereby dismissed. The Income Tax Appeals Nos. 3 of 1999, 4 of 1999, 5 of 1999, 6 of 1999, 7 of 1999, 7 of 2000, 8 of 2000 and 20 of 1999 are hereby disposed of with the following directions :

(i) In I. T. A. Nos. 3 of 1999, 4 of 1999, 6 of 1999, 7 of 1999, 20 of 1999 and 7 of 2000 :

(a) Question No. 1 is answered in the positive.

(b) Question No. 2 is answered in the positive. (ii) In I. T. A. No. 5 of 1999 and 8 of 2000 :

(a) The question is answered in the negative.

S.K. Kar, J.

I agree.