Commissioner of Income Tax vs Varalakshmi Chemind P. Ltd.

P.D. Dinakaran, J.—The above tax case appeal is directed against the order of the Income Tax Appellate Tribunal dated October 5, 2006, raising the following substantial questions of law:

(a) Whether, on the facts and circumstances of the case, the Tribunal had properly exercised its discretion and was right in deleting the penalty imposed u/s 271(1)(c)?

(b) Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the Assessing Officer has to prove with evidence that there was a deliberate attempt to conceal income before he could invoke the provisions of Section 271(1)(c), ignoring the Explanation 1 to Section 271?

The facts which led to the rise of the above appeal are as under:

The assessee filed its return for the relevant assessment year declaring a loss of Rs. 1,30,81,000. While completing the assessment u/s 143(3) of the Act, the Assessing Officer made two additions, viz., unexplained credit in the form of shares advance and unexplained sundry credits. The Assessing Officer adjusted the brought forward loss of Rs. 32,94,175 in relation to the assessment year 1994-95 against the income determined and levied the penalty u/s 271(1)(c) of the Act as the assessee had failed to prove the authenticity of share contributors and the sundry creditors. Aggrieved by the same, the assessee filed an appeal before the Commissioner of Income Tax (Appeals), who annulled the levy of penalty and decided the issue in favour of the assessee. The Tribunal, on appeal at the instance of the Revenue, following the decision in Commissioner of Income Tax Vs. A. Hariraman, , decided the issue in favour of the assessee. Hence, the above appeal.

Learned standing counsel appearing for the Revenue submits that the issue involved in the above appeals is covered by the decision of this Court in Commissioner of Income Tax Vs. A. Hariraman, , wherein it has held as follows:

It would be appropriate to refer to Section 271(1)(c) of the Act in this regard, which reads as under:

Failure to furnish returns, comply with notices, concealment of income, etc.--(1) If the Assessing Officer or the Commissioner (Appeals) or the Commissioner in the course of any proceedings under this Act, is satisfied that any person-....

(c) has concealed the particulars of his income or furnished inaccurate particulars of such income,

he may direct that such person shall pay by way of penalty,--

(i) [Omitted by the Direct Tax Laws (Amendment) Act, 1989, with effect from April 1, 1989] ;

(ii) in the cases referred to in Clause (b), in addition to tax, if any, payable by him, a sum of ten thousand rupees for each such failure ;

(iii) in the cases referred to in Clause (c), in addition to tax, if any, payable by him, a sum which shall not be less than, but which shall not exceed three times, the amount of tax sought to be evaded by reason of the concealment of particulars of his income or the furnishing of inaccurate particulars of such income.

(emphasis supplied).

The words "in addition to tax, if any, payable by him" employed in Sub-clauses (ii) and (iii) above and the words "amount of tax sought to be evaded by reason of such concealment of particulars of his income" employed in Sub-clause (iii) of Section 271(1)(c) of the Act are the deciding factors for invoking penalty proceedings u/s 271(1)(c) of the Act. A plain reading of Sub-clauses (ii) and (iii) of Section 271(1)(c) of the Act, particularly in the context of the words "in addition to tax, if any, payable him" employed in Sub-clauses (ii) and (iii) would make it clear that the penalty contemplated in all the above sub-clauses is a measure of tax payable by the assessee. In other words, if no tax is payable by the assessee, there would be no penalty which could be levied on the assessee.

As per the language in Section 271(1)(c) of the Act, there could be no case in which penalty could be levied where no tax is payable by the assessee since the quantification of the penalty is totally dependent upon the tax payable by the assessee. Therefore, the conclusion is irresistible that when the assessee is not liable to pay any tax, no penalty can be levied on the assessee, vide ADDITIONAL COMMISSIONER OF Income Tax, MADRAS-II Vs. MURUGAN TIMBER DEPOT., .

It is trite law that the loss cannot be taken into account in computing penalty. Similarly, the amount representing unexplained credit cannot be treated as concealed income for levying penalty, vide Commissioner of Income Tax Vs. C.R. Niranjan, .

The word "income" occurring in Clause (c) and Sub-clause (iii) of Section 271(1) of the Act refers to positive income only and not a loss. Penalty could be imposed only in addition to the tax payable. When there is no tax payable, the question of any penalty does not arise. In fact, evasion of tax is the sine qua non for imposition of penalty. If there is no taxable income or tax assessed for payment during a particular year, the question of evasion and, consequently, penalty do not arise. The penalty provisions of Section 271(1)(c), therefore, are attracted only in the case of an assessee having positive income and not loss, as the question of concealment of income to avoid payment of tax would arise only in the former case. Penalty is a deterrent measure to prevent evasion of tax and when there was no tax payable, there could be any such evasion so as to provide a scope for levying any penalty, vide Commissioner of Income Tax Vs. Prithipal Singh and Co., .

The view taken by the Punjab and Haryana High Court in Commissioner of Income Tax Vs. Prithipal Singh and Co., was upheld by the Supreme Court in Commissioner of Income Tax Vs. Prithipal Singh and Co., .

This court, in Ramnath Goenka (Decd. by L. Rs.) Vs. Commissioner of Income Tax, , following the decisions cited above, held that penalty is imposable only in cases where tax has been levied and that no penalty can be levied when the result of the computation made by the Assessing Officer is a loss. In other words, penalty is not leviable when the assessment did not show any taxable income, but net loss.

Applying the ratio laid down in the decisions cited supra, we do not find any error or illegality in the order of the Tribunal in deleting the penalty taking into account the income of the assessee is a net loss.

Finding no substantial question of law arising for consideration, the appeal is dismissed.

In view of the ratio laid down in the decision cited supra, we do not find any error or illegality in the order of the Tribunal in deleting the penalty. Finding no substantial question of law arising for consideration, these appeals are dismissed.