Vildirect: IncomeTax-caselaws-1997-VIL-93-ITAT-PAT

1997-VIL-93-ITAT-PAT

Equivalent Citation: [2000] 244 ITR (A. T.) 98, ITD 64, 129, TTJ 60, 684,

Income Tax Appellate Tribunal PATNA

Date: 26.09.1997

ASSISTANT COMMISSIONER OF INCOME-TAX

SHARMA COLD STORAGE & ICE FACTORY (P.) LTD.

BENCH

Member(s) : R. D. AGRAWALA., V. K. SINHA., ABDUL RAZACK.

JUDGMENT

Per Shri V.K. Sinha, A.M. --- This is an appeal filed by the Department against an order of the CIT(A) cancelling a penalty of Rs. 1,25,053 imposed under section 271(1)(c) of the Act for concealment of income.

2. The assessee-company was running a cold storage and also had a small plant for manufacture of ice. The assessee disclosed a net loss for the current year as per Profit & Loss Account of Rs. 7,92,517, which was shown in the return of income also. During the assessment proceedings, certain additions were made on account of which the net loss for the year was reduced to Rs. 5,88,220 as per assessment order. We are concerned in this appeal with the following additions which were later taken into account for imposition of penalty under section 271(1)(c):

Rs.

(1) Excess receipts estimated : 71,092

(2) Expenses relating to earlier year: 1,06,837

(3) Income from ice estimated: 5,000

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1,82,929

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3. The accounts of the assessee were audited. Total receipts from cold storage were shown at Rs. 85,788, which was a steep decline compared to receipts of Rs. 2,69,074 in the immediately preceding assessment order. It was explained that the season for storage of potato starts from last week of February every year and in this year a large number of customers came in May 1986 because the purchase of potato itself was late. The Assessing officer did not find the explanation to be satisfactory. He found that expenses like power and fuel increased to Rs. 94,899 as against Rs. 69,209 in the preceding year. Further, the auditor in the audit report itself had mentioned that there was storage to the extent of 5,960 qtls. whereas the assessee had shown storage of 3,063.87 qtls. only. Another case of M/s. Motipur Cold Storage had shown tremendous increase of receipts in this year compared to the preceding year. The Assessing Officer held that the storage was actually 5,960 qtls. as per Audit Report and this led to an addition of Rs. 71,092 to the Cold Storage receipts.

4. The Assessing Officer further noticed that the Profit & Loss Account contained a claim for deduction of Rs. 1,06,837 relating to earlier years. According to the assessee, a sum of Rs. 1,01,300 was charged as lump sum by Bihar State Financial Corporation as interest and adjusted against capital subsidy which was received by the assessee. It was, therefore, charged to the Profit & Loss Account in one year only. There was another amount of Rs. 5,537 which related to electricity charges for the month of March 1985, and according to the assessee, this could not be visualised in the earlier year. The Assessing Officer was not satisfied and added a sum of Rs. 1,06,837 to the assessee's income.

5. The assessee did not show any income from ice plant during the year, although an income of Rs. 9,000 was shown in the preceding year. It was stated that the boring machine was not functioning and was under repair during the summer season, from 30-5-1985 to 17-7-1985. The Assessing Officer observed that manufacture of ice starts from April and continues upto October and, therefore, he estimated the income from ice at Rs. 5,000.

6. In appeal before the CIT (Appeals), the addition of Rs. 71,092 was upheld, rejecting the assessee's contention that there was a typing error in the Chartered Accountant's Report in Schedule 'C' where the season was wrongly, mentioned as 1986 as against season 1985, in support of which a corrigendum, issued by the Chartered Accountant, was furnished.

7. Regarding the disallowance of interest of Rs. 1,01,300, a copy of letter from the Director of Industries was filed before the CIT (Appeals) in respect of subsidy of Rs. 2,34,450, out of which Rs. 1,01,300 was debited out of the sanctioned grant. The letter did not indicate that this was on account of interest relating to earlier period. The CIT(Appeals) directed the Assessing Officer to verify the above contention from the Bihar State Financial Corporation and in case the above liability was ascertained for the first time in the relevant accounting period, allow its deduction. No specific relief was allowed regarding the bill for electricity consumption of Rs. 5,537 for March 1985.

8. No appeal was filed regarding an addition of Rs. 5,000 on income from ice factory.

9. In penalty proceedings under section 271(1)(e), the assessee filed a written explanation. Regarding the addition of Rs. 71,092 it was stated that if the storage is examined on the basis of 1985 season and 1986 season, it would have been found that there was no substantial fall in cold storage. The following figures were given in support of the contention :

Storage and rent during the 1985 and 1986 season :

Storage (Q. Kg.) Rent

Season 1985 : Up to 31-3-1985 : 7,665.37 2,14,630 = 36

From 1-4-1985 : 1,236.95 34,634 = 60

Season 1986 : Up to 31-3-1986 : 1,826.92 31,153 = 76

From 1-4-1936 : 4,327.52 1,21,170 = 56.

10. It was further explained that if financial year was taken as a unit, then there would appear to be a decline in storage and rent as following figures will show, which were really derived from the earlier figures :

Storage and rent during the asstt. Yr. 1986-87 :

(1-4-1985 to 31-3-1986)

Qt. Rs.

1,236.95 34,634 = 60

1,826.92 51,153 = 76

3,063.87 85,788 = 36.

11. It was next submitted that M/s Motipur Cold Storage was not a comparable case, since it had a storage capacity of 40,000 qtl. whereas the capacity of the assessee-company was 10,000 qtls. only. Further, payment of electricity bill was no measure for storage because expenditure under this head was shown as and when bills were received.

12. It was further explained that the Chartered Accountant has rectified the mistake by issuing a corrigendum and, therefore, could not be the basis for imposition of penalty.

13. Lastly, reliance was placed on the proviso below Explanation 1(b) to section 271(1)(c) and it was submitted that the explanation was bona fide and all facts relating to the explanation and material to the computation of the income were disclosed by the assessee and. therefore, no penalty was leviable.

14. The Assessing Officer was not satisfied with the above explanation. He reiterated the reasons for addition of Rs. 71,092 and added that the addition had been confirmed by the CIT (Appeals).

15. Regarding the addition of Rs. 1,06,837, the Assessing Officer stated that the matter had been set aside by the CIT (Appeals) and, thereafter, in the penalty proceedings a reference had been made to the Bihar State Financial Corporation. Their reply was that it was wrong on the part of the assessee to say that interest liability was ascertained for the first time during the year under consideration. The Bihar State Financial Corporation was raising demand notices on a half-yearly basis from year to year and the assessee was well aware of this liability. It was only when the assessee did not pay the interest, that a deduction of arrear of interest relating to several years had been made while making payment of capital subsidy. In view of this, the Assessing Officer held that the assessee should have debited the interest amount in the year of liability and it was not deductible in the year under consideration.

16. Regarding the income from ice factory, the Assessing Officer observed that no appeal had been filed regarding this addition.

17. Some case law was also relied upon. Finally, he held that addition of Rs. 1,83,229 will be treated as concealed income and he imposed minimum penalty @ 100% of the tax, which amounted to Rs. 1,25,053.

18. The same arguments were reiterated before the CIT (Appeals) regarding the addition of Rs. 71,092. Regarding the addition for interest of Rs. 1,01,300 it was submitted that the entire penalty order had been vitiated, since the Assessing Officer did not pass any order under section 251 to give effect to the order of the CIT (Appeals) before imposing penalty. Further, the assessee was not confronted with the result of any enquiry conducted from the Bihar State Financial Corporation, and the material collected behind the assessee's back, in course of penalty proceedings, could not be utilised against the assessee. It was further submitted that no such half-yearly demand notices had been served on the assessee by the Bihar State Financial Corporation.

19. In the end, a legal objection was also raised before the CIT (Appeals). It was stated that there was no tax sought to be evaded, since the assessment had resulted in a loss and, therefore, penalty could not be levied under section 271(1)(c). Such penalty could be levied only if there was a positive income in the completion of the assessment. Reliance was placed on the decision of the Punjab & Haryana High Court in CIT v. Prithipal Singh & Co. [1990] 183 ITR 69 and the decision of the Madras High Court in CIT v. C.R. Niranjan [1991] 187 ITR 280.

20. After stating the facts and the arguments before him, the CIT(Appeals) cancelled the penalty after a very brief observation which is reproduced below:

"8. I have carefully considered the above submissions. Considering the totality of the facts and the legal provisions as discussed above I am of the opinion that this is not a fit case for the imposition of penalty for concealment of income under section 271(1)(c). The order of the Assessing Officer thereunder is accordingly cancelled and the appeal is allowed."

21. Thus, the penalty was cancelled both on account of legal objection and on merits.

22. The ld. DR. first dealt with the legal objection that there was no tax sought to be evaded, since the assessment had resulted in a loss and, therefore, the penalty could not be levied. Our attention was invited to the decision of Bombay Bench 'B' of the Tribunal in case of Laxmichand Bhagaji v. Dy. CIT [1994] 48 ITD 322 where it was held that as far as the law as it existed from 1-4-1976 is concerned, keeping in view Explanation 4(a) below section 271(1)(c), penalty can be levied under section 271(1)(c) even in a case where returned income and finally assessed income are losses. The ld. D.R. pointed out that the decision of the Punjab & Haryana High Court in case of Prithipal Singh & Co. had been duly considered in the above decision and it had been noticed that the assessment order concerned was 1970-71 when Explanation 4 below section 271(1)(c) was not in existence. He, therefore, submitted that the preliminary/legal objection should be rejected.

22A. Replying to the above submissions, the ld. counsel for the assessee submitted that the Supreme Court had held in CIT v. G.R. Karthikeyan [1993] 201 ITR 866/68 Taxman 145 that the meaning of "Income" should be the same as that of the word occurring in Legislative List. The meaning was of the widest amplitude and must be given natural and grammatical meaning. According to him, such a meaning would not include "Loss" and peculiar results would follow if income was clubbed with loss everywhere. Our attention was invited to section 167A of the Act, inserted by the Finance Act, 1992 w.e.f. 1-4-1993, according to which, in case of a firm which is assessable as a Firm, tax shall be charged on its total income at the maximum marginal rate. The ld. counsel submitted that it could not be conceived that tax would be charged on total loss also at maximum marginal rate.

23. We will dispose of the preliminary legal objection first before going to the merits. This question has been examined in considerable detail in the decision of the Bombay Bench of the Tribunal in case of Laxmichand Bhagaji. It was observed that the matter can be appreciated properly only when the changes in law relating to levy of penalty from time to time are noticed. The decisions of various courts should then be related to the law as it existed at the relevant time. A chart giving a comparative account of the changes right from section 28(1)(c) of the Indian Income-tax Act, 1922 to section 271(1)(c) of the Income-tax Act, 1961 has been given, pointing out the law prior to 1-4-1968, the law from 1-4-1968 to 31-3-1976 and the law from 1-4-1976. We are concerned here with the law from 1-4-1976 when sub-clause (iii) of section 271(1) stood amended as under :

"(iii) in the cases referred to in clause (c), in addition to any tax payable by him, a sum which shall not be less than, but which shall not exceed twice, 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."

Simultaneously w.e.f. 1-4-1976, the measure of penalty became "Tax sought to be evaded" and this phrase was defined by clause (a) of Explanation 4 below section 271(1)(c) of the Act as under :

"Explanation 4: For the purposes of clause (iii) of this sub-section, the expression 'the amount of tax sought to be evaded',---

(a) in any case where the amount of income in respect of which particulars have been concealed or inaccurate particulars have been furnished exceeds the total income assessed, means the tax that would have been chargeable on the income in respect of which particulars have been concealed or inaccurate particulars have been furnished had such income been the total income;"

24. In case of Parithipal Singh & Co. the assessment year concerned was assessment year 1970-71 when Explanation 4 below section 271(1)(c) was not in existence and, therefore, the case does not support the assessee. Similarly, the case of C.R. Niranjan was concerned with assessment year 1969-70, which is again before 1-4-1976 and the case, therefore, does not support the assessee.

25. On the other hand, the decision of the Kerala High Court in the case of CIT v. India Sea Foods [1976] 105 ITR 708 has referred to the law after 1-4-1976 and supports the Department's stand [para 37 of the decision in Laxmichand Bhagaji's case ]. In case of CIT v. J.H. Gotla [1985] 156 ITR 323/23 Taxman 14J (SC), the Supreme Court held that the word "Income' includes loss in connection with section 16(3)(a) of the Indian Income-tax Act, 1922 corresponding to section 64 of the Income-tax Act, 1961. In case of CIT v. Harprasad & Co. (P.) Ltd. [1975] 99 ITR 118 (SC) it was held by the Supreme Court that profits and gains represented "plus income" were as the loss represented "minus income" and this was derived from the charging provisions of the Act. These cases were found to support the stand of the Department (para 38 of 48 ITD 322). In the end, the Bombay Bench of the Tribunal held that as far as the law as it. existed from 1-4-1976 is concerned, keeping in view Explanation 4(a) below section 271(1)(c) of the Act, penalty can be levied under section 271(1)(c) even in a case where the returned income and finally assessed income are losses.

26. The ld. counsel for the assessee has invited our attention to the decision of the Supreme Court in G.R. Karthikeyan's case but we are unable to see how it helps the assessee. it was held that the meaning of "Income" is of the widest amplitude and must be given natural and grammatical meaning. The observations were made in a different context considering the conclusive definition of "Income" in section 2(24) of the Act. It was held that "Winnings" was not confined to games of gambling nature or races and prizes or prizes received in car rally for testing skill and endurance. The question whether income would include "Loss" was not under consideration by the Hon'ble Supreme Court in this case. Therefore, it does not support the assessee.

27. Regarding the provisions of section 167A of the Act, no doubt, the interpretation will have to be done considering the totality of facts and circumstances. In the present case, before us, it is not merely a question of substituting the word "Income" by the word "Loss" but interpreting the provisions of Explanation 4(a) below section 271(1)(c) of the Act. In view of above, we concur with the decision of the Bombay Bench of the Tribunal in the case of Laxmichand Bhagaji and hold accordingly that the penalty is leviable in the present case even though the returned income and assessed income were both losses. The preliminary objection is, therefore, rejected.

28. We now come to the merits of the case. The ld. D.R. reiterated the earlier arguments and added that after the order of the CIT (Appeals), the Tribunal had confirmed the addition of Rs. 71,092 in the quantum appeal by the assessee in ITA No. 347 (Pat.) 1990, dated 16-5-1994. A copy of the order of the Tribunal was also placed before us. He submitted that there was no bar to investigation regarding the addition of Rs. 1,01,300 being made in penalty proceedings, since penalty proceedings were quite separate from assessment proceedings. Further, according to him, the case fell under Explanation 1(b) to section 271(1)(c) of the Act, that is, the assessee was not able to substantiate the Explanations and, therefore, the additions were deemed to represent income in respect of which particulars have been concealed. He, therefore, submitted that the penalty should be restored.

29. The ld. counsel for the assessee, on the other hand, took us through the explanation given by the assessee in reply to the show-cause notice for penalty issued by the Assessing Officer and submitted that the Explanation was bona fide and all the facts relating to the same and material to the computation of the total income were disclosed by the assessee and, therefore, the case fell under the proviso below Explanation 1(b) to section 271(1)(c) and it went outside the purview of Explanation 1. Regarding the addition of Rs. 1,01,300 he reiterated the earlier argument that when no addition had been made in the assessment after the order of the CIT(Appeals) setting aside the addition, no question arose regarding penalty. He, therefore, submitted that the penalty had been rightly cancelled.

30. We have considered the rival submissions carefully. There are three additions on the basis of which penalty was levied for concealment. We shall take them up separately.

31. An addition of Rs. 71,092 was made as additional receipts for cold storage. The reasons were decline in receipts in this year, increase in expenses on power and fuel, increase in receipts in M/s. Motipur Cold Storage and remarks of the auditor in Schedule 'C' of Contingent liabilities and notes forming part of the Balance Sheet as on 31st March 86. Here, the actual storage during the season 1985 was shown at Rs. 5,960.32 qtls. whereas according to the books, the storage was 3,066.83 qtls. The difference was treated as undisclosed receipts. In our opinion, the assessee is saved by the proviso below section 1(b) to section 271(1)(c) as far as this addition goes. It was explained that a typing error had taken placed and the figures related to season 1986 and not season 1985. A corrigendum issued by the auditor was also filed and has been noted by the CIT (Appeals) in the quantum appeal and also by the Assessing Officer in the penalty order. The reason for decline in receipts was also given and relevant figures have been reproduced above. It is true that the Explanation was not accepted and the addition was confirmed in quantum appeal by the Tribunal also yet the fact remains that the Explanation was bona fide and all facts relating to the same and material to the computation of the total income were disclosed. We, therefore, hold that no penalty is leviable with respect to this addition.

32. The situation, however, is different as regards the addition of Rs. 1,01,300 being arrears of interest relating to earlier years. The amount was claimed as a deduction in this year as a lump sum deduction against capital subsidy and it was nowhere disclosed that it related to earlier years. This fact was revealed only when the Assessing Officer sought clarification from Bihar State Financial Corporation after the directions of the CIT (Appeals) in quantum appeal. Thus the proviso below section 1(b) to section 271(1)(c) cannot come to the assessee's help. It is also significant that in the assessee's reply to the show-cause notice, issued by the Assessing Officer, there was no mention of this addition at all.

33. There remains the objection of the ld. counsel for the assessee that since no addition has been made in the computation of income, penalty is not leviable in law. In this context, we must highlight that the CIT (Appeals) did not delete the addition. Had he done so, the situation would have been different. However, he only set it aside with the direction for further enquiry. The matter was, therefore, open. Penalty proceedings are separate proceedings and can be taken up in law even before assessment is completed. There is no bar to it. The Supreme Court has held in P. Jayappan v. S.K. Perumal, First ITO [1984] 149 ITR 696/19 Taxman 1 that prosecution under section 276C/277 cannot be withheld on the ground that result of pending re-assessment is awaited. The two are independent proceedings. Similarly, assessment proceedings and penalty proceedings are independent proceedings. It is only for practical convenience that the result of assessment and appeals is awaited before penalty proceedings are finalised. However, there is no legal bar to it. We, therefore, uphold the action of the Assessing Officer in considering the sum of Rs. 1,01,300 for penalty even though the assessment in respect of it was pending.

34. It was objected before the CIT (Appeals) that the demand notices, sent by Bihar State Financial Corporation, were not served on the assessee. In our opinion, this is immaterial. It is not necessary that the demand notices should be served. The assessee was following mercantile system or accounting and the interest accrued at the specified intervals. The demand notices merely quantify the sum and did not affect the accrual. It is, therefore, evident that the interest had accrued earlier and this fact was not revealed by the assessee voluntarily. In these circumstances, it is not even necessary to invok the provisions of Explanation 1(b) to section 271(1)(c). We hold that the amount was concealed income of the assessee under the main provisions of section 271(1)(c) and penalty with respect to this amount is hereby restored.

35. The last amount to be considered is an addition of Rs. 5,000 as the income from ice factory. The assessee's Explanation that the factory did not work, was not accepted. In the facts and circumstances, we hold that here also the assessee is saved by the proviso below Explanation 1(b) to section 271(1)(c) and no penalty is leviable with respect to this amount.

36. In the result, the Departmental appeal is partly allowed.

Per Shri Abdul Razack, Judicial Member --- The order passed by my ld. Brother (AM) has been studied in conjunction with the decision of Bombay Bench 'B' of this Tribunal in the case of Laxmichand Bhagaji which has been authored by my ld. Brother being a party on the Bench with the ld. Judicial Member.

2. I have also studied the decision of the Amritsar Bench of this Tribunal in the case of Victory P.H.M. Transport Co. (P.) Ltd. v. ITO [1986] 17 ITD 857 (Asr.) and that of the Allahabad Bench of this Tribunal in the case of Omrao Industrial Corpn. (P.) Ltd. v. ITO [1990] 35 ITD 42 on the strength of which the decision in the case of Laxmichand Bhagaji was delivered. The Judgments of different High Courts and that of the Apex Court have also been carefully studied and examined by me keeping in mind the controversy raised in this appeal. Since copies of orders of Bombay and Ahmedabad Benches in the case of Mutual Plastics v. 12th ITO [IT Appeal No. 2965 (Bom.) of 1985 dated 28-7-1989], 5 Star Galvanizers v. Asstt. CIT [IT Appeal No. 5919 (Bom.) of 1989 dated 1-1-1990], Khedut Sahakari Khand Udyog Mandal Ltd. v. ITO [IT Appeal No. 218 (Ahd.) of 1988, dated 19-10-1989] referred in the case of Laxmichand Bhagaji are not available in this appeal record, I am unable to have the benefit of reasonings of my ld. Brothers in those cases.

3. I had discussed this case with my ld. Brother. I had pointed out to him that the Amritsar Bench of this Tribunal had followed its earlier decision in Prithipal Singh & Co. 's case which got approved by the Punjab & Haryana High Court as reported in Prithipal Singh & Co.'s case. In the discussion, I also drew the attention of my ld. Brother to para 40 of 35 ITD 42 (which is the decision in the case of Omrao Industrial Corpn. (P.) Ltd.) stating that the Judgment of the Punjab & Haryana High Court was distinguished because it was based on the law prevalent after 1-4-1976 through the matter before their Lordships related to assessment year 1970-71. While this is the view of Allahabad Bench of this Tribunal, the Bombay Bench of this Tribunal in the case of Laxmichand Bhagaji have held that since the Judgment of Punjab & Haryana High Court did not take into account and consider the law prevalent after 1-4-1976, therefore it was in-applicable. While this is so the Bombay Bench 'B' in Laxmichand Bhagaji's case took a view drawing support and inspiration from the decision of Allahabad Bench in the case of Omrao Industrial Corpn. (P.) Ltd. I, therefore, suggested to my ld. Brother to refer this case to the Hon'ble President, Income-tax Appellate Tribunal in terms of section 255(3) of the IT Act, 1961 to constitute a Special Bench owing to conflicting decisions of different Benches of this Tribunal. My ld. Brother did not agree to my suggestion because according to him there is no conflict indifferent decisions. According to my ld. Brother the controversy in this case is clearly covered by the decision rendered by the Bombay Bench 'B' in the case of Laxmichand Bhagaji which has been adopted by my ld. Brother in arriving at a conclusion on the legal aspect of the case. Left in such a situation I have no other option or choice except to pass a separate dissenting order. In my view the decision rendered by the Punjab & Haryana High Court in the case of Prithipal Singh & Co. and the decision of the Amritsar Bench in the case of Victory P. H.M. Transport Co. (P.) Ltd. and the other decisions of the Bombay Bench in the case of Mutual Plastics , 5 Star Galvanizers as well the decision of the Ahmedabad Bench in the case of Khedut Sahakari Khand Udyog Mandal Ltd. amply support the case of the assessee and the view which I am taking. My reasons are like this :

4. Return was filed by the assessee declaring loss of Rs. 7,92,517 and the assessment was completed computing the loss in a sum of Rs. 5,82,220 owing to certain disallowances aggregating to Rs. 1,82,929. No tax was, therefore, levied or demanded by the Assessing Officer (A.O.) as no income resulted on account of the disallowances. I am deliberately mentioning this because it is relevant for the purpose of my view. My ld. Brother as stated by me earlier has adopted the view taken in the case of Laxmichand Bhagaji and has come to the conclusion in this case also that, though the returned and assessed figure was loss; yet the assessee is liable for penalty as provided in section 271(1)(c) read with Explanation 4(a) to that provision of the IT Act, 1961. My view is that in such cases, that is to say where the returned and assessed figure is a loss then the assessee cannot be penalised under section 271(1)(c) of the Act even with the aid of Explanation 4(a) to that provision.

5. Let me elaborate. The dominant intent, object, spirit and Scheme of the IT Act is to charge tax as per section 4 of the Act on the total income as defined in section 5 of the Act earned by the assessee who is defined in section 2(7) of the Act during the previous year as defined in section 3 of the Act. The provisions of section 139(1) of the Act cast an obligation upon a person to file a return of his income or the income of any other person for which he is assessable as deemed assessee if the total income during the previous year exceeds the income chargeable to tax which varies from year to year as per the Finance Act of each year. Then there is a sub-section (2) attached to section 139 which lays down that if an assessee fails to file a return as laid down in sub-section (1) of section 139 then the Assessing Officer may issue a notice during the assessment year calling upon a person to file a return of income or the income of any other person for which he is chargeable to tax in accordance with the provisions of the IT Act, 1961. A little furthermore there are provisions contained in section 147 of the Act which lay down that if a person has omitted to file the return which he was required to file under section 139(1) of the Act or having filed it there is omission to disclose trite and full facts in relation to the chargeable income or the Assessing Officer has information in his possession that proper income escaped assessment to tax then he may upon formation of a reasonable belief issue a notice to the assessee as provided in section 148 of the Act directing such person to file a return, There are then provisions contained in the I.T. Act, 1961 for advance payment of tax in the financial year and tax payable on the basis of the return which is called as self assessment tax.

6. It is laid down in section 271(1)(c) of the Act that if the Assessing Officer is satisfied during the course of assessment proceedings that the assessee has either concealed the particulars of his income or furnished inaccurate particulars of such income then he may as per clause (iii) direct that such person shall pay by way penalty in the case referred to in clause (c) "in addition to any tax payable by him" a sum which shall not be less than, but which shall not exceed twice the amount of tax sought to be evaded by the reason of the concealment of particulars of such income or the furnishing or inaccurate particulars of such income.

7. A bare reading of the provisions contained in section 271(1)(c) clearly shows that the Legislature intended to penalise assessee's as a deterent to tax evasion and the tax payable is considered as a base and a measure for imposition of penalty. If correctly understood sub-clause (iii) following sub-section (c) to section 271(1) clearly makes out that if no tax is payable by an assessee then no penalty can be levied on him.

8. According to my ld. Brother in the case of Laxmichand Bhagaji the Judgment of Punjab & Haryana High Court in the case of Prithipal Singh & Co. is not applicable because their Lordships in that case have not considered the law which was prevalent after 1-4-1976 when Explanation 4(a) was added to section 271(1)(c) of the Act. I am unable to agree with this view. It is by now a well settled proposition that an Explanation added or inserted by the Legislature to clarify the main effect of the provision or for proper and unambiguous understanding of a particular provision. There are catena of decisions which lay down that the Explanation is not a substantive law or rule but explains the matter contained in the rule or a provision and that it does not stand either, by itself or go beyond the particular rule. Latest in point of time which I know is the decision of the Madras High Court in the case of CIT v. Maschmeijer Aromatics (India) (P.) Ltd. [1985] 214 ITR 22. I quote from the said Judgment of the Madras High Court:

"It is well settled that Explanation attached to a rule explains the matter contained in the said rule and does not stand either by itself or go beyond the particular rule. On the basis of this Rule, the Explanation will have to be understood in the context of the main rule 2 itself. The main rule 2, as stated earlier, relates situations mentioned in clause (iii), (vi) or (viii) of rule I. Under the circumstances this Explanation will not be applied or attracted to other clauses of rule 1. Since the case in hand is covered by clause (i) of rule 1, there is no scope for applying the Explanation to the facts and circumstances of the case."

The Supreme Court in the recent case of Sulochana Amma v. Narayanan Nair AIR 1994 SC 152 at page 156, para 7 have observed as under in relation to the effect of an Explanation. I quote :---

"It is a settled law that Explanation to a section is not a substantive provision by itself. It is entitled to explain the meaning of the words contained in the section or clarify certain ambiguities or clear them up. It becomes a part and parcel of the enactment. Its meaning must depend upon its terms. Sometimes it would be added to include something within it or to exclude from the ambit of the main provision or condition or some words occurring in it. Therefore, the explanation normally should be so read as to harmonise with and to clear up any ambiguity in the same section."

Applying the above tests it is amply clear that Explanation 4(a) to section 271(1)(c) is not a substantive provision by itself but has been attached to understand the meaning of the word "tax sought to be evaded' used in sub-clause (iii) of clause (c) to section 271(1) of the Act because that provision lays down the measure or quantum of penalty and 'tax sought to be evaded' has been made as the basis. It, therefore. cannot correctly be said that the Explanation 4, which is effective from 1-4-1976, is a substantive provision and, therefore, the Judgment of the Punjab & Haryana High Court in the case of Prithipal Singh & Co. is distinguishable or inapplicable to the facts of the case.

9. There is not a single provision under the entire Scheme of the IT Act casting an obligation upon a person to file a return where he has incurred or sustained loss during the previous year. The question then is, why countless assessees of all categories do file returns declaring loss incurred during the previous year and further scrupulously comply with the notices and requisitions issued by their respective Assessing Officer's from time to time laid down under different provisions of the Act. According to me such assessees file return of the loss sustained in a previous year in order to get it determined by the Assessing Officer in terms of section 80 of the Act so that he can get the benefit of such determined loss being set off from out of the income which he may earn in future coming years as per the provisions from sections 70 to 79(both inclusive) contained in Chapter VI of the Act.

10. Let me illustrate: Take the case of an assessee who submitted a return declaring loss, say of Rs. 1,00,000 and the Assessing Officer, upon scrutiny determined the loss say in a sum of Rs. 50,000 by disallowing a sum of Rs. 50,000. There is no loss of revenue by way of tax to the Government in such a case and it will be capricious and illogical yet to penalise an assessee in terms of section 271(1)(c) read with Explanation 4(a) of the Act on the sum of Rs. 50,000 which has been disallowed by saying

"Look, this is the amount (Rs. 50,000) on which you sought to evade tax, and though no tax is levied by me or payable by you as per IT Law on such disallowance; yet you must be penalised."

11(a). If the loss of an assessee is determined by the Assessing Officer is at a lesser figure than the returned then it is the assessee who will be the looser and sufferer and not the Government or the Revenue Authority because in the coming future years the assessee will get the lesser amount of loss being set off from its future income as per provisions contained in sections 70 to 79 of the Act. Then why penalise him under section 271(1)(c) ?

11 (b). Even without scanning the case laws on the subject I do not find any logic or rationale on the part of the Assessing Officer in penalising this assessee in terms of section 271(1)(c) of the Act even with the aid of Explanation 4(a) for reduction of loss from Rs. 7,92,517 to Rs. 5,82,200 owing to certain disallowances, considering it to be income on which the assessee sought to evade tax as defined in Explanation 4(a) to section 271(1)(c) of the Act. I do not think that Legislature which is most wise should on the one hand say in an enactment "not to levy or charge any tax on the loss incurred by the citizens and later on in the same enactment say "penalise citizens for reduction of losses treating the disallowances as income on which the assessee sought to evade tax." The Legislature or the Statute cannot contradict itself.

12. According to my ld. Brother, the penal provisions of section 271(1)(c) have undergone change from 1-4-1976 and, therefore, the judgment of the Punjab & Haryana High Court in the case of Prithipal Singh & Co. which was for the assessment year 1970-71 was distinguishable. I have read the said Judgment of Punjab & Haryana High Court very meticulously and I do not find so. The Punjab & Haryana High Court was answering the questions which were referred by the Tribunal under section 256(1) and which I am extracting below for easy reference :---

"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding:

(a) that the provisions of the Explanation to section 271(1)(c) will not be attracted to the present case ?

(b) that the word 'income occurring in clauses (c) and (iii) of section 271(1) refers to a positive income only and not to a loss?

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in cancelling the penalty order passed by the Inspecting Assistant Commissioner by holding that no penalty could be levied against the assessee?"

While answering these questions their Lordships, though concerned with the assessment year 1970-71, were yet considering whether where the returned and assessed figure is loss penalty was still leviable. And in answering the referred questions their Lordships have read and considered the effect of Explanations 3 and 4 annexed to section 271(1)(c) of the Act. The observations are very pertinent and I also deem it useful to reproduce the same to support my view that the said Judgment squarely applies to the facts of the case and is not distinguishable. I quote the observations :---

"Penalty imposed is paid 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. Clause (iii) deals with the cases referred to in clause (c) under sub-section (1) of section 271 of the Act and it clearly provides therein that the penalty or further sum payable by a person would be in addition to any tax payable by him. Explanations 3 and 4 annexed to the said provision of law also presuppose taxable income with regard to the assessment year in question. If there is no taxable income or tax assessed for payment during the particular year, the question of evasion and consequently penalty do not arise. As is obvious from annexure 'B', the assessee was assessed finally at a loss figure amounting to Rs. 34,164 as pointed out at page 33 of the record. Thus, there was no income and so the motive to avoid tax during the year in question is completely missing. May be, it may give a benefit to the assessee in the coming year as the loss could be carried forward but, by no stretch of imagination, can it be said that, during the assessment year in question, the assessee had concealed its income."

13. Though not necessary; yet to buttress my view, I would like to state that in law when a judgment is delivered either by the Supreme Court or by the High Court then it is always presumed that the Supreme Court or the High Court have taken into consideration the law prevailing when the Judgment was delivered and it cannot be stated that the Courts have not considered the prevalent or existing law while deciding the issue by delivering the Judgments and hence such Judgment is in applicable. The Judgment of Punjab & Haryana High Court in the case of Prithipal Singh & Co. was delivered on 3-11-1988 and, it is, therefore, to be presumed that their Lordships while delivering that Judgment were fully aware of the presence and effect of Explanation 4(a) to the said provisions of section 271(1)(c) of the Act while answering the referred questions.

14. The Apex Court as well as various High Courts in countless cases have repeatedly emphasised that all the provisions of a statute have to be read, understood and construed harmoniously and in consonance and conformity with the intent, purpose, object and spirit of the entire scheme of an enactment as a whole and not in a piece-meal and truncated manner divorced from and in isolation with the main, basic and fundamental provisions of a statute or an enactment. I do not wish to discuss in detail here the various decisions of Courts in this regard and make my order lengthy and unweildy. It will be sufficient if a reference is made to the latest decision of the Kerala High Court in the ease of CWT v. Dominic Joseph [1992] 195 ITR 412 on which I could lay my hand.

15. I reiterate that the dominant, intent and purposes of enacting IT Act is to impose tax on income as defined in section 2(24) of the Act and not loss which cannot be described as income. Income means real income that is to say monetary gains which come in and which swell assessee's funds, capital, resources and boosts the economic prosperity of this country and not losses which in contradistinction to income, deplete funds, wealth and resources of citizens and ultimately Nation's prosperity.

16(a). According to my ld. Brother, the law relating to imposition of penalty for concealment of income or for furnishing inaccurate particulars of such income has undergone change from 1-4-1976 and, therefore, the judgment of Punjab & Haryana High Court and the other decisions of different Benches of this Tribunal except Allahabad Bench in the case of Omrao Industrial Corpn. (P.) Ltd. are inapplicable and cannot be followed to agree with the A/C. With respect, it is not so. The penalty provisions as contained in section 271(1)(c) of the Act have not undergone change from 1-4-1976. It is unaltered since its enactment in the year 1961 except that the word 'deliberately' was omitted from 1-4-1964 by section 40 of the Finance Act, 1964. 1 do agree with my ld. Brother that the measure and quantum of imposition of penalty under sub-clause (iii) to section 271(1)(c) has been substituted by Taxation Laws (Amendment) Act, 1975 and penalty of "twice" the amount of tax sought to be evaded was inserted as a measure punishment. This word 'twice' was omitted and the words 'three times' was inserted w.e.f. 1-4-1989 by virtue of Taxation Laws (Amendment) Act, 1989. But there is no alteration, change or substitution of the main provision of sub-clause (c) of sub-section (1) of section 271 nor any of its essential ingredients. They were not touched by Taxation Laws (Amendment) Act, 1975. Therefore, it cannot be said, contended or accepted that owing to changes in section 271(1)(c) of the Act w.e.f. 1-4-1976 the above-referred decisions are inapplicable. They are, in my view, in- applicable and the Revenue's appeal has, therefore, to be dismissed on the strength of those decisions.

16(b). My ld. Brother is further of the view that insertion of Explanation 4(a) w.e.f. 1-4-1976 had brought this assessee within the clutches and mischief of the penal provisions of section 271(1)(c) of the Act and, therefore, rightly penalised by the Assessing Officer. As already stated earlier, it is well-settled through catena of decisions that Explanation in an enactment is not a substantive law and that it is generally brought on the statute book to clarify the effect of a provision and clear the ambiguity or obscurity if any present in a particular provision of a statute. Sometimes an Explanation is added by the Legislature nearer to a provision to define the particular phrase without adding to the definition section of a statute. A bare reading of Explanation 4(a) extracted by my ld. Brother at pages 7 & 8 of his order clearly shows that it has been introduced to define the phrase "tax sought to be evaded' which word is used in sub-clause (iii) of clause (c) of section 271(1) of the Act which has also been extracted by my ld. Brother at page 7 of his order. This Explanation 4(a) is not a substantive provision by itself or on its own. It does not fasten any penal liability upon an assessee. It merely explains and defines to avoid future disputes and controversies regarding the true meaning of the words 'tax sought to be evaded' which is contained in sub-clause (iii) of section 271(1)(c) of the Act. The Legislature could have defined this phrase anywhere in the definition section 2 of the Act. But the Legislature in its wisdom perhaps thought it fit and desirable to define these words near the penal provision itself. But that does not mean that by insertion of this Explanation 4(a) the law has changed from 1-4-1976 so as to deprive this assessee the benefit of the decisions discussed above.

17. If the Legislature intended that income include a loss for imposition of penalty under section 271(1)(c) of the Act then it could have easily done so by adding it in the main definition section 2 or could have added an Explanation anywhere near to section 271(1)(c) of the Act as it did in sub-section (2) to section 64, where Explanation 2 is added which says that for the purpose of this section "income include loss".

18. A careful reading of sub-clause (iii) and Explanation 4(a) to section 271(1)(c) clearly shows that this assessee cannot be penalised at all because they speak of there being tax on income and such tax was sought to be evaded by the assessee. Sub-clause (iii) to section 271(1)(c) clearly says that in the case referred to in clause (c), "in addition to any tax payable by him', a sum which shall not be less than .... Thus, use of this phraseology "in addition to any tax payable by him" amply reveals the intention of the Legislature that it is only where income is concealed on which tax is payable that an assessee should be penalised and it shall be deemed that "he sought to evade tax" where a concealment or furnishing of inaccurate particulars of such income is detected by the Assessing Officer during the course of finalisation of assessment proceedings. In my view, Explanation 4(a) comes more to the rescue of the assessee than to the revenue. Tax is not payable on partial disallowance of a loss or an expenditure which went to decrease the loss. And when there is no tax on assessed or computed loss how can it be said, by any stretch of argument that the assessee sought to evade the same, viz., the tax. if the word 'loss' is substituted in place of the word 'income' in all places occurring in section 271(1)(c) or in sub-clause (iii) or Explanation 4(a) then it will give very incongruous and absurd results and the Courts have laid down that any provision of statute should not be construed or interpreted in such a manner that it gives incongruous and absurd results. Therefore, construing loss as income for the purpose of levy of penalty under section 271(1)(c) of the Act will lead to incongruity and absurdity because a person is not obliged to pay a rupee as tax on loss but yet has to suffer punishment by way of penalty under section 271(1)(c) of the Act and perhaps with this kind of analogy may even land him for prosecution under section 276C of the Act.

19. Reliance by the assessee's counsel on the latest judgment of the Supreme Court in the case of CIT v. G.R. Karthikeyan [1993] 201 ITR 866 is well taken and the ratio and principle laid down therein vindicates the assessee's stand. The decision of the Supreme Court in the case of J.H. Gotla laying down that income would mean loss for the purposes of section 16(3) of the IT Act, 1922 which is analogous to section 64 of IT Act, 1961, also cannot be imported here because we are dealing with a penal provision which has to be construed strictly on the basis of the words, phrases and language used. Almost all Courts have unanimously laid down that penal proceedings being quasi-criminal in nature, the penal provisions should be strictly construed and there should not be any intendment or 'ifs' and 'buts' while, interpreting those provisions particularly in a fiscal statute like IT Act. The latest judgment of the Bombay High Court in the case of CIT v. P.M. Shah [1993] 203 ITR 792 and that of the Madras High Court in the case of TMT. Thangalakshmi v. ITO [1994] 205 ITR 176 can be usefully referred to in regard to this proposition.

20. The essence of my view is that if the definition, charging, machinery and penalising provisions all are properly synchronised, aligned, read, understood and applied correctly in a proper perspective, then this assessee surely cannot be penalised for lesser assessment of loss than returned on account of which there is no tax evasion nor loss of a paisa towards Government revenue. In enacting the provisions of section 271(1)(c) and by adding Explanation 4 w.e.f. 1-4-1976 the Legislature never intended to penalise assessees of the instant type, but these provisions are intended to penalise those assessees who do not disclose true and correct income earned by them during the previous year and/or reduce the income by making false and incorrect claims and deductions with a view to evade tax which is due and payable legitimately as per the charging and machinery provisions of the IT Act.

21. Before concluding, I must hasten to add that I have greatest respect for my ld. Brother with whom this appeal was heard and for other Brother colleagues of Bombay and Allahabad Benches in the cases of Laxmichand Bhagaji and Omrao Industrial Corpn. (P.) Ltd. and I have not the least intention to sit in judgment over their decisions or views. I have discussed in a little greater detail certain salient features and aspects of this case with reference to the relevant provisions of the Act backed up by few decisions of Courts discussed by me at appropriate places in this order. If these were placed and presented before my ld. colleagues in the manner recorded by me, I am sure their decisions would have been otherwise. I have not ventured or made an attempt to critically examine or analyse the decision rendered by Bombay Bench 'B' of this Tribunal in Laxmichand Bhagaji's case which was authored by my ld. Brother sitting along with Brother Judicial Member on that Bench. I have only analysed that decision in the light of the judgments of various Courts on the subject as understood by me in arriving at a just decision in this case

22. In view of the foregoing discussion, I unhesitatingly hold that the assessee was unlawfully penalised under section 271(1)(c) of the Act and I do not find any fallacy or error in the reasoning on the part of the A/C in cancelling the penalty levied. It was rightly cancelled and, therefore, has to be upheld. Since I am holding, on the preliminary legal issue, that the assessee was unlawfully penalised under section 271(1)(c) of the Act, I am not going into the merits or demerits of the case as has been done by my ld. Brother.

23. In the end, the Revenue's appeal is dismissed.

STATEMENT FOR THIRD MEMBER REFERENCE AS PER SUB-SECTION (4) OF SECTION 255 OF THE IT ACT, 1961

As we have differed in our views in the above-mentioned IT. Appeal, we refer the below given point for the consideration of Third Member as provided in sub-section (4) of section 255 of the Act and request the Hon'ble President accordingly.

Point for Preference :

"Whether, in law and on the facts and in the circumstances of the case, relating to assessment year 1986-87, the assessee can be penalised under section 271(1)(c) read with Explanation 4(a) of the IT Act, 1961 for disallowance of expenditure amounting to Rs. 1,82,929 resulting in lesser loss of Rs. 5,88,220 being determined and assessed as against the returned loss of Rs. 7,92,517

THIRD MEMBER ORDER

Under sub-section (4) of section 255 of the Income -tax Act, 1961 (hereinafter referred to as the 'Act' for brief), I have been nominated by the Hon'ble President of the 'Appellate Tribunal' to act as a Third Member due to dissent in the disposal of the aforesaid appeal by the learned Members who originally heard it.

2. The point for reference runs as under :---

"Whether, in law and on the facts and in the circumstances of the case, relating to assessment year 1986-87, the assessee can be penalised under section 271(1)(c) read with Explanation 4(a) of the Income-tax Act, 1961, for disallowance of expenditure amounting to Rs. 1,82,929 resulting in lesser loss of Rs. 5,88,220 being determined and assessed as against the returned loss of Rs. 7,92,517?"

3. As is evident, the only point on which the Third Member is called upon to express his opinion revolves round the raging controversy as to whether in the case of a loss return if the amount of loss claimed by the assessee gets reduced due to its partial non-acceptance (patently covered by the penalty provisions) and the assessment still results in a loss figure, penalty under clause (c) of sub-section (1) of section 271 of the Act read with Explanation 4(a) thereto would be imposable or not. It is possible to answer this question sans the facts about which incidentally there is no dispute by either of the two sides and that is the reason I intend to skip over them to eliminate avoidable bulk of the order. I may, however, mention that while the learned Judicial Member suggested that the matter may be referred to the Special Bench, the same did not find favour with the learned Accountant Member mainly on the ground that the issue was squarely covered by the ratio of a decision of the Bombay Bench of the Tribunal in the case of Laxmichand Bhagaji to which incidentally he was also a party. Further, although it is gathered that the issue has been referred to the Special Bench in some other case but considering the fact that neither party made any prayer to me about doing/ suggesting so and I have been specifically assigned this case to act as a Third Member, I proceed to dispose it of on merits.

4. The principal basis for the two different views taken by the learned Members constituting the Division Bench is as follows as per the learned Accountant Member, in the Laxmichand Bhagaji's case referred to supra, the legislative changes made from time to time in the respective law, were properly taken note of. The present case is governed by sub-clause (iii) of sub-section (1) of section 271 of the Act, as it stood amended from 1-4-1976. It runs as under :---

(iii) in the case referred to clause (c), in addition to any tax payable by him, a sum which shall not be less than, but which shall not exceed twice, 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."

He also referred to the fact that simultaneously w.e.f. 1-4-1976 itself, the mode/measure of penalty was changed to "tax sought to be evaded", which phrase was defined by clause (a) of Explanation 4 appended below section 271(1)(c) of the Act. It runs as under :

"Explanation 4: For the purposes of clause (iii) of this sub-section, the expression 'the amount of tax sought to be evaded' ---

Meeting the ratio of Prithipal Singh & Co.'s case on which strong reliance was placed on behalf of the assessee, the learned Accountant Member observed that in that case, the assessment year involved was 1970-71 when Explanation 4 appended below section 271(1)(c), reproduced hereinbefore, had not seen sunshine. It, therefore, did not support the assessee's case, so did certain other cases become legally incapable of acting as an effective precedent for the same reason. Reference was thereafter made by him to several other decisions which included the case of J.H. Gotla wherein the Apex Court held that the word 'income' included "loss".

5. Disagreeing, the learned Judicial Member took the view that both on facts and in law to hold that penalty could be imposed in the situation, we are confronted with, would be legally incorrect and factually unfair as well incongruous. According to him, no law necessarily required a person suffering loss to file a return which the assessees were doing only with a view to claiming set off under sections 70 to 79 of the Act. Further, it was wholly illogical to levy penalty on an assessee who, to illustrate, if returned a loss of Rs. 1 lakh which on scrutiny decimated, say, to Rs. 50,000, by holding that he sought to evade tax-on an amount of Rs. 50,000. Coming to the legal aspect of the matter, the learned Judicial Member has been of the opinion that Explanation to a section is not a substantive provision by itself and in this case also Explanation 4(a) had been inserted only with a view to explaining the meaning of the phrase 'tax sought to be evaded" already existing in sub-clause (iii) of section 271(1)(c) of the Act. In this connection, he laid exphasis on the language of sub-clause (iii) appearing in section 271(1) of the Act, mainly on the phrase "in addition to any tax payable by him", which meant that penalty was imposable only and only if some tax was payable by an assessee. In a loss return since no tax was payable, no penalty was imposable.

6. I have heard both the sides in detail

7. Apart from supporting the view taken by the learned Accountant Member, the learned D.R. invited my attention to Explanation 6 inserted in section 271 of the Act by Direct Tax Laws (Amendment) Act, 1989 w.e.f. 1-4-1989 which runs as under :---

"Explanation 6.--- Where any adjustment is made in the income or loss declared in the return under the proviso to clause (a) of sub-section (1) of section 143 and additional tax charged under that section, the provisions of this sub-section shall not apply in relation to the adjustment so made."

8. The learned D.R. also placed reliance on the Special Bench decision of the High Court of Patna in the case of CIT v. Nathulal Agarwala & Sons [1985] 153 ITR 292 /22 Taxman 199 (FB).

9. As against this, the learned counsel for the assessee submitted that the term 'income' always meant a positive figure and wherever loss was intended to be included in this term, it had been specifically said so by the Legislature as in sub-section (2) of section 64 of the Act.

10. I have given my utmost consideration to the facts and circumstances of the case. Without being repetitive and providing bulk to my opinion on the controversy, which has been elaborately dealt with by my learned Brothers in their own manner, I would straightaway refer to the fact that penalty under section 271(1)(c) is imposable on a person who has concealed the particulars of his income or furnished inaccurate particulars of such income. The scale of penalty is provided in sub-clause (iii) of sub-section (1) of section 271 of the IT Act. The base is "the amount of tax sought to be evaded" by reason of the concealment of particulars of the income or the furnishing of inaccurate particulars of such income. The real question for consideration is as to what would constitute "the amount of tax sought to be evaded". This concept is statutorily clarified in Explanation 4 to section 271(1)(c), which is reproduced below :---

"Explanation 4 - For the purposes of clause (iii) of this sub-section, the expression "the amount of tax sought to be evaded"---

(b) in any case to which Explanation 3 applies, means the tax on the total income assessed;

(c) in any other case, means the difference between the tax on the total income assessed and the tax that would have been chargeable had such total income been reduced by the amount of income in respect of which particulars have been concealed or inaccurate particulars have been furnished."

With a view to appreciating the purport and scope of the above Explanation, it would be useful to go into its genesis. Since a need was felt for major amendments in respect of certain provisions of the Income-tax Act, particularly those relating to avoidance of Direct Taxes, the Government of India had appointed a Committee of experts in March 1970, headed by Mr. Justice K.N. Wanchoo, former Chief Justice of India. In its final report, the Wanchoo Committee had observed as under (refer to pages 5802 onwards of "Income-tax Law", 4th Edition, Volume 5 of Chaturvedi and Pithisaria) :---

"2.71 As the number of taxpayers increases, the tax administration has of necessity to rely more and more on voluntary compliance of tax laws by the assessees. Appropriate penal provisions form a necessary complement to this approach as they impel compliance

with the tax laws by imposing additional monetary burden on those who happen to go astray either in adevertently or by design. It is in this context that we have considered it necessary to review the penal provisions in the direct tax laws....

2.73 Penalty serves its purpose only so long as it is within reasonable limit. Once it crosses that limit, it is more likely to increase the rigidity of a taxpayer's recalcitrance than to reform him. If a tax evader is really unable to pay a heavy penalty, he would prefer to go underground and start business in benami names. Unduly harsh penalties thus breed only defiance of the law and have to be eschewed. The purpose of penalty should, however, be only to bend and not to break the taxpayer. We recommend that the quantum of penalty imposable for concealment of income should be with reference to the tax sought to be evaded, instead of the income concealed. Moreover, the minimum penalty imposable for concealment of income should be the amount of tax sought to be evaded and the maximum penalty imposable should be fixed at twice the said amount. It may also be clarified that 'tax sought to be evaded' in this context means the difference between the tax determined in respect of total income assessed and the tax that would have been payable had the income other than the concealed income been the total income. This would ensure that taxpayers are not made to pay penalty in respect of certain additions of income, which are not in the nature of concealment but are made only for certain technical reasons.

2.74 We are not unaware that linking concealment penalty to tax sought to be evaded can, at times, lead to anomalies. We would recommend that in cases where the concealed income is to be set off against losses incurred by an assessee under other heads of income or against losses brought forward from earlier years, and the total income, thus, gets reduced to a figure smaller than the concealed income or even to a minus figure, the tax sought to be evaded should be calculated as if the concealed income were the total income."

After considering the Wanchoo Committee report, the Government of India, by the Taxation Laws (Amendment) Act, 1975 made substantial changes in the provisions of section 271 of the Act. Once such significant change was introduction of Explanation 4, defining the expression "the amount of tax sought to be evaded", for the purposes of sub-clause (iii) of section 271[1) of the Act, reproduced above.

11. The aforesaid background and the consequent legislative changes make it manifest and abundantly clear that the Legislature was fully conscious of a situation where a citizen/assessee had returned a negative income which on assessment either became positive or came to a lesser minus figure, eventually as a result of some concealment of income or furnishing of inaccurate particulars of income by him, "tax sought to be evaded", had to calculated as if the concealed income were the total income. In effect, the fact that even after assessment, there remained a negative figure would be of no consequence, obviously because in any case, the income which was found to have been concealed would remain the same. Even at the cost of repetition, we would say that para 2.74 of the Wanchoo Committee's recommendation, referred to supra, specifically took stock of such a situation, as a sequel to which legislative changes were effected.

12. Applying the aforesaid dictum to the facts of the present case, as is evident from the point of reference under section 255(4) itself, the loss returned by the assessee at Rs. 7,92,517 eventually, as a result of disallowance of expenditure, got decimated to Rs. 5,88,220, the difference to the extent of Rs. 1,82,929 held to be representing income either concealed or in respect of which inaccurate particulars were furnished by him. It is this amount of Rs. 1,82,929 which partakes the character of 'total income' for the purposes of reaching the 'tax sought to be evaded' for imposing penalty under section 271(1)(c) of the IT Act.

13. In view of the foregoing, I agree with the view taken by the learned Accountant Member.

14. The matter will now go back to the regular Division Bench at Patna for disposal, as envisaged by the latter part of sub-section (4) of section 255 of the Act.

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