Rajes Kumar, J.:— The Income-tax Appellate Tribunal has referred the following question under section 256(2) of the Income-tax Act (hereinafter referred to as “Act”) relating to the assessment year 1985–86 for opinion to this court:
“Whether the Tribunal was justified in confirming the view taken by the Commissioner of Income-tax (Appeals) holding that subclause (a) of Explanation 4 appended to section 271(1)(c) of the Income-tax Act, 1961, was applicable only if there was a positive income of an assessee and not applicable where even as a result of the detection of concealment or furnishing of inaccurate particulars of income, loss shown by such assessee got reduced or waived off?”
2. The brief facts of the case are as follows: The assessee-opposite party (hereinafter referred to as the “assessee”) is a registered firm deriving income from business of tanning raw hides. The assessee had filed a return of income showing a profit of Rs. 3,57,454 but subsequently the same had been revised to Rs. 5,01,579. After allowing deductions under section 80HHC, even the revised return filed was at nil income. The assessing authority has also assessed the assessee at a nil income. Despite that the Assessing Officer initiated penalty proceedings, on the difference of income shown in the original return and in the subsequent revised return, the explanation of the assessee that there was no positive income even after the revised income and, thus, no penalty provisions were attracted, was not accepted and a penalty under section 271(1)(c) was imposed. Against the penalty order, the assessee filed appeal before the Commissioner of Income-tax (Appeals), which was allowed, and the penalty was deleted. The Revenue filed appeal before the Tribunal, which was rejected. The Tribunal held as follows:
“We have heard the parties at length and we are of the opinion that there is no infirmity in the order of the learned Commissioner of Income-tax (Appeals). The Bombay Bench of the Tribunal in the case of Star Galvanizers v. Asstt. CIT, [1990] 38 TTJ 12 held that where the assessee was assessed at a loss even after the addition of concealed income the provisions of section 271(1)(c) were not attracted. Likewise again the Bombay Bench in the case of Mutual Plastics v. Twelth ITO, [1989] 80 CTR (Tribunal) 45 had held that Explanation 4(a) to section 271(1)(c) deals with cases of positive income only and it does not specifically provide for levy of any penalty in case of assessed loss. Accordingly, in the said case, penalty imposed was deleted. Again the Ahmedabad Bench in the case of H.T Power Structures (P) Ltd. v. Asstt. CIT, [1993] 45 ITD 571 had held that where the assessment had resulted in a loss, penalty under section 271(1)(c) would not be leviable even on the basis of Explanation 4 to section 271(1)(c) as inserted with effect from April 1, 1976. Even the Jaipur Bench in the case of Indo-German Electricals v. ITO, [1992] 41 ITD 445 (copy filed in the compilation) had held that where total the income is assessed at a loss, no penalty under section 271(1)(c) is leviable: Even the hon'ble Allahabad High Court in the case of Indo-Gulf Fertilizers and Chemicals Corporation Ltd. v. Union of India, [1992] 195 ITR 485 had laid down a ratio that income means positive income and it does not mean a case of overall loss. No doubt it was a question of levy of additional income-tax under section 143(1A), yet the point involved was the same as to whether even after certain additions the overall result was loss.
All the decisions mentioned above clearly lay down that the word ‘income’ as defined in section 2(24) means a positive income and it does not mean a loss. Hence, in a case where even after certain additions the overall picture is either nil income or of loss, it cannot be said that there was any mens rea on the part of the assessee to conceal any income and thereby no penalty provisions could be attracted. We, therefore, hold that the order passed by the learned Commissioner of Income-tax (Appeals) was perfectly correct and justified and does not call for any interference.”
3. Heard Shri R.K Upadhyaya, learned standing counsel for the Revenue, and Sri S.D Singh, learned counsel for the respondent-assessee.
4. Learned standing counsel submitted that in view of the Explanation 4 to section 271(1)(c), it is the concealed income which is relevant for the purpose of levy of penalty and merely because, returned income was loss or nil and the assessee was subjected to assessment at nil income, the assessee is not absolved from penalty. In support of his contention, he relied upon the decision of the Karnataka High Court in the case of P.R Basavappa and Sons v. CIT reported in [2000] 243 ITR 776.
5. Learned counsel for the assessee submitted that the word “income” in Explanation 4 to section 271(1)(c) refers to positive income and unless actual tax is found to be evaded, penalty should not be levied. In support of his contention, he relied upon the following decisions:
(1) CIT v. Harprasad and Co. P. Ltd. reported in [1975] 99 ITR 118 (SC);
(2) CIT v. India Sea Foods reported in [1976] 105 ITR 708 (Ker);
(3) CIT v. Rowther Brothers reported in [1979] 119 ITR 353 (Ker);
(4) Samunder Bhan Sadh v. Commissioner Of Income-Tax. reported in [1991] 188 ITR 638 (All);
(5) CIT v. Prithipal Singh and Co. reported in [2001] 249 ITR 670 (SC); and
(6) Henri Isidore v. CIT reported in [1999] 240 ITR 247 (Mad).
6. We have heard learned counsel for the parties and perused the order of the Tribunal. section 271(1)(c) of the Act immediately prior to amendment by the Taxation Laws (Amendment) Act, 1975, read as follows:
“(1) If the Income-tax Officer or the Appellate Assistant 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,—…….
(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 the income in respect of which the particulars have been concealed or inaccurate particulars have been furnished.
Explanation.— Where the total income returned by any person is less than eighty per cent, of the total income (hereinafter in this Explanation referred to as the correct income) as assessed under section 143 or section 144 or section 147 (reduced by the expenditure incurred bona fide by him for the purpose of making or earning any income included in the total income but which has been disallowed as a deduction), such person shall, unless he proves that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on his part, be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income for the purposes of clause (c) of this sub-section.”
7. section 271(1)(c) of the Act after the amendment by the Taxation Laws, (Amendment) Act, 1975, with effect from April 1, 1976 reads as follows:
“Section 271. Failure to furnish returns, comply with notices, concealment of income, etc.— (1) If the Income-tax Officer or the Appellate Assistant Commissioner or the Commissioner (Appeals) 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,—…….
(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 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.
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;
(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.”
8. section 271(1)(c) of the Act has been further amended by the Finance Act, 2002, by which clause (iii) and Explanation 4 has been modified. After the amendment section reads as follows:
“(iii) in the cases referred to in clause (c) in addition to any 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.
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 has the effect of reducing the loss declared in the return or converting that loss into income, 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;
(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.”
9. Section 2.(24) “income” includes:—
(i) profits and gains;
(ii) dividend;
(iia) voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes, not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution.
Explanation. For the purposes of this sub-clause, ‘trust’ includes any other legal obligation;
(iii) the value of any perquisite or profit in lieu of salary taxable under clauses (2) and (3) of section 17;
(iv) the value of any benefit or perquisite, whether convertible into money or not, obtained from a company either by a director or by a person who has a substantial interest in the company, or by a relative of the director or such person, and any sum paid by any such company in respect of any obligation which, but for such payment, would have been payable by the director or other person aforesaid;
(iva) the value of any benefit or perquisite, whether convertible into money or not, obtained by any representative assessee mentioned in clause (iii) or clause (iv) of sub-section (1) of section 160 or by any person on whose behalf or for whose benefit any income is receivable by the representative-assessee (such person being hereafter in this sub-clause referred to as the ‘beneficiary’) and any sum paid by the representative assessee in respect of any obligation which, but for such payment, would have been payable by the beneficiary,
(v) any sum chargeable to income tax under clauses (ii) and (iii) of section 28 or section 41 or section 59;
va) the value of any benefit or perquisite taxable under clause (iv) of section 28;
(vi) any capital gains chargeable under section 45; (vii) the profits and gains of any business of insurance carried on by a mutual insurance company or by a co-operative society, computed in accordance with section 44 or any surplus taken to be such profits and gains by virtue of provisions contained in the First Schedule;
(viii) any annuity due, or commuted value of any annuity paid, under the provisions of section 280D;
(ix) any winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever;”
10. In the case of CIT v. India Sea Foods, [1976] 105 ITR 708, the Division Bench of the Kerala High Court held that the penalty under section 271(1)(c) of the Act is leviable with reference to the amount of income in respect of which concealment of particulars or furnishing of false particulars had actually taken place, even if, the total income was assessed at Rs. 18,640 as against the concealment of income at Rs. 2,84,727. The court has justified the levy of penalty on the concealed income of Rs. 2,84,727. A similar view has also been taken by the Kerala High Court in the case of CIT v. Rowther Brothers, [1979] 119 ITR 353.
11. In the case of P.R Basavappa and Sons v. CIT, [2000] 243 ITR 776 the Division Bench of the Karnataka High Court on consideration of Explanation 4 to section 271(1)(c) of the Act held that the income includes loss and since loss declared had been reduced, penalty under section 271(1)(c) of the Act is imposable. The Division Bench of the Karnataka High Court has distinguished the decision of the Punjab and Haryana High Court in the case of CIT v. Prithipal Singh and Co., [1990] 183 ITR 69 on the ground that the year involved in the said case was 1970–71, i.e, before the insertion of Explanation 4 to section 271(1)(c) of the Act. The Karnataka High Court has also relied upon the decision of the Calcutta High Court in the case of Atul Kumar Deovrat and Co. v. CIT, [1987] 168 ITR 286 in which the Calcutta High Court has upheld the levy of penalty under section 271(1)(c) of the Act in respect of the claim for loss on purchase and sale of shares which was not allowed in the assessment proceedings.
12. A similar view has also been taken by the Bombay High Court in the case of Commissioner Of Income-Tax v. Chemiequip Ltd., [2004] 265 ITR 265 in which the decision of the Punjab and Haryana High Court in the case of CIT v. Prithipal Singh and Co., [1990] 183 ITR 69 has been distinguished on the ground that it relates to the assessment year 1970–71, when Explanation 4 was not there and the amendment made by the Finance Act, 2002, in clause (iii) and Explanation 4 has been held clarificatory in nature. The Bombay High Court has not, however, considered the decision of the apex court in the case of CIT v. Prithipal Singh and Co., [2001] 249 ITR 670 (SC).
13. In the case of CIT v. Prithipal Singh and Co., [1990] 183 ITR 69, the Division Bench of the Punjab and Haryana High Court on a consideration of the entire provisions of section 271(1)(c) of the Act as it stood in the year 1970–71, held as follows (page 71):
“Penalty is always imposed and 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 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 a particular year, the question of evasion and consequently penalty do not arise. As is obvious from annexure ‘B’, the assessee was assessed finally to a loss figure amounting to Rs. 34,164 as pointed out at p. 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.
‘Income’ has been defined in section 2(24) of the Act, which clearly includes profits, gains, dividends or other benefits derived only. Loss cannot possibly be termed as income. Under section 139(1) of the Act, a person is required to furnish a return only if his total income during the previous year exceeded the maximum amount, which is not chargeable to income-tax. If the same falls short of the maximum amount, which is not chargeable, which has been the case here as per final assessment, he need not file a return. A person who sustains a loss, however, may file a return in view of sub-section (3) of section 139 of the Act, if he wants to claim that the loss or any part thereof should be carried forward. “The penal 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 not be any such evasion so as to provide a scope for levying any penalty. In the present case, only the loss has been reduced and it cannot be said that the assessee had suppressed any income, which would have attracted liability to tax. The question of imposition of penalty, therefore, did not arise. Thus, on the facts and in the circumstances of the case, the Appellate Tribunal has acted rightly in law in holding that the provisions of the Explanation to section 271(1)(c) will not be attracted to the present case. The word ‘income’ occurring in clause (c) and (iii) of section 271(1) of the Act refers to positive income only, and that no penalty could be levied against the assessee.”
14. Special leave petition against the aforesaid decision of the Punjab and Haryana High Court has been dismissed by the apex court on July 20, 2000. The decision of the apex court in CIT v. Prithipal Singh and Co., [2001] 249 ITR 670 is as follows (page 671):
“We have heard learned counsel and find that, on the facts of this case, no interference is called for. The civil appeal is dismissed. No order as to costs.”
15. In the case of CIT v. N. Krishnan, [1999] 240 ITR 47 the Division Bench of the Kerala High Court held as follows (page 49):
“It is amply clear from a perusal of section 271(1)(c) that penalty could be determined with reference to the amount of tax and unless tax is determined penalty could not be quantified. In the case of the assessee, the assessment having been made at loss, the question of determining the amount of tax did not arise and, therefore, no penalty could be determined. When the penalty cannot be quantified, in absence of determination of tax, it goes without saying that no penalty could be imposed. Even if there were concealment, assessments having been made at loss, no penalty could be imposed.”
16. The Punjab and Haryana High Court in the case of CIT v. Varindra and Co., [2001] 71 CTR 51, which related to the assessment year 1990–91 followed the earlier decision in the case of CIT v. Prithipal Singh and Co., [1990] 183 ITR 69 and has further held that the decision of the apex court in the case of Prithipal Singh and Co, [2001] 249 ITR 670 is also applicable to the assessment year 1990–91 and the penalty cannot be levied where the assessed income is loss.
17. It may be mentioned here that after the amendment in clause (iii) and Explanation 4 to section 271(1)(c) by the Finance Act, 2002, there is no manner of doubt that the penalty is leviable even in cases where no tax is payable and if income is assessed at a loss in respect of the concealed income. The question for consideration is whether by Explanation 4 to section 271(1)(c) of the Act by the Taxation Laws (Amendment) Act, 1975, with effect from April 1, 1976, there is any change in the position of law with regard to levy of penalty in case no tax was payable and the income assessed was loss and the decision of the Punjab and Haryana High Court in the case of CIT v. Prithipal Singh and Co., [1990] 183 ITR 69, which has been confirmed by the apex court ([2001] 249 ITR 670) still holds good and the amendment by the Finance Act, 2002, with effect from April 1, 2003, is only prospective and not retrospective and not applicable to the period prior to April 1, 2003.
18. Clause (iii) as it existed prior to April 1, 1976, says “he may direct that such person shall pay by way of penalty ‘in addition to any tax payable by him’, a sum which shall not exceed twice the amount of the income in respect of which the particulars have been concealed.”
19. We find that the words “in addition to any tax payable by him” in clause (iii) also exist after the amendment by the Taxation Laws (Amendment) Act, 1975. In the amended clause (iii) further the words “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 his income or the furnishing of inaccurate particulars of such income” are added. Therefore, in clause (iii) both prior to the amendment and after the amendment the words “in addition to any tax payable by him” are available. The word “income” used in clause (iii) has been interpreted by the Punjab and Haryana High Court in the case of CIT v. Prithipal Singh and Co., [1990] 183 ITR 69 as positive income and not loss, as the question of concealment of income to avoid payment of tax arises only in positive income. This view of the Punjab and Haryana High Court has been upheld by the apex court in the case of Prithipal Singh and Co., [2001] 249 ITR 670 and, therefore, the decision of the Punjab and Haryana High Court and the decision of the apex court is also applicable to assessment years after April 1, 1976, to which the amended section 271(1)(c) by the Taxation Laws (Amendment) Act, 1975, is applicable. The decision of the apex court is binding under article 141 of the Constitution of India.
20. It may also be useful to consider the provisions of section 143(1A) before the amendment by the Finance Act, 1993, which read as follows:
“(1A)(a) Where, in the case of any person, the total income, as a result of the adjustments made under the first proviso to clause (a) of sub-section (1), exceeds the total income declared in the return by any amount, the Assessing Officer shall,—
(i) further increase the amount of tax payable under sub-section (1) by an additional income-tax calculated at the rate of twenty per cent of the tax payable on such excess amount and specify the additional income-tax in the intimation to be sent under sub-clause (1) of clause (a) of sub-section (1).” The issue whether the additional tax could be levied where the assessed income is loss as per the above provision of section 143(1A), came up for consideration before this court in the case of Indo-Gulf Fertilizers and Chemicals Corporation Ltd. v. Union of India, [1992] 195 ITR 485. This court relying upon the decision in the case of CIT v. Prithipal Singh and Co., [1990] 183 ITR 69 (P & H) held that the same principle would apply in the case of an order imposing additional income-tax. This court held as follows (page 493):
“We feel that the same principle would apply in the case of an order imposing additional income-tax by way of penalty. According to Circular No. 549 (see [1990] 182 ITR (St.) 1), referred to above, clause (i) of the Explanation to section 143(1A) of the Act, is on the same lines for the purpose of imposition of penalty as that of section 271(1)(c) of the Act, for concealment of income in the case of loss returns as contained in clause (a) of Explanation 4 to section 271(1). The circular, we find, does not contain correct directions, nor the directions issued by the Board for imposition of additional tax in the case of reduced losses. For imposition of additional tax or penalty for concealment of income or for furnishing inaccurate returns to evade income-tax, there should be some concealment of positive income. We may clarify here that we are only considering the question of imposition of additional tax under section 143(1A) of the Act. It does not cover cases of imposition of penalty or additional tax under any provision for any other Act, omission or commission on the part of the assessee.”
21. A similar view was taken by the Delhi High Court in the case of Modi Cement Ltd. v. Union of India, [1992] 193 ITR 91 and in the case of J.K Synthetics Ltd.… v. Asstt. Commissioner Of Income-Tax…., [1993] 200 ITR 584 (Delhi). It may be mentioned here that in view of the aforesaid decision, section 143(1A) of the Act has been amended by the Finance Act, 1993, with retrospective effect from April 1, 1989, specifically providing for the levy of additional tax where the loss declared by such persons in the return of income is reduced or is converted into income.
22. In the case of Indo-Gulf Fertilizers and Chemicals Corporation Ltd. v. Union of India, [1992] 195 ITR 485 this court had clearly held that the principle for levy of penalty for concealment of income under section 271(1)(c) of the Act and the levy of additional tax under section 143(1A) of the Act would be applicable where the assessed income is loss. After the aforesaid decision, the Legislature amended the provisions of section 143(1A) of the Act with retrospective effect but no retrospective amendment has been made under section 271(1)(c) of the Act. The Legislature, vide the Finance Act, 2002, amended section 271(1)(c) of the Act with effect from April 1, 2003 and it has not been made with retrospective effect.
23. In the case of CIT v. Onkar Saran and Sons, [1992] 195 ITR 1, the apex court held that the penalty for concealment would be governed by the law as it stood at the time when the original return was filed. A similar view has also been expressed by the apex court in the case of Brij Mohan v. CIT, [1979] 120 ITR 1. It is settled principle of law that the amendment should be made applicable prospectively unless it is specifically made with retrospective effect. The apex court in the case of K.M Sharma v. Income Tax Officer, Ward 13(7), New Delhi, [2002] 254 ITR 772 held as follows (page 779):
“The taxing provision imposing a liability is governed by the normal presumption that it is not retrospective and the settled principle of law is that the law to be applied is that which is in force in the assessment year unless otherwise provided expressly or by necessary implication. Even a procedural provision cannot in the absence of clear contrary intendment expressed therein be given greater retrospectivity than is expressly mentioned so as to enable the authorities to affect the finality of tax assessments or to open up liabilities, which have become barred by lapse of time.”
24. In the case of Pyare Lal Sharma v. Managing Director, Jammu and Kashmir Industries Ltd., (1989) 3 SCC 448 : AIR 1989 SC 1854, apex court held that it is a basic principle of natural justice that no one can be penalised on a ground of fact, which was not on the day it was committed. For the reasons stated above, we respectfully not agree with the view taken by the Karnataka High Court and the Bombay High Court and we agree with the view of the Punjab and Haryana High Court and the Kerala High Court. We are of the view that the decision of Punjab and Haryana High Court in the case of CIT v. Prithipal Singh and Co., [1990] 183 ITR 69, which has been confirmed by the apex court in appeal applies in the present case. Amended clause (iii) of Explanation 4 by the Finance Act, 2002, with effect from April 1, 2003, is prospective in nature and does not apply to the years in consideration. The amendment does not speak that it is clarificatory in nature.
25. For the aforesaid reasons, we answer the question referred to us in the affirmative, i.e, in favour of the assessee and against the Revenue.