Holding

Penalty under Section 271(1)(c)(iii) cannot be levied where there is no tax payable, and the 2002 amendment to the provision is prospective, not retrospective.

Summary

Virtual Soft Systems Ltd. filed a loss return for AY 1996-97 which was later reduced to a loss of Rs. 11,02,255 after disallowances and adjustments. The Assessing Officer levied a penalty of Rs. 31,71,692 under Section 271(1)(c)(iii) for concealment of income, despite the fact that no tax was payable. The ITAT deleted the penalty, relying on the Prithipal Singh judgment, but the Commissioner appealed. The Supreme Court held that a penalty under Section 271(1)(c)(iii) can be imposed only when there is a positive tax liability; where the total income is a loss, the penalty cannot be levied. The Court also ruled that the amendment to Section 271 and Explanation 4 by the Finance Act, 2002 is prospective, not retrospective, and therefore does not apply to assessment years before 1‑April‑2003. Consequently, the penalty was set aside and the appeals were allowed.

Issues considered

Whether a penalty under Section 271(1)(c)(iii) of the Income Tax Act can be imposed when the assessee’s total income is a loss and no tax is payable.
Whether the amendment to Section 271(1)(c) and Explanation 4 by the Finance Act, 2002 is clarificatory/retrospective and therefore applicable to assessment years prior to 1‑April‑2003.

Legislation cited

Finance Act, 1993s. Amendment to Section 143(1A)
Finance Act, 2002s. Amendment to Section 271(1)(c) and Explanation 4 (effective from 1‑April‑2003)
Income Tax Act, 1961s. 143(1A), s. 271(1)(c)(iii), s. Explanation 4 to section 271(1)(c)

Subjects

Income TaxPenaltySection 271Loss returnRetrospective amendmentClarificatory amendmentTotal incomeConcealment of incomePenal provision interpretationTax law

Judgment

MIS VIRTUAL SOFT SYSTEMS LTD . A
. "" v.
COMMISSIONER OF INCOME TAX, DELHI- I

FEBRUARY 6, 2007

[ASHOK BHAN AND DAL VEER BHANDARI, JJ.] B

Income Tax Act, 196/_:_section 27/(/)(c) as amended by Finance Act,
1975 and Finance Act, 2002-Loss returned by Assessee-Quantum of loss
reduced on assessment-Liability to penalty for concealment of income or
furnishing inaccurate particulars of income-Held, assessees are not liable
c
to penalty for assessment years falling before the introduction of the amendment
in the section by Finance Act, 2002-Amendment is not clarificatory as it is
not specifically stated in the statute and hence it applies prospectively and
not retrospectively.
D
The question involved in the appeals is whether an assessee is liable to
penalty under section 271(1) (c) of the Income Tax Act, 1961 for concealing
\
income or for furnishing inaccurate particulars of such income in a case
1 where a return declaring loss was filed and was assessed finally at a reduced
amount of loss.
E
The appllants-assessees contended that if there is no positive income
and no tax is chargeable, penalty cannot be levied for concealment or
furnishing inaccurate particulars of income under section 27l(l)(c) of the
Act; that the levy of penalty with the insertion of Explanation 4 to the Section
w.e.f 1.4.1976 is contrary to the law laid down by this Court in C/Tv. Prithipal
Singh & Co., 249 ITR 670 SC; that where majority of the High Courts have F
taken a view in favour.ofassessees, then that view must be adopted; that the
amendment in Section 271(1) (c) (iii) and Explanation 4 thereto by the Finance
Act, 2002 is not clarificatory in nature and hence does not apply
restrospectively; and that the retrospective effect could not be brought in a
penal provision. G
Allowing the appeals, the Court. . .:_,.
pi·
\
HELD:l.1. The Provisions :>fSection 271(1) (c) (iii) of the Income Tax
Act before and after amendment by the Finance Act, 1975 are substantially
289 H
290 SUPREME COURT REPORTS (2007] 2 S.C.R.

A the same. Absence of tax continued to exist changing only the measure or the
scale as to the working of the penalty which earlier was with reference to the
.,..
'income' and after the amendment related to the 'tax sught to be evaded'. The
sine qua non, which was there prior or after the amendment on l.4.1976 to
the fact that there must be a positive income resulting in tax before any penalty
B could be levied, continued to exist. The penalty imposed was in 'addition to
any tax'. If there was no tax, no penalty could be levied. The return filed
declaring loss and assessment made at a reduced loss did not warrant any
levy of penalty within the meaning of Section 271(1) (c) (iii) with or without
Explanation 4 to the Section. [Para 2811303-A-DI

C C!Tv. Prithipa/ Singh & Co., 249 ITR 670 SC, relied on.

C!Tv. Prithipa/ Singh & Co., 183 ITR 69 (P & H ); C!Tv. Virendra &
Co., 171CTR51 (P & H ); C/Tv. N. Krishnan, 240 rrff 47 _(Ker); Ramnath
Goenka v. CIT. 259 ITR 229 (Mad.); CIT v. Jaba/pur Co-operative Milk
Producers Uni0t1 Ltd., 276 ITR 49 (MP); C!Tv. Zam Zam Tanners, 279 ITR
D 197 (All) and CITv. R.G. Sales (P) Ltd., 278 rrR. 140 (Cal), referred to.

1.2. "Total income" under the Income Tax Act, 1961 can only connote
a positive figure and prior to amendment made by Finance Act, 2002, I
Explanation 4(a) to Section 271(1) (c) of the Act required the computation to
be done with reference to "total income". The computation in the case of a
E loss making assesses cannot be made. The words "in addition to any tax
payable" can only be understood as the words "additional income-tax" pre-
suppose that tax was otherwise payable. Conversely, even if the words "in
addition to any tax payable" are considered superfluous and must be ignored
when considering the case of a loss return, the computation cannot be made
F because here there is no total income, and because the computation cannot be
made the charge cannot be levied. [Para 481 [309-G-H; 310-A-BJ .r

CIT, Bombay v. Elphinstone Spinning & Weaving Mills Company Ltd.,
40 ITR 142 (SC), relied on.

CITv. S. V. Angidi Chettiar, 44 ITR 739 (SC), distinguished.
G
Dooars Tea Co. Ltd. v. Commissioner ofAgricultural Income Tax, West
Bengal, 44 ITR 6 (SC); CIT (Central) Delhi v. Harparshad & Co. P. Ltd., 99
ITR 118 (SC); C!Tv . .J.H. Got/a, 156 ITR 323 (SC), referred to.
,- ......

H Modi Cement Ltd. v. Union of India & Ors., 193 ITR 91 (Cal); Inda-
VIRTUAL SOFT SYSTEMS LTD. i·. COMMNR. OF INCOME TAX, DELHI 291
,. Gulf Fertilizers & Chemicals Corporation Ltd. v. Union of India & Anr., 195 A
~.~
ITR 485 (All); JK. Synthetics Ltd. v. ACIT, 200 ITR 584 (Del); C.R. Niranjan
187 ITR 280 (Mad) and C/Tv. N. Krishnan, 240 ITR 47 (Ker), referred to.

1.3. Only after the amendment made by the Finance Act, 2002, the
Explanation 4 of Section 271(1) (c) dealt with the situation of an assessee
having returned a loss and where even after addition of concealed income by B
the assessee, the end result was still an assessed loss. This situation was not
dealt with at all by the Explanation to section 271(1) (c) prior to its amendment
by the Finance Act, 2002. [Para 56) (312-G)
):•

P.R. Basavappa & Sons v. CIT, 243 ITR 776 (Kar)] and CIT v.
Chemiequip Ltd, 265 ITR 265 (Born), overruled. c
,
2.1. Section 271 of the Income Tax Act, 1961, being a penal provision,
hai to be construed strictly and narrowly and not widely or with the object of
advancing the object and intention of the Legislature. [Para 24] (301-D)
'
Bijaya Kumar Agarwala v. State of Qrissa, (1996] 5 SCC 1; CIT v. D
Vegetable Products Limited, 88 ITR 192 (SC); Tolaram Relumal v. State of
Bombay, AIR (1954) SC 496 and C/Tv. TV. Sundaram Iyengar & Sons (P)
' ~
Ltd., 101 ITR 764 (SC), referred to.

CWTv. Ram Narain Agrawal, 106 ITR 965 (All); TMT Thangalakshmi
E
v. /TO, 205 ITR 176 (Mad); C/Tv. A.K Das, 77 ITR 31 (Cal) and Engineers
lmpex Pvt. Ltd. & Ors. v. D.D. Sharma, 244 ITR 247 (Del), referred to.

2.2. Where the predominant majority of the High Courts have taken a
certain view of the interpretation of a certain provision, the Supreme Court
would lean in favour of the predominant view. [Para 31) (304-D] F
-1
C/Tv. Podar Cement Pvt. Ltd & Ors. 226 ITR 625 (SC); C/Tv. P.l.
Chemicals 210 ITR 830 (SC) and C/Tv. Kera/a State Industrial Development
Corporation Ltd., 233 ITR 197 (SC), referred to.

2.3. The amendment made to Section 271 of the Income Tax Act, 1961 G
by the Finance Act, 2002 only stated that the amended provision would come
into force with effect from 1.4.2003. The Statute nowhere stated that the said
a1,11endment was either clarificatory or declaratory An amendment Can be
considered to be declaratory and clarificatory only if the statue itself expressly
and unequivocally states that it is a declaratory and clarificatory provision. If
H
292 SUPREME COURT REPORTS [2007)2 S.C.R.

A there is no such clear statement in the statue itself, the amendment w~I not
be considered to be merely declaratory or clarificatory. A statement in the
Notes on Clauses cannot possibly bind the Court when even a statement in
the statute itself is not regarded as binding or conclusive. [Paras 51 and 53[
(311-B-H; 312-A[

B Sakuru v. Tanaji, [1985( 3 SCC 590; Harding & Anr. v. Commissioner
of Stamps for Queensland, (1898) Appeal Cases 769; B. Rajagopal Reddy
(Dead) by Lrs. & Ors. v. Padmini Chandrasekharan (Dead) by Lrs., (1995) 2
SCC 630; CITv. Patel Brothers & Co. Ltd. & Ors., 215 ITR 165 (SC) and
Sedco Forex International Drill Inc. & Ors. v. CIT & Anr., 279 ITR 310 (SC),
C referred to.

2.4. In the absence of an express provision or clear implication, the
Legislature does not intend to attribute to the amending provision, a greater
retrospectivity than is expressly mentioned. A taxing provision imposing
liability is governed by the normal presumption that is not retrospective. There
D is nothing in the language of Section 271(1) (c) as amended by the Finance
Act, 2002 w.e.f. 1.4.2003 to suggest that the amendment is retrospective. The
same being in the nature of a substantive amendment would be prospective, in
the absence of any indication to the contrary. (Paras 54 and 55) (312-B-E[ '
S.S. Gadgil, ITO, Bombay v. Lal & Co., 53 ITR 231 SC; KM Sharma v.
E ITO, 254 ITR 772 SC; Gem Granites v. CIT, 221 ITR 322 SC and Brij Moh.::m
v. CIT, New Delhi, 120 ITR 1 SC, referred to.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 7115 of2005.

From the Judgment and final Order dated 29.7.2005 of the High Court
F of Delhi at New Delhi in LT.A. No. 340/2004.
WITH

C.A. No. 345 of2006, C.A. No. 1340 of2006, C.A. No. 3390 of2006, C.A.
No. 5219 of2006, C.A. No. 5221 of2006, C.A. No. 5220 of2006, C.A. No. 5218
G of2006 and C.A. No. 4367 of2006

S. Ganesh, K. Radhakrishnan, D.N. Sawhney, M.P. Rastogi, K.N. Ahuja,
Harinder Mohan Singh, P.N. Monga, S.S. Ray, Manu Monga, Rakhi Ray, ,>n
Bhargava V. Desai, Rahul Gupta, B.V. Desai, Kavita Jha, Vinay Yaish, Rahul
Gupta, Rahul Yadav, K.K. Senthilvelan, Gaurav Dhingra, Arijit Prasad,
H Chidananda, B.V. Balaram Das, Vivek Kohli, SubramoniumPrasad and Gopal
VIRTUAL SOFT SYSTEMS LTD. v. COMMNR OF INCOME TAX, DELHI [BHAN, J.] 293
Krishnan R for the appearing parties. A
-~

The Judgment of the Court was delivered by

BHAN, J. I. We propose to dispose of these appeals as has been done
by the High Court, by a common order, as the point involved in all these
appeals is the same. B
2. Facts are taken from Civil Appeal No. 7115 of2005.

~·
3. Commissioner of Income Tax, Delhi-I, the respondent herein, filed ITA
No. 340 of 2004 in the High Court of Delhi against the order passed by the
Income Tax Appellate Tribunal (for short "the Tribunal") under Section 260A c
of the Income Tax Act. Assessee also filed ITA No .... of 2004 being aggrieved
against a part of the order of the Tribunal. High Court allowed the ITA No.
340 of 2004 filed by the Revenue and held that the Tribunal was not right in
deleting the penalty imposed under Section 27l(l)(c) oft,he Income Tax Act,
1961 (for short "the Act") merely on the ground that the total income of the
assessee was assessed at a minus figure/loss. Tribunal had allowed the
D
assessee's appeal remitting the penalty imposed by the assessing officer
'\ under Section 271(1)(c) relating to the assessment year 1996-97, relying upon
-(
the decision of the Punjab High Court in CIT v. Prithipal Singh & Co., 183
!TR 69, which was affirmed by this Court in CIT v. Prithipal Singh & Co.,
Civil Appeal No. 1961of1996 dated 27.07.2000, reported in 249 !TR 670 (SC). E
4. In the appeal filed by the Revenue in the High Court of Delhi, the
following two questions of law were framed:

"I. Whether the ITAT was right in deleting the penalty imposed under
section 271(1)(c) of the Income Tax Act, 1961 on the ground that the F
-1 total income of the assessee has been assessed at a minus figure/
loss?

2. Whether the ITAT was justified in holding that the judgments in
Prithipal Singh 's case (183 !TR 69 and 249 !TR 670) will apply even
after insertion of Explanation 4 to Section 271 (I)(c) of the Income Tax G
Act, 1961 with effect from 1.4.1976?

-'
~
-~, FACTS (C.A. NO. 7115 OF 2005)

5. For the assessment year 1996-97, the assessee-appellant returned an
income of Rs. 1,32,44,507 .29 subject to depreciation. The depreciation claimed H
294 SUPREME COURT REPORTS (2007] 2 S.C.R.

A for the year was Rs.1,47,97,995.01 computed as under:- ,,....
Depreciation for Assessment year Rs. 1,32,44,507 .29
1996-97

Unabsorbed depreciation for Rs. 15,53,487.72
' .
B Assessment Year 1995-96
Total =Rs. 1,47,97,995.0100

6. Accordingly, the appellant filed a "nil" return and carried forward the
·~

unabsorbed depreciation of Rs. 15,53,487.72 (Rs. 1,47,97,995.01 = Rs. '<::;'

c 1,32,44,507.29 =Rs. 15,53,487.72) to the following year. By the assessment
order dated 30.03.1999, the Deputy Commissioner oflncome-Tax assessed the
appellant's income at a figure of Rs. 47,03,120.00. This was because:

(i) Disallowance of claim of Rs. 57,51,520.00
depreciation of purchase and
D
lease of cinematographic films
held to be bogus
)

(ii) Reduction of claim of Rs. 10,28,462.00 y
depreciation in respect of leasing
E vehicles from 40% to 20%.

(iii) Unexplained share application Rs. 19,16,000.00
money added back as unexplained
cash credits under Section 68
F
(iv) Lease rentals of cinematographic Rs. 63,43,750.00
films held to be bogus and
assessed as income from other
sources
7. The Commissioner of Income Tax set aside the order of assessment
G and directed the Assessing Officer to frame a fresh assessment and fresh
proceedings concluded with an order of assessment dated 19.03.2002 in which
it was found that the appellant had a loss of Rs. 11,02,255.00. It was because: >-
(i) Since the leasing transactions in respect of cinematograph films
were found to be bogus and the depreciation of Rs. 57,51,520.00
H
y·,,
VIRTUAL SOFT SYSTEMS LTD. v. COMMNR. OF INCOME TAX, DELHI [BHAN, J.] 295
was not allowed, nor could the lease rental of Rs. 63,43,750.00 be A
-4:' added as income.
(ii) Therefore, the Appellant's income was reduced to Rs. 68,00,757.00
(returned income, Rs. 1,32,44,507.00 = Rs. 63,43,750.00 = Rs.
68,00,757.00)
(iii) The appellant was able to prove some sources of the share B
application money and the amount of Rs. 19,16,000.00 added back
was reduced to Rs. 1, 15,000.00

'>'.'. (iv) Adding the above amount, the Appellant's income became Rs.
~·

69,15,757.00 (Rs. 68,00,757.00 +Rs. 1,15,000.00 =Rs. 69, 15, 757.00)
(v) Depreciation on leased vehicles.claimed at 40% was reduced to
c
20% (as in the original assessment) and an amount of Rs.
I0,28,462.00 was disallowed.
·-
(vi) Accordingly, against the total amount of depreciation claimed at
Rs. 1,47,97,994.00, an amount of Rs. 67,79,982.00 (Rs. 57,51,520.00
D
+Rs. 10,28,462.00 =Rs. 67, 79, 982.00) was disallowed.

"i..
(vii) Therefore, the depreciation allowable was Rs. 80, 18,011.00 (Rs.
1,47,97,995.00 =Rs. 67,79,982.00 =Rs. 80,18,011.00)
-r
(viii) Making a deduction on account of depreciation as in sub-
Paragraph (vii) above, the Appellant was assessed at a loss of E
Rs. 11,02,255.00 (Rs. 69,15,757.00)- Rs. 80,18,012.00 = - Rs.
11,02,255.00)

8. In this manner, the carry-forward loss of Rs. 15,53,487.72 originally
claimed by the appellant was reduced to Rs. 11,02,225.00.
F
9. By order dated nil September, 2002, the Deputy Commissioner of
' Income Tax levied a penalty of Rs. 31,71,692.00. He distinguished the decision
of the Punjab and Haryana High Court in Prithipal Singh 's case (supra),
which was affirmed by this Court on the ground that it related to the
assessment year 1971-72 when Explanation 4 to Section 271 (I)( c) had not
been introduced. He concluded the issue against the appellant on the basis G
~- of the decision of the Kamataka High Court in P.R. Basavappa & Sons v. CIT,
- ....
•.).. 243 !TR 776 (Kamataka). He added the amounts disallowed i.e. Rs. 10,28,462.00,
Rs. 57,51,520.00 and Rs. I, 15,000.00. He conclt;,ied that by adding these
figures the total amount of Rs. 68,94,982.00 was the income in respect of
which inaccurate particulars had been furnished. The tax was computed at H
-~

296 SUPREME COURT REPORTS [2007] 2 S.C.R.

A Rs. 31, 71,692.00. It was held that the tax sought to be evaded was Rs.
31, 71,692.00 and imposed penalty of Rs. 31,71,692.00 ( 100% of the tax). The
Commissioner of Income Tax confirmed the order of the assessing officer on
24.12.2002. The Tribunal by its order dated 11.05.2004 reversed the order of
the Commissioner of Income Tax by applying Prithipal Singh 's case (supra).
B Revenue filed an appeal under Section 260A of the Act which was allowed
by the High Court by the impugned order.

I0. The point involved before the High Court was, as to whether
penalty was leviable under Section 271 (lXc)(iii) read with Explanation 4
thereto which came on the statute book w.e.f. 01.04.1976, in a case where the
.,
c return filed was one of loss and the assessment made by the assessing officer
was at a reduced amount of loss.

11. Revenue's c~.se before the High Court was that after 1.4.1976
Explanation 4 had made a material change and even though no tax was
payable, as a result of the assessment framed at a loss, it will still fall under
D Section 271 (I)( c)(iii) attracting levy of penalty in so far as the effect of
reduction of loss from the returned loss, had resulted in concealment of
income, the assessee having filed inaccurate particulars of its income in filing
.Y
the loss return. In support of this proposition, the Revenue placed reliance
on the interpretation of Explanation 4 which added the words "tax sou_ght to y

be evaded". Revenue's contention was that Prithipal Singh 's case (supra)
E decided by the Punjab and Haryana High Court pertaining to the assessment
year 1970-71 was prior to the amendment ofFinance Act, 1975 and therefore,
was not applicable. For the same reason, the decision of this Court in affirming
the decision of the Punjab and Haryana High Court in Prithipal Singh 's case
(supra) was also not applicable. Revenue had also placed reliance on the
F decision of the Karnataka High Court in P.R. Basavappa 's case (supra). In this
case Karnataka High Court distinguished the view taken in Prithipal Singh 's
case (supra) on facts stating that the said decision related to the period prior
to 1.4.1976 and therefore, has no application as Explanation 4 inserted w.e.f.
1.4.1976 in the statute book was not considered by the Punjab and Haryana
High Court.
G
12. The High Court answering the second question first, concurred with ,
the view taken by the Karnataka High Court and dissented from the view
)-
taken by the Punjab and Haryana High Court in Prithipal Singh 's ca•e
(supra), distinguishing the same on facts stating that the said decision related
to the period prior to 1.4.1976 and therefore, had no application because
H
tf'
VIRTUAL SOFT SYSTEMS LTD. '" COMMNR OF INCOME TAX, DELHI [BHAN, J.] 297
~ Explanation 4 inserted in Section 271(1)(c) with effect from 1.4.1976 in the A
statute was not considered by the Punjab and Haryana High Court and for
similar reason held that the decision of this Court upholding the decision of
the Punjab and Haryana High Court in Prithipal Singh 's case (supra) wes also
not helpful to the assessee in such a case.

13. Answering the first question also against the assessee and in favour B
of the Revenue, the High Court referred to some illustrations in the impugned
order and concluded that the Tribunal was not right in deleting the penalty
x imposed under Section 271 (I)( c) of the Act, merely on the ground that the
7' total income of the assessee was assessed at a minus figure/loss. In arriving
/
at this decision on question no. I, the Delhi High Court in the impugned order
dissented from the view taken by Madras High Court, reported as CITv. C.R.
c
-- Niranjan, 187 ITR 280 (Madras), CIT v. N. Krishnan, 240 ITR 47 (Ker.).
Reference was made to CIT v. S. V. Angidi Chettiar, 44 ITR 739 (SC) which
referred to the expression 'income tax" this judgment being under Section
28(1)(c) of the Income Tax Act, 1922, Dooars Tea Co. Ltd. v. Commissioner
of Agricultural Income-tax, West-Bengal, 44 ITR 6 (SC) referring to the D
expression "total income", CIT (Central) Delhi v. Harparshad & Co. P. Ltd.,
"<.
99 ITR 118 (SC), again referring to the expression word "total income".
~ Reference is also made to CIT v. J.H. Got/a, 156 ITR 323 (SC) for the
proposition as to whether word income would include loss. In this connection,
the High Court also referred to CIT, Bombay v. Elphinstone Spinning &
E
Weaving Mills Company Ltd., 40 ITR 142 (SC).

14. Section 271(1)(c) was again amended by the Finance Act, 2002.
Subsequent amendment was brought to the notice of the Bench hearing the
Appeal. In the impugned order, the High Court did not express any opinion
~ and observed inter alia that while the Revenue stated that the amendment F
brought about by the Finance Act, 2002, w.e.f. 1.4.2003, was declaratory in
nature, therefore, retrospective in operation and the sabmission on behalf of
the assessee was that the same being substantive in nature and being an
amendment to the statute could not be said to be operative retrospectively.
The High Court as stated above, did not express any opinion on this aspect
.•. of the matter and held that for imposition of penalty after 1.4.1976 it was not G
necessary that there must be a positive income and the levy of tax, for the
A penalty to be imposed under Section 271(1)(c) of the Act.

15. Learned counsels appearing in different appeals filed by the assessee
assailed the impugned judgment by contending that provisions of Section
H
·\j

298 SUPREME COURT REPORTS [2007] 2 S.C.R.

A 27l(l)(c)(iii) prior to 1.4.1976 and after its amendment by the Finance Act, 1975
with effect from 1.4.1976, later provisions being applicable to the assessment
year in question, being substantially the same, the High Court in the impugned
order erred in distinguishing Prithipal Singh 's case (supra), and taking a view
contrary to the view taken in the said case. They referred to a number of
judgments of various High Courts in support of their contention. According
B to them even after 1.4.1976, if there is no positive income, no taxes was
leviable, and therefore penalty cannot be levied for concealment of income.
The view that with the insertion of Explanation 4 w.e.f. 1.4.1976, penalty is
~
leviable even in cases where the return filed is of loss and assessment framed
is also of loss, as expressed by the Karnataka High Court in 243 ITR page
c 776, P.R. Bassappa 's case (supra) and also by the Bombay High Court in CIT
v. Chemiequip Ltd., 265 ITR page 265 do not lay down the correct law as
these decisions run contrary to the law laid down by this Court in CIT v.
Prithipal Singh & Co. (Supra). It is contended that the contrary view in any
case, is of no assistance to the Revenue as against large number of other
decisions of different High Courts. It was contended that it has been laid
D down by this Court in CIT v. Podar Cement Pvt. Ltd. & Ors., 226 ITR 625
at 648 that where various High Courts have taken different views on a ..-
particular point, then that view which is in favour of the assessee should be
y
adopted.

16. It was contended that income will not include loss as income means
E
positive income on which tax is leviable which would not include loss income
as no tax would be payable on a loss income. In the context of provisions
of Section 271 (I)( c), as it existed prior to 2002 amendment, in the absence of
no tax, no penalty could be levied. This submission is based with reference
to the provisions contained in Section 143 (IA) of the Act before its amendment
F which came on the Statute in 1993 with retrospective effect from 1.4.1989. In
support of this contention, the asseessee invited our attention to the decisions
of various High Courts in Modi Cement Ltd. v. Union of India & Ors., 193
ITR 91 (Del.), Indo-Gulf Fertilizers and Chemicals Corporation Ltd. v. Union
ofIndia & Anr., 195 ITR 485 (All.) and CITv. Zam Zam Tanners, 279 ITR page
197 (All).
G
>-
17. Referring to the amendment carried in Section 271 (I)( c)(iii) and
Explanation 4 by the Finance Act, 2002 where the expression used in Explanation ~
4 "the amount of tax sought to be evaded" has been amended providing
specifically that where the filing of return and the assessment had the effect
H of reducing the loss would entail the penalty. It is contended that the
;

--- 4 VIRTUAL SOFT SYSTEMS LTD. v. COMMNR. OF INCOME TAX, DELHI [BHAN, J.) 299
Legislature has now deliberately enacted such provision to fill in the lacuna A
in law and also to put an end to the controversy which existed between the
High Courts in interpreting the laws after 1.4. 1976.

18. It was also contended that the view taken by the Bombay High
Court in CIT v. Chemiequpi Ltd. (supra) that the amendment in Finance Act,
2002 is retrospective according to them is bad in law. That the amendment is B
not clarificatory in nature. That the penalty being penal, provisions .could not
be brought on the statute book with retrospective effect.
'r
~
19. As against this, the Counsel for the Revenue supported the judgment
for the reasons recorded in the impugned order.
c
20. We have heard the counsels for the parties at length.
~-
;....·
21. Section 271(1)(c) and the subsequent amendments carried out in the
said section with effect from IA.1976 (as amended by the Taxation Laws
(Amendment) Act, 1975) and the al'lendment by Finance Act, 2002 (with effect
from 1.4.2003) on the interpretation of which the entire controversy in the D
·-.., present appeal rests are:-
-v "271. Failure to furnish returns, comply with notices, concealment of
income, etc.-(!) If the Income tax Officer or the Appellate Assistant
Commissioner in the course of any proceedings under this Act, is
E
satisfied that any person-

(a) xxxxx; or
,.,.. (b) xxxxx; or

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

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

(i)xxxxx

<.>L_ (ii)xxxxx G
A (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
H
tJ
300 SUPREME COURT REPORTS [2007] 2 S.C.R.

A been furnished. "

[Emphasis supplied]

22. Sub-clause (iii) of sub-section (I)( c) of Section 271 after its amendment
with effect from 1.4.1976 and the Explanation 4 added thereto read as under:-
B "(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 ofparticulars of his income or the -r
furnishing of inaccurate particulars of such income." '
c [Emphasis supplied]

"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
D partici.lars 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 y
had such income been the total income;
E (b) in any case to which Expln. 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
F respect of which particulars have been concealed or inaccurate '11
particulars have been furnished."

[Emphasis supplied]

23. Sub-clause (iii) of Section 271(1}(c) after its amendment by Finance
G Act, 2002 with effect from 1.4.2003 and the amendment to clause (a) of
,;..
Explanation 4 are reproduced below:-
$4
"(iii) in the cases referred to in clau~e (c), in addition to tax, if any,
payable by him, a sum which shall not be less than, but which
shall not exceed three times, the amount of tax sought to be
H
-j,

VIRTUAL SOFT SYSTEMS LTD. v. COMMNR OF INCOME TAX, DELHI [BHAN, J.) 30 J
evaded by reason of the concealment of particulars of his income A
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 B
particulars have been concealed or inaccurate particulars have
been furnished has the effect of reducing the laws 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 inqccurate particulars
have been furnished had such income been the total income; C

[Emphasis supplied]

24. Section 271 of the Act is a penal provision and there are well
established principles for the interpretation of such a penal provision. Such
a provision has to be construed strictly and narrowly and not widely or with D
the object of advancing the object and intention of the legislature.

25. This Court as well as the various High Courts of the country have
1 consistently held that the statute creating the penalty is the first and the last
consideration and must be construed within the term and language of the
particular statute. In Bijaya Kumar Agarwala v. State ofOrissa, [1996] 5 SCC E
1, it has been held by this Court in paras 17 and 18 as under:-

"17. Strict construction is the general rule of penal statutes. Justice
Mahajan in Tolaram Re/umal v. State of Bombay, AIR (1954) SC 496
at pages 498-499, stated the rule in the following words:
F
"(I)f two possible and reasonable constructions can be put upon
a penal provision, the court must lean towards that construction
which exempts the subject from penalty rather than the one
which imposes penalty. It is not competent to the court to stretch
the meaning of an expression used by the Legislature in order to
carry out the intention of the Legislature." G
18. The same principle was echoed in the Judgment of the five Judge
Bench in the case of Sanjay Dutt v. State through C.B.J., [1994] 5 SCC
402, which approved an earlier expression of the rule by us in Niranjan
Singh Karam Singh Punjabi v. Jitendra Bhimraj Bijjaya, [1990] 4
sec 76, at page 86 para 8. H
302 SUPREME COURT REPORTS [2007] 2 S.C.R.

A "Therefore, when a law visits a person with serious penal
consequences extra care must be taken to ensure that those
whom the legislature did not intend to be covered by the express
language of the statute are not roped in by stretching the language
of the law."

B Keeping in view the rules of interpretation of criminal statue and the
language and intent of the Order and the Act, we find ourselves in
agreement with the view expressed by Ranganath Misra, J. as he then
was, in Prem Bahadur v. State ofOrissa, 1978 Cri. LJ 683, at page 685,
para 4:

c "The Orissa Order does not make possession without a licence
an offence. Storage, however, has been made an offence. Between
"possession" and "storage" some elements may be common and,
therefore, it would be appropriate to say that in all instances of
storage there would be possession. Yet, all possession may not
amount to storage. "Storage" in the common parlance meaning
D connotes the concept of continued possession. There is an
element of continuity of possession spread over some time and
the concept is connected with the idea of a regular place of
storage. Transshipment in a moving vehicle would not amount to y
storage within the meaning of the Orissa Order."
E 26. To the similar effect, is the view taken by this Court and the various
High Courts in C!Tv. Vegetable Products Limited, 88 ITR 192, 195 SC, CWT
v. Ram Narain Agrawal, I06 ITR 965-968 (All.), Tolaram Relumal v. State of
Bombay, AIR (1954) SC 496, at page 498, TMT Thanga/akshmi v. ITO, 205 ITR
176 Mad., CJTv. A.K. Das, 77 ITR 31, at page 52 (Cal.), CITv. T. V. Sundaram
p Iyengar & Sons (P) Ltd., 101 ITR 764, at page 773 (SC) and Engineers lmpex
Pvt. Ltd. & Ors. v. D.D. Sharma, 244 !TR 247 (Del.).

27. Every statutory provision for imposition of penalty has two distinct
components: -

G (i) That which lays down the conditions for imposition of penalty.
(ii) That which provides for computation of the quantum of penalty.

Section 271(l)(c) and clause (iii) relate to the conditions for imposition of
penalty, whereas, on the other hand, Explanation 4 to Section 27l(l)(c) relates
to the computation of the quantum of penalty.
H
VIRTUAL SOFT SYSiEMS LTD. v. COMMNR OF INCOME TAX, DELHI [BHAN, 1.l 303

28. The provisions of Section 271(I)(c)(iii) prior to 1.4.1976, and after its A
amendment by the Finance Act, 1975 with effect from 1.4.1976, later provisions
being applicable to the assessment year in question, being substantially the
same except that in place of the word "income" in sub clause (iii) to sub
clause (c) of Section 271 prior to its amendment by Finance Act, 1975, the
expression "amount of tax sought to be evaded" have been substituted. B
Explanation 4 inserted for the purpose of clause (iii) where the expression othe
amount of tax sought to be evaded", was inserted had in fact made no
difference in so far as the main criteria, namely, absence of tax continued to
y exist, prior to or after 1.4.1976, changing only the measure or the scale as to
the working of the penalty which earlier was with reference to the "income"and
after the amendment related to the "tax sought to be evaded." The sine qua C
non which was there prior or after the amendment on 1.4.1976 to the fact that
I· there must be a positive income resulting in tax before any penalty could be
· · levied continued to exist. The penalty imposed was :n "addition to any tax.
If there was no tax, no penalty could be levied. The return filed declaring loss
and assessment made at a reduced loss did not warrant any levy of penalty
within the meaning of Section 271 (I)( c)(iii) with or without Explanation 4. D
29. Contention of the appellant is supported by the decisions of various
High Courts reported in Prithipal 's case (supra), 183 ITR page 69 (P&H High
Court, C/Tv. Prithipal Singh & Co.) affirmed by this Court in 249 ITR page
670 (SC), CIT v. Prithipal Singh & Co., 171 CTR page 51 (P&H High Court, E
CIT v. Virendra & Co., 240 ITR page 47 (Kerala High Court, CJT.v. N.
Krishnan, 259 ITR page 229 (Madras High Court, Ramnath Goenka v. CJD,
276 ITR page 649 (M.P. High Court, CIT v. Jabalpur Co-operative Milk
Producers Union Ltd., 279 ITR page 197 (Allahabad High Court, C!Tv. Zam
Zam Tanners, 278 ITR page 140 (Calcutta High Court, C!Tv. R.G. Sales (P)
Ltd, all the aforesaid decisions support the assessee's contention that even F
after 1.4.1976 if there is no positive income, no taxes leviable, no penalty can
be levied for concealment of income.

30. Predominant majority of High Courts to which reference has been
made in the foregoing paragraph have taken the view that the judgment in
the Prithipal Singh's case holds good in respect of Section 271(l)(c) as it G
stood after the 1976 amendment and prior to its amendment by Finance Act,
2002. Contrary view is expressed in: -

i. P.R. Basavappa & Sons v. CIT, 243 !TR 776 (Kar.) - Kamataka
High Court rejected assessee' s reference on the sole ground that
H
304 SUPREME COURT REPORTS (2007] 2 S.C.R.

A Prithipa/ 's case relates to assessment year 1970-71 and prior,
~-
therefore, to the 1976 amendment.
II. CIT v. Chemiequip Ltd., 265 !TR 265 (Bomb.}-Bombay High
Court has held that after 1.4.1976, Explanation 4(a) permits the
charge on an assessee whose loss has been reduced in
B assessment proceedings distinguishing Prithipa/ Singh 's case
and also refers to the amendment in Section 271(1)(c) by Finance
Act, 2002. In this judgment, there is no discussion or reasoning
either on the scope of Section 271(l)(c) and Explanation 4(a) or
the nature of I976 or 2002-2003 amendments.

c 31. It has been laid down in CIT v. Podar Cement (supra), CIT v. P.J.
Chemicals, 210 ITR 830 (SC) and again in CIT v. Kera/a State Industrial
Development Corporation Ltd., 233 !TR 197 (SC) that where the predominant
majority of the High Courts have taken certain view of the interpretation of
a ct~rtain provision, the Supreme Court would lean in favour of the predominant
view.
D
32. The contention advanced by the Ld. Counsel appearing for assesses
;y
that when there is no tax, there cannot be any penalty, is made with reference
to the provisions contained in Section 143(1A) of the Act before its amendment y
which came on the statute in 1993 with retrospective effect from 1.4.1989. The
E Finance Act, 1993 amended Section 143(1A) of the Act with retrospective
effective from 1.4.1989 to specifically provide for levy of additional tax in a
situation where the loss declared by the assessee is reduced or is converted
into his income.

33. Section 143(1A) (before its amendment in 1993) was interpreted by
F the following 3 decisions which include 2 of the Delhi High Court itself. In
r
Modi Cement Ltd. v. Union of India, 193 ITR 91 (Del.), it was held as under:-

" ..... What is important is that, as a result of the adjustments carried
out under sub-section (1) of section 143, the assessee became liable
to pay some tax. Where, as in the present case, after the adjustments
G under section 143(1 A) are carried out, the resultant figure is still at
a loss, the question of section 143(1A) applying does not arise. As
a result of adjustments carried out, no tax is payable if the resultant \-:

figure is a loss and a question of there being any further increase
to this does not arise. We are surprised that the Deputy Commissioner
having accepted a huge loss of Rs.1,32,97,22,383, still required the ...__
H
VIRTUAL SOFT SYSTEMS LTD. v. COMMNR. OF INCOME TAX, DELHI [BHAN, J.] 305
assess to pay a sum of Rs.38,60,075. If the interpretation sought to A
be put by the Department is correct, then there would be a lot of
force in the contention of Shri Aggarwal, learned counsel for the
petitioner, that such a provision would be clearly arbitrary and may
even have to be struck down. "

[Emphasis supplied] B
34. In Inda-Gulf Fertilizers and Chemicals Corporation Ltd v. Union
of India, 195 ITR 485 (All.), it was held as under: -

"The language of the provision quoted above itself shows that
where "the total income" after making adjustments under clause (a) of C
sub-section (I) of section 143 of the Act exceeds the total income
declared in the return, in that event an order can be passed levying
additional income-tax. In a case like the present one, there is no
income shown in the return but only losses are indicated Adjustment
resulting in reduction of the amount of losses can, by no stretch of D
imagination, be said to have increased the "total income" declared
in the return. There is no dispute that in the return, only losses are
shown even after adjustment and if there is no income, no tax or
additional income-tax can be charged. Therefore, it is immaterial that
the amount of losses are more or less. To elaborate further, it may be
pointed out that if no tax was chargeable on the losses to the tune E
of rupees sixty-two crores odd, as shown in the return submitted by
the petitioner, there would be no question of charging any additional
income-tax under section 143(1A)(a) of the Act, on the amount of
reduced losses, i.e., rupees fifty-eight crores odd. To put it plainly, if
there is no income, there would be no income-tax of any kind, whether
additional or by way of surcharge. Learned counsel for the petitioner F
has rightly placed reliance upon a case, Modi Cement Ltd. v. Union
of India, ( 1992) 193 !TR 91 (Delhi). In the said case, the order passed
under section 143(1A)(a) of the Act was quashed under similar
circumstances where, after adjustment, the assessee was still found to
be in losses." G
[Emphasis supplied]

35. In JK. Synthetics L:'d. v. ACIT, 200 ITR 584 (Del.), it was held as
under: -
H
306 SUPREME COURT REPORTS [2007] 2 S.C.R.

A "The income-tax is payable only on income which in a business )--·
venture would imply profit after deducting therefrom deductible
expenses and not loss. If after determining the liability of the assessee
after the process of adjustment, the net result is still loss, there
cannot be any question of any further tax liability accruing and as
such, no tax would be payable much less any additional tax on the
B amount by which the losses stood reduced. "

[Emphasis supplied]

36. It was because of these decisions that section 143(1A) was amended
by the Finance Act, 1993 in exactly the same manner as the Finance Act, 2002
C amended Section 271(1 )(c) and Explanation 4(a). However, this amendment
was retrospective with effect from 1.4.1989, not claiming to be declaratory or
clarificatory.

37. Though the Legislature was conscious that the provisions of Sections
D 143(1A) and 271 (l)(c) are pari materia and were similarly interpreted by
different High Courts, while Section 143(1A) was amended by Finance Act,
1993 with retrospective effect from 1.4.1989, the provisions of Section 271(1Xc)
have been amended much later by Finance Act, 2002 with prospective effect
from 1.4.2003.

E 38. The two questions which arise in the present cases are, prior to the
amendments by the Finance Act, 1992 with effect from 1.4.2003 (2003
amendment): -

i.. What is meant by the words "in addition to any tax" in the
charging Section 271 (I)(c)(iii)?
F ii. What is meant by the term "total income" in Explanation 4(a)?

39. Both these questions are fully answered by this Court in
Commissioner of Income Tax, Bombay City v. Elphinstone Spinning and
Weaving Mills Co. Ltd., 40 ITR 142 (SC).

G 40. Under the Finance Act, 1951, a provision was enacted to discourage
the declaration of dividend disproportionate to the declared income. It provided
I
that where the "total income" exceeded the dividend by a certain amount, a f

rebate would be allowed, and where the dividend exce-.,ded the ototal incomeo
by such amount, "an additional income tax" would be levied.
H
VIRTUAL SOFT SYSTEMS LTD. v. COMMNR. OF INCOME TAX, DELHI [BHAN, J.] 307
The facts of the case were: - A
"During the calendar year 1950, the assessee company had made a
profit but the depreciation allowance which .it was entitled to under
the Income-tax Act came to Rs.7,84,063 thus converting the profit into
a loss of Rs.2, 19,848 for income-tax purposes, and the company was
adjudged not to be liable to income-tax for the relevant assessment B
year 1951-52. The company, however, declared dividends in that year
amounting to Rs.3,29,062 and the question was whether this amount
was "excess dividend" within the meaning of paragraph B of Part I of
the First Schedule to the Finance Act, 1951, and additional income-
tax could be levied in respect thereof:"
c
It was held by this Court that: -

"The word "additional" in the expression "additional income-tax"
must refer to a state of affairs in which there has been a tax before."

and that D
"The words "charge on the total income" are not appropriate to
describe a case in which there is no income or there is a loss."

41. These two findings conclude the two issues in paragraph (i) and (ii)
above in favour of the assessees's contention in the present batch of cases. E
It was noted by this Court that there was indeed a lacuna in the statute but
that Court could not depart from the rule of literal construction: -

"There is no doubt that if the words of a taxing statute fail, then so
must the tax. The courts cannot, except rarely and in clear cases, help
the draftsmen by a favourable construction. Here, the difficulty is not F
one of inaccurate language only. It is really this that a very large
number of taxpayers are within the words but some of them are not.
Whether the enactment might fail in the former case on some other
ground (as has happened in another case decided today) is not a
matter we are dealing with at the moment. It is sufficient to say here G
that the words do not take in the modifications which the learned
counsel for the appellant suggests. The word "additional" in the
expression "additional income-tax" must refer to a state of affairs in
which there has been a tax before. The words "charge on the total .•
income" are not appropriate to describe a case in which there is no
income or there is loss. The same is the case with the expression H
308 SUPREME COURT REPORTS [2007) 2 S.C.R.

A "profit liable to tax". The last expression "dividends payable out of
such profits" can only apply when there are profits and not when
there are no profits."

[Emphasis supplied]

B 42. This Court noted that the High Court allowed the assessee's reference
(reluctantly) but from the plain language of the provision, an assessee
sustaining a loss could have no "total income": -

"It is clear that the Legislature had in mind the case of persons paying
dividends beyond a reasonable portion of their income. A rebate was
c intended to be given to those who kept within the limit and an
enhanced rate was to be imposed on those who exceeded it. The law
was calculated to reach those persons who did the latter even if they
resorted to the device of keeping profits back in one year to earn
rebate to pay out the same profits in the next. For this purpose, the
profits of the earlier years were deemed to be profits of the succeeding
D years. So far so good. But the Legislature failed to fit in the law in ,
the scheme of the Indian Income-tax Act under which and to effectuate
.T
which the Finance Act is passed. The Legislature used language
appropriate to income, and applied the rate to the "total income".
Obviously, therefore, the law must fail in those cases where there is
E no total income at all, and the courts cannot be invited to supply the
omission by the Legislature.

It is quite possible that the Legislature did not contemplate the
imposition of tax in circumstances such as these, and we are not
prepared to read the proviso without the words "on the total income"
F or after modifying this and other expressions. The High Court has
given adequate reasons to show that these words are quite
inappropriate, where the total income, if it can be described as
income at all, is a loss. The imposition of the additional income-tax
is conditioned by the existence of income and profits, to the total of
which income the rate is made applicable. Unless some other amount,
G not strictly income, is by law deemed to be income [see, for example,
Mc Gregor & Balfour Ltd v. Commissioner of Income-tax, (1959) 36
ITR 65 we cannot improve the existing law by deeming it to be so
by our interpretation. "

[Emphasis supplied)
H
VIRTUAL SOFT SYSTEMS LTD. v. COMMN~ OF INCOME TAX, DELHI [BHAN, J.] 309

43. The impugned judgment has erred in observing that in Elphinstone A
·-+ case (supra): -

"The situation is different and the context is different."

44. The observations by this Court were not made in any special context
or in the face of a fiction created by the Finance Act, 1951. On the contrary, B
the Act set out in the First Schedule as under: -

"For the purposes of this section and of the rates of tax imposed
thereby, the expression "total income" means total income as determined
for the purposes of income-tax or super-tax, as the case may be, in
accordance with the provisions of the Income Tax Act..." C
45, In fact, it is the impugned Judgment which has isolated a phrase in
Elphinstone case and taken it out of context.

46. The ratio of Elphinstone case cannot be that a loss can be described
as total income, If it were so, this Court could not have dismissed the appeal D
of the Revenue.

47. In CIT v. B.C Srinivasa Setty, (supra), this Court reiterated the
principle that the charge and its computation were two parts of an integral
whole and concluded therefore, that if the computation could not be done,
the charge was not intended to apply. In this case, the Court was concerned E
with the transfer of goodwill valued at Rs.1,50,000 from a dissolved partnership
to a newly constituted one. Despite the fact that this Court found that
goodwill was an "asset of the business", it was held that the charge of capital
gains could not be levied because under section 48(ii) required computing the
gain by deducting from the full value of the consideration received. F
l.
48. Applying Elphinstone case to the present case, it can be held: -

a. "Total income" can only connote a positive figure and prior to
the 2003 Amendment, Explanation 4(a) to Section 271(1)(c) required
the computation to be done with reference to "total income".
G
b. The computation in the case of a loss making assesses, as in the
present case cannot be made.

c. The words "in addition to any tax payable" can only be
understood as the words "additional income-tax" were in
Elphinstone case where this Court held that these words pre- H
310 SUPREME COURT REPORTS [2007] 2 S.C.R..

A suppose that tax was otherwise payable.
d. Conversely, even if the words "in addition to any tax payable"
are considered superfluous and must be ignored when considering
the case of a loss return, the computation cannot be made because
here there is no total income, and because the computation
B cannot be made, the charge cannot be levied.

49. The judgment of this Court in Angidi Chettair's case (supra) relied
upon by the Delhi High Court in its impugned judgment, has been given in
an entirely different statutory context and, therefore, the ratio of that judgment
is not at all applicable to the issue arising for consideration in the present
C case. That judgment dealt with the interpretation of section 28(l)(c) of the
Income-tax Act, 1922. The question which arose in that case was whether a
penalty could be imposed on a registered firm. The contention of the assessee
was that a registered firm was not liable to pay tax itself and that under the
statute as it then stood, the tax was payable only by the partners of the
registered firm and not by the registered firm itself. The Revenue pointed out
D that if this contention of the assessee is accepted, then the highly anomalous
and totally unacceptable consequence that would follow would be that no
penalty could even be imposed on a registered firm, even though this section
itself expressly provided that the penalty can be imposed on any "person"
and "person" unquestionably included a registered firm. It was in this special
E and extraordinary statutory context that this Court laid down that a penalty
could be imposed on a registered firm even though the firm was not liable to
pay tax, or otherwise a portion of section 28 would be rendered completely
meaningless and infructuous. Further, in the said case, this Court proceeded
specifically on the footing that under section 23(5) of the 1922 A~t, a registered
firm was liable to pay tax but the tax due from the firm was collected from the
F partners. This judgment has to be read in the special and extraordinary
statutory context of section 28 of the 1922 Act, the wording and phraseology
of which is very different from that of section 271 (l)(c)(iii) of the Income-tax
Act. The judgment in Angidi Chettiar's case (supra) cannot be relied upon
for the purpose of construing section 27l(l)(c)(iii) of the Income-tax Act.
G 50. Prior to the amendment made to Section 271 by the Finance Act,
2002, which came into operation on 1.4.2003, no penalty for concealment
could be imposed unless some tax was payable by the assessee. In other
words, if no tax was payable by the assessee, then the question of imposition
of penalty of concealment did not arise at all. That position was changed for
H the first time only by the amendment made by the Finance Act, 2002 with
VIRTUAL SOFT SYSTEMS LTD. v. COMMNR OF INCOME TAX, DELHI [BHAN, J.] 311
~J.,- effect from 1.4.2003, It is only by this amendment that the hitherto inseverable A
inter-connection between the liability to pay tax and the imposition of penalty
was severed for the first time.

51. It may be noted that the amendment made to Section 271 by the
Finance Act, 2002 only stated that the amended provision would come into
force with effect from 1.4.2003. The statute nowhere stated that the said B
amendment was either clarificatory or declaratory. On the contrary, the statue
stated that the said amendment would come into effect on 1.4.2003 and
Y: therefore, would apply to only to future periods and not to any period prior
to 1.4.2003 or to any assessment year prior to assessment year 2003-2004. It
is the well settled legal position that an amendment can be considered to be
declaratory and clarificatory only ifthe statue itself expressly and unequivocally
c
states that it is a declaratory and clarificatory provision. If there is no such
clear statement in the statute itself, the amendment will not be considered to
be merely declaratory or clarificatory.

52. Even if the statute does contain a statement to the effect that the D
amendment is declaratory or clarificatory, that is not the end of the matter. The
i. Court will not regard itself as being bound by the said statement made in the
~ statute but will proceed to analyse the nature of the amendment and then
conclude whether it is in reality a clarificatory or declaratory provision or
whether it is an amendment which is int.ended to change the law and which
applies to future periods. In this connection, see the fllowing: - E

I. Sakuru v. Tanaji, (1985] 3 SCC 590 at page 593-594.
2. Harding and Anr. v. Commissioner of Stamps for Queensland,

,. 3.
(1898) Appeal Cases 769 at 775 to 776.
R. Rajagopal Reddy (Dead) by Lrs. and Ors. v. Padmini F
Chandrasekharan (Dead) by Lrs., (1995] 2 SCC page 630 at 646.
4. CIT v. Patel Brothers & Co. Ltd. & Ors., 215 !TR 165 (SC).

5. Sedco Forex International Drill Inc. & Ors. v. CIT & Anr., 279
!TR 310 page 317. G
53. In the present case, it is only in the Notes on Clauses relating to
~ 1,
2002 amendment that it has been stated that the said amendment is clarificatory.
There is no such mention of the said amendment being clarificatory, anywhere
in the statute itself. Such a statement in the Notes on Clauses cannot possibly
bind the Court when even a statement in the statute itself is not regarded as H
312 SUPREME COURT REPORTS [2007) 2 S.C.R.

A binding or conclusive. In the present case, the statute expressly states that --f •
the amendment would take effect only from 1.4.2003. Consequently, this
amendment cannot possibly be applied to or in respect of any period prior
to 1.4.2003.

B 54. Otherwise also, it has been consistently held that a provision rriust
be read subject to the rule that in the absence of an express provision or clear
implication, the Legislature does not intend to attribute to the amending
provision, a greater retrospectivity than is expressly mentioned. It is settled
law that a taxing provision imposing liability is governed by the normal 'f

presumption that is not retrospective. Reference made to the decisions in: -
c i. S.S. Gadgi/, ITO, Bombay v. Lal & Co., 53 !TR 231 (SC),
ii. K.M Sharma v. ITO, 254 !TR 772 (SC),
iii. Gem Granites v. CIT, 271 !TR 322 (SC),
iv. Sedco Forex International Drill Inc. & Ors. v. CIT, 279 !TR 310
D (SC).

55. There is nothing in the language of Section 271 (I)( c) as amended
by the Finance Act, 2002 w.e.f. 1.4.2003 to suggest that the amendment is
retrospective. The amendment in clause (iii) and simultaneously in Explanation
E 4(a) carried out enlarges the scope of penalty under Section 27l(l)(c) to
include even cases where assessment has been completed at loss. The same
being in the nature of a substantive amendment would be prospective, in the
absence of any indication to the contrary.

56. Explanation 4 to Section 271 (I)(c) as it stood prior to its amendment
F by the Finance Act, 2002, requires to be carefully compared with the said
Explanation as amended by the Finance Act, 2002. The comparison of the
Explanation as it stood before 2002 and after 2002 by itself shows clearly that
it is only after the amendment made by the Finance Act, 2002 that the
Explanation dealt with the situation of an assessee having returned a loss and
where, even after ad_dition of concealed income by the assessee, the end
G result was still an assessed loss. This situation was not dealt with at all by
the Explanation to Section 27l(I)(c) as it stood prior to its amendment by the
Finance Act, 2002. Further, the plain reading of clause (a) of Explanation 4 to
section 271 as it stood prior to the 2002 amendment, shows that this clause
applied to a situation where an assessee has returned a loss which by reason
H of the addition of the concealed income thereto by the assessing officer, is
)"
VIRTUAL SOFT SYSTEMS LTD. r. COMMNR. OF INCOME TAX, DELHI [BHAN, J .l 313
)

,..,._ converted into a positive figure of the assessed income on which the assessee A
is required to pay tax. In contrast, clause (c) of the said Explanation 4 applies
only to a situation where the assessee has returned a positive income, which
stands enhanced by reason of the concealed income added thereto by the
assessing officer in the assessment order. Consequently, both under clause
(a) and clause (c) of the said Explanation 4, the assessee can be penalized
only if he has a positive assessed income on which tax is payable. The only
B
difference between clause (a) and clause (c) is that clause (a) applied to an
assessee who had filed a loss return, and clause (c) to an assessee who has
}c filed a positive return. However, the end result in both the cases was the
same, i.e., a positive assessed income on which the assessee was required to
pay tax. It is this basic condition precedent for the imposition of the penalty, c
i.e., existence of liability to pay tax which existed prior to 2002, which has been
done away with for the first time by the Finance Act, 2002 .
.,
57. There is nothing in the language of Section 27!(l)(c) as amended
by the Finance Act, 2002 w.e.f. 1.4.2003 to suggest that the amendment is
retrospective. The amendment in clause (iii) and simultaneously in Explanation D
4(a) carried out enlarges the scope of penalty under Section 27I(l)(c) to
-~ include even cases where assessment has been completed at loss. The same
~
being in the nature of a substantive amendment would be prospective, in the
absence of any indication to the contrary. The Finance Bill/Finance Act, 2002
brought about many amendments in the statute, some of which had
E
retrospective operation. The amendment in Section 271(1)(c) was consciously
made applicable w.e.f. 1.4.2003 and not with retrospective date.

58. Next proposition is with reference to the amended provision of law
made by the Finance Act, 2002, where the expression used in Explanation 4
"the amount of tax sought to be evaded" has been deliberately amended F
-~
providing specifically cases where the filing of return and the assessment had
the effect of reducing the loss declared in the return or converting that losses
into income. Taking support from this amendment brought about in the statute
with effect from 1.4.2003, it is contended that the Legislature has now
deliberately enacted such provision to fill in the lacuna in law and also to put
G
..' an end to the controversy which existed between the High Courts in
interpreting the laws after 1.4.1976. The amended provision of law is not
~ ,,, -... , available prior to 1.4.2003, as the same,is not enacted with retrospective effect.
That this amendment is declaratory a~d applies to all pending cases, as held
by the Bombay High Court in CIT v. Chemiequip Ltd (supra), is untenable
• for the following reasons: -
G
314 SUPREME COURT REPORTS (2007] 2 S.C.R.

A (a) There is nothing in the statute to suggest to that effect. The
interpretation that it is clarificatory as per the notes on clauses
do not advance the Revenue's case, because of its specific
omission to that effect. It is purely a case of amendment to the
statute;

B (b) Amendment is not retrospective and there is no assumption as
to its retrospectivity. Retrospectivity has to be enacted specifically
in the fiscal statute and it is more so in the case of penal
provisions, otherwise it would be contradictory or derogatory to
Article 20(1) of the Constitution. This Court has held in Brij
Mohan v. C.1.T., New Delhi, 120 ITR page 1, that the law to be
c applied is the one in force on the first day of accounting period.
To this effect are the other decisions of this Court reported as
CITv. Patel Brothers & Co. Ltd. & Ors .. 215 !TR page 165 (SC).
Allahabad High Court has also taken same view in Zam Zam
Tanners (supra). Notes on clauses on the amendment introduced
D by the Finance Act, 2002 makes specific mention inter alia of the
amendment to be effective from 1.4.2003 of which the Bombay
High Court has failed to take notice in its judgment in CIT v.
Chemiequip Ltd. (supra).

59. For the reasons stated above, the Appeals are accepted and the
E impugned judgment is set aside, it is held that prior to its amendment by
Finance Act, 2002 in the absence of any po~itive income and no tax being
levied, penalty for concealment of income could not be levied. The view taken
by the Kamataka High Court in P.R. Basavapaa & Sons v. CIT (supra) and
CIT v. Chemiequip Ltd. (supra), does not lay down the correct law.

F 60. The position stands altered after the amendment in law by the
amendment of Section 27l(l)(c) and Explanation 4(a) by the Finance Act, 2002
w.e.f. 1.4.2003.

B.S. Appeals allowed.