My return declared a loss and even after the addition the assessed figure is still a loss. Can concealment penalty under section 271(1)(c) be levied when no tax is payable?
Yes. A three-judge bench of the Supreme Court held that Explanation 4 to section 271(1)(c) is clarificatory and not substantive, so penalty was leviable even between 1 April 1976 and 1 April 2003 where the addition of concealed income merely reduced a returned loss and the assessed figure remained negative. Income in section 2(24) includes losses, as Harprasad had held, so the returned loss is no answer. The contrary view of a two-judge bench in Virtual Soft Systems Ltd v CIT was held not to be correct. The two assessees before the Court were spared, the Solicitor General having said the Department would not demand penalty from them.
Decided by the Supreme Court (Supreme Court of India, Civil Appellate Jurisdiction; Dr Arijit Pasayat, P. Sathasivam and Aftab Alam, JJ (judgment by Dr Arijit Pasayat, J)) on 2008-08-18, reported as (2008) 304 ITR 308; 2008 (9) SCC 622; 2008 AIR SCW 5841; AIR 2009 SC (SUPP) 780; (2008) 11 SCALE 492; 2008 Tax LR 531. It bears on section 271(1)(c), section 2(24), section 72 of the Income Tax Act 1961, in Penalty and How Tax Law Is Read matters.
This is the decision that removed the loss-return defence to concealment penalty for years before the Finance Act 2002 amendment took effect, and it is the authority to cite whenever the Department relies on a clarificatory amendment. Virtual Soft Systems had held that penalty could not be levied where the return declared a loss, since section 271(1)(c)(iii) spoke of a sum in addition to any tax payable. The larger bench held the amendment substituting if any for any did no more than make explicit what was already implicit, tracing it back to the Wanchoo Committee recommendation at paragraph 2.74 and to Board Circular No. 204 of 24 July 1976, both of which already said that where concealed income is set off against losses and the total goes to a lower or minus figure, the tax sought to be evaded is the tax on the concealed income as if it were the total income. Beyond section 271(1)(c), the judgment is a compact statement of when an amendment is declaratory: the Court must look at the scheme before and after, the mischief and the former state of the law, and a statement in the Notes on Clauses that the change is clarificatory is relevant but never conclusive.
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The matter came to a three-judge bench on a reference made by a Division Bench on 7 April 2008, doubting the correctness of Virtual Soft Systems Ltd v Commissioner of Income Tax, Delhi. The question in Virtual Soft was whether penalty under section 271(1)(c) can be levied where the returned income is a loss. Before the Finance Act 2002, clause (iii) of section 271(1) provided for a sum, in addition to any tax payable by the assessee, of not less than but not more than twice the amount of the income concealed. The Finance Act 2002, with effect from 1 April 2003, changed any tax payable to if any and amended Explanation 4, the Notes on Clauses saying the change was to clarify that penalty could be levied even if no tax is payable on the total income assessed, and that where concealment reduces the loss declared or converts a loss into income, the tax sought to be evaded is the tax that would have been chargeable on that income as if it were the total income. In Virtual Soft the Court had rejected the Department's reliance on the Notes on Clauses and held the amendment not retrospective. The referring Bench thought the true effect of the amendment had not been considered. The Revenue argued that the word any showed penalty was leviable whether or not tax was payable and that the amendment created no new penalty; the assessees relied on Virtual Soft and on Prithipal Singh & Co.
The inevitable conclusion, the Court held, is that Explanation 4 to section 271(1)(c) is clarificatory and not substantive, and the contrary view in Virtual Soft Systems is not correct. Reading the Wanchoo Committee recommendation with Circular No. 204 of 24 July 1976, Explanation 4(a) as it stood between 1 April 1976 and 1 April 2003 covered not only the case where addition of concealed income turns a returned loss into positive income but also the case where it merely reduces the returned loss and the assessed figure is still a loss. Since income in section 2(24) is an inclusive definition covering losses, as Harprasad & Co. had held with reference to the charging provisions, penalty was leviable in both situations throughout that period. Prithipal Singh, where the Revenue's appeal had been dismissed, was distinguished as relating to assessment year 1970-71, before Explanation 4 existed, and the point about income including losses had not been noticed in Virtual Soft. The Court also held that the applicable provision is the law as it stood on the date of filing the return, and noted that a returned loss need not be that of the previous year alone since it may include carried forward loss to be set off under section 72. The appeals were disposed of, the Solicitor General having stated that even if the Department succeeded the two assessees before the Court would not be asked to pay penalty.
The reasoning runs on two tracks. On the substance of section 271(1)(c), the Court fixed on the meaning of income. Section 2(24) is an inclusive definition and, as Harprasad & Co. held, income read with the charging provisions includes losses: profits and gains is positive income, a loss is negative profit or minus income. Once that is accepted, a return declaring a loss is still a return of income, and concealment which reduces that loss is concealment of income even if the assessed figure never becomes positive. That aspect, the Court said, had not been noticed in Virtual Soft. The legislative history confirmed it: the Wanchoo Committee had recommended in terms that where concealed income is set off against losses and the total is reduced to a figure lower than the concealed income or to a minus figure, the tax sought to be evaded should be computed as if the concealed income were the total income; Explanation 4(a) was inserted from 1 April 1976 pursuant to that recommendation, and Circular No. 204 explained it in the same terms. So the position the 2002 amendment stated had been the position since 1976. On retrospectivity, the Court accepted the test Virtual Soft itself had stated - that a legislative statement that an amendment is clarificatory is not the end of the matter, and the Court must analyse the scheme before and after to see whether it is in reality declaratory - but applied it to the opposite result. Citing Podar Cement on looking at the circumstances in which the amendment was brought and its consequences, the passage from Justice G.P. Singh's Principles of Statutory Interpretation on declaratory statutes, and Zile Singh on the four relevant factors - the general scope and purview of the statute, the remedy sought, the former state of the law and what the legislature contemplated - the Court held that an Act passed to explain an earlier one would be without object unless construed retrospectively, and that the presumption against retrospectivity does not apply to declaratory statutes. Since some High Courts had taken a contradictory view, Parliament had clarified rather than enlarged.
the inevitable conclusion is that Explanation 4 to Section 271(1)(c) is clarificatory and not substantive. The view expressed to the contrary in Virtual's case (supra) is not correct.
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Handle my notice → Ask a CA on WhatsAppYes. A three-judge bench of the Supreme Court held that Explanation 4 to section 271(1)(c) is clarificatory and not substantive, so penalty was leviable even between 1 April 1976 and 1 April 2003 where the addition of concealed income merely reduced a returned loss and the assessed figure remained negative. Income in section 2(24) includes losses, as Harprasad had held, so the returned loss is no answer. The contrary view of a two-judge bench in Virtual Soft Systems Ltd v CIT was held not to be correct. The two assessees before the Court were spared, the Solicitor General having said the Department would not demand penalty from them. This was decided by the Supreme Court (Supreme Court of India, Civil Appellate Jurisdiction; Dr Arijit Pasayat, P. Sathasivam and Aftab Alam, JJ (judgment by Dr Arijit Pasayat, J)) and bears on section 271(1)(c), section 2(24), section 72 of the Income Tax Act 1961. It is reported as (2008) 304 ITR 308; 2008 (9) SCC 622; 2008 AIR SCW 5841; AIR 2009 SC (SUPP) 780; (2008) 11 SCALE 492; 2008 Tax LR 531. This is the decision that removed the loss-return defence to concealment penalty for years before the Finance Act 2002 amendment took effect, and it is the authority to cite whenever the Department relies on a clarificatory amendment. Virtual Soft Systems had held that penalty could not be levied where the return declared a loss, since section 271(1)(c)(iii) spoke of a sum in addition to any tax payable. The larger bench held the amendment substituting if any for any did no more than make explicit what was already implicit, tracing it back to the Wanchoo Committee recommendation at paragraph 2.74 and to Board Circular No. 204 of 24 July 1976, both of which already said that where concealed income is set off against losses and the total goes to a lower or minus figure, the tax sought to be evaded is the tax on the concealed income as if it were the total income. Beyond section 271(1)(c), the judgment is a compact statement of when an amendment is declaratory: the Court must look at the scheme before and after, the mischief and the former state of the law, and a statement in the Notes on Clauses that the change is clarificatory is relevant but never conclusive. If it applies to you, the first step is this: Do not argue that a loss return or a nil tax demand by itself defeats penalty under section 271(1)(c) for years before assessment year 2003-04; that argument has gone.
The matter came to a three-judge bench on a reference made by a Division Bench on 7 April 2008, doubting the correctness of Virtual Soft Systems Ltd v Commissioner of Income Tax, Delhi. The question in Virtual Soft was whether penalty under section 271(1)(c) can be levied where the returned income is a loss. Before the Finance Act 2002, clause (iii) of section 271(1) provided for a sum, in addition to any tax payable by the assessee, of not less than but not more than twice the amount of the income concealed. The Finance Act 2002, with effect from 1 April 2003, changed any tax payable to if any and amended Explanation 4, the Notes on Clauses saying the change was to clarify that penalty could be levied even if no tax is payable on the total income assessed, and that where concealment reduces the loss declared or converts a loss into income, the tax sought to be evaded is the tax that would have been chargeable on that income as if it were the total income. In Virtual Soft the Court had rejected the Department's reliance on the Notes on Clauses and held the amendment not retrospective. The referring Bench thought the true effect of the amendment had not been considered. The Revenue argued that the word any showed penalty was leviable whether or not tax was payable and that the amendment created no new penalty; the assessees relied on Virtual Soft and on Prithipal Singh & Co. The matter was decided on 2008-08-18 by the Supreme Court (Supreme Court of India, Civil Appellate Jurisdiction; Dr Arijit Pasayat, P. Sathasivam and Aftab Alam, JJ (judgment by Dr Arijit Pasayat, J)). On those facts the Supreme Court held as follows. The inevitable conclusion, the Court held, is that Explanation 4 to section 271(1)(c) is clarificatory and not substantive, and the contrary view in Virtual Soft Systems is not correct. Reading the Wanchoo Committee recommendation with Circular No. 204 of 24 July 1976, Explanation 4(a) as it stood between 1 April 1976 and 1 April 2003 covered not only the case where addition of concealed income turns a returned loss into positive income but also the case where it merely reduces the returned loss and the assessed figure is still a loss. Since income in section 2(24) is an inclusive definition covering losses, as Harprasad & Co. had held with reference to the charging provisions, penalty was leviable in both situations throughout that period. Prithipal Singh, where the Revenue's appeal had been dismissed, was distinguished as relating to assessment year 1970-71, before Explanation 4 existed, and the point about income including losses had not been noticed in Virtual Soft. The Court also held that the applicable provision is the law as it stood on the date of filing the return, and noted that a returned loss need not be that of the previous year alone since it may include carried forward loss to be set off under section 72. The appeals were disposed of, the Solicitor General having stated that even if the Department succeeded the two assessees before the Court would not be asked to pay penalty.
The reasoning runs on two tracks. On the substance of section 271(1)(c), the Court fixed on the meaning of income. Section 2(24) is an inclusive definition and, as Harprasad & Co. held, income read with the charging provisions includes losses: profits and gains is positive income, a loss is negative profit or minus income. Once that is accepted, a return declaring a loss is still a return of income, and concealment which reduces that loss is concealment of income even if the assessed figure never becomes positive. That aspect, the Court said, had not been noticed in Virtual Soft. The legislative history confirmed it: the Wanchoo Committee had recommended in terms that where concealed income is set off against losses and the total is reduced to a figure lower than the concealed income or to a minus figure, the tax sought to be evaded should be computed as if the concealed income were the total income; Explanation 4(a) was inserted from 1 April 1976 pursuant to that recommendation, and Circular No. 204 explained it in the same terms. So the position the 2002 amendment stated had been the position since 1976. On retrospectivity, the Court accepted the test Virtual Soft itself had stated - that a legislative statement that an amendment is clarificatory is not the end of the matter, and the Court must analyse the scheme before and after to see whether it is in reality declaratory - but applied it to the opposite result. Citing Podar Cement on looking at the circumstances in which the amendment was brought and its consequences, the passage from Justice G.P. Singh's Principles of Statutory Interpretation on declaratory statutes, and Zile Singh on the four relevant factors - the general scope and purview of the statute, the remedy sought, the former state of the law and what the legislature contemplated - the Court held that an Act passed to explain an earlier one would be without object unless construed retrospectively, and that the presumption against retrospectivity does not apply to declaratory statutes. Since some High Courts had taken a contradictory view, Parliament had clarified rather than enlarged. In the words reproduced by the source cited on this page: "the inevitable conclusion is that Explanation 4 to Section 271(1)(c) is clarificatory and not substantive. The view expressed to the contrary in Virtual's case (supra) is not correct."
It was decided by the Supreme Court on 2008-08-18 and is reported as (2008) 304 ITR 308; 2008 (9) SCC 622; 2008 AIR SCW 5841; AIR 2009 SC (SUPP) 780; (2008) 11 SCALE 492; 2008 Tax LR 531. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 271(1)(c), section 2(24), section 72, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The inevitable conclusion, the Court held, is that Explanation 4 to section 271(1)(c) is clarificatory and not substantive, and the contrary view in Virtual Soft Systems is not correct. Reading the Wanchoo Committee recommendation with Circular No. 204 of 24 July 1976, Explanation 4(a) as it stood between 1 April 1976 and 1 April 2003 covered not only the case where addition of concealed income turns a returned loss into positive income but also the case where it merely reduces the returned loss and the assessed figure is still a loss. Since income in section 2(24) is an inclusive definition covering losses, as Harprasad & Co. had held with reference to the charging provisions, penalty was leviable in both situations throughout that period. Prithipal Singh, where the Revenue's appeal had been dismissed, was distinguished as relating to assessment year 1970-71, before Explanation 4 existed, and the point about income including losses had not been noticed in Virtual Soft. The Court also held that the applicable provision is the law as it stood on the date of filing the return, and noted that a returned loss need not be that of the previous year alone since it may include carried forward loss to be set off under section 72. The appeals were disposed of, the Solicitor General having stated that even if the Department succeeded the two assessees before the Court would not be asked to pay penalty. It arises in Penalty and How Tax Law Is Read matters, on section 271(1)(c), section 2(24), section 72 of the Income Tax Act 1961, and was decided by Supreme Court of India, Civil Appellate Jurisdiction; Dr Arijit Pasayat, P. Sathasivam and Aftab Alam, JJ (judgment by Dr Arijit Pasayat, J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Fight instead on concealment or inaccurate particulars themselves, and on the computation of the tax sought to be evaded under Explanation 4. When the Department calls an amendment clarificatory, ask the tribunal to examine the scheme before and after the change, the mischief it addressed and the former state of the law - the label in the Notes on Clauses does not settle it. Where a genuine ambiguity produced conflicting High Court views before the amendment, that history now supports rather than undermines a retrospective reading, so build the record on what the provision actually did before.
Still good law. A three-judge Supreme Court judgment of 18 August 2008, marked reportable, which itself holds that the two-judge decision in Virtual Soft Systems does not lay down the correct law. No citator check for anything later was possible; only the judgment text was before me. Section 271(1)(c) has since been displaced for later years by sections 270A and 270AA, which this judgment naturally does not address. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The judgment gives no facts about either assessee - no assessment year, no amount, no description of what was concealed. It is a pure reference on a question of law, so it is authority on the question and nothing else. The batch line lists section 4 among the sections; the judgment does not discuss section 4, and the sections field carries section 2(24), on which the reasoning actually turns, and section 72, which the Court mentions on carried forward loss. Explanation 4 to section 271(1)(c) is the provision construed but is not a numbered section and so is not in that field. The Court records the Solicitor General's statement that penalty would not be demanded from these two assessees even if the Department succeeded, so the ruling settles the law without any consequence for the parties before it. Nothing in the judgment addresses how Explanation 4 is to be applied to compute the penalty in a given case. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The inevitable conclusion, the Court held, is that Explanation 4 to section 271(1)(c) is clarificatory and not substantive, and the contrary view in Virtual Soft Systems is not correct. Reading the Wanchoo Committee recommendation with Circular No. 204 of 24 July 1976, Explanation 4(a) as it stood between 1 April 1976 and 1 April 2003 covered not only the case where addition of concealed income turns a returned loss into positive income but also the case where it merely reduces the returned loss and the assessed figure is still a loss. Since income in section 2(24) is an inclusive definition covering losses, as Harprasad & Co. had held with reference to the charging provisions, penalty was leviable in both situations throughout that period. Prithipal Singh, where the Revenue's appeal had been dismissed, was distinguished as relating to assessment year 1970-71, before Explanation 4 existed, and the point about income including losses had not been noticed in Virtual Soft. The Court also held that the applicable provision is the law as it stood on the date of filing the return, and noted that a returned loss need not be that of the previous year alone since it may include carried forward loss to be set off under section 72. The appeals were disposed of, the Solicitor General having stated that even if the Department succeeded the two assessees before the Court would not be asked to pay penalty.
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Valuables were found at my premises and I say they are not mine. Who has to prove ownership?
Is penalty under s.271(1)(c) criminal, quasi-criminal or civil?
The officer disallowed your claim. Does a disallowance automatically bring penalty with it?
The penalty notice does not say whether I concealed income or filed inaccurate particulars. Does that matter?