My assessment ended in a loss, only a smaller loss than I returned. Can concealment penalty under section 271(1)(c) still be levied for a year before April 2003?
No, for years before the Finance Act 2002 amendment took effect. The Supreme Court allowed the assessees' appeals and set aside the Delhi High Court. It held that as Explanation 4 to section 271(1)(c) stood before that amendment, both clause (a) and clause (c) presupposed a positive assessed income on which tax was payable; the only difference was whether the return itself showed a loss or a profit. The existence of a liability to pay tax was a condition precedent to penalty, and it was the Finance Act 2002, with effect from 1 April 2003, that first removed it. That amendment is substantive and prospective, so penalty could not be levied where the assessment ended in a loss.
Decided by the Supreme Court (Supreme Court of India - Ashok Bhan and Dalveer Bhandari, JJ. (judgment per Ashok Bhan, J.)) on 2007-02-06, reported as Civil Appeal No.7115 of 2005 and connected appeals (Supreme Court of India). It bears on section 271(1)(c) of the Income Tax Act 1961, in Penalty matters.
Beyond the penalty point, this is one of the clearest Supreme Court statements on when an amendment is clarificatory. A statement in the Notes on Clauses that an amendment is clarificatory does not make it so; even a declaration in the statute itself is not conclusive, because the Court will examine the nature of the amendment. Where the statute says the amendment takes effect from a stated future date and says nothing about being declaratory, it operates prospectively. That presumption is at its strongest for a taxing provision imposing liability, and stronger still for a penal one, given Article 20(1). The Court also applied Brij Mohan: the law to be applied to a penalty is the law in force on the first day of the accounting period. Read it together with any later authority on the same amendment.
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For assessment year 1996-97 the assessee returned income of Rs.1,32,44,507 before depreciation and claimed depreciation of Rs.1,47,97,995, made up of the current year's Rs.1,32,44,507 and unabsorbed depreciation of Rs.15,53,488 from the previous year. It filed a nil return and carried forward Rs.15,53,488. By assessment order of 30 March 1999 income was assessed at Rs.47,03,120 after disallowing depreciation of Rs.57,51,520 on cinematograph films held to be bogus, reducing depreciation on leased vehicles from 40% to 20% by Rs.10,28,462, adding Rs.19,16,000 of share application money under section 68, and assessing lease rentals of Rs.63,43,750 as income from other sources. The Commissioner set that assessment aside. In the fresh assessment of 19 March 2002 the film lease rentals were also excluded once the transactions were held bogus, the share application addition fell to Rs.1,15,000, and depreciation of Rs.67,79,982 was disallowed, leaving an assessed loss of Rs.11,02,255 against the carry forward loss of Rs.15,53,488 originally claimed. Penalty of Rs.31,71,692 was levied under section 271(1)(c) on the footing that Rs.68,94,982 represented income of which inaccurate particulars had been furnished. The Commissioner confirmed it; the Tribunal deleted it on 11 May 2004 following CIT v. Prithipal Singh & Co. The Delhi High Court allowed the Revenue's appeal, preferring the Karnataka High Court in P.R. Basavappa & Sons and dissenting from the Punjab and Haryana view, on the ground that Explanation 4, inserted with effect from 1 April 1976, had not been considered there. The assessees appealed.
The appeals were accepted and the High Court's judgment set aside. The Court held that prior to its amendment by the Finance Act 2002, in the absence of any positive income and where no tax was levied, penalty for concealment of income could not be levied. The views of the Karnataka High Court in P.R. Basavappa & Sons and of the Bombay High Court in CIT v. Chemiequip Ltd were held not to lay down the correct law. The Court recorded that the position stands altered after the amendment of section 271(1)(c) and Explanation 4(a) by the Finance Act 2002 with effect from 1 April 2003.
The Court compared Explanation 4 before and after the Finance Act 2002. As it stood before, clause (a) covered an assessee who had returned a loss which, on addition of the concealed income, was converted into positive assessed income on which tax was payable; clause (c) covered an assessee who had returned a positive income which was enhanced by the addition. In both, the end result had to be positive assessed income carrying a tax liability. The situation of a return of loss which, even after adding the concealed income, still ended in an assessed loss was not dealt with at all before 2002. The existence of a liability to pay tax was therefore a condition precedent to penalty, and it was the Finance Act 2002 which for the first time removed it, simultaneously amending clause (iii) and Explanation 4(a) to bring in cases where the assessment reduced a returned loss or converted a loss into income. On retrospectivity the Court held that an amendment is declaratory or clarificatory only if the statute itself expressly and unequivocally says so; and even then the Court will examine the true nature of the amendment rather than treat the statement as binding. Here the statute said only that the amendment took effect from 1 April 2003; the assertion that it was clarificatory appeared only in the Notes on Clauses, which cannot bind the Court when even a statement in the statute would not conclude the matter. The general presumption against retrospectivity applies with particular force to a taxing provision imposing liability, and the amendment, enlarging the scope of penalty, was substantive. The Court noted that the Finance Act 2002 made several amendments expressly retrospective while this one was consciously made effective only from 1 April 2003, and that retrospectivity in a penal provision would run against Article 20(1). It applied Brij Mohan v. CIT, that the law to be applied is that in force on the first day of the accounting period.
Prior to its amendment by Finance Act, 2002 in the absence of any positive income and no tax being levied, penalty for concealment of income could not be levied.
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Handle my notice → Ask a CA on WhatsAppNo, for years before the Finance Act 2002 amendment took effect. The Supreme Court allowed the assessees' appeals and set aside the Delhi High Court. It held that as Explanation 4 to section 271(1)(c) stood before that amendment, both clause (a) and clause (c) presupposed a positive assessed income on which tax was payable; the only difference was whether the return itself showed a loss or a profit. The existence of a liability to pay tax was a condition precedent to penalty, and it was the Finance Act 2002, with effect from 1 April 2003, that first removed it. That amendment is substantive and prospective, so penalty could not be levied where the assessment ended in a loss. This was decided by the Supreme Court (Supreme Court of India - Ashok Bhan and Dalveer Bhandari, JJ. (judgment per Ashok Bhan, J.)) and bears on section 271(1)(c) of the Income Tax Act 1961. It is reported as Civil Appeal No.7115 of 2005 and connected appeals (Supreme Court of India). Beyond the penalty point, this is one of the clearest Supreme Court statements on when an amendment is clarificatory. A statement in the Notes on Clauses that an amendment is clarificatory does not make it so; even a declaration in the statute itself is not conclusive, because the Court will examine the nature of the amendment. Where the statute says the amendment takes effect from a stated future date and says nothing about being declaratory, it operates prospectively. That presumption is at its strongest for a taxing provision imposing liability, and stronger still for a penal one, given Article 20(1). The Court also applied Brij Mohan: the law to be applied to a penalty is the law in force on the first day of the accounting period. Read it together with any later authority on the same amendment. If it applies to you, the first step is this: Identify the assessment year and the exact text of the penalty provision in force on the first day of that accounting period; for penalties, that is the law that governs.
For assessment year 1996-97 the assessee returned income of Rs.1,32,44,507 before depreciation and claimed depreciation of Rs.1,47,97,995, made up of the current year's Rs.1,32,44,507 and unabsorbed depreciation of Rs.15,53,488 from the previous year. It filed a nil return and carried forward Rs.15,53,488. By assessment order of 30 March 1999 income was assessed at Rs.47,03,120 after disallowing depreciation of Rs.57,51,520 on cinematograph films held to be bogus, reducing depreciation on leased vehicles from 40% to 20% by Rs.10,28,462, adding Rs.19,16,000 of share application money under section 68, and assessing lease rentals of Rs.63,43,750 as income from other sources. The Commissioner set that assessment aside. In the fresh assessment of 19 March 2002 the film lease rentals were also excluded once the transactions were held bogus, the share application addition fell to Rs.1,15,000, and depreciation of Rs.67,79,982 was disallowed, leaving an assessed loss of Rs.11,02,255 against the carry forward loss of Rs.15,53,488 originally claimed. Penalty of Rs.31,71,692 was levied under section 271(1)(c) on the footing that Rs.68,94,982 represented income of which inaccurate particulars had been furnished. The Commissioner confirmed it; the Tribunal deleted it on 11 May 2004 following CIT v. Prithipal Singh & Co. The Delhi High Court allowed the Revenue's appeal, preferring the Karnataka High Court in P.R. Basavappa & Sons and dissenting from the Punjab and Haryana view, on the ground that Explanation 4, inserted with effect from 1 April 1976, had not been considered there. The assessees appealed. The matter was decided on 2007-02-06 by the Supreme Court (Supreme Court of India - Ashok Bhan and Dalveer Bhandari, JJ. (judgment per Ashok Bhan, J.)). On those facts the Supreme Court held as follows. The appeals were accepted and the High Court's judgment set aside. The Court held that prior to its amendment by the Finance Act 2002, in the absence of any positive income and where no tax was levied, penalty for concealment of income could not be levied. The views of the Karnataka High Court in P.R. Basavappa & Sons and of the Bombay High Court in CIT v. Chemiequip Ltd were held not to lay down the correct law. The Court recorded that the position stands altered after the amendment of section 271(1)(c) and Explanation 4(a) by the Finance Act 2002 with effect from 1 April 2003.
The Court compared Explanation 4 before and after the Finance Act 2002. As it stood before, clause (a) covered an assessee who had returned a loss which, on addition of the concealed income, was converted into positive assessed income on which tax was payable; clause (c) covered an assessee who had returned a positive income which was enhanced by the addition. In both, the end result had to be positive assessed income carrying a tax liability. The situation of a return of loss which, even after adding the concealed income, still ended in an assessed loss was not dealt with at all before 2002. The existence of a liability to pay tax was therefore a condition precedent to penalty, and it was the Finance Act 2002 which for the first time removed it, simultaneously amending clause (iii) and Explanation 4(a) to bring in cases where the assessment reduced a returned loss or converted a loss into income. On retrospectivity the Court held that an amendment is declaratory or clarificatory only if the statute itself expressly and unequivocally says so; and even then the Court will examine the true nature of the amendment rather than treat the statement as binding. Here the statute said only that the amendment took effect from 1 April 2003; the assertion that it was clarificatory appeared only in the Notes on Clauses, which cannot bind the Court when even a statement in the statute would not conclude the matter. The general presumption against retrospectivity applies with particular force to a taxing provision imposing liability, and the amendment, enlarging the scope of penalty, was substantive. The Court noted that the Finance Act 2002 made several amendments expressly retrospective while this one was consciously made effective only from 1 April 2003, and that retrospectivity in a penal provision would run against Article 20(1). It applied Brij Mohan v. CIT, that the law to be applied is that in force on the first day of the accounting period. In the words reproduced by the source cited on this page: "Prior to its amendment by Finance Act, 2002 in the absence of any positive income and no tax being levied, penalty for concealment of income could not be levied."
It was decided by the Supreme Court on 2007-02-06 and is reported as Civil Appeal No.7115 of 2005 and connected appeals (Supreme Court of India). 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), 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 taxpayer. The appeals were accepted and the High Court's judgment set aside. The Court held that prior to its amendment by the Finance Act 2002, in the absence of any positive income and where no tax was levied, penalty for concealment of income could not be levied. The views of the Karnataka High Court in P.R. Basavappa & Sons and of the Bombay High Court in CIT v. Chemiequip Ltd were held not to lay down the correct law. The Court recorded that the position stands altered after the amendment of section 271(1)(c) and Explanation 4(a) by the Finance Act 2002 with effect from 1 April 2003. It arises in Penalty matters, on section 271(1)(c) of the Income Tax Act 1961, and was decided by Supreme Court of India - Ashok Bhan and Dalveer Bhandari, JJ. (judgment per Ashok Bhan, 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. Where the Revenue calls an amendment clarificatory, ask where the statute says so; a Notes on Clauses statement is not enough, and even a statutory declaration can be examined. Distinguish carefully between a reduced loss and a converted loss, because clause (a) of Explanation 4 as it stood dealt only with a loss turned into positive income. Check the present state of this question before advising, as the retrospectivity of the Finance Act 2002 amendment to section 271(1)(c) was heavily contested and High Courts had divided on it.
Overruled. and it concludes that 'the inevitable conclusion is that Explanation 4 to Section 271(1)(c) is clarificatory and not substantive' and that 'The view expressed to the contrary in Virtual's case (supra) is not correct'. The observation that 'the true scope and ambit of the amendment has been lost sight of in Virtual Soft's case' is recorded in the judgment as the submission of learned counsel for the appellant, not as the Court's own holding. 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 harvested page is clipped: a substantial portion of the middle of the judgment is missing, including the full text of section 271(1)(c) and Explanation 4 before and after amendment, and much of the argument. The framed questions, the facts, the concluding reasoning and the operative order were read. The judgment refers to the Punjab and Haryana decision in Prithipal Singh sometimes as of the Punjab High Court and gives the assessment year there as both 1971-72 and 1970-71. No reporter citations were supplied with the batch line, so the appeal numbers are used. 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 appeals were accepted and the High Court's judgment set aside. The Court held that prior to its amendment by the Finance Act 2002, in the absence of any positive income and where no tax was levied, penalty for concealment of income could not be levied. The views of the Karnataka High Court in P.R. Basavappa & Sons and of the Bombay High Court in CIT v. Chemiequip Ltd were held not to lay down the correct law. The Court recorded that the position stands altered after the amendment of section 271(1)(c) and Explanation 4(a) by the Finance Act 2002 with effect from 1 April 2003.
TaxSphere, “Virtual Soft Systems Ltd v CIT”, https://taxnotice.vittsphere.com/caselaw/case/virtual-soft-systems-ltd-v-cit/ (validity last checked 2026-08-29)
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