Karnataka High Court
Bidar Sahakari Sakkare Krarkhane ... vs Union Of India & Ors. on 25 November, 1998
Equivalent citations: (1999)152CTR(KAR)314
ORDER
V.K. SINGHAL, J:
The validity s. 143(1A) of the IT Act, 1961, has been assailed in all these writ petitions, on the ground of liability of additional tax being violative of the principles of natural justice, discriminatory, arbITRary, unreasonable and as such are in violation of Arts. 14 and 265 of the Constitution of India. The provisions of s. 143(1A) are as under:
"Sec. 143(1A)(a): Where, in the case of any person, the total income, as a result of the adjustments made under the proviso to cl. (a) of sub-s. (1), exceeds the total income declared in the return by any amount, the AO shall,-
(i) further increase the amount of tax payable under sub-s. (1) by an additional income-tax calculated at the rate of 20 per cent of the tax payable on such excess amount and specify the additional income-tax in the intimation to be sent under sub~cl. (i) of cl. (a) of sub-s. (1);
(ii) where any refund is due under sub-s. (1) reduce the amount of such refund by an amount equivalent to the additional income-tax calculated under sub-cl. (i)
(b) where as a result of an order under s. 154 or s. 250 or s. 254 or s. 260 or s. 262 or s. 263 or s. 264, the amount on which additional income-tax is payable under cl. (a) has been increased or reduced as the case may be, the additional income-tax shall be increased or reduced accordingly, and,-
(i) in a case where the additional income-tax is increased, the AO shall serve on the assessee a notice of demand under s. 156;
(ii) in a case where the additional income-tax is reduced, the excess amount paid, if any, shall be refunded.
Explanation : For the purpose of this sub-section, "tax payable on such excess amounC means,-
(i) in any case where the amount of adjustments made under the proviso to cl. (a) of sub-s. (1) exceeds the total income, the tax that would have been chargeable had the amount of adjustments been the total income;
(ii) in any other case, the difference between the tax on the total income and the tax that would have been chargeable had such total income been reduced by the amount of adjustments."
2. Submission of the learned counsel for the petitioner is that the provisions for charging this additional income-tax is penal in nature as the income declared in the return is to be increased on the basis of the documents on record requiring prima facie adjustment which may amount to inaccurate particulars and the nature of this additional tax should be that of penalty as provided under s. 271(1)(c) and being penal in nature, the assessee should have been provided with reasonable opportunity of being heard before levying additional tax.
3. Arguments of both the learned counsel have been heard. Provisions of s. 143(1A) of the Act were added by Direct Tax Laws (Amendment) Act, 1989 w.e.f. 1st April, 1989. The said section was retrospectively substituted by Finance Act, 1993 w.e.f. Ist April, 1989 and the following notes on clauses while moving the Bill were given in the bill.
"Sub-cl. (i) seeks to substitute cl. (a) of sub-s. (1X of s. 143. The new cl. (a) seeks to provide that where as a result of the adjustments made under the first proviso to cl. (a) of sub-s. (1) of s. 145, the income declared by any person in the return is increased, the AO shall charge additional income-tax at the rate of twenty per cent on the difference between the tax on the increased total income and the tax that would have been chargeable had such total income been reduced by the amount of adjustments. The additional income-tax will be specified in the intimation to be sent under sub-cl. (i) of cl. (a) of sub-s. (1) of s. 143. In cases, where the loss declared in the return has been reduced as a result of the aforesaid adjustments or the aforesaid adjustments have the effect of converting that loss into income, the AO shall calculate a sum (referred to as additional income-tax) equal to twenty per cent of the tax that would have been chargeable on the amount of the adjustments as if it had been the total income of such person, and specify the said additional income-tax in the intimation to be sent under sub-cl. (i) of cl. (a) of sub-s. (1) of s. 143. Where any refund is due under sub-s. (1) of s. 143, the AO shall reduce the amount of such refund by an amount equivalent to the additional income-tax calculated as aforesaid. "
4. Madhya Pradesh High Court in the case of Kamal Textiles & Ors. vs. ITO & Ors. (1991) 95 CTR (MP) 274 : (1991) 189 ITR 339 (MP) .. , has considered s. 143(1)(a)(i) as not opposed to the principles of natural justice and the validity of the provisions was upheld on the ground that adjustments are only in respect of apparent arithmetical errors in the return, accounts or documents accompanying the return, loss carried forward, deduction, allowance or relief, which is prima facie admissible on the basis of the information available in the return but not claimed in the return, and similarly, those claims which are on the basis of information available in the return, prima facie inadmissible, are to be disallowed.
5. Entry 82 of List I of 7th Schedule to the Constitution of India authorises the Parliament to legislate in respect of taxes on income other than agricultural income. Entry 97 refers to any other matter not enumerated in List 11 or List III including any tax not mentioned in either of those lists. The provisions for self assessment were existing since IT Act, of 1922 was enacted but it was not fully implemented. There had been legislative changes from time to time and it is in order to encourage self assessment scheme the assessee is obliged to furnish return showing the income truly and correctly so that the requirement of personal presence or production of documents is dispensed with which will save time not only of the Department but also the assessee as well. The object of s. 143(1A) for levying the additional income-tax at the rate of 20 per cent on the difference between tax on the total income so increased and the tax that would have been chargeable had such total income been reduced by the amount of adjustment is to ensure that an assessee has to be careful while submitting the return. It is not the case of the assessee that the power under s. M(Ma) could not have been exercised as it was not the case of prima facie adjustment. In a case where provisions of s. 143(1)(a) are applicable, provisions of s. 143(1A) are automatically attracted.
6. By the Direct Laws (Amendment) Act, 1987 a new scheme of assessment was introduced in s. 143. The scope and effect of this section was subsequently amended by Direct Tax Law (Amendment) Act, 1989 reducing the Department workload to dispense with the requirement of passing assessment order in all cases. The Amendment Act, 1987, had not prescribed the time-limit for sending intimation to the assessee under s. 143(1)(a). The Amending Act, 1989 providing that intimation shall not be sent after the expiry of two years from the end of the assessment year, in which the income was first assessable. Thus if the AO fails to send intimation then it was not possible to recover the tax or interest due from the assessee on the basis of the return. Cases could be reopened under s. 147 cl. (b) Expln. 2. In the Amending Act of 1987 there were no deterrent provision for filing the incorrect return. It was by the Amending Act of 1989 s. 143(1A) has provided for levy of 20 percent additional tax to ensure that true and correct returns are filed.
7. Sec. 143(1A) was substituted w.e.f. 1st April, 1989 by Finance Act, 1993. Recommendation of Dr. Chelliah Committee were to this effect:
'10.59 With a view to encouraging voluntary compliance, reducing the discretionary power of the tax administration so as to minimise opportunities for bribery, and reducing the costs of checking the expected excuses that would be submitted for almost every case of arithmetical error and prima facie inadmissible claims, it is necessary to build in a system of automatic sanction in the nature of additional tax. The committee, therefore, recommends the continuation of the existing scheme of levying additional income-tax under s. 143(1A) of the IT Act. Further, in the interests of an equitable tax system, it is necessary that taxpayers committing the same fault should be subjected to the same penal consequences. Therefore, the existing policy of first completing every case under the summary assessment scheme and only, thereafter, initiating proceedings for scrutiny assessment should be continued."
The CBDT issued Circular No. 549 dt. 31st Oct., 1989 [(1990) 82 CTR (St.) 1 (1990) 182 ITR 1 (St.)1justifying levy of additional tax as under:
"The new s. 143, as substituted by the Amendment Act, 1987, while dispensing with the necessity of passing assessment orders in all cases did not contain any deterrent provision against filing of incorrect return to show lesser tax liabilities. Consequently the new scheme of assessment was liable to be misused by unscrupulous taxpayers, who might return lesser income by making obvious mistakes or by claiming obvious incorrect deductions and taking a chance that if the same are detected by the Department, they would have to pay the correct tax only. Besides the deterred effect, the purpose of this levy is also to persuade all taxpayers to file their returns of income carefully to avoid mistakes. It is, thus, a sort of negligence tax on the assessee and compensates the Department for the effort involved in detecting obvious mistakes committed by the taxpayers on their returns of income or loss."
The Bombay High Court in Saiko Matek Engineering (P) Ltd. vs. D. C. Pant, Dy. CIT & Anr. (1992) 108 CTR (Bom) 108.. (1993) 204 ITR 839 (Bom), Delhi High Court in the case of JK. Synthetics Ltd. vs. Asstt. CIT (1993) 109 CTR (Del) 171 :(1993) 200 ITR 58,4 (Del).- and Modi Cement Ltd. vs. Union of India (1991) 100 CTR (Del) 48 : (1991) 193 ITR 91 (Del) Rajasthan High Court in the case of Ralasthan State ElectriCITy Board vs. Dy. CIT (1992) 110 CTR (Raj) 278: (1993) 200 17R 434 (Raj) -1 Allahabad High Court in the case of Indo Gulf Fertilisers & Chemicals Corpn. Ltd, vs. Union of India (1992) 103 CTR (All) 25 : (1992) 195 ITR 485 (All) held that if as a result of adjustment no additional tax is payable if the resultant figure is loss.
8. Retrospective amendment from 1st April, 1989, provided levy of additional tax when the resultant figure is a loss. Kerala High Court in the case of Kerala State Coir Corporation Ltd. vs. Union of India & Ors. (1994) 121 CTR (Ker) 245 : (1994) 210 1M 121 (Ker) bserved that the object of s. 143(1A) is prevention of tax evasion. It was observed thus:
"Apart from that the objection of s. 143(1A) is prevention of tax evasion. Its purpose is to see that the assessee makes a true and correct disclosure of his income and expenditure. A true picture of the loss has to be made, inasmuch as the loss is liable to be carried forward to the succeeding years. The provision for additional tax is thus one intended to prevent evasion of tax, and such a legislation intended for purposes ancillary to the correct assessment of the income or the loss, and to prevent evasion of tax cannot be branded as arbITRary or struck down as such. The section is invoked only when the return filed does not accord with the realities."
It was considered that Entry 97 of the List of V11 Schedule to the Constitution authorities Parliament to legislate on any subject so long as it is not enumerated in List 11 or List Ill and the levy of additional tax can also be justified under Entry 97.
9. Madhya Pradesh High Court in the case of Sanctus Drugs Pharmaceuticals (P) Ltd. & Anr. vs. Union of India & Ors. (1997) 137 CTR (MP) 207: (1997) 225 ITR 252 (MP) observed thus:
"Penal provision means imposition of penalty or any criminal prosecution. That is not the case here. It is only the device to check evasion of tax by the clever taxpayers. Hence, it is more of a compensatory nature. Parliament is competent to enact the law prospectively and this power also denotes the competence of Parliament to make the law retrospective also. In this connection, reference can be made to a decision in the case of Rai Ramakrishna & Ors. vs. State of Bihar (1963) 50 ITR 171 (SC).. AIR 1963 SC 1667, wherein their Lordships have held as under :
'The legislative power conferred on the appropriate legislature to enact law in respect of topics covered by the several entries in the three lists can be exercised both prospectively and retrospectively. Where the legislature can make a valid law, it may provide not only for the prospective operation of the material provisions of the said law, but it can also provide for the retrospective operation of the said provisions'."
Madras High Court in the case of Sukra Diamond Tools (P) Ltd. vs. Dy. CIT (1998) 137 CTR (Mad) 629: (1998) 229 ITR 682 (Mad) on the basis of the Finance Bill, 1993 observed that it makes clear that the intention is to impose penalty for filing improper return. Amendment by Finance Act, 1993 of s. 143(1A) was held applicable from the asst. yr. 1989-90 by Allahabad High Court in the case of Banwai Paper Mills (P) Ltd. vs. Dy. CIT & Ors. (1997) 228 ITR 320 (All). Gauhati High Court in the case of Sati Oil Udyog Ltd. & Anr. vs. CIT & Ors. (1999) 152 CTR (Gau) 245 : (1998) 232 ITR 502 (Gau) considered levy of additional tax as penal in character and therefore prospective. Assistance was taken from Expln. 6 to sub-s. (1) of s. 271 of the Act. By Direct Tax Laws (Amendment) Act, 1989, to the effect that wherein adjustment is made in the income or loss declared in the return under the proviso to cl. (a) of sub-s. (1) of s. 143 an additional tax was charged and under that section provisions of sub-s. (1) of s. 271 for imposition of penalty would not apply in relation to adjustment so made.
In Union of India vs. Bombay International Ltd. (1986) 59 Corn. Cas 40 (SC) it was observed by the apex Court:
"Viewed from this standpoint, it is not possible to accept the contention that because the levy of excise is a levy on goods manufactured or produced, the value of an excisable article must be limited to the manufacturing cost plus the manufacturing profit. We are of the opinion that a broader based standard of reference may be adopted for the purpose of determining the measure of the levy. Any standard which maintains a nexus with the essential character of the levy can be regarded as a valid basis for assessing the measure of the levy. In our opinion, the original s. 4 and the new s. 4 of the Central Excises and Salt Act satisfy this test.
In coming to the said conclusion the apex Court had taken note of the well known proposition that the levy of tax is defined by its nature, while the measure of the tax may be assessed by its own standard. It was also noticed that the standard adopted as the measure of the levy may indicate the nature of the tax, but it does not necessarily determine it. The observations of the Privy Council in a reference under the Government of Ireland Act, 1920 s. 51 and s. 3 of the Finance Act (Northern Ireland), 1934, In re (1936) AC 352, are opposite:
'...it is the essential character of the particular tax charged that is to be regarded, and the nature of the machinery-often complicated-by which the tax is to be assessed is not of assistance except insofar as it may throw light on the general character of the tax'."
Further in CIT vs. B.C. Srinivasa Setty (1981) 21 CTR (SC) 138 .. (1981) 128 ITR 294 (SC) , it was observed:
"The character of the computation provisions in each case bears a relationship to the nature of the charge. Thus, the charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section."
10. From the various judgments which are given by different High Courts, it is found that the validity of s. 143(1A) has been upheld. Entry 82 of First List of VII Schedule of the Constitution (Union List) authorises imposition of tax on income other than agricultural income. It is the computation of the income by which resultant figure may result in loss figure which is sought to be taxed. This is with the object to prevent tax evasion or filing of incorrect return and to ensure proper payment of tax and compliance of law. Such an object could be considered as ancillary and incidental to the main power and thus even without seeking any assistance from Entry 97 of the Union List, I feel that the Parliament has power to levy the tax. The word 'tax' will include 'additional tax'. Character of tax and penalty may differ, but not of tax and additional tax. In penalty, normally discretion has to be exercised to levy or not to levy it is not automatic. Here in all cases where return is filed, action under s. 143(1)(a) has to be taken levying additional tax of 20 per cent. No discretion is left with the assessing authority. Expln. 6 to s. 271(1)(c) has only clarified the position that the penalty would not be levied where additional tax has been levied. This is in order to make the provision clear. That Explanation does not make the character of additional tax as that of penalty. Parliament has power to legislate prospectively or retrospectively. Sec. 143(1A) inserted by Finance Act, 1993, retrospectively from 1st April, 1989, therefore, cannot be considered to be violative of Arts. 14 and 265 of the Constitution of India. The very object of s. 143(1)(a) by making prima facie adjustment is to avoid hearing being given. Debatable adjustments excludes prima facie adjustments. It is post-decisional hearing which is provided enabling the assessee to file objection by moving an application under s. 143(2)(a) within one month from the date of service of notice of demand. A revision could have been filed under s. 264 and now in view of the Expln. to s. 143(5) even against an intimation appeal could be filed under s. 246 beside availability of the remedy of revision under s. 264. Provisions of s. 143(1)(a) or 143(1A) of the Act cannot be considered to be violative of the principles of natural justice or discriminative, arbITRary or unreasonable being violative of Arts. 14 and 265 of the Constitution.
11. Learned standing counsel for the Department has pointed out that this 20 per cent additional tax is levied in all the cases where on account of prima facie adjustment figure is varied resulting in higher income or lesser loss or loss figure is converted into income figure. The provision being within the legislative competence ensuring proper and correct payment of tax and particulars in the return dispensing the hearing, at pre-decisional stage and providing such hearing under the provisions of the Act subsequently under different provisions cannot be considered as unreasonable. The legislature can by specific provision exclude an opportunity being given and if such an opportunity is given subsequently for redressals then the provision cannot be considered to be beyond the competence of legislation.
12. In view of the above observations, I feel that additional tax which has been levied uniformly at 20 per cent on account of prima facie adjustment cannot be considered to be unreasonable or violative of the provisions of Arts. 14 and 265 of the Constitution of India.
Writ petitions are accordingly dismissed.