Income-tax---

----Assessment---Loss---Additional tax---Constitutional validity of provisions---Object of provision to prevent tax evasion or filing of incorrect return---"Tax" includes "Additional Tax" ---Dispensing with hearing at pre -decisional stage and providing such hearing subsequently under different provisions not unreasonable---Character of additional tax is not that of penalty---Parliament has power to legislate prospectively or retrospectively-- Provisions not violative of Arts. 14 & 265---Provisions valid---Indian Income Tax Act, 1961, S.143(1)(a), (IA) ---Constitution of India, Arts. 14 & 265.

Entry 82 of List 1 of Schedule VII to the Constitution (Union List) authorises imposition of tax on income other than agricultural income. It is the computation of the income by which the resultant figure may result in a 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 with 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, Parliament has power to levy the tax. The word "tax" will include "additional tax". The 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. In all cases where return is filed, action under section 143(1A) of the Income Tax Act, 1961, has to be taken levying additional tax of 20 percent. No discretion is left with the assessing authority. Explanation 6 to section 271(1)(c) of the Act has only clarified the position that the penalty would not be levied where additional tax has been levied. That Explanation does not make the character of additional tax as that of penalty. Parliament has power to legislate prospectively or retrospectively. Section 143(1A) inserted by the Finance Act, 1993, retrospectively from April 1, 1989, therefore, cannot be considered to be violative of Articles 14 and 265 of the Constitution of India. The very object of section 143(1)(a) by making prima facie adjustment is to avoid hearing being given. Debatable adjustments exclude prima facie adjustments. It is post-decisional hearing which is provided enabling the assessee to file objection by moving an application under section 143(2)(a), within one month from the date of service of notice of demand. A revision could. be filed under section 264 and in view of the Explanation to section 143(5) even against an intimation. Appeal could be filed under section 246 besides availability of the remedy of revision under section 264. The provisions of section 143(1)(a) or, section 143(1A) of the Act cannot be considered to be violative of the principles of natural justice or discriminatory, arbitrary or unreasonable being violative of Articles 14 and 265 of the Constitution of India.

The provisions being within the legislative competence ensuring proper and correct payment of tax and particulars in the return dispensing with 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 the Legislature.

Therefore, additional tax which .has been levied uniformly at 20 per cent under section 143(1A) of the Act on account of prima facie adjustment cannot be considered to be unreasonable or violative .of the provisions of Articles 14 and 265 of the Constitution of India.

Kamal Textiles v. Income-tax Officer (1991) 189 ITR 339 (M.P); Kerala State Coir Corporation Ltd. v. Union of India (1994) 210 ITR 121 (Ker.) and Sanctus Drugs Pharmaceuticals (Pvt.) Ltd. v. Union of India (1997) 225 ITR 252 (MP) fol.

A reference under the Government of Ireland Act, 1920, section 51 and section 3 of the Finance Act (Northern Ireland), 1934, In re (1936) 2 All ER 111; (1936) AC 352 (PC); Banwari Paper Mills (P) Ltd. v. Deputy CIT (1997) 228 ITR 320 (Kar.); CITv. B.C. Srinviasa Setty (1981) 128 ITR 294 (SC); Indo-Gulf Fertilizers and Chemicals Corporation Ltd. v. Union of India (1992) 195 ITR 485 (All.); J.K. Synthetics Ltd. v. Assistant CIT (19933 200 ITR 584 (Delhi); Modi Cement Ltd. v. Union of India (1992) 193 ITR 91 (Delhi); Rai Ramkrishna v. State of Bihar (1953) 50 ITR 171 (SC); Rajasthan State Electricity Board v. Deputy CIT (1993) 200 ITR 434 (Raj.); Saiko Matek Engineering (Private) Limited v. D.C. Pant, Deputy CIT (1993) 204 ITR 839 (Bom.); Sati Oil Udyog Ltd. v. CIT (1998) 232 ITR 502 (Gau.); Sukra Diamond Tools (Pvt). Ltd. v. Deputy CIT (1998) 229 ITR 682 (Mad.) and Union of India v. Bombay Tyre International Ltd. (1986) 59 Comp. Cas. 460 (SC) ref.

Kishore Mallya for Petitioner.

H.N. Naga Mohan Das and M.V. Seshachala for Respondents.

JUDGMENT

The validity of section 143(1A) of the Income Tax 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 Articles 14 and 265 of the Constitution of India. The provisions of section 143(1 A) are as under:

" 143. (1 A)(a) Where, in the case of any person, the total income, as a result of the adjustments made under the proviso to clause (a) of subsection (1), exceeds the total income declared in the return by any amount, the Assessing Officer shall,---

(i) further increase the amount of tax payable under subsection (1) by an additional income-tax calculated at the rate of 20 percent. of the tax payable on such excess amount and specify the additional income-tax in the intimation to be sent under sub-clause (i) of clause (a) of subsection (1);

(ii) where any refund is due under subsection (1), reduce the amount .of such refund by an amount equivalent to the additional income-tax calculated under sub-clause (i).

(b) where as a result of an order under section 154 or section 250 or section 254 or section 260 or section 262 or section 263 or section 264, the amount on which additional income-tax is payable under clause (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 Assessing Officer shall serve on the assessee a notice of demand under section 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 subsection, 'tax payable on such excess amount means,--

(i) in any case where the amount of adjustments made under the proviso to clause (a) of subsection (1) exceed 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 adjustment."

The submission of learned counsel for the petitioner is that the provision 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 section 271(1)(c) and being penal in nature, the assessee should have been provided with reasonable opportunity of being heard before levying additional tax.

Arguments of both learned counsel have been heard: The provisions of section 143(1 A) of .the Act were added by the Direct Tax Laws (Amendment) Act. 1989. with effect from April I. 1989. The said section was retrospectively substituted by the Finance Act of 1993 with effect from April 1, 1989 and the following Notes on Clauses while moving the Bill were given in the Bill (See t 1993) 2(X) ITR (St.) 124):

"Sub-clause (i) seeks to substitute clause (a) of subsection (l A) of section 143. The new clause (a) seeks to provide that where as a result of the adjustments made under the first proviso to clause (a) of subsection (1) of section- 143. the income declared by any person to the return is increased, the Assessing Officer shall charge additional income-tax at the rate of twenty percent. 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-clause (i) of clause (a) of subsection (1) of section 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 Assessing Officer shall calculate a sum (referred to as additional income-tax) equal to twenty percent. 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-clause (i) of clause (a) of subsection (1) of section 143. Where any refund is due under subsection (1) of section 143, the Assessing Officer shall reduce the amount of such refund by an amount equivalent to. the additional income-tax calculated as aforesaid:"

The Madhya Pradesh Nigh court in the case of Kamal Taxtiles v. ITO (1991) 189 ITR 339, has considered section 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.

Entry 82 of List 1 of the Seventh Schedule to the Constitution of India authorises Parliament to legislate in respect of taxes on income other than agricultural income. Entry 97 refers to any other matter not enumerated in List II or List III including any tax not mentioned in either of those lists. The provisions for self-assessment were existing since the Indian Income-tax 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 the self-assessment scheme the assessee is obliged to furnish a 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 section 143(1A) for levying the additional income-tax at the rate of 20 pre 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 section 143(1A) could not have been exercised as it was not the case of prima facie adjustment. In a case where provisions of section 143(1)(a) are applicable the provisions of section 143(1 A) are automatically attracted.

By the Direct .Tax, Laws (Amendment) Act, 1987, a new scheme of assessment was introduced, in section 143. The scope and effect of this section was subsequently amended by the Direct Tax Laws (Amendment) Act, 1989, reducing the Department's work load to dispense with the requirement of passing assessment order in all cases. The Amendment Act of 1987 had not prescribed the time limit for sending intimation to the assessee under section 143(1)(a). The Amending Act, 1989, providing that an 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 Assessing Officer 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 section 147, clause (b), Explanation 2. In the amending Act of 1987 there were no deterrent provisions for filing the incorrect return. It was by the amending Act of 1989, section 143(1 A) provided for levy of 20 percent. additional tax to ensure that true and correct returns are filed:.

Section 143(1 A) was substituted with effect from April 1, 1989, by the Finance Act, 1993. The recommendations of the 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 section 143(lA) of the Income-tax Act. Further. in the interest 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 Central Board of Direct Taxes issued Circular No.549, dated October 31, 1989 (1990) 182 ITR (St.) 1, justifying levy of additional tax as under (page 23):

"The new section 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 returns 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 obviously 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 its deterrent effect, the purpose of this levy is also to persuade all the taxpayers to fill 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 in their returns of income or loss."

The Bombay High Court in Saiko Matek Engineering (Private) Limited v. D.C. Pant, Deputy CIT (1993) 204 ITR 839, the Delhi High Court in the cases of J.K. Synthetics Ltd. v. Assistant CIT (1993) 20() ITR '584 and Modi Cement Ltd. v.. Union of India (1992) 193 ITR 91, the Rajasthan High Court in the case of Rajasthan State Electricity Board v: Deputy CIT (1993) 200 ITR 434, the Allahabad High Court in the case of Indo-Gulf Fertilizers and Chemicals Corporation Ltd. v. Union of India (1992) 1.95 ITR 485 held that if as a result of adjustment the resultant figure is loss no additional tax is payable.

Retrospective amendment from April 1; 1989, provided for levy, of additional tax when the resultant figure is a loss. The Kerala High Court in the case of Kerala State Coir Corporation Ltd. v. Union of India (1984) 21 ITR 121 observed that the object of section 143(lA) is prevention of tax evasion. It was observed thus (page 123):

"Apart from that the object of section 143(1 A) 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 List I of the Seventh Schedule to the Constitution authorises Parliament to legislate on any subject so long as it is not enumerated in List- 11 or Last III and the levy of additional tax can also be justified under Entry 97.

The Madhya Pradesh High, Court in the case of Anctus Drugs Pharmaceuticals (Pvt). Ltd. v. Union of India (1997) 225 ITR 252, observed thus (page 255):

"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 Ramkrishna v. State of Bihar (1963) 50 ITR 171 (SC); AIR 1963 SC -1667. wherein their Lordships have held as under (page 1673):

'The legislative power conferred on the appropriate Legislatures 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'."

The Madras High Court in the case of Sukra Diamond Tools (Pvt.) Ltd. v. Deputy CIT (1998) 229 ITR 682. on the basis of the Finance Bill, 1993; observed that it makes it clear that the intention is to impose penalty for filing improper return. Amendment by the Finance Act. 1993. of section 143(IA) was held applicable from the assessment year 1989-90 by the Allahabad High Court in the case of Banwari Paper Mills (P.) Ltd. v: Deputy CIT (1997) 228 ITR 320. The Gauhati High Court in the case of Sati Oil Udyog Ltd. v. CIT (1998) 232 ITR 502, considered levy of additional tax as penal in character and, therefore, prospective. Assistance was taken from Explanation 6-to 'subsection (1) of section 271 of the Act. By the 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 clause (a) - of subsection (1) of section 143 an additional tax was charged and under that section the provisions of subsection (1-) of section 271 for imposition of penalty would not apply in relation to adjustment so made.

In Union of India v. Bombay Tyre International Ltd. (1.986) 59 Comp. Cas. 460 (SC). it was observed by the apex Court (page 476):

"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 section 4 and the new section 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 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. section 51 and. section 3 of the Finance Act (Northern Ireland); 1934, In re: (1936) AC 352; (1936) 2 All ER 111 are apposite (page 475 of 59 Comp. Cas.):

.. 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 in so far as it may throw light on the general character of the tax. "

Further in CIT v, B.C. Srinivasa Setty (1981) 128 ITR 294 (SC), it was observed (page 299):

"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:"

From the various judgments, which are given by different. High Courts, it is found that the validity of section 143(lA) has-been upheld. Entry 82 of the First List of the Seventh Schedule of the Constitution (Union List) authorises imposition of tax on income other than 4gricultural income. It is the computation of-the income by which the resultant figure may result in a 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 with 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 Parliament has power to levy the tax. The-word "tax" will include "additional .tax". The character of fax 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 section 143(1 A) has to be taken levying additional tax of 20 percent. No discretion is left with the assessing authority. Explanation 6 to sec tion 271(1)(c) has only clarified the position that the penalty would not be levied where additional tax has been levied. This is to 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. Section 143(1 A), inserted by, the Finance Act. 1993. retrospectively from April 1,1989, therefore, cannot be considered to be violative of Articles 14 and 265 of the Constitution of India. The very object of section 143(1)(a) by making prima facie adjustment is to avoid hearing being given. Debatable adjustments exclude prima facie adjustments. It is post-decisional hearing which is provided enabling the assessee to file objection by moving an application under section 143(2)(a) within one month from the date of service of notice of demand. A revision could. have been filed under section 264 and now in view of the Explanation to section 143(5) even against an -intimation, appeal could be filed under section 246 besides availability of the remedy of revision under section 264. The provisions of section 143(1)(a) or section 143(1 A) of the Act cannot be considered to be violative of the principles of natural justice or discriminatory, arbitrary or unreasonable being Violative of Articles 14 and 265-of the Constitution.

Learned standing counsel for the Department has pointed out that this 20 percent. 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 with 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.

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 Articles 14 and 265 of the Constitution of India.

Writ petitions are accordingly dismissed.

M.B.A.131/FC

Petitions dismissed.