Additional Tax u/s 1431A can be levied on attempt to evade tax lawfully payable not bonafide mistakes. Purpose and object of enacting Statue cannot be lost sight – SC
ABCAUS Case Law Citation
ABCAUS 3291 (2020) (03) SC
Important case law relied upon by the parties:
Commissioner of Income Tax, Gauhati vs. Sati Oil Udyog Limited and another, (2015) 7 SCC 304
K.P. Varghese v. ITO, (1981) 4 SCC 173
The appellant assessee was a Government Company. It had filed return of income showing a loss. Under the amended Section 32(2) of the Income Tax Act, 1961 (the Act) the assessee was entitled to claim only 75% depreciation. However, due to a bonafide mistake the assessee claimed 100% depreciation on written down value of assets instead of 75% depreciation.
The assessee supported the returns with provisional revenue account, balance sheet, details of gross fixed assets, computation chart and depreciation chart. No tax was payable on the said return by the assessee.
No notice u/s 143(2) of the Act was received by the assessee. However, an intimation u/s 143(1)(a) was issued by the Assessing Officer (AO) disallowing 25% of the depreciation, restricting the depreciation to 75% and demanding additional tax u/s 143(1-A)of the Act.
The assessee filed an application u/s 154 of the Act praying for rectification of the demand. The assessee also filed a petition under Section 264 of the Act against the demand of additional tax. It was explained that even after allowing only 75% of depreciation the income of the assessee remained to be in loss. The assessee prayed for quashing the demand of additional tax.
The application filed under Section 154 was rejected by the AO. The revision petition u/s 264 was also dismissed by the Commissioner of Income Tax stating that whenever an adjustment is made, additional tax has to be charged @ 20% of the tax payable on such ‘excess amount’. Which refers to the increase in the income and by implication the reduction in loss where even after the addition there is negative income.
On further appeal, the Single Judge of the Hon’ble High Court allowed the appeal of the assessee. However, the Division Bench upheld the demand of additional tax.
The Hon’ble Supreme Court observed that the Finance Act, 1993 Section 143(1-A) was substituted with retrospective effect from 01.04.1989. The memorandum explaining the provisions of the Finance Bill took note of the judicial pronouncements which held that the provisions of Section 143(1-A) were not applicable in loss cases. The Bill, therefore, sought to amend Section 143(1-A) by providing that in cases where the loss declared in the return is reduced as a result of the adjustments or the loss is converted into income, the AO shall levy the additional tax u/s 143(1A).
The Hon’ble Supreme Court concurred with the submission of the Revenue that the object of Section 143(1-A) was the prevention of evasion of tax. The memorandum explaining the provisions of the Finance Bill was also to persuade to the assessee to file Income Tax Return carefully to avoid mistakes.
Additional Tax u/s 1431A can be levied on attempt to evade tax lawfully payable
It was noted that in a judgment, the Hon’ble Court had held that provisions of Section 143(1A)should be made to apply only to tax evaders. The Court in the said case upheld the constitutional validity of Section 143(1A)(as inserted by the Finance Act, 1993)subject to holding that Section 143(1-A)can only be invoked where it is found on facts that the lesser amount stated in the return filed by the assessee is a result of an attempt to evade tax lawfully by the assessee.
In the instant case, the Hon’ble Supreme Court observed that that even after disallowing 25% of the depreciation, the assessee in the return remained in loss and the 100% depreciation was claimed by the assessee in the return due to a bonafide mistake. By an amendment, the depreciation in the case of Company was restricted to 75% which due to oversight was missed by the assessee while filing the return. The CIT while deciding the revision petition had also not made any observation to the effect that 100% depreciation claimed by the assessee was with intend to evade payment of tax lawfully payable by the assessee
The Purpose and object of a Statue cannot be lost sight
The Hon’ble Supreme Court stated that it is true that while interpreting a Tax Legislature the consequences and hardship are not looked into but the purpose and object by which taxing statutes have been enacted cannot be lost sight.
It was observed that the Court while considering the very same provision i.e. Section 143(1Aits object and purpose and while upholding the provision held that the burden of proving that the assessee has attempted to evade tax is on the Revenue which may be discharged by the Revenue by establishing facts and circumstances from which a reasonable inference can be drawn that the assessee has, in fact, attempted to evade tax lawfully payable by it.
In view of its previous judgment, the Hon’ble Supreme Court held that in the instant case, mechanical application of Section 143(1A) was uncalled for.
Accordingly, the Hon’ble Supreme Court allowed the appeal, set aside the judgment of the Division Bench of the High Court as well as the demand of additional tax.
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