A penalty is a creature of the Statute. Unless there is a specific provision in the Act providing for levy of penalty, the same cannot be levied. Further, even if there is an overall provision, but the machinery in the provision is not adequate to deal with alleged offence, the penalty becomes unworkable.

Delhi High Court in the case of CIT vs. Nalwa Sons Investments Ltd as reported in [2010] 327 ITR 543 {Del}

Here, the assessee initially filed its return declaring a loss of Rs. 43.47 crores. Thereafter, it filed a revised return declaring an income of Rs. 3,86,82,128 being book profits us 115JB of the Income Tax Act. In assessment us 143 [3] of the Income Tax Act, the loss was assessed at Rs. 36.95 crores as per the normal provisions and the book profits as the total income assessed at Rs. 4,01,63, 180. An issue for consideration before the High Court was whether penalty us 271 [1][c] is leviable in respect of the disallowances made in the income assessed under the normal provisions {The loss assessed under normal provisions was reduced due to some disallowances}.

The High Court held as under :-

” Under the scheme of the Income Tax Act, 1961, the total income of the assessee is first computed under the normal provisions of the Act and the tax payable on such profits is compared with the prescribed percentage of the book profits computed under section 115JB of the Act. The higher of the two amounts is regarded as total income and tax is payable with reference to such total income. If the tax payable under the normal provisions is higher, such amount is the total income of the assessee, otherwise, the book profits are deemed as the total income of the assessee in terms of section 115JB of the Act. Where the total income computed in accordance with the normal procedure is less than the income determined by the legal fiction, namely, the book profits under section 115JB of the Act and not under the normal provisions, the tax is paid on the income assessed under section 115JB of the Act. Concealment of income would have no role to play and would not lead to tax evasion. Therefore, penalty cannot be imposed on the basis of disallowance or additions made under the regular provisions.”

It may be noted that the computation of penalty us 271 [1][c] is also with reference to “the amount of tax sought to be evaded”, which expression has been defined in Explanation 4. Under this Explanation, the tax on the additions which constitute concealed income is treated as the amount of tax evaded. In short, the additions made in the assessed income are compared with returned income for determining the tax sought to be evaded. In the instant case before the Delhi High Court, the allegation of concealment was with respect to the income assessable under the normal provisions and not regarding the book profits us 115JB returned as the total income and later assessed.

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September 2021