WP(C) No. 5059-2008 Page 1 of 64 +* THE HIGH COURT OF DELHI AT NEW DELHI % Judgment Reserved on : 27.04.2009 Judgment Delivered on: 24.07.2009 + WP(C) No. 5059 of 2008 MS. MADHUSHREE GUPTA ..... Petitioner versus UNION OF INDIA & ANR. ..... Respondent WP(C) No. 6272 of 2008 BRITISH AIRWAYS PLC ..... Petitioner versus UNION OF INDIA & ORS. ..... Respondent Advocates who appeared in this case: For the Petitioner : Mr O.S. Bajpai, Mr Bibhuti Singh & Mr V.N. Jha, Advocates in WP(C) No. 5059/2008 Mr M.S. Syali, Sr. Advocate with Mr Satyen Sethi, Ms Mahua Kalra, Mr Peeyoosh Kalra & Ms Vidushi Chandana, Advocates in WP(C) No. 6272/2008 For the Respondent : Mr P.P.Malhotra, Additional Solicitor General with Ms Sonia Mathur, Advocate for the UOI. Ms Prem Lata Bansal & Mr Sanjeev Sabharwal, Sr. Standing Counsels for Revenue. CORAM :- HON'BLE MR JUSTICE VIKRAMAJIT SEN HON'BLE MR JUSTICE RAJIV SHAKDHER 1. Whether the Reporters of local papers may be allowed to see the judgment ? Yes 2. To be referred to Reporters or not ? Yes 3. Whether the judgment should be reported in the Digest ? Yes RAJIV SHAKDHER, J 1. The captioned writ petitions lay challenge to the provisions of Section 271(1B) of the Income Tax Act, 1961 (hereinafter referred to WP(C) No. 5059-2008 Page 2 of 64 as the ‗Act‘) on the ground that it is ultra vires the Constitution of India. The impugned provision which was brought on to the statute book by the Finance Act, 2008 with retrospective effect from (w.r.e.f.) 01.04.1989, has resulted in a grievance in so far as the petitioners/assessees are concerned, in as much as, apropos to its insertion in the Act, the salutary requirement of the Assessing Officer arriving at his own ―satisfaction‖ during the course of assessment proceedings that the assessee has concealed the particulars of his income or has furnished inaccurate particulars before initiating penalty proceedings has been done away, by a deeming fiction encapsulated therein. This, in short, is the kernel of the controversy before us. As is evident on a bare reading of the provisions of Section 271(1B) of the Act that the deeming fiction envisaged in the said provision which is to operate retrospectively, pertains only to clause (c) of sub-section (1) of Section 271 of the Act. 1.1 Consequently, the writ petitioners before us have made the following main prayers in their respective writ petitions: Writ petition No. 5059/2008 ―i) That the impugned sub-section (1B) of Section 271 of the Act may be struck down as constitutionally invalid; or alternatively, it may be read down to the effect that the satisfaction should be deemed to have been recorded only where reasons are specified with respect to specific items of additions or disallowances leading to the initiation of penalty proceedings.‖ Writ petition No. 6272/2008 ―a. A writ of Certiorari or Writ, order of Direction in the nature of Certiorari, or any other appropriate Writ, Order WP(C) No. 5059-2008 Page 3 of 64 or Direction under Article 226/227 of the Constitution of India quashing sub-section (1B) to section 271 inserted by Finance Act, 2008 as arbitrary, ultra virus and violative of Article 14 of the Constitution of India. b. A Writ of Certiorari or Writ, Order of Direction in the nature of Certiorari, or any other appropriate Writ, Order or Direction under Article 226 / 227 of the Constitution of India declaring that sub-section (1B) to section 271 inserted by Finance Act, 2008 cannot be given retrospective effect from 1.4.1989. c. A Writ of Prohibition or Writ, Order of Direction in the nature of prohibition, or any other appropriate Writ, Order or Direction under Article 226/227 of the Constitution of India restraining the respondents No. 3 & 4/ or their officers, agents, etc., from taking any proceedings by way of rectification or otherwise to give effect to retrospective insertion of sub-section (1B) in section 271 of the Act, in respect of assessment years 1996-97 to 2001-02.‖ 2. In order to adjudicate upon the writ petitions the following facts are required to be noticed. Writ petition No. 5059/2008 2.1 In respect of Writ Petition No. 5059/2008, we had called for ITA No. 548/2006, which is an appeal filed by the Department against the order of the Income Tax Appellate Tribunal (hereinafter referred to as the ‗Tribunal‘) quashing the penalty proceedings, in order to ascertain the bare facts; the writ petition being bereft of facts essential for the WP(C) No. 5059-2008 Page 4 of 64 purposes of adjudication. The following facts, which are not disputed, emerge on reading of the file. 2.2 On 29.10.2001 the petitioner filed a return of income declaring a loss of Rs 53,54,135/-. The said return was processed under Section 143(1) of the Act. However, on 25.10.2002 notices under Section 143(2) of the Act were issued. Consequent thereto, even though the Assessing Officer by an order dated 20.02.2004 assessed the taxable income of the assessee as ‗nil‘, he made two adjustments to the returned income. First, an addition of Rs 3,82,636/- as income from undisclosed sources. Second, he restricted the deduction under Section 80HHC of the Act to Rs 53,17,841/- as against the claim of the assessee of Rs 1,03,61,340/-. Importantly, by the very same order, the Assessing Officer initiated penalty proceedings under Section 271(1)(c) of the Act by making the following endorsement at the foot of the order: ―Initiate penalty proceeding u/s 271(1)(c) of the I.T. Act separately. Issue necessary forms.‖ 2.3 By an order dated 31.08.2004 the Assessing Officer after considering the reply filed by the petitioner imposed a penalty of Rs 18,79,303/- at the minimum rate of 100% of tax evaded. Being aggrieved, the assessee preferred an appeal to the Commissioner of Income Tax (Appeals) [hereinafter referred to as the ‗CIT(A)‘]. The CIT(A) vide order dated 04.03.2005 sustained the penalty imposed by the Assessing Officer. Aggrieved, the assessee carried the matter further in appeal to the Tribunal. The Tribunal by an order dated 15.07.2005 deleted the penalty imposed on the petitioner. In doing so it posed to itself the following two issues: WP(C) No. 5059-2008 Page 5 of 64 (i) Whether penalty under Section 271(1)(c) of the Act could be imposed on the assessee if the taxable income was nil? (ii) Whether penalty under Section 271(1)(c) of the Act could be imposed in the event the satisfaction arrived at by the Assessing Officer before initiation of the penalty proceedings is not recorded by the Assessing Officer? 2.4 In respect of the first issue the Tribunal relied upon the judgment of the Supreme Court in CIT vs Prithipal Singh & Co (2001) 249 ITR 670 to hold that no penalty under Section 271(1)(c) of the Act could be levied in view of the fact that the assessee‘s taxable income was nil. We may point out at this stage that this view found resonance in another judgment of the Supreme Court in the case of Virtual Soft Systems Ltd vs CIT (2007) 289 ITR 83 which, however, now stands reversed by a judgment of a larger bench of the Supreme Court in the case of CIT vs Gold Coin Health Food Pvt Ltd (2008) 304 ITR 308. 2.5 As regards the second issue the Tribunal opined, in line with the judgment of this Court, which is the Jurisdictional High Court, in the case of CIT vs Ram Commercial Enterprises Ltd (2000) 246 ITR 568 (Del) and Diwan Enterprises vs CIT (2000) 246 ITR 571 (Del), that the Assessing Officer having not recorded his satisfaction that the assessee had concealed particulars of his income or furnished inaccurate particulars before completion of the assessment proceedings, the initiation of penalty proceedings was bad in law and hence the order imposing penalty must fail. The Department being aggrieved preferred an appeal, being ITA No. 548/2006 to this court WP(C) No. 5059-2008 Page 6 of 64 under Section 260A of the Act. The said appeal is pending adjudication and is listed for hearing on 28.10.2009. Writ petition No. 6272/2008 3. The petitioner is a company incorporated in United Kingdom and is engaged in the business of air transportation service. The petitioner has branch offices in India at New Delhi, Mumbai, Chennai and Kolkata. 3.1 The operations of the petitioner in India essentially pertain to the following activities: (i) air-transportation of passengers, cargo and mail to and from India; and (ii) rendering engineering and ground-handling services to aircrafts operated by other airlines in India. 3.2 On 11.02.1994, the Government of India as empowered under the provisions of Section 90 of the Act, entered into a Double Taxation Avoidance Agreement (in short ‗DTAA‘) with the Government of United Kingdom. 3.3 It was the claim of the petitioner that by virtue of the provisions of Article 8 of DTAA the profits from both the activities described hereinabove, were not taxable in India in view of the fact that the petitioner was a tax resident of United Kingdom and the profits earned from the said activities were taxable only in United Kingdom. 3.4 The stand taken by the petitioner was not accepted by the Department with respect to engineering and ground-handling services. Consequently, a notice dated 09.06.1998 was issued by the WP(C) No. 5059-2008 Page 7 of 64 Assessing officer calling for information with regard to the engineering and ground-handling services, in respect of assessment years 1996-97, 1997-98 and 1998-99. Pursuant thereto, the petitioner filed returns for the aforementioned assessment years on 30.11.1998, offering to tax 15% ‗deemed profit‘ from engineering and ground- handling services. 3.5 The Assessing Officer in March, 1999, completed the assessment of the petitioner. By his assessment order, the Assessing Officer while rejecting the stance of the petitioner that engineering and ground-handling services were not amenable to tax in India by virtue of Article 8(2) of the DTAA, brought to tax petitioner‘s income in excess of 80% of gross receipts, from engineering and ground- handling services. By the same assessment order the Assessing Officer also initiated penalty proceedings against the petitioner. The CIT(A) sustained the assessment order. The matter was carried further in appeal to the Tribunal. The Tribunal by an order dated 26.03.2003, in-principle, sustained the assessment order in so far as it brought to tax profits which the petitioner-assessee had earned from engineering and ground-handling services. The matter was, however, remanded to the Assessing Officer for re-computation of taxable profits from the said activities. 3.6 The Assessing Officer by an order dated 23.02.2004 gave effect to the order of Tribunal in respect of the assessment year 1996-97, 1997-98 and 1998-99. It is important to note that at the foot of the assessment order, the Assessing Officer made the following endorsement with respect to initiation of penalty proceedings: WP(C) No. 5059-2008 Page 8 of 64 ―Initiate penalty proceedings under Section 271(1)(c) for furnishing inaccurate particulars of income‖ 3.7 In the meanwhile, the petitioner had also filed its returns for assessment years 1999-2000, 2000-01 and 2001-02 declaring nil income. In respect of these years too, the Assessing Officer completed the assessment in the same manner as was done in the earlier years. Importantly, the Assessing Officer, as was done in the earlier years, by the very same order initiated penalty proceedings. Consequent thereto, the Respondent No. 4, that is, the Assistant Director of Income Tax, by an order of even date i.e., 30.03.2006 imposed penalty separately, equivalent to 100% of tax sought to be evaded on the aforesaid concealed income, in respect of, all six assessment years mentioned hitherto, that is, assessment years 1996- 97 to 2001-02. 3.8 Aggrieved, the assessee preferred an appeal to the CIT(A). The CIT(A) by an order dated 30.12.2006 confirmed the penalty imposed by the Assessing officer under Section 271(1)(c) of the Act. 3.9 Being aggrieved, the petitioner carried the matter further in appeal to the Tribunal. The Tribunal by an order dated 23.11.2007 set aside the order of the CIT(A) confirming the penalty imposed by the Assessing Officer under Section 271(1)(c) of the Act in respect of the six assessment years referred to hereinabove. The Tribunal relied upon the judgment of the Division Bench of this court in Ram Commercial (supra) as also the judgment of the Supreme Court in the case of D.M. Manasvi vs CIT (1972) 86 ITR 557, in coming to the conclusion that the Assessing Officer is required to form his own opinion and record his satisfaction before initiating penalty WP(C) No. 5059-2008 Page 9 of 64 proceedings. The Tribunal observed that merely because penalty proceedings have been initiated it cannot be assumed that such satisfaction has been arrived at, in the absence of the same being spelt out, in the order of the Assessing Officer. In order to ascertain whether requisite satisfaction had been arrived at by the Assessing officer the Tribunal was called upon to decide which of the two assessment orders had to be looked at, that is, one which was passed originally or the one which was passed on remand. The Tribunal after due discussion of the case law on the issue, came to the conclusion that since in the present case it had in the first round by its order dated 30.10.2006 sustained the original assessment on principle by agreeing with the Assessing Officer that the income received by the assessee by way of engineering and ground handling services was taxable, and had thus set aside the said assessment order partially only for re-computation of income from the said activities; for the purpose of ascertaining satisfaction of the Assessing Officer with regard to initiation of penalty proceedings only the original assessment order could be looked at. The Tribunal upon perusal of the assessment orders for each of the six assessment years came to the conclusion that the requisite satisfaction with regard to assessee having concealed particulars of his income or having furnished inaccurate particulars of such income having not been recorded by the Assessing Officer in the relevant assessment years before initiation of penalty proceedings under Section 271(1)(c) of the Act, the initiation of penalty proceedings was unsustainable in law. In these circumstances the Tribunal did not examine the matter on merits. Being aggrieved, the Department preferred five separate appeals in respect of the assessment years 1997-98 to 2001-02 to this WP(C) No. 5059-2008 Page 10 of 64 Court. These being ITA Nos. 877/2008, 957/2008, 965/2008, 880/2008 & 818/2008. These appeals were disposed of by this Court vide order dated 27.08.2008 by setting aside order of the Tribunal dated 23.11.2007 and remanding the appeals for a decision on merits, in view of the fact that the impugned provision, that is, Section 271(1B) of the Act was already operable. We have not been informed whether the Department has preferred an appeal for assessment year 1996-97. The submissions of the learned counsel for the assessee, however, to the effect that remand of the matter ought not to be construed as, the assessee, having accepted the constitutional validity or the applicability of the impugned provision to its case; as these were the subject matter of the writ petition filed by the assessee, that is, the present writ; was taken note of by this Court. Submissions 4. Submissions on behalf of the petitioner have been made by Mr.O.S. Bajpai, Advocate in Writ Petition No.5059/2008. The contours of his submissions are as follows:- (i) It is contended that the only object of the impugned amendment, i.e., insertion of Section 271(1B) of the Act with retrospective effect is to nullify the judgment of the Supreme Court in D.M. Mansavi (supra) and CIT vs. S.V. Angidi Chettiar (1962) 44 ITR 739. The impugned amendment does not seek to cure any defect and as a matter of fact the impugned provision leaves the main penalty provision, i.e., Section 271(1)(c) of the Act intact, in as much as it remains on the statue book. WP(C) No. 5059-2008 Page 11 of 64 (ii) The impugned provision is not a validating Act. In this context the judgment of the Supreme Court in the case of Shri Prithvi Cotton Mills Ltd vs. Broach Borough Municipality (1989) 2 SCC 283 was read and sought to be distinguished. It was contended that in the instant case there is no statute or rule which has been declared invalid so as to impinge on the very power to levy tax or penalty. It is submitted that the present case is not one where power to levy penalty is wanting, but is a case where a jurisdictional error has been committed in invoking the power to impose penalty while the power by itself remains undisturbed under the provisions of Section 271(1)(c) of the Act. In short it is submitted that there is no challenge to the validity of Section 271 of the Act except to a limited extent in so far as it pertains to sub-section (1B) of Section 271 of the Act. It is thus submitted that the ratio of Shri Prithvi Cotton Mills Ltd (supra) would not be applicable as there is no challenge to the competence of the legislature to levy penalty or to the provision under which the penalty is levied. (iii) The well settled principle established by the Courts which includes the Supreme Court and the various High Courts is that, before initiation of penalty proceedings, the Assessing Officer has to arrive at a prima facie satisfaction during the course of any proceedings before him which would include assessment, re- assessment or even rectification proceedings. This is a jurisdictional issue and there is not a single judgment of any Court which propounds a principle contrary to this proposition. It is further contended that the only difference in the judicial opinion of various High Courts is as regards the manner in which such prima facie satisfaction before initiation of proceedings is to be recorded. WP(C) No. 5059-2008 Page 12 of 64 Learned counsel relied upon the Full Bench judgment of this Court in the case of CIT vs Rampur Engineering Co Ltd (2009) 309 ITR 143(Del) in which one of us, (Rajiv Shakdher, J) was a member, as also on the Division Bench Judgment of this Court in Ram Commercial (supra) and Diwan Enterprises (supra) which was affirmed by the Full Bench, to contend that satisfaction should be spelt out in the assessment order. (iv) In view of the position of law professed by the learned counsel, it was submitted by him that such satisfaction which is required to be arrived at by the Assessing Officer before initiation of penalty proceedings and issuance of notice under Section 274 of the Act, is a question of fact which cannot be legislatively presumed by creating a fiction, as is sought to be done, by the impugned provision. Furthermore, he contends that the decision to levy penalty is discretionary which has to be exercised by the Assessing Officer, acting in his quasi judicial capacity, based on facts and circumstances of each case and hence cannot be substituted by legislative presumption. (v) The impugned provision is violative of Article 14 of the Constitution as there is no nexus between the object sought to be achieved by the legislature and the impugned provision. He impugned the provisions of Section 271(1B) of the Act on the ground that it confers on the Assessing Officer wholly arbitrary power, there being no in-built guidelines laid down for exercising such power. (v)(a). To buttress his submissions the learned counsel has given examples such as the following:- WP(C) No. 5059-2008 Page 13 of 64 (v)(b) He hypothesizes a situation by suggesting that: suppose an Assessing Officer makes additions or disallowances in respect of say, assessees A and B and initiates penalty proceedings against only one of the two. The learned counsel submits that in the absence of any guidelines as to which of the assessee‘s case ought to be picked up for initiation of penalty proceedings it would lead to unnecessary harassment and protracted litigation, besides the one who is picked up for initiation of penalty proceedings will be meted with unequal treatment in law. (v)(c) The learned counsel went on to illustrate the arbitrariness by citing another example: He submitted that say in a given case during the course of assessment proceedings, an Assessing Officer makes five or six additions and disallowances, but prima facie satisfaction is not found to exist in respect of all such additions or disallowances save and except in the case of one or two of such additions or disallowances. The Assessing Officer by taking recourse to the impugned provision would issue notice and initiate penalty proceedings with respect to all additions and disallowances. To drive home the point the learned counsel referred to facts of the instant case. He states that the Assessing officer during the course of assessment has made an addition of a sum of Rs 3,82,656/- on account of undisclosed income and a disallowance under Section 80HHC by restricting deduction to the extent of Rs 50,43,499/- as against the claim made by the assessee of over Rs 1 crore. He submits that the assessee‘s claim with respect to Section 80HHC was made based on the following judgments: CIT vs. Shirke Construction Equipments Ltd (2000) 246 ITR 429 (Bom) and CIT vs. Smt.T.C.Usha (2004) WP(C) No. 5059-2008 Page 14 of 64 266 ITR 497 (Ker). The position in law was, however, set at rest, according to the learned counsel, by a judgment of the Supreme Court in IPCA Laboratory Ltd vs. DCIT (2004) 266 ITR 521(SC). According to him there was an honest difference of opinion between the Assessing Officer and the assessee in respect of the claim under Section 80 HHC. Despite, these circumstances penalty to the tune of Rs 18,79,303/- was imposed by the Assessing officer on the entire additional concealed income of Rs 53,54,140/- which included disallowance on account of claim under Section 80HHC. (vi) The learned counsel submits that the impugned provision deprives the tax payer a right to seek judicial review. The impugned provision, he contends denudes the power of the court to judicially review orders initiating penalty proceedings, and hence, according to him, strikes at the very basic structure of the Constitution. The learned counsel submits that the impugned provision is unconstitutional and, therefore, void ab-initio. It is, thus submitted, that, it can neither be held to be valid prospectively or retrospectively. (vii) The presumption contained in Explanation 1 of Section 271 being a rule of evidence whereby the onus is shifted on to the assessee is available only at the time of imposition of penalty. The stage of initiation of penalty proceedings being separate and independent to the stage of imposition of penalty, the said presumption provided for in Explanation 1 is not available at the time of initiation of penalty proceedings. 5. Mr M.S. Syali, Senior Advocate appearing for the petitioner in Writ Petition No.6272/2008 while complimenting the submissions made by Mr.O.S.Bajpai, Advocate has submitted that a bare reading of WP(C) No. 5059-2008 Page 15 of 64 the Memorandum explaining the Finance Bill, 2008 (hereinafter referred to as the ‗Memorandum‘) and the Notes on Clauses, i.e., Clause 48 would show that the object and reasons stated therein do not get reflected in the impugned provision. He contends that the very fact that sub-section (1B) of Section 271 of the Act deems satisfaction in the order of assessment, re-assessment or rectification, the Revenue would accept that satisfaction is required to be arrived at by the Assessing Officer during the course of any such proceedings. Being a quasi-judicial function the satisfaction should be reasoned. Reliance was placed on S.N. Mukherjee vs Union of India AIR 1990 SC 1984 at 1994 (para 31) and at 1997 (para 39). The learned counsel further submitted that while he does not question the power of legislature to enact law retrospectively; the retrospective amendment is not only oppressive but also fails to supply any rationale for its applicability from 1.4.1989. In this context he relies on the judgment of the Supreme Court in Virender Singh Hooda vs. State of Haryana (2004) 12 SCC