TAX CASES No.6 OF 1999 Reference against the statement of case drawn on 21.4.1999 by the Income Tax Appellate Tribunal, Patna Bench Patna in R.A.No.131 (Pat)/98. -------- M/s Zink Products & Co. P.Ltd------- (Applicant) Versus THE COMMISSIONER OF INCOME TAX------ (Respondent) For the applicant: Mr. A.K. Rastogi,Advocate For respondent : Mr. Harshwardhan Prasad Senior Standing Counsel ------- P R E S E N T THE HON'BLE MR.JUSTICE CHANDRAMAULI KUMAR PRASAD THE HON'BLE DR. JUSTICE RAVI RANJAN Prasad & Ranjan,JJ. This matter has come up before us on reference made by Patna Bench of Income Tax Tribunal at the instance of the assessee. The assessee M/s Zink Products and Company Private Limited filed return showing loss on 4.3.1992 for the assessment year 1991-1992 which was processed on 8.7.1992 under Section 143 (i)(a)of the Income Tax Act, hereinafter referred to as „the Act‟. An adjustment of Rs.10,11,732/- was made in the returned loss. It included disallowance of interest amounting to Rs.6,63,300/- 2 payable to the Bihar State Financial Corporation. The assessee filed petition under Section 154 of the Act contending that disallowance of interest is wrong because the interest has been paid to the Bihar State Financial Corporation, for short „Corporation‟ by converting the loan into a fresh loan as per the Rehabilitation Assistance. According to the assessee, the interest should have been allowed treating the same as deemed payment. The Assessing Officer did not accede to the submission of the assessee and observed that deferred payment of the interest shall not be treated to be deemed payment. An amount of Rs.6,63,300/- shown as interest payable by the Assessee to the Corporation in the Profit and loss account was added by the Assessing Officer. The Assessing Officer observed that in the document filed along with the return, there is no indication that the Corporation had treated the interest as deemed payment. Accordingly, the Assessing Officer rejected the 3 assessee‟s claim regarding the interest payable to the Corporation. The assessee preferred first appeal before the Commissioner of Income Tax, who upheld the disallowance of the claim. The assessee carried the matter in Second Appeal before the Patna Bench of the Income Tax Tribunal, hereinafter referred to as „the Tribunal‟. The Tribunal, on consideration of the agreement, arrived at between the assessee and the Corporation, did not find any mention of the words “deemed payment” in the agreement. The Tribunal further found that there is nothing in the agreement to indicate that the Corporation had treated the interest in question as paid or deemed payment. In fact, the Corporation, in the agreement, had only rescheduled the repayment of the principal amount and the interest. According to the Tribunal, the liability for the interest in question did not arise during the period relevant to the assessment year in question because as 4 per the agreement, the interest due as per the original loan agreement, had been rescheduled to be payable in the subsequent years. Since the agreement was made on 15th of March,1991, i.e. period relevant to the assessment year, the liability for the interest had not accrued and the liability for the interest was to be accrued as per the reschedule for payment of the interest from 15.4.1992. Accordingly, the Tribunal concluded that the allowance of the claim of interest was out of question and the view taken by the Assessing officer and the Commissioner of Income Tax was upheld. It was contended before the Tribunal that the levy of additional tax under section 143 (1)(1A) of the Act is wrong because in any view of the matter, it is a case of net loss. The Tribunal negatived this contention and held that in view of amendment brought about by Finance Act, 1993, substituting section 143 (1A) (ii) (B) with effect from 1.4.1989, even in a 5 case of net loss, the assessee was liable to pay additional tax. On these facts, the Tribunal has referred the following questions for our opinion: 1. Whether the Tribunal is right in law in holding that the disallowance of interest of Rs.6,53,400/- u/s 43B paid to M/s Bihar State Financial Corporation by way of prima facie adjustment u/s 143(1)(a) by the Assessing Officer was proper and justified? 2. Whether on the facts and in the circumstances of the case and on the basis of material available on record the finding of the Tribunal that interest in question had not been actually paid during the previous year relevant to Assessment Year in question or up to the due date of filing of return for the assessment year in question is correct and tenable in law? 3. Whether the levy of additional tax on the facts of the petitioner‟s case (loss of Rs.9,60,604/- having been determined as per assessment order) is legal and valid even after amendment of section 143 (1A) (ii) (B) with retrospective effect from 1.4.1989? At the fist instance, we take up the third question for our answer. Mr. Ajay Rastogi, learned counsel appearing on behalf of the assessee, submits that additional tax has imprint of 6 penalty and in support thereof, reliance has been placed on a decision of the Supreme Court in the case of Commissioner of Income Tax Vs. Hindustan Electro Graphites Ltd. (243 ITR 48) and our attention has been drawn to the following passage from the said judgment: xxx “No additional tax would have been leviable on the cash compensatory support if the Finance Act, 1990 had not so provided even though retrospectively. The assessee could not have suffered additional tax but for the Finance Act of 1990. After he had filed his return of income, which was correct as per law on the date of filing of the return, it was thereafter that the cash compensatory support also came within the sway of section 28. When additional tax has the imprint of penalty, the Revenue can not be heard to say that the levy of additional tax is automatic under section 143 (1A) of the Act. If additional tax cold be levied in such circumstances, it will be punishing the assessee for no fault of his.” xxx Underlining mine) Mr. Rastogi submits that once it is held that additional tax has the imprint of penalty, even in a case in which the assessee has committed the mistake, the law providing for additional tax cannot be 7 applied retrospectively. He submits that the liability to pay additional tax shall be in accordance with the law prevailing on the date, the return is filed. In support of the submission, reliance has been placed on a decision of the Supreme Court in the case of Commissioner of Income Tax Vs. Onkar Saran and Sons (195 ITR-1) and our attention has been drawn to the following passage: “xxx Admittedly, in these returns filed after April 1, 1968, the assessee had failed to disclose the income from the sale of lands which was clearly taxable, if not as income from business, certainly, as income by way of capital gains. It is now well settled that the law applicable regarding penalty for concealment is the law in force as on the date of the offence”, i.e. the filing of return.” xxx Mr. Harshwardhan Prasad, appearing on behalf of the Revenue, however, submits that on account of retrospective application of law, the assessee shall be liable to pay additional tax, as provided under section 143 of the Act. Having considered the rival submission, we find substance in the submission of Mr. 8 Rastogi. In view of the decision of the Supreme Court in the case of Hindustan Electro Graphites Ltd (supra), there is no difficulty in accepting that additional tax has the imprint of penalty. It is well settled that penalty can be inflicted in accordance with the law prevailing on the date the return is filed. A retrospective application of law in matter of penalty is not permissible. In the case of Onkar Saran and Sons (supra), the Supreme Court has observed that the law applicable regarding the penalty shall be law in force as on the date of the filing of the return. Undisputedly, on the date of filing of the return, section 143 (1A)(ii)(B) of the Act was not in force, and it is only by virtue of its retrospective application by Finance Act, 1993, that additional tax became leviable. In view of the discussions aforesaid, the levy on additional tax is illegal and invalid and is not protected by amending and enforcing section 143 (1A)(ii)(B) with retrospective effect from 1.4.1989. 9 Accordingly, our answer to question no.3 is in the negative, against the Revenue and in favour of the assessee and it is held that the levy of additional tax is illegal and invalid even after amendment of Section 143(1A)(ii)(B) of the Act with retrospective effect from 1.4.1989. In view of aforesaid, Mr. Rastogi submits that opinion on question nos.1 and 2 have become academic. Accordingly, we refrain from answering the same. Let a copy of our opinion be forwarded to the Patna Bench of Income Tax Tribunal. (C.K.Prasad) (Dr.Ravi Ranjan) Patna High Court, Dated,30th July.2008. NAFR/ahk