HON’BLE THE CHIEF JUSTICE SRI MADAN B. LOKUR AND THE HON’BLE SRI JUSTICE SANJAY KUMAR ITTA No.27 of 1999 28th December, 2011 Between: P. Ram Gopal Varma … Appellant And The Dy. Commissioner of Income-Tax (Assets), Spl. Range – 2, Hyderabad. … Respondent Counsel for the appellant : Sri C.V. Narasimham Counsel for the respondent : Sri S.R. Ashok, Standing Counsel for Income-Tax HON’BLE THE CHIEF JUSTICE SRI MADAN B. LOKUR AND THE HON’BLE SRI JUSTICE SANJAY KUMAR ITTA.No.27 of 1999 JUDGMENT: (per Hon’ble the Chief Justice Shri Madan B. Lokur) The substantial question of law framed for our consideration in this appeal filed under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) is as follows:- Whether the proviso to Section 69C of the Income Tax Act, 1961 is merely declaratory of the existing legal position, in which case the provision could operate in respect of the previous assessment years or it creates a new liability? 2 . During the course of submissions learned counsel for the assessee proposed an additional question of law which is as follows: Whether the additions confirmed as undisclosed expenditure of Rs.20,90,000/- as payments to artists, Rs.5,15,300/- as film production expenses at Madras and Rs.18,95,000/- as payments to artists, technicians, manager, etc., are on basis of mere suspicions, surmises and conjectures and therefore the findings of the Appellate Tribunal are unsustainable? 3. Broadly, the facts of the case indicate that search operations were carried out at the office-cum-residence of the assessee at Bombay on 6.12.1995 and 7.12.1995. A search was also carried out at his premises in Hyderabad from 7.12.1995 to 20.1.1996. 4. During the search operations, the Revenue seized records in the form of loose slips as well as computerized accounts relevant for the previous years 1993-94, 1994-95 and partly for the year 1995-96. In addition, some cash was also seized. 5. On an examination of the seized material, the Assessing Officer concluded that the assessee had some undisclosed income which was required to be assessed under Chapter XIV-B of the Act as introduced by the Finance Act, 1995. Accordingly, a notice under Section 158-BC(a) of the Act was issued to the assessee requiring him to file a return for the block period 1986-87 to 1996-97. 6. The assessee filed the block return in which he admitted an income of Rs.45,48,600/-. After reconciliation of accounts, the undisclosed income relevant for the assessment year 1994-95 was returned at Rs.3,44,600/- and for the assessment year 1996-97 the undisclosed income was returned at Rs.40,75,370/-. The admitted undisclosed income returned was, therefore, Rs.44,18,970/- for the block period. As against this, the Assessing Officer determined the undisclosed income at Rs.1,33,78,974/- by his block assessment order dated 31.12.1996. 7. Feeling aggrieved, the assessee preferred an appeal, which was allowed in part by the Income Tax Appellate Tribunal (for short ‘the Tribunal’) by its order dated 28.12.1998. It is under these circumstances, that the present appeal has arisen at the instance of the assessee. 8. On the first substantial question, whether the proviso to Section 69C of the Act has retrospective effect or not, it is necessary to first go through the provisions of Section 69C of the Act. It may be mentioned at this stage that the substantive provision was introduced in the Act by the Taxation Laws (Amendment) Act, 1975 with effect from 1.4.1976. The proviso was introduced by the Finance (No.2) Act, 1998 with effect from 1.4.1999. The section including the proviso reads as follows: “Section 69C – Unexplained expenditure etc. Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the Assessing Officer, satisfactory, the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the assessee for such financial year. Provided that, notwithstanding anything contained in any other provision of this Act, such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income.” 9 . On a plain reading of this section, it is clear that it merely provides, as a rule of evidence, that if an assessee incurs some expenditure and is unable to explain the source of that expenditure, then the expended amount will be deemed to be his income. The proviso (which was introduced much later) lays down that such deemed income shall not be allowed as a deduction under any head of income. From a reading of the section (minus the proviso), it does appear that an assessee could claim deductions on the deemed income. It seems that the proviso was introduced to prevent this and ensure that such deductions “shall not be allowed”. The question is whether a deduction “shall not be allowed” in respect of only future claims or even in respect of existing or closed claims. In other words, what is required to be ascertained is whether the proviso is declaratory or clarificatory of the law and therefore retrospective in operation or whether it creates a new obligation on an assessee and is therefore prospective in operation. That is the substantial question of law framed for our consideration. 10. During the course of submissions, it was not disputed that the substantive provision of Section 69C of the Act is a declaratory or clarificatory provision. Indeed, this question did not arise, and it is for this reason that no such dispute was raised. However, we may only note that in Yadu Hari Dalmia v. CIT[1] it was held by the Delhi High Court that Section 69C of the Act is a clarificatory provision and embodies a rule of evidence. It was, therefore, given retrospective operation. 11. It may be added, en passant, that in relation to Section 69C of the Act, the Central Board of Direct Taxes (for short ‘CBDT’) issued Circular No.204 dated 24.7.1976 to the following effect: “Unexplained expenditure to be treated as income for financial year in which expenditure incurred 17. The new section 69C provides that where an assessee incurs in any financial year an expenditure about the source of which he offers no explanation or the explanation offered by him is found to be not satisfactory, the amount covered by such expenditure shall be treated as income of the assessee for the financial year in which such expenditure is incurred. The provision is only clarificatory. Accordingly, although it comes into force with effect from 1-4-1976, the principle will apply not only in relation to assessments for the assessment year 1976-77 and subsequent years but also to assessments for earlier assessment years.” While the Circular may not be conclusive of the interpretation of Section 69C of the Act, it does suggest the legislative intent to give retrospective effect to the section. 12. Coming back to the interpretation of the proviso to Section 69C of the Act, it is necessary to survey the law on the subject. 13. There can be no dispute that Parliament, or indeed any Legislature, has the power to enact retrospective legislation. However, there are certain recognized limitations such as if the statute affects a substantive (or vested) right, then it has only prospective effect, unless the language of the statute is clear that it has retrospective operation (or it must necessarily be so implied). This general proposition was accepted by the Supreme Court in Commissioner of Income Tax v. Gold Coin Health Foods[2] wherein it was held: “It is a cardinal principle of construction that every statute is prima facie prospective unless it is expressly or by necessary implication made to have a retrospective operation. But the rule in general is applicable where the object of the statute is to affect vested rights or to impose new burdens or to impair existing obligations.” On the other hand, if the statute affects a procedural right, then the presumption is that the statute is intended to have retrospective effect. This general proposition was acknowledged in Thirumalai Chemicals Ltd. v. Union of India[3] in the following words: “Substantive law refers to body of rules that creates, defines and regulates rights and liabilities. Right conferred on a party to prefer an appeal against an order is a substantive right conferred by a statute which remains unaffected by subsequent changes in law, unless modified expressly or by necessary implication. Procedural law establishes a mechanism for determining those rights and liabilities and machinery for enforcing them. Right of appeal being a substantive right always acts prospectively. It is trite law that every statute is prospective unless it is expressly or by necessary implication made to have retrospective operation….. Procedural law is retrospective meaning thereby that it will apply even to acts or transactions under the repealed Act.” 14. Declaratory or clarificatory statutes are sometimes referred to as curative statutes and they are retrospective in operation. Such statutes are intended to remove an existing ambiguity in the interpretation or understanding of the Act. Some relevant decisions concerning such statutes are: 14.1 Chaman Singh v. Smt. Jai Kaur[4] wherein the basic principles were stated in the following words: “It is well settled that if a statute is curative or merely declares the previous law retroactive operation would be more rightly ascribed to it than the legislation which may prejudicially affect past rights and transactions.” 14.2 Govind Das v. Income Tax Officer[5] cited by learned counsel for the assessee, in which the basic principles of interpretation were reiterated by the Supreme Court: “Now it is a well settled rule of interpretation hallowed by time and sanctified by judicial decisions that unless the terms of a statute expressly so provide or necessarily require it, retrospective operation should not be given to a statute so as to take away or impair an existing right or create a new obligation or impose a new liability otherwise than as regards matters of procedure. The general rule as stated by Halsbury in Vol. 36 of the Laws of England (3rd Ed.) and reiterated in several decisions of this Court as well as English Courts is that "all statutes other than those which are merely declaratory or which relate only to matters of procedure or of evidence are prima facie prospective" and retrospective operation should not be given to a statute so as to affect, alter or destroy an existing right or create a new liability or obligation unless that effect cannot be avoided without doing violence to the language of the enactment. If the enactment is expressed in language which is fairly capable of either interpretation, it ought to be construed as prospective only.” 14.3 Commissioner of Income Tax, Bhopal v. Shelly Products[6]. In this case, the assessment order was held as void ab initio. The assessee then sought refund of tax paid on the basis of the assessment order as well as the advance tax and self assessment tax paid. The Revenue was of the opinion that the assessee was entitled to a refund only of the tax paid pursuant to the assessment order, since declared void. The Revenue placed reliance on proviso (b) to Section 240 of the Act, contending that it was retrospective in operation. The Supreme Court agreed with the Revenue and held that proviso (b) to Section 240 of the Income Tax Act “……seeks to clarify the law so as to remove doubts leading to the courts giving conflicting decisions, and in several cases directing the revenue to refund the entire amount of income-tax paid by the assessee where the revenue was not in a position to frame a fresh assessment. Being clarificatory in nature it must be held to be retrospective, in the facts and circumstances of the case. It is well settled that the legislature may pass a declaratory Act to set aside what the legislature deems to have been a judicial error in the interpretation of statute. It only seeks to clear a meaning of a provision of the principal Act and make explicit that which was already implicit.” 14.4 Commissioner of Income Tax, Bombay v. Podar Cement Pvt. Ltd.[7] wherein the Supreme Court quoted with approval the following passage from Justice G.P. Singh's (Sixth Edition 1996) “Principles of Statutory Interpretation” under the heading ‘Declaratory statutes’: “In the absence of clear words indicating that the amending Act is declaratory, it would not be so construed when the pre-amended provision was clear and unambiguous. An amending Act may be purely clarificatory to clear a meaning of a provision of the principal Act which was already implicit. A clarificatory amendment of this nature will have retrospective effect and, therefore, if the principal Act was existing law when the Constitution came into force, the amending Act also will be part of the existing law.”[8] 14.5 Sedco International Forex Drill v. Commissioner of Income Tax[9], in which the Supreme Court reaffirmed the law and held: “….. An Explanation to a statutory provision may fulfill the purpose of clearing up an ambiguity in the main provision or an Explanation can add to and widen the scope of the main section [See Sonia Bhatia v. State of U.P. (1981) 2 SCC 585, 598 = AIR 1981 SC 1274, 1284 para 24]. If it is in its nature clarificatory then the Explanation must be read into the main provision with effect from the time that the main provision came into force [See Shyam Sunder v. Ram Kumar (2001) 8 SCC 24 (para 44); Brij Mohan Das Laxman Das v. CIT (1997) 1 SCC 352, 354; CIT v. Podar Cement (P) Ltd. (1997) 5 SCC 482, 506]. But if it changes the law it is not presumed to be retrospective, irrespective of the fact that the phrases used are “it is declared” or “for the removal of doubts”. 14.6 Allied Motors v. Commissioner of Income Tax[10] wherein it was held that: “A proviso which is inserted to remedy unintended consequences and to make the provision workable, a proviso which supplies an obvious omission in the section and is required to be read into the section to give the section a reasonable interpretation, requires to be treated as retrospective in operation so that a reasonable interpretation can be given to the section as a whole.” 14.7 Commissioner of Income Tax v. Alom Extrusions Limited[11] in which the Supreme Court referred to Allied Motors and held: “This Court, in Allied Motors (P) Limited held that when a proviso is inserted to remedy unintended consequences and to make the section workable, a proviso which supplies an obvious omission in the section and which proviso is required to be read into the section to give the section a reasonable interpretation, it could be read retrospective in operation, particularly to give effect to the section as a whole. Accordingly, this Court, in Allied Motors (P) Limited, held that the first proviso [to section 43B of the Income Tax Act] was curative in nature, hence, retrospective in operation with effect from 1st April, 1988.” 15. The principles that emerge from the aforesaid decisions indicate as follows: i. A statute is prima facie prospective in operation, but it may be given retrospective operation expressly or by necessary implication. ii. If a statute affects a substantive right or a vested right or creates a new obligation, it is prospective in nature. However, a statute affecting a procedural right is retrospective in operation. iii. A declaratory or a clarificatory or a curative law removes doubts on the interpretation of a statute or corrects its erroneous interpretation. Such a statute is retrospective in nature. Similarly, if an explanatory law is clarificatory in nature or clears an existing ambiguity, it is also retrospective in nature. iv. If a statute changes the existing legal position and creates a new obligation or liability (except in a procedural issue), then it is not retrospective, unless it is declared to be so, or such effect cannot be avoided without doing violence to the language of the statute v. However, an intention to enact a retrospective statute must be clearly expressed. The mere use of words conveying such an intention is not, by itself, sufficient. Therefore, mere use of words such as “it is declared” or “for the removal of doubts” is not conclusive of the legislative mandate. vi. A proviso, like an explanation, would have retrospective operation if it removes unintended consequences or supplies an omission or is curative in nature. It would, nevertheless, be governed by the general principles mentioned above. 16. On a plain reading of the proviso to Section 69C of the Act, it is quite clear that it creates a new liability or at least impairs an existing right (of claiming a deduction) that an assessee had prior to its insertion in the statute. We say this because Section 69C of the Act, without the proviso, merely states that if an assessee has incurred expenditure and the assessee has no explanation about the source of such expenditure, then that expenditure would be the deemed income of the assessee for the relevant financial year. As the section stands, the assessee can justify the expenditure, regardless of the source of funds, and claim the expenditure to be legitimate for a deduction. In other words, without giving a satisfactory explanation about the source of the expenditure, the assessee can still explain the expenditure and claim a deduction thereon. However, with the insertion of the proviso, it is made clear that the deemed income (where the source of the expenditure is not explained) cannot be allowed as a deduction under any head of income. In other words, even if the assessee can justify the expenditure, but cannot explain its source, the proviso effectively disentitles him from claiming a deduction on the deemed income under any head of income. 17. The distinction, therefore, between the section and the proviso is that the section deals with the inability of the assessee to explain the source of the expenditure and, therefore, deems that expended amount his income for the relevant financial year. This, nevertheless, leaves a window open for the assessee to justify the expenditure and thereafter claim a deduction thereon. However, with the insertion of the proviso, that window has been closed and even if an explanation for the expenditure is forthcoming, it will not benefit the assessee and the expenditure would nevertheless be taxable as a part of the total income. To this extent, the existing right of the assessee to explain and justify the expenditure has been taken away with the insertion of the proviso and has made the assessee open to a liability. In view of this, in our opinion, the proviso does not have retrospective operation inasmuch as it changes the existing legal position and creates a new obligation on the assessee. There is also nothing in the language of the proviso that compels us to give it retrospective effect. 18. In support of his contention that the proviso to Section 69C of the Act does not have retrospective operation, learned counsel for the assessee relied on Krishna Textiles v. Commissioner of Income Tax[12]. It is true that the decision mentions that the proviso does not have retrospective operation, but that is only in passing and without any discussion on the subject. In any event, we are in agreement with learned counsel that the proviso does not operate retrospectively. 19. What is the understanding of the Revenue on the subject? 20. In our opinion, the Revenue was conscious that the proviso was in fact creating a new obligation on the taxpayer, and therefore, did not intend it to have retrospective effect. This is clear from two documents, the first being the Notes on Clauses accompanying the Finance (No.2) Bill, 1998 which inserted the proviso to Section 69C of the Act. Even though this document may not have any binding force, it does indicate what was passing through the mind of the draftsman. The Notes on Clauses reads: “Clause 29 seeks to amend section 69C of the Income- tax Act relating to unexplained expenditure, etc. It is proposed to add a proviso to section 69C to provide that notwithstanding anything contained in any other provision of the Act, such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income. This amendment will take effect from 1st April, 1999, and will, accordingly, apply in relation to the assessment year 1999- 2000 and subsequent years.” 21. The second document in this regard is Circular No. 772 dated 23.12.1998 issued by the CBDT, which is to the following effect: “Amendment of Section 69C — Unexplained expenditure not to be allowed as deduction 29.1 Under the existing provisions, where an expenditure incurred by the taxpayer in respect of which he either offers no explanation regarding the source of such expenditure or where explanation offered is found unsatisfactory, the expenditure is treated as ‘income’ under section 69C. There is no corresponding provision for disallowance of such expendi​ture. 29.2 This used to enable the tax payer charged to tax under section 69C to claim the expenditure as deduction under section 37 defeating the very objective of the section. 29.3 The Act has amended section 69C of the Income Tax Act according to which unexplained expenditure deemed as income cannot be allowed as deduction under any head of income. 29.4 This amendment will take effect from 1st day of April, 1999 and will, accordingly, apply in relation to the assessment year 1999‑2000 and subsequent years.” This document too may not have any binding effect per se, but again this document suggests that the introduction of the proviso to Section 69C of the Act would affect the existing rights of an assessee and might place a financial burden on the assessee requiring payment of tax with retrospective effect. It is to avoid this situation that the CBDT made it clear that the provision would have prospective effect. 22. Assuming the CBDT Circular has no binding effect, yet where the Revenue itself decides to interpret the law in favour of a citizen, there is no reason why the Court should interpret it to the detriment of the citizen and impose on him a financial burden which even the Revenue is not keen to impose. Under these circumstances, it appears to us that even if we are wrong in holding that the proviso to Section 69C of the Act does not have retrospective operation, the CBDT has, in any case, limited its operation prospectively with effect from the assessment year 1999-2000 onwards. 23. Therefore, whichever way the issue is looked at, there can be no doubt that the proviso to Section 69C of the Act has only prospective operation. 24. As mentioned above, we are concerned in this case with the block assessment period 1986-87 to 1996-97. Since we have held that the operation of the proviso to Section 69C of the Act is prospective, it has no application to the period that we are concerned with. Accordingly, the first question must be answered in the negative, in favour of the assessee and against the Revenue. 25. Having answered the first substantial question in favour of the assessee, we need to have a look at the additional substantial question of law which learned counsel has proposed. This relates to three items of unexplained expenditure incurred by the assessee. The attempt of learned counsel is to justify the expenditure as business expenditure and thereby claim a deduction under Section 37 of the Act. 26. The first item relates to an addition of Rs.20,90,000/- shown as payments to various cine artists. According to the sworn statement given by the assessee before the Revenue, he had made payments of Rs.55,50,000/- to various artists and technicians in connection with the production of the film ‘Rangeela’. However, in the seized books of account, only Rs.34,60,000/- was accounted for. This resulted in