[Amar Tandon is a IV year student and Mansi Mishra a III year student at the National Law Institute University, Bhopal]
In Rajasthan State Electricity Board v. Dy. Commissioner of Income Tax (decided on 19 March 2020), the Supreme Court set a precedent for expanding the scope of leniency under section 143(1-A) of the Income Tax Act, 1961. In this post, the authors seek to discuss the details of the ruling, revisit the earlier relevant decisions on section 143(1-A) and compare them with Rajasthan State Electricity Board.
Overview of the Facts
The assessee in this case was a government company which had filed its income tax return for the assessment year 1991-92 showing a loss. In the return, the assessee had wrongly claimed 100% depreciation on written down value of asset under the un-amended section 32(2) of the Income Tax Act. However, following the amendment which was in force at the time of filing the return, only 75% depreciation could have been claimed under the said provision. As a result, the assessee was served with an intimation under section 143(1)(a) of the Act wherein the Assessing Officer disallowed 25% of the depreciation, restricting the depreciation to 75%. Furthermore, additional tax was demanded under section 143(1-A) of the Act. As a response, the assessee filed an application under section 154 of the Act praying for rectifying the demand. Simultaneously, a revision petition was filed by the assessee under section 264 praying for quashing of the demand. Both the application and the petition were rejected and dismissed by the Assessing Officer and the Commissioner of Income Tax respectively. After being aggrieved by the order of the High Court, the assessee came to the Supreme Court in appeal.
The Issue and the Decision
Section 143(1)(a) of the Act provides that if any tax or interest is found due upon an income tax return filed by an assessee, it shall be informed about the same and such information shall be deemed to be a notice of demand. Furthermore, if there is any arithmetical error or an error in carrying forward any amount wrongly by the assessee in the return, appropriate adjustments shall be made by the Assessing Officer, which too shall be followed by information to the assessee. Section 143 (1-A) provides that if the profit declared is increased following the adjustments made under section 143(1)(a), an amount equaling tax on 20% of the difference between the tax on total income so increased and before the adjustment shall be charged as additional tax. On the other hand, if loss declared by an assessee is decreased, a sum equal to 20% of the tax that would be chargeable on the amount of the adjustments as if it had been the total income of the assessee would be demanded as additional tax.
Various High Courts and the Supreme Court had, in the past, ruled upon the challenge to the constitutional validity and clarified the objective of section 143(1-A), but this was a unique question before the Apex Court where a particular amendment was clearly in force, and the assessee omitted to take note of it. The issue at hand was whether 100% depreciation as mentioned in return filed by the assessee in the case could be held to be the outcome of an attempt to evade tax and whether the situation warranted application of the aforementioned provision. The Supreme Court in this case ruled in favour of the assessee while holding that only tax evaders are caught under section 143(1-A). The Court referred to the memorandum explaining the Finance Bill and clarified that the provision aims to have a deterrent effect instead of punishing bona fide assessees, and the Revenue failed to establish that assessee’s mistake of claiming 25% extra deduction was not a bona fide one.
Revisiting Previous Jurisprudence
In Commissioner of Income Tax, Gauhati v. Sati Oil Udyog Limited (2015), the Supreme Court was to decide upon the constitutional validity of section 143(1-A) of the Income Tax Act, wherein it discussed the scheme and objectives of the provision elaborately. Initially, the Gauhati High Court had held the retrospective application of section 143(1-A), as it stands today, to be unconstitutional. However, the Supreme Court overturned the High Court’s ruling by upholding the constitutional validity of the provision. While doing so, it held that section 143 (1-A) can be invoked only in cases where the facts make it clear that the lesser amount of income or greater amount of loss stated in the income tax return is a result of assessee’s attempt to evade tax lawfully payable. The burden of proving such evasion on the basis of facts and resulting reasonable inference lies on the Revenue.
The Supreme Court in Rajasthan State Electricity Board placed reliance upon its ruling in K.P. Verghese v. The Income Tax Officer (1981), where it was held that where the assessee had declared the consideration received in a transaction in a bona fide manner, he could not be asked for additional tax under section 52 of the Act just because the Income Tax Officer finds out that fair market value of the sold asset is higher than what is shown to be received by the assessee. In other words, the crux was that the Act cannot be interpreted in a manner where it leads to absurd result of penalizing innocent assessees, unless the Revenue can prove otherwise.
In order to understand the threshold of bona fide mistake under SECTION 143(1-A), it would also be pertinent to note another Supreme Court ruling in Commissioner of Income Tax, Bhopal v. Hindustan Electro Graphites, Indore (2000). The factual matrix involved an assessee who had filed its income tax return wherein it showed that it had received an amount by way of cash compensatory support. The said amount was not taxable in accordance with the law in force at the time of filing return, but was made taxable retrospectively vide a subsequent amendment. When the Revenue invoked section 143(1-A) and imposed additional tax, the Supreme Court held that under a “humane and considerate administration” of the Act, the assessee in this case cannot be punished for no fault of his, as he could not have known about the taxability of the amount before the amendment actually came out. Hence, the Court held that section 143(1-A) does not catch bona fide assessees.
Analysis and Conclusion
The Supreme Court has, while ruling in favor of the assessee in Rajasthan State Electricity Board, expanded the scope of leniency towards the assessees under section 143(1-A). Whereas in its earlier ruling in Hindustan Electro Graphites, the Court ruled in favor of the assessee and disallowed additional tax under section 143(1-A) only when it was satisfied that there was absolutely no means whereby the assessee could have known about the taxability of the amount in question, there is clear divergence in the Rajasthan State Electricity Board, where the amendment was clearly in force and the assessee ought to have known about the same. Whether or not there was a bona fide mistake is a question of fact, and inference has to be drawn on the basis of established facts. Hence, Supreme Court’s reliance on Hindustan Electro Graphites while ruling in favour of the assessee in Rajasthan State Electricity Board is slightly misplaced when the facts are different in both the cases.
While one of the aims of section 143(1-A) is to have a deterrent effect on tax evaders, it also seeks to serve the purpose of persuading all the assessees to file their returns of income carefully to avoid mistakes, as per the memorandum explaining the provisions of the Finance Bill. This requires striking a balance between the twin aims of the provision and give effect to both of them, instead of ignoring one of them by exercising excessive leniency. Even though the increased leniency established under section 143(1-A) is a sigh of relief for the assessees, it might prove to be a bit open ended for further references and increase Revenue’s burden of identifying and correcting avoidable mistakes on part of assessees. This calls for establishment of a more detailed threshold to be followed while deciding whether or not to invoke section 143(1-A) of the Act. It would be interesting to see the stance of the Supreme Court when faced with different kinds of factual scenarios and application of the provision in cases in the future.
– Amar Tandon & Mansi Mishra