Income Tax, No retrospective demand if bonafide

C.A.No.8590 of 2010 tiled Rajathan State Electricty Board Jaipur v/s DY. Commissioner of Income Tax & Ans dated 19.04.2020 has held that

"Section 143(1-A) can only be invoked when the lesser amount stated in the return filed by the assesses is a result of an attempt to evade tax lawfully payable by the assesses. In view of the above, we hold that mechanical application of Section 143(1-A) in the facts of the present case was uncalled for. In the result, we allow the appeal, set aside the judgment of the Division Bench of the High Court as well as demand of additional tax dated 12.02.1992 as amended on 28.02.1992"

This Court in Commissioner of Income Tax, Gauhati vs. Sati Oil Udyog Limited and another, (2015) 7 S C C 304, had occasion to consider elaborately the provisions of Section 143(1-A), its object and validity. There was a challenge to the retrospective of the provisions of Section 143(1-A) as introduced by Finance Act, 1993. The Gauhati High Court had held that retrospective effect given to the amendment would be arbitrary and unreasonable. The appeal was filed by the Revenue in this  Court in which appeal, this Court had occasion to examine the constitutional validity of the provisions. This Court in the above judgment held that object of Section 143(1-A) was the prevention of evasion of tax. In paragraph 9 of the judgment following has been laid down:

“9. On a cursory reading of the provision, it is clear that the object of Section 143(1-A) is the prevention of evasion of tax. By the introduction of this provision, persons who have filed returns in which they have sought to evade the tax properly payable by them is meant to have a deterrent effect and a hefty amount of 20% as additional income tax is payable on the difference between what is declared in the return and what is assessed to tax.”

18. Relying on earlier judgment of this Court in K.P. Varghese v. ITO, (1981) 4 S C C 173, this Court in the above case held that provisions of Section 143(1-A) should be made to apply only to tax evaders. In paragraphs 21 and 25 following was laid down:

“21. In the present case, the question that arises before us is also as to whether bona fide assesses are caught within the net of Section 143(1-A). We hasten to add that unlike in J.K.Synthetics case, Section 143(1-A) has in fact been challenged on constitutional grounds before the High Court on the facts of the present case. This being the case, we feel that since the provision has the deterrent effect of preventing tax evasion, it should be made to apply only to tax evaders. In support of this proposition, we refer to the judgment in K.P. Varghese v. ITO. The Court in that case was concerned with the correct construction of Section 52(2) of the Income Tax Act: (K.P. Varghese case, S C C P. 179, para 4 : S C R P. 639)

“52. (2) Without prejudice to the provisions of sub-section (1), if in the opinion of the Income Tax Officer the fair market value of a capital asset transferred by an assesses as on the date of the transfer exceeds the full value of the consideration declared by the assesses in respect of the transfer of such capital asset by an amount of not less than fifteen per cent of the value declared, the full value of the consideration for such capital asset shall, with the previous approval of the Inspecting Assistant Commissioner, be taken to be its fair market value on the date of its transfer.”

25. Taking a cue from Varghese case, we therefore, hold that Section 143(1-A) can only be invoked where it is found on facts that the lesser amount stated in the return filed by the assesses is a result of an attempt to evade tax lawfully payable by the assesses. The burden of proving that the assesses has so attempted to evade tax is on the Revenue which may be discharged by the Revenue by establishing facts and circumstances from which a reasonable inference can be drawn that the assesses has, in fact, attempted to evade tax lawfully payable by it. Subject to the aforesaid construction of Section 143(1-A), we uphold the retrospective clarification amendment of the said section and allow the appeals.The judgments of the Division Bench of the Gauhati High Court are set aside. There will be no order as to costs.”

19. This Court in the above case upheld the constitutional validity of Section 143(1-A) (as inserted by the Finance Act, 1993) subject to holding that Section 143(1-A) can only be invoked where it is found on facts that the lesser amount stated in the return filed by the assesses is a result of an attempt

to evade tax lawfully by the assesses.