Supreme Court clarifies the applicability of Section 143(1-A) of the Income Tax Act in cases of bonafide errors: Rajasthan State Electricity Board vs. Deputy Commissioner of Income Tax (2020)

Date of the Judgment: March 19, 2020
Citation: (2020) INSC 253
Judges: Ashok Bhushan, J., Mohan M. Shantanagoudar, J. (authored by Ashok Bhushan, J.)

Can a taxpayer be penalized for a genuine mistake in calculating depreciation, even when they still report a loss? The Supreme Court of India addressed this question in a recent case, clarifying the application of Section 143(1-A) of the Income Tax Act, 1961. The Court emphasized that additional tax under this provision should not be levied for bonafide errors, especially when there is no intention to evade tax.

Case Background

The Rajasthan State Electricity Board, a government company, filed its income tax return for the assessment year 1991-92 on December 30, 1991, declaring a loss of Rs. (-)427,39,32,972. Due to a genuine error, the assessee claimed 100% depreciation on its assets amounting to Rs. 333,77,70,317, instead of the permissible 75% as per the amended Section 32(2) of the Income Tax Act, 1961. The assessee submitted provisional revenue accounts, balance sheets, and detailed depreciation charts with its return. No tax was payable on the return.

The Assessing Officer issued an intimation under Section 143(1)(a) of the Income Tax Act, 1961, on February 12, 1992, disallowing 25% of the depreciation and restricting it to 75%. Consequently, an additional tax of Rs. 8,63,64,827 was demanded under Section 143(1-A) of the Income Tax Act, 1961. The assessee filed a rectification application under Section 154 of the Income Tax Act, 1961, and a revision petition under Section 264 of the Income Tax Act, 1961, which were both rejected. The Commissioner of Income Tax stated that additional tax was applicable whenever adjustments were made, even if the income remained negative.

Timeline:

Course of Proceedings

The assessee challenged the additional tax demand in the High Court of Judicature for Rajasthan, Bench at Jaipur. A single judge allowed the writ petition, quashing the additional tax levy under Section 143(1-A) of the Income Tax Act, 1961. The Revenue appealed, and a Division Bench of the High Court reversed the single judge’s decision, upholding the additional tax demand. The assessee then appealed to the Supreme Court.

Legal Framework

The core legal issue revolves around Section 143 of the Income Tax Act, 1961, specifically sub-sections (1)(a) and (1-A). Section 143(1)(a) outlines the process for assessing returns, allowing for adjustments for arithmetical errors and inadmissible claims. Section 143(1-A), as amended, provides for additional tax when the declared income is increased or the declared loss is reduced due to adjustments made under Section 143(1)(a).

Section 143(1)(a) of the Income Tax Act, 1961 states:

“143. (1)(a) Where a return has been made under Section 139, or in response to a notice under sub-section (1) of Section 142,—
(i) if any tax or interest is found due on the basis of such return, after adjustment of any tax deducted at source, any advance tax paid and any amount paid otherwise by way of tax or interest, then, without prejudice to the provisions of sub-section (2), an intimation shall be sent to the assessee specifying the sum so payable, and such intimation shall be deemed to be a notice of demand issued under Section 156 and all the provisions of this Act shall apply accordingly; and
(ii) if any refund is due on the basis of such return, it shall be granted to the assessee:
Provided that in computing the tax or interest payable by, or refundable to, the assessee, the following adjustments shall be made in the income or loss declared in the return, namely—
(i) any arithmetical errors in the return, accounts or documents accompanying it shall be rectified;
(ii) any loss carried forward, deduction, allowance or relief, which, on the basis of the information available in such return, accounts or documents, is prima facie admissible but which is not claimed in the return, shall be allowed;
(iii) any loss carried forward, deduction, allowance or relief claimed in the return, which, on the basis of the information available in such return, accounts or documents, is prima facie inadmissible, shall be disallowed:
Provided further that where adjustments are made under the first proviso, an intimation shall be sent to the assessee, notwithstanding that no tax or interest is found due from him after making the said adjustments:
Provided also that an intimation under this clause shall not be sent after the expiry of two years from the end of the assessment year in which income was first assessable.”

Section 143(1-A) of the Income Tax Act, 1961, as amended by the Finance Act, 1993, reads:

“143. (1-A)( a) Where as a result of the adjustments made under the first proviso to clause (a) of sub-section (1),—
(i) the income declared by any person in the return is increased; or
(ii) the loss declared by such person in the return is reduced or is converted into income,
the Assessing Officer shall,—
(A) in a case where the increase in income under sub-clause ( i) of this clause has increased the total income of such person, further increase the amount of tax payable under sub-section (1) by an additional income tax calculated at the rate of twenty per cent on the difference between the tax on the total income so increased and the tax that would have been chargeable had such total income been reduced by the amount of adjustments and specify the additional income tax in the intimation to be sent under sub-clause ( i) of clause ( a) of sub-section (1);
(B) in a case where the loss so declared is reduced under sub-clause ( ii) of this clause or the aforesaid adjustments have the effect of converting that loss into income, calculate a sum (hereinafter referred to as additional income tax) equal to twenty per cent of the tax that would have been chargeable on the amount of the adjustments as if it had been the total income of such person and specify the additional income tax so calculated in the intimation to be sent under sub-clause ( i) of clause ( a) of sub-section (1)
(C) where any refund is due under sub-section (1), reduce the amount of such refund by an amount equivalent to the additional income tax calculated under sub-clause (A) or sub-clause ( B), as the case may be.”

The third proviso to Section 32 of the Income Tax Act, 1961, introduced by the Taxation Laws (Amendment) Act, 1991, restricted depreciation for companies to 75%:

“Provided also that, in respect of the previous year relevant to the assessment year on the 1st day of April, 1991, the deduction in relation to any block of assets under this clause shall, in the case of a company, be restricted to seventy-five per cent of the amount calculated at the percentage, on the written down value of such assets, prescribed under this Act immediately before the commencement of the Taxation Laws (Amendment) Act, 1991.”

The Supreme Court also referred to the memorandum explaining the provisions of the Finance Bill, which stated that the purpose of additional tax under Section 143(1-A) was to encourage taxpayers to file accurate returns and prevent tax evasion.

Arguments

Appellant (Rajasthan State Electricity Board)’s Arguments:

• The additional tax under Section 143(1-A) of the Income Tax Act, 1961, is a penalty and should only be applied when an assessee intentionally files an incorrect return.
• The assessee made a bonafide mistake in claiming 100% depreciation instead of 75% due to an oversight.
• The assessee was in loss and continued to be in loss even after the depreciation was reduced, so there was no reduction in loss.
• Additional tax under Section 143(1-A) of the Income Tax Act, 1961, is meant to prevent tax evasion, not to punish genuine errors.
• The assessee should not be penalized without a hearing for a mistake that did not reduce the business loss.
• The unabsorbed losses and depreciation were to be carried forward to future years and did not affect the business loss.
• The intent of the legislature was to ensure that the assessee declares the loss correctly and not to punish for genuine mistakes.

Respondent (Revenue)’s Arguments:

• Section 143(1-A) of the Income Tax Act, 1961, is not a penalty but a measure to prevent tax evasion.
• The provision was inserted to prevent assessees from first showing a loss and then reducing it to evade tax.
• The High Court rightly upheld the demand for additional tax because the law is clear.
• The challenge to the validity of Section 143(1-A) of the Income Tax Act, 1961, has been rejected by various High Courts and the Supreme Court.

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was:

1. Whether the demand of additional tax under the provisions of Section 143(1-A) of the Income Tax Act, 1961, was justified in the present case where the assessee made a bonafide mistake in claiming depreciation.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court held that the additional tax demand under Section 143(1-A) of the Income Tax Act, 1961, was not justified in this case. The court emphasized that the assessee’s mistake in claiming 100% depreciation was bonafide and not an attempt to evade tax. The court relied on its previous decision in Commissioner of Income Tax, Gauhati vs. Sati Oil Udyog Limited and another [CITATION: (2015) 7 SCC 304], which held that Section 143(1-A) should only be invoked when there is an attempt to evade tax.

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Supreme Court followed Commissioner of Income Tax, Gauhati vs. Sati Oil Udyog Limited and another [(2015) 7 SCC 304], emphasizing that Section 143(1-A) should only be applied when there is an attempt to evade tax.
• The Supreme Court relied on K.P. Varghese v. ITO [(1981) 4 SCC 173], to support the view that tax laws should be interpreted to apply to tax evaders only.

The Court observed:

“We cannot mechanically apply the provisions of Section 143(1-A) in the facts of the present case and in view of the categorical pronouncement by this Court in Commissioner of Income Tax, Gauhati vs. Sati Oil Udyog Limited and another(supra) , where it is held that Section 143(1-A) can only be invoked when the lesser amount stated in the return filed by the assessee is a result of an attempt to evade tax lawfully payable by the assessee.”

“In the present case, not even whisper, that claim of 100% depreciation by the assessee, 25% of which was disallowed was with intend to evade tax.”

“It is true that while interpreting a Tax Legislature the consequences and hardship are not looked into but the purpose and object by which taxing statutes have been enacted cannot be lost sight.”

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle that tax laws should not be used to penalize taxpayers for genuine mistakes, especially when there is no intention to evade tax. The court emphasized that Section 143(1-A) of the Income Tax Act, 1961, was intended to prevent tax evasion, not to punish bonafide errors. The court also considered the fact that the assessee remained in loss even after the depreciation adjustment, indicating that there was no attempt to reduce tax liability through incorrect reporting.

Sentiment Analysis of Reasons Given by the Supreme Court

Fact:Law Ratio

The Court’s reasoning was a blend of factual analysis and legal interpretation. The factual aspects of the case, such as the bonafide mistake and the assessee’s continued loss, played a significant role in the court’s decision. The legal interpretation of Section 143(1-A) and its intended purpose also influenced the judgment.

Logical Reasoning:

Key Takeaways

• Additional tax under Section 143(1-A) of the Income Tax Act, 1961, should not be levied for bonafide mistakes in income tax returns.
• The intent behind Section 143(1-A) of the Income Tax Act, 1961, is to prevent tax evasion, not to punish genuine errors.
• Taxpayers should not be penalized for mistakes that do not result in a reduction of their tax liability.
• The burden of proving that an assessee attempted to evade tax lies with the Revenue.

Directions

The Supreme Court set aside the judgment of the Division Bench of the High Court and the demand for additional tax dated February 12, 1992, as amended on February 28, 1992.

Development of Law

The ratio decidendi of this case is that Section 143(1-A) of the Income Tax Act, 1961, should not be applied mechanically in cases of bonafide mistakes where there is no intention to evade tax. This judgment reinforces the principle that tax laws should be interpreted in a manner that promotes fairness and prevents undue hardship on taxpayers who make genuine errors.

Conclusion

The Supreme Court’s decision in this case clarifies that additional tax under Section 143(1-A) of the Income Tax Act, 1961, should not be levied for genuine mistakes, especially when there is no intention to evade tax. This judgment provides relief to taxpayers who make bonafide errors in their returns and reinforces the principle that tax laws should be applied fairly and reasonably.

Category

Parent Category: Income Tax Act, 1961

Child Categories: Section 143, Income Tax Act, 1961; Section 143(1-A), Income Tax Act, 1961; Section 32, Income Tax Act, 1961; Depreciation; Tax Evasion; Bonafide Error; Assessment Year 1991-92; Additional Tax; Penalty

FAQ

Q: What is Section 143(1-A) of the Income Tax Act, 1961?

A: Section 143(1-A) of the Income Tax Act, 1961, allows the tax authorities to levy additional tax when there is an increase in income or a reduction in loss due to adjustments made in the tax return.

Q: When is additional tax under Section 143(1-A) of the Income Tax Act, 1961, applicable?

A: Additional tax under Section 143(1-A) of the Income Tax Act, 1961, is applicable when the tax authorities find that there is an increase in income or a reduction in loss due to adjustments made in the tax return. However, as per this judgment, it should not be levied in case of bonafide errors.

Q: What was the issue in the Rajasthan State Electricity Board case?

A: The issue was whether the Rajasthan State Electricity Board should be penalized with additional tax for claiming excess depreciation due to a genuine mistake, even though they still reported a loss.

Q: What did the Supreme Court decide in this case?

A: The Supreme Court decided that additional tax under Section 143(1-A) of the Income Tax Act, 1961, should not be levied when the mistake is bonafide and there was no intention to evade tax.

Q: What is a bonafide error in tax return?

A: A bonafide error is a genuine mistake made without any intention to deceive or evade tax.

Q: What should taxpayers do to avoid penalties under Section 143(1-A) of the Income Tax Act, 1961?

A: Taxpayers should ensure that they file their returns accurately and carefully. If an error occurs, they should immediately rectify the same and approach the tax authorities.