The assessee became liable to pay “penalty” for overloading wagons under the rules of the Railways. The question arose whether the said “penalty” was disallowable under the Explanation to s. 37 (1) which provides that “expenditure incurred for any purpose which is an offence or which is prohibited by law” shall not be allowable. HELD, deciding in favour of the assessee:
The substance of the matter had to be looked into and given preference over the form. Though the amount was termed “penalty”, it was essentially of a commercial nature and incurred in the normal course of business and was consequently allowable.
Expl. (baa) to S. 80HHC defines the term “profits of the business” to mean the profits under the head “profits and gains” as reduced by 90% of the sum referred to in s. 28 (iiid). The 2nd & 3rd Provisos to s. 80HHC (3) provide that the profits computed there under shall be increased by the said 90% amount computed in the proportion of export turnover to total turnover. S. 28 (iiid) refers to “any profit on the transfer of the Duty Entitlement Pass Book Scheme (‘DEPB’)”. The Special Bench had to consider whether the entire amount received on sale of DEPB entitlements represents ‘profits’ chargeable u/s 28 (iiid) or the profit referred to therein requires any artificial cost to be imputed. HELD deciding in favour of the assessee: only the “profit” (i.e. the sale value less the face value) is required to be considered for purposes of s. 80HHC.
In Rajendra Prasad Moody 115 ITR 522 the Supreme Court held that interest on monies borrowed for purchase of shares was allowable as a deduction u/s 57 (iii) irrespective of whether or not there is any yield of dividend to the assessee. It was held that the words “expenditure incurred for making or earning the income” in s. 57 (iii) did not mean that income actually had to be earned for the allowability of the expenditure. The converse of this principle is now applicable. i.e. s. 14A disallows expenditure “in relation to income which does not form part of total income” and in order for the expenditure to be disallowed, actual income need not be earned
It is beyond comprehension how expenditure incurred on the project itself can be disallowed on the ground that it was incurred prior to setting up the project office. When computing the income of the project as a whole including that part which relates to the period anterior to the setting up of the project office, there can be no question of not allowing such expenditure which is relatable to the period prior to the setting up of the project. If the expenditure is identifiable with the project, it has to be allowed as a deduction under the matching concept.
The fact that the proviso to s. 112 uses the words ‘before giving effect to the second proviso to s. 48’ does not mean that the benefit of the lower rate can be given only to those cases eligible for the indexation benefit. Even non-residents who are not eligible for indexation are eligible for the lower rate of 10%.
Para 13.1 of Accounting Standard 7 (AS-7) mandates that a foreseeable loss on the entire contract should be provided for in the financial statements irrespective of the amount of work done and the method of accounting followed; The fact that AS-7 has not been notified by the Central Government as an accounting standard for purposes of s. 145 (2) is not relevant; In principle, anticipated losses on incomplete projects are allowable as a deduction subject to their being calculated as per AS-7.
Although at the time of hearing, the initial impression was to write a reference to the President for constituting a larger Bench the fact that an appeal has been filed in the Bombay and Delhi High Courts against Daga Capital mean that (as per the decision of the President in Star India) a reference to a larger bench cannot be made. However, the appeals should be blocked for 6 months or till the disposal of appeal by the Bombay High Court in Daga Capital whichever is earlier.
SCM Creations is not an authority on how s. 80-IA (9) is to be applied because the effect and implementation of above provision was neither raised, nor examined nor decided by the Court. A decision is an authority for the proposition that it decides and not what can logically be deduced there from. A point not raised nor argued at the Bar cannot be said to be the ratio of the decision. Accordingly SCM Creation does not impinge upon the ratio of Rogini Garments.
As the assessee had earned tax-free dividend income, s.14A was applicable. The question of determination of the disallowable amount has to be worked out by the AO as per Rule 8D as held the Special Bench judgement in ITO Vs. Daga Capital Management Pvt. Ltd. (2008) 119 TTJ (Mum) (SB) 289. However, the disallowance u/s 14A in the fresh proceedings cannot exceed the original amount disallowed by the AO in the assessment order.
The judgement in UOI vs. Dharmendra Textile Processors has to be understood in the correct perspective. It does not make a radical change in the law nor does it affect the basic scheme of s. 271 (1) (c). Even in K P Madhusudanan vs. CIT 251 ITR 99, the assessee’s plea to the effect that ‘revenue was required to prove mens rea of a criminal offence’ before penalty u/s 271(1)(c) can be imposed was rejected. Penalty u/s 271 (1) (c) has been held to be ‘civil liability’ in contradistinction to prosecution u/s 276C. It is wrong to infer that because the liability is a “civil liability”, it ceases to be penal in character. There is no contradiction in a liability being a civil liability and the same liability being a penal liability as well, though a civil liability cannot certainly be a criminal liability as well. As observed in Om Prakash vs. UOI AIR 1984 SC 1194 @ 1209 “A penalty imposed by the sales tax authorities is a civil liability, though penal in character”.