(272.5 KiB, 1,865 DLs)

Supreme Court explains UOI vs. Dharmendra Textile 306 ITR 277 (SC)

Held in the context of s. 11AC of the Excise Act (which provides that where any duty of excise has not been .. paid .. by reasons of fraud, collusion or any wilful mis-statement or suppression of facts ….. or contravention of any of the provisions of this Act … with intent to evade payment of duty, the person who is liable to pay duty as determined under sub-section (2) of section 11A, shall also be liable to pay a penalty equal to the duty so determined) that

(1) “At this stage, we need to examine the recent decision of this Court in Dharamendra Textile (supra). In almost every case relating to penalty, the decision is referred to on behalf of the Revenue as if it laid down that in every case of non-payment or short payment of duty the penalty clause would automatically get attracted and the authority had no discretion in the matter. One of us (Aftab Alam,J.) was a party to the decision in Dharmendra Textile and we see no reason to understand or read that decision in that manner.”

(2) After quoting from Dharmendra Textiles “we fail to see how the decision in Dharamendra Textile can be said to hold that section 11AC would apply to every case of non-payment or short payment of duty regardless of the conditions expressly mentioned in the section for its application.”

(3) “There is another very strong reason for holding that Dharamendra Textile could not have interpreted section 11AC in the manner as suggested because in that case that was not even the stand of the revenue.”

(4) “The decision in Dharamendra Textile must, therefore, be understood to mean that though the application of section 11AC would depend upon the existence or otherwise of the conditions expressly stated in the section, once the section is applicable in a case the concerned authority would have no discretion in quantifying the amount and penalty must be imposed equal to the duty determined under sub-section (2) of section 11A. That is what Dharamendra Textile decides”.

(333.8 KiB, 1,512 DLs)

Estimated expenditure towards warranty is allowable u/s 37 (1)

The assessee sold valve actuators. At the time of sale, the assessee provided standard warranty that if the product was defective within the stated period, the product would be rectified or replaced free of charge. For AY 1991-92, the assessee made a provision for warranty at Rs.10,18,800 at the rate of 1.5% of the turnover. As the actual expenditure was only Rs. 5,18,554, the excess provision of Rs.5,00,246 was reversed and only the net provision was claimed. The Tribunal allowed the claim on the basis that the provision had been consistently made and on a realistic manner. The High Court reversed the Tribunal on the basis that the liability was contingent and not allowable u/s 37 (1). HELD, reversing the High Court that:

(1) A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when: (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized;

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(353.3 KiB, 1,935 DLs)

Disciplinary action by ICAI in breach of natural justice is invalid

In October 2007, Disciplinary proceedings were initiated against two partners of M/s Pricewaterhouse (PWC) for alleged professional and other misconduct in conducting the statutory audit of Global Trust Bank. The proceedings were based on the findings in the Special Audit report and the Annual Financial Inspection of the RBI. Though several hearings were conducted by the Disciplinary Committee, no progress was made. On 23rd March, 2009, the hearing was held before a newly constituted Disciplinary Committee. The new Committee decided to hold de novo hearing. In that proceeding, the accused auditors pointed out that despite summons being issued to the RBI, the RBI and its witness had failed to produce relevant documents/ records /working papers, etc. in support of the AFI report. The Committee was requested to ensure production of documents. However, the Committee instead of acceding to the auditors’ request and directing the ICAI’s witness to lead evidence as per the well established procedure called upon the auditors to make their submissions and meet the charges contained in the show cause notice. No procedure as such was clarified. A handwritten application for an adjournment was submitted. The members of the Committee rejected the said application by an oral order. However, a transcript of the order was not provided to the auditors and even a short adjournment was declined and the Committee declared that the proceedings were closed. This was challenged by the auditors and the ICAI contended that the challenge was “frivolous” and “premature”. HELD, rejecting the stand of the ICAI that:

(1) The ICAI has the power to direct the name of a member to be removed from the Register for “misconduct” and consequently the member would lose his certificate and the right to practice. This is a matter having serious civil consequences and thus the power can only be exercised in accordance with law and the rule of fairness. Fairness should not only appear to have been done but should actually be done in such proceedings. To many a man, his professional reputation is his most valuable possession. It affects his standing and dignity among his fellow members in the profession and guarantees the esteem of his clientele;

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(57.8 KiB, 1,007 DLs)

Sunset clause of s. 80HHC (1B) applies to s. 115JB

In respect of AY 2001-2002, the assessee claimed that though s. 80HHC (1B) limited the deduction to 80% of the profits eligible for deduction u/s 80HHC, this limitation did not apply for purposes of “book profits” u/s 115JB and that 100% of the 80HHC profits were deductible. The Tribunal allowed the claim by relying on the Special Bench judgement in Syncome Formulations 106 ITD 193 (Mum) (SB) and the Budget speech of the Finance Minister. On appeal by the Revenue, HELD, reversing the Tribunal’s order:

(1) S. 115JB allows a deduction from the “book profits” of “the amount of profits eligible for deduction u/s 80HHC, computed under clause (a) …. of sub-section (3) …. subject to the conditions specified in that section.” Ss (3) and (3A) provide for the method for computation of profits. Once the profits are worked out, then only the profit which is eligible can be deducted. In computing the “eligibility”, the limits of s. 80HHC (1B) have to be read in;

(2) Accepting the argument that MAT companies are not subject to the limits of s. 80HHC (1B) would mean that they are treated more advantageously than other export companies. There is no rational reason why the legislature would give MAT companies additional benefits than that given to other companies;

(3) The argument also renders s. 80HHC (1B) irrelevant and otiose for s. 115JB and results in the absurdity that MAT companies will enjoy exemption even after AY 2005-2006 when s. 80HHC ceases to operate;

(4) The Budget Speech and the Memorandum explaining the Bill are external aids to construction and reliance on them is not permissible as there is no absurdity on a literal reading of s. 80 HHC r.w.s. 115JB(2);

Note: The judgements in Syncome Formulations 106 ITD 193 (Mum) (SB) and Govind Rubber 89 ITD 457 (Mum) have been overruled.

The Judgment of the Kerala High Court in GTN Textiles 248 ITR 372 was distinguished.

(25.4 KiB, 2,254 DLs)

S. 145A requires opening stock to be adjusted

S. 145A inserted w.e.f 1.4.1999 (AY 1999-2000) requires the valuation of purchase and sale of goods and inventory to include the amount of any tax, duty, cess or fee paid for the goods. On the question whether the opening stock as of 1.4.1988 has also to be so adjusted, HELD:

To give effect to s. 145A, if there is any change in the closing stock at the end of the year then there must necessarily be a corresponding adjustment made in the opening stock of that year. This does not amount to giving double benefit to the assessee and would be necessary to compute the true and correct profit for the purpose of assessment.

Note: CIT vs. Mahavir Alluminium Ltd 297 ITR 77 (Delhi) followed.

See Also: Hawkins Cookers vs. ITO (ITAT Mumbai)

(181.3 KiB, 1,197 DLs)

S. 14A & Daga Capital cannot put assessee in worse position

The assessee earned dividend income of Rs. 7.57 lakhs but the AO disallowed Rs. 20.73 lakhs u/s 14A as being relatable to the said income. The CIT (A) gave part relief. In deciding cross appeals, HELD

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.

See Also: ACIT vs. Indexport Ltd (ITAT Mumbai) where the same view has been taken after considering Assam Travels 199 ITR 1 (SC).

See Also: New Rule 8D – A lesson in tight rope walking? by CA Anant N. Pai

(348.6 KiB, 4,402 DLs)

SC judgement on s. 271 (1)(c) penalty in Dharmendra Textiles explained

In respect of AY 2002-2003, the assessee claimed by a revised return that the loss suffered in respect of one s. 10A unit was not liable to be set-off against the profits of another s. 10A unit. The AO rejected the claim and the assessee accepted the decision of the AO. On the question whether the assessee was liable for penalty u/s 271 (1) (c) for “furnishing inaccurate particulars of income”, especially in the light of UOI vs. Dharmendra Textile Processors 306 ITR 277 (SC), HELD allowing the appeal:

(1) On first principles, penalty u/s 271(1)(c) is not simply a consequence of an addition being made to the income of the assessee. Penalty u/s 271(1) (c), irrespective of whether it is a civil liability or a criminal liability can only be imposed when the scheme of the Act permits or requires so. It is not an automatic consequence of an addition being made to the income. An addition made during the course of assessment proceedings, by itself, cannot be enough to initiate, leave aside conclude, penalty proceedings u/s 271(1)(c).

(2) 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”.

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