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.”
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;
(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;
(2) The law requires the principles of natural justice to be followed even in pure administrative action. It is a fundamental principle of fair hearing incorporated in the doctrine of natural justice and as a rule of universal obligation, that all administrative acts or decisions affecting the rights of the individual must comply with the principles of natural justice and the person or persons sought to be affected adversely must be granted not only an opportunity of hearing but a fair opportunity of hearing. This is all the more required when the reputation of a professional is involved and the damages may be irreparable and irretrievable. It is mandatory for the Disciplinary Committee to adhere to the principles of natural justice;
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.
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.
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”.