TaxTMI Updates e-Newsletter
Apr 28,2012

Explanation (baa) to Section 80HHC - profits of the business as computed under the head 'Profits and Gains of Business or Profession' - ninety per cent deduction of receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature - receipt included in profits of business - classification of receipts as income from business or income from other sources

Explanation (baa) to Section 80HHC - ninety per cent deduction of receipts by way of ... interest - receipt included in profits of business - interest earned on fixed deposit receipts (FDRs) - Whether interest earned on FDRs placed with the bank for obtaining credit facilities can be taken into account for computing deductions under Explanation (baa) to Section 80HHC and whether ninety per cent deduction applies to such interest - HELD THAT: - The Tribunal held that interest earned on FDRs placed with the bank for export trade is assessable under the head 'Profits and Gains of Business or Profession' and hence forms part of business profits for purposes of Explanation (baa). The court applied the law laid down in ACG Associated Capsules Pvt. Ltd. v. CIT, holding that Explanation (baa) requires first computing profits under the head 'Profits and Gains of Business or Profession' in accordance with Sections 28 to 44D. Clause (1) of Explanation (baa) permits deduction of ninety per cent only of those receipts by way of interest (or similar receipts) which are actually included in such profits. If any quantum of interest has been allowed as an expense and therefore is not included in business profits, ninety per cent of that excluded quantum cannot be deducted under Explanation (baa). Consequently, only ninety per cent of the net interest amount that is included in business profits is deductible under Explanation (baa). [Paras 5, 7, 8, 9]

Interest earned on FDRs placed for export trade is to be treated as business income for computation under Explanation (baa) to Section 80HHC, and only ninety per cent of the net interest actually included in business profits is subject to deduction under Explanation (baa).

Explanation (baa) to Section 80HHC - profits of the business as computed under the head 'Profits and Gains of Business or Profession' - classification of receipts as income from business or income from other sources - EDP receipts / receipts for use of computers - Whether receipts from group companies for use of computers (EDP receipts) and profit from sale of EDP receipts under the duty remission scheme can be excluded from business profits for purposes of computing the deduction under Explanation (baa) to Section 80HHC - HELD THAT: - The Tribunal found that the EDP receipts arose from group companies' use of the assessee's computers and office equipment and were chargeable under the head 'Profits and Gains of Business or Profession' rather than 'Income from Other Sources'. The court accepted the Tribunal's classification and applied the principle from ACG Associated Capsules Pvt. Ltd., namely that Explanation (baa) operates on business profits as computed under the specified head and permits deduction of ninety per cent only of those receipts of the enumerated nature which are actually included in those profits. Thus, EDP receipts, being business receipts included in profits, fall within the ambit of Explanation (baa) and cannot be excluded merely because of their characterization in other contexts. [Paras 5, 6, 7, 9]

EDP receipts are assessable as business income and are to be taken into account for computing deductions under Explanation (baa) to Section 80HHC; they cannot be excluded from business profits for that purpose.

Final Conclusion: Both substantial questions of law are answered in favour of the assessee: interest on FDRs and EDP receipts are to be treated as business income for computation under Explanation (baa) to Section 80HHC, and only ninety per cent of the net amounts actually included in business profits are deductible under that Explanation; the appeal is allowed.

Penalty under section 271(1)(c) for concealment - assessment under section 115JB (book-profits deemed income) - Explanation 4(a) to section 271(1)(c) - concealment irrelevant where assessment is based on higher deemed income

Penalty under section 271(1)(c) for concealment - assessment under section 115JB (book-profits deemed income) - Explanation 4(a) to section 271(1)(c) - concealment irrelevant where assessment is based on higher deemed income - Whether penalty under section 271(1)(c) can be imposed where additions are made to income under the normal provisions but the assessment is finally carried out under section 115JB and there is no addition to book profits - HELD THAT: - The Tribunal deleted the penalty relying on this Court's decision in CIT v. Nalwa Sons Investments Ltd., which held that where the normal-provisions computation yields a lower income (or a loss) but the assessment is actually made on the higher deemed income under section 115JB, any concealment that only affected the normal-provisions computation bears no consequence for tax liability because tax is paid on the income assessed under section 115JB. Applying Explanation 4(a) to section 271(1)(c) in that factual matrix, the Court concluded that concealment did not lead to tax evasion since the assessment and tax liability were determined by the higher book-profits figure; hence penalty under section 271(1)(c) could not be sustained. The facts for AY 2003-04 and AY 2004-05 fall squarely within that principle: although additions were made under the normal provisions, the final assessment in each year rested on book-profits under section 115JB without any enhancement of those book-profits, and tax was consequently assessed on that higher deemed income. Therefore the penalty could not be imposed.

Penalty under section 271(1)(c) deleted as Nalwa Sons principle applies and concealment did not result in tax evasion where assessment was on section 115JB book-profits.

Final Conclusion: Appeals dismissed; the Tribunal's deletion of penalty under section 271(1)(c) is upheld for assessment years 2003-04 and 2004-05.

Res judicata - constructive res judicata - finality of judicial decisions - vires of Sections 205A and 205C of the Companies Act, 1956 - legislative competence to enact provisions affecting proprietary rights - Investor Education and Protection Fund (IEPF)

Res judicata - constructive res judicata - finality of judicial decisions - Whether the present writ petition is barred by res judicata/constructive res judicata by reason of the earlier writ proceedings in which the vires of the same statutory provisions were challenged. - HELD THAT: - The Court held that the present challenge is to the same statutory provisions earlier assailed in W.P.(C) No.10517/2009 and that the petitioner cannot revive the controversy by advancing new grounds which were available at the time of the earlier litigation. The principle of res judicata, aimed at securing finality in litigation, precludes re-agitation of matters directly and substantially adjudicated between the same parties. The earlier petition had challenged the vires of Sections 205A and 205C and related contentions (including arbitrariness, retrospectivity and accumulation of corpus in IEPF) were specifically considered and rejected by the Court. Since the present legislative-competence argument (regarding Entry 42/43) was available at the earlier stage, it is barred by constructive res judicata and cannot be entertained now. [Paras 10, 11, 12, 13]

The writ petition is barred by res judicata/constructive res judicata and is dismissed.

Final Conclusion: Petition dismissed on the ground of res judicata; the Court declined to entertain a fresh challenge to the same provisions (Sections 205A/205C) that had been earlier adjudicated between the parties.

Clandestine removal - illicit diversion - cenvat credit wrongly taken - calculation of unaccounted quantity by purchase minus admitted consumption - rejection of after thought claim of use in manufacture - confiscation under Rule 15(1) of the Cenvat Credit Rules, 2004 - penalty under Rule 26 of the Central Excise Rules, 2002 - longer limitation period under the proviso to Section 11A(1) - corporate liability and attribution of mens rea - benefit of doubt

Clandestine removal - calculation of unaccounted quantity by purchase minus admitted consumption - benefit of doubt - The Tribunal's finding that 768.03 MT of resin CP172SG was illicitly diverted is upheld. - HELD THAT: - The Tribunal computed the unaccounted quantity by starting from the total purchases of CP172SG (1102.715 MT) and subtracting quantities admitted to have been used in manufacture (PVC filler cord and, on benefit of doubt, PVC tape). The Tribunal accepted 104.01 MT used in filler cord and allowed 230.72 MT for PVC tape on benefit of doubt, leaving 768.03 MT unaccounted for. The appellants' challenge that the Tribunal's quantification was based on surmise was rejected in view of the admitted purchases, the recorded statements of the director admitting diversion, and the internal inventory and batch linking showing supply from the appellant to the purchasers. The Court found no perversity in the Tribunal's arithmetic or reasoning and affirmed the finding of illicit diversion. [Paras 5, 7, 12]

Finding of 768.03 MT illicitly diverted is affirmed and upheld.

Rejection of after thought claim of use in manufacture - illicit diversion - The Tribunal's rejection of the contention that CP172SG was used in manufacture of PVC compound is affirmed. - HELD THAT: - The director's contemporaneous statements did not assert use of CP172SG in PVC compound; instead they recorded use of 6701 grade resin for the compound and admitted CP172SG use in filler cord and later in tape. The Tribunal noted that it was incumbent on the appellant to show that purchased 6701 resin was insufficient for manufacture of the compound; absence of such proof and the statements on record supported the Tribunal's conclusion that bulk quantity remained illicitly diverted. The Court found no error in this conclusion. [Paras 5, 6]

Tribunal's conclusion that CP172SG was not used for PVC compound is sustained.

Cenvat credit wrongly taken - confiscation under Rule 15(1) of the Cenvat Credit Rules, 2004 - longer limitation period under the proviso to Section 11A(1) - Illicitly diverted inputs in respect of which cenvat credit was taken are liable to confiscation and recovery, and longer limitation would apply for recovery of the cenvat credit on such quantity. - HELD THAT: - The Tribunal held that the CP172SG resin found to have been illicitly diverted was input in respect of which cenvat credit had been wrongly availed; under Rule 15(1) such inputs are liable for confiscation. Because the diversion occurred without reversal of cenvat credit, the proviso to Section 11A(1) permits invocation of the longer limitation period for recovery. The Court accepted the Tribunal's application of these legal consequences to the established factual findings. [Paras 7, 8]

Confiscation and longer limitation for recovery of wrongly taken cenvat credit upheld.

Penalty under Rule 26 of the Central Excise Rules, 2002 - corporate liability and attribution of mens rea - Penalty under Rule 26 was rightly imposed on the companies and persons who dealt with the illicitly diverted resin; corporate entities are amenable to penalty. - HELD THAT: - The Tribunal found that Natraj Plast Industries Ltd., Tanishq Wires & Conductors Pvt. Ltd., and the named individuals had dealt with the diverted resin knowing it was liable to confiscation. The Court rejected the submission that limited companies could not be penalised for lack of mens rea, relying on precedent that 'person' includes companies and that corporate bodies can be subjected to penalties for economic contraventions; criminal imprisonment may be inapplicable but monetary penalties are permissible. Given the findings of supply, batch linkage and admissions, the imposition of penalties under Rule 26 was sustained. [Paras 8, 9, 10, 11]

Penalties under Rule 26 against the companies and persons dealing with the diverted resin are affirmed.

Quantification in clandestine removal cases - imposition of fines on individuals - Fines imposed on the individual respondents were sustainable and no interference was called for; the Tribunal's reduction of one fine was noted. - HELD THAT: - The appellants argued that fines on Sunil Mittal and Rajesh Mittal (and on Mr. Dinesh Gupta originally) were unjustified because exact quantities could not be precisely attributed. The Court observed that clandestine removal cases necessarily involve estimation and that, at searches, stock of CP172SG linked to the appellant was recovered from the premises of the purchasers. The Tribunal had imposed fines on the individuals and reduced the fine on Mr. Dinesh Gupta from a higher amount to a lower sum in view of mitigation for his son. Considering the factual findings and the quantum of penalty, the Court found no ground to interfere. [Paras 12, 13, 14]

Fines on the individuals are upheld and the Tribunal's reduction in respect of one individual is recorded; no interference.

Final Conclusion: The Tribunal's order is affirmed in all material respects: the finding of clandestine diversion of 768.03 MT of CP172SG is sustained; the rejection of the after thought claim of use in PVC compound is upheld; confiscation, recovery of wrongly taken cenvat credit (with longer limitation) and penalties under Rule 26 are validated; fines imposed on individuals are maintained with the Tribunal's reduction in one case. The appeals are dismissed and no substantial question of law arises.