2005 (4) TMI 242 - AT - Income Tax

Tribunal Upholds Addition for Non-Utilized Withdrawals from Investment Deposit Account Under Income Tax Section 32AB(6.

Nirma Industries Ltd. Versus Assistant Commissioner Of Income-tax, Central Circle 2 (1).

a direct nexus with the Industrial Undertaking. 14. Addition on Account of Withdrawal from Investment Deposit Account u/s 32AB(6): The Tribunal upheld the ... Business Disallowance, Preliminary Expenses ISSUES PRESENTED AND CONSIDERED 1. Whether payments of professional/consultation fees fall within the prohibition/limitation of section 40A(12) and, if so, whether the Assessing Officer/CIT(A) erred in treating the whole fee as covered by section 40A(12) or in not examining the nature of services. 2. Whether expenditure incurred on a feasibility/consultancy Soda Ash Project is revenue in nature or capital/qualifies for amortization under section 35D (i.e., deductible only when the new industrial undertaking commences production). 3. Whether various receipts attributable to Vatva and Mandali industrial undertakings (interest on fixed deposits, interest from related company, late payment interest from debtors, transport rent income, sale of bardana/waste, profit on sale of raw material, insurance refunds) are 'profit and gains derived from' the industrial undertaking for purposes of sections 80-I/80HH. 4. Whether Rule 6B disallowance for promotional/presentation articles (absence of logo) was properly deleted by the CIT(A) given prior findings in identical earlier years. 5. Whether proportionate interest disallowance is warranted where bank overdraft withdrawals for payment of income-tax were made from an account into which daily collections (sales) were deposited. 6. Whether payment of management/service charges to Nirma Management Services is hit by section 40A(2)(b) as excessive or payments to a 'related person', and whether the authorities below erred in not examining factual particulars (relationship, nature and quantum of services, reason for large increase). 7. Whether withdrawals from Investment Deposit Account (IDA) with the Development Bank, when utilized for repayment of term loans (some against road transport vehicles), are exigible as income under section 32AB(6) or allowable/deletable under section 32AB read with the Investment Deposit Account Scheme. ISSUE-WISE DETAILED ANALYSIS Issue 1: Applicability of section 40A(12) to professional/consultation fees Legal framework: Section 40A(12) (as then worded) disallows deduction in excess of Rs.10,000 for fees/remuneration paid to non-employees for services 'in connection with any proceeding under this Act' (except preparation of return), for services in connection with any other tax-related proceeding, or for any advice in connection with tax/penalty/interest matters. Precedent treatment: No specific precedent cited resolving the factual split; authorities below treated whole payments as within s.40A(12) while assessee contended partial non-tax services and relied on earlier Tribunal percentages in prior years. Interpretation and reasoning: The Court identifies that the question turns on the precise nature of services rendered by each professional (retainer covering return preparation, auditing, company law matters, tax representation/advice). Authorities below did not examine bills or segregate services. Because material (bills) were not produced and lower orders lack specific factual findings, the correct course is to remit for fresh adjudication focused on nature of services and appropriate apportionment under s.40A(12), allowing the assessee hearing opportunity. Ratio vs. Obiter: Ratio-where the Assessing Officer treats an entire retainer/fee as covered by s.40A(12) without examining documentary evidence and the precise nature of services, the matter should be remanded for fact-finding and apportionment. Obiter-reference to prior Tribunal percentage in earlier years noted but not binding absent identical fact-finding. Conclusion: Orders below set aside; matter restored to Assessing Officer to examine and re-adjudicate the nature of fees, apportionment under s.40A(12), with opportunity to be heard. Issue 2: Soda Ash Project expenditure - capital vs revenue and section 35D treatment Legal framework: Expenditure incurred in connection with setting up a new industrial undertaking is governed by section 35D (amortization of preliminary expenses) - deduction allowable by amortization in the year the undertaking commences production/operation; revenue/capital distinction generally directs the tax treatment. Precedent treatment: Assessee relied on Calcutta High Court decision (Asiatic Oxygen Ltd.) where feasibility-report expenditure was allowed as revenue - but that decision turned on procedural unlawfulness under section 144B, not on principle applicable here. Tribunal previously upheld authorities' finding in assessment year 1991-92; assessee accepted that order and did not appeal to High Court. Interpretation and reasoning: The Calcutta High Court authority was distinguished because its result rested on procedural infirmity (impermissible enhancement under section 144B), not on the substantive proposition that feasibility report expenses are revenue. The Assessing Officer's finding that section 35D requires amortization when the industrial undertaking begins production is accepted. No fresh justification provided to depart from the earlier Tribunal decision which assessee has accepted. Ratio vs. Obiter: Ratio-the proper treatment of project/preparatory expenditure for setting up a new industrial undertaking is amortization under s.35D and not immediate revenue deduction where the expenditure relates to the creation of a new undertaking; distinction of authorities that were decided on different grounds. Obiter-the characterization arguments by assessee (Soda Ash is raw material) noted but insufficient to overturn earlier findings. Conclusion: Disallowance affirmed; expenditure to be amortized under section 35D and not allowed as revenue in the year. Issue 3: Eligibility under sections 80-I/80HH - 'derived from' test for various receipts Legal framework: Sections 80-I/80HH permit deduction in respect of profits/gains 'derived from' specified industrial undertakings; judicial gloss requires a direct or immediate nexus between the receipt and the industrial undertaking (Sterling Foods; Pandian Chemicals - direct/immediate nexus test; Privy Council in Raja Bahadur Kamakhaya Narayan Singh on genealogy of source). Precedent treatment: Apex Court decisions (Sterling Foods; Pandian Chemicals) applied narrowly; Tribunal decisions split earlier, some pre-dating Pandian were favorable to assessee on certain items (interest from debtors); local High Court decisions were distinguishable or did not decide the point on merits. Interpretation and reasoning: The Court applies the immediate/direct nexus test. For interest on fixed deposits and interest from deposits with IDBI/Nirma Ltd., direct nexus lacking - the immediate source is the deposit, not the industrial undertaking; interest therefore not 'derived from' the undertaking. Late payment interest from debtors similarly arises from the debt (arrears), a step removed from the manufacturing activity - following Privy Council/Apex Court reasoning, interest is not directly derived from the undertaking and thus not eligible. Transport rent income from letting out trucks is not income 'derived from' the industrial undertaking; net transport income (after expenses and depreciation) is to be excluded from the undertaking's profits. Sale of bardana and waste material generated in production are directly connected with manufacturing and qualify as derived from the undertaking. Profit on sale of raw material lacked immediate nexus and was disallowed for section 80-I purposes. Insurance refund found to be offset by higher repair expenditure and thus not an assessable income to be excluded from deduction analysis as per facts. Ratio vs. Obiter: Ratio-the strict direct/immediate nexus test governs eligibility under sections 80-I/80HH; receipts whose immediate source is a debt (interest), a bank deposit (deposit interest), or separate letting business (transport rent) are not 'derived from' the undertaking. Receipts intrinsically generated in production (bardana/waste sales) do qualify. Obiter-discussion of applicability and precedential hierarchy of conflicting earlier Tribunal/High Court decisions is explanatory. Conclusions: Interest on fixed deposits, deposits with IDBI/Nirma and late payment interest from debtors do not qualify for deduction under sections 80-I/80HH (order of CIT(A) reversed on late payment interest); transport rent income not eligible but only net transport profit is to be excluded from business profits (CIT(A) calculation upheld); sale of bardana and waste material qualify and are eligible (CIT(A) upheld); profit on sale of raw material not eligible. Issue 4: Rule 6B disallowance for presentation/advertising articles (absence of logo) Legal framework: Rule 6B disallows expenses on certain gifts/advertising unless they bear logo/advertising element; deductibility depends on whether the articles have an advertising character. Precedent treatment: Earlier identical years the Tribunal sustained CIT(A) that articles lacked logo and thus no advertising element; reliance placed on Hon'ble Mumbai High Court in similar context. Interpretation and reasoning: Facts identical to earlier years and prior conclusion (no logo, hence no advertising expense) was maintained; CIT(A) followed his prior order and Tribunal had earlier sustained that view. Ratio vs. Obiter: Ratio-where identical facts reflect absence of advertising element (no logo) the Rule 6B disallowance is not sustainable. Obiter-none significant. Conclusion: Disallowance under Rule 6B deleted; Revenue's ground rejected. Issue 5: Disallowance of interest on overdraft for payment of income-tax Legal framework: Interest deduction depends on purpose of borrowing; borrowed sums used for business purpose are deductible unless shown otherwise. Precedent treatment: CIT(A) deleted disallowance following earlier case (Norma Detergents) where Tribunal upheld deletion. Interpretation and reasoning: Assessing Officer's view that overdraft was borrowed funds for tax payment was rebutted by undisputed factual matrix: daily collections and income were deposited in same overdraft account; withdrawals for tax were far less than collections deposited, indicating payment originated from collections (business receipts) rather than borrowings. Given identical facts and earlier Tribunal support, deletion of disallowance was upheld. Ratio vs. Obiter: Ratio-where daily collections are deposited in an overdraft account and withdrawals for tax are covered by the deposited collections, interest cannot be disallowed as borrowings for non-business purposes. Obiter-reliance on identical earlier Tribunal decision bolsters finding. Conclusion: Disallowance of proportionate interest reversed; CIT(A) upheld. Issue 6: Section 40A(2)(b) disallowance of service charges to related concern (Nirma Management Services) Legal framework: Section 40A(2)(a)/(b) permits disallowance of expenditure paid to related persons if Assessing Officer finds it excessive/unreasonable having regard to fair market value, legitimate needs, or benefit derived; 'related persons' enumerated in clause (b) with explanation of 'substantial interest'. Precedent treatment: Authorities below made disallowance following earlier year orders; CIT(A) deleted following his earlier order; neither authority examined particulars (directors, shareholding, nature/scope of services, reason for sharp increase in charges). Interpretation and reasoning: The Assessing Officer failed to specify under which sub-clause Nirma Management Services was a related person and did not examine material facts (directors, shareholding, service details, justification for jump from Rs.13 lakhs to Rs.40 lakhs). CIT(A) also did not examine year-specific facts. Given the lack of fact-finding, proper course is remand to Assessing Officer to (i) determine whether Nirma Management Services falls within section 40A(2)(b), (ii) assess nature and fair market value of services, and (iii) examine reasons for increase in charges, affording opportunity to assessee. Ratio vs. Obiter: Ratio-where section 40A(2)(b) disallowance is proposed, AO must identify the statutory relationship clause relied on and make detailed factual findings on relationship, nature of services and reasonableness before disallowing; absence of such inquiry requires remand. Obiter-prior year outcomes are informative but not dispositive without current-year fact examination. Conclusion: Orders below set aside in part; matter remitted to Assessing Officer for fresh enquiry on relatedness, service nature, and reasonableness with hearing opportunity. Issue 7: Withdrawal from Investment Deposit Account (IDA) - s.32AB(6) addition Legal framework: Section 32AB(1) permits deduction for amounts deposited in IDA or amounts utilized for purchase of new ship/aircraft/plant/machinery under Government Scheme; s.32AB(4) excludes certain items (road transport vehicles); s.32AB(6) deems amounts withdrawn and not used as per Scheme to be taxable in year of withdrawal. Investment Deposit Account Scheme clause 9 prescribes permitted uses on withdrawal, including repayment of principal of term loans contracted after 31.3.1986 for three years or more from specified financial institutions. Precedent treatment: Assessing Officer added withdrawals to income under s.32AB(6) on view that withdrawals repaid loans taken for trucks (road transport vehicles) which are excluded under s.32AB(4); CIT(A) deleted following earlier Norma Detergents order; Tribunal previously upheld CIT(A) in Norma. Interpretation and reasoning: The Court analyses statutory text and Scheme: (a) deduction under s.32AB(1) is claimable in the year of deposit if conditions met; (b) s.32AB(6) triggers taxation in year of withdrawal only if withdrawn amount is not utilised in accordance with the Scheme; (c) Scheme clause 9(1)(iii) expressly permits utilisation of withdrawn amounts for repayment of principal of term loans contracted after 31.3.1986 from specified institutions for term =3 years. There is no Scheme requirement in year of withdrawal to re-satisfy s.32AB(1) conditions; Assessing Officer's insistence that repayment must have been of loans originally taken for purchase of qualifying new plant/machinery is not found in the Scheme. The assessee utilised withdrawn sums for repayment of term loans in accordance with clause 9(1)(iii); consequently s.32AB(6) addition is not justified. Ratio vs. Obiter: Ratio-withdrawn amounts from IDA, when utilised for purposes expressly allowed by the Scheme (e.g., repayment of qualifying term loans contracted after 31.3.1986 from specified institutions), are not taxable under s.32AB(6); the year-of-withdrawal test focuses on compliance with Scheme utilisation, not a fresh re-qualification under s.32AB(1). Obiter-distinction drawn between Scheme permissions and Assessing Officer's narrower reading. Conclusion: Addition under s.32AB(6) reversed; CIT(A) deletion upheld (withdrawals used for permitted loan repayments under the Scheme). OVERALL RESULT The appeals were partly allowed: (a) several revenue contentions rejected (Rule 6B, interest disallowance, s.32AB(6) addition); (b) certain issues remanded for factual inquiry (s.40A(12) apportionment of professional fees; s.40A(2)(b) related-party service charges); (c) section 35D/amortization treatment and the strict direct/immediate nexus test under sections 80-I/80HH were applied yielding affirmances and reversals as specified above.