TaxTMI 
TaxTMI 
2014 (9) TMI 99
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.... profits for deduction u/s 80I, the following items: Interest received from employees of Rs. 1,96,09,604/- and 20% thereof (as without the employees of the Hazira Factory producing 2700 M.T. per day of Ammonia and 4400 M.T. of Urea, cannot be run which is admittedly the relevant industrial undertaking earning profits and gains. 2(b). The ld CIT(A) has erred in not including in the computation of eligible profits receipt of service charges working u/s 80I of Rs. 7,77,84370/- being the amount received from Heavy Water Board of the Department of Atomic Energy, government of India in terms of an agreement with the appellant and the Heavy Water Board. Service charges forms part of the industrial activity has not been understood and not allowed by both the A.O and the CIT(A), since substantial production of Ammonia and other goods are supplied on a day to day basis to the factory manufacturing Heavy Water. 2(c). The Ld CIT(A)-X has erred in confirming disallowance of the claims of the appellant for inclusion in the computation of deduction u/s 80I of the following:- Rs. a. Equipment Hire Char....
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....a small paragraph (Page 3 Para of the CIT(A) order. The order of Ld CIT(A) is not a speaking order and has been done in a mechanical way without proper application of mind and facts to the claims and consequent confirmation by CIT(A) of the disallowance is wrong and bad in law. 6. The above grounds are independent and without prejudice to one another. 7. The appellant prays that he may be allowed to add, alter, amend or forego any of the grounds at the time of hearing." 3. Apropos ground No. 1 in respect of disallowing depreciation for building used as guest house. 4. Brief facts of the case is that the assessee is a multi state Co-operative Society substantially owned by the Government of India registered under the Multi State Co-operative Societies Act, 1984, and is engaged in the business of manufacturing of fertilizers such as Urea and Ammonia at its plant at Hazira in Gujarat. The assessee also does trading of other fertilizers on behalf of Government of India. The assessee claimed depreciation of Rs. 2,15,487/- on the building used as guest house under section 32 of the Income Tax Act, 1961 (herein after 'the Act') which was disallowe....
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....ther fertilizers on behalf of Government of India. The assessee was entitled to claim u/s 80I of the Act in respect of its manufacturing activity. While computing the eligible deduction the assessee had included service charges received from Heavy Water Board of the Department of Atomic Energy, Govt. of India which was not allowed by AO. Aggrieved by the said order of the AO, the assessee preferred an appeal before the ld CIT(A) who was pleased to confirm the order of AO. Aggrieved by the said order of the ld CIT(A) the assessee is before us. 11. At the outset the ld AR pointed out that in assessee's own case reported in (2013) 358 ITR 168 the Hon'ble Delhi High Court has favoured the assessee and this issue is covered in favour of the assessee. In the aforesaid assessee's own case the Hon'ble Delhi High Court held as follows:- "Therefore, we feel that as the issue of ownership is irrelevant, the service charges received by Kribhco from the Heavy Water Board, would have to be regard as profits or gains derived from an industrial undertaking so as to qualify for deduction u/s 80I of the said Act. Because of the view we have taken, i....
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....ct of ammonia tanker hire charges is, therefore, to be decided against the appellant-assessee. 16. The Hon'ble High court of Delhi in the aforesaid decision has held in Para 3 as under:- "we also record that crane hire charges would also be covered by the aforesaid decision, which refers to equipment hire charges" 17. In respect to equipment hire charges, the Hon'ble High Court order is reported in (2008) 300 ITR 92 dated 15.11.2006 wherein it was held that equipment hire charges would not be entitled to special deduction u/s 80I of the Act. In the light of the above decisions of the jurisdictional High Court against the assessee, this ground of the assessee is dismissed. 18. Apropos ground No. 2(d) disallowance of the claim of guest house receipt (noted as guest house expenses) for inclusion in the computation u/s 80I. This ground has not been pressed due to smallness of amount of Rs. 1,87,229/-, therefore, this ground of the assessee is dismissed. 19 Apropos ground No. 2(e) in respect of interest income from (I) Nationalized Banks (ii) Financial Institutions (iii) From ICICI Bank. The ld AR fairly and candidly conceded that th....
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....t or immediate nexus of the income from the assessee's undertaking, consequently we hold that the interest derived from IDBI under investment u/s 32AB cannot qualify as profit and gain derived from the undertaking for the purpose of the said deduction u/s 80I of the Act. In the result this ground of the assessee fails and is therefore dismissed. 24. Apropos ground 3(a) and 3(b) in respect to disallowance of claim of legal and professional charges incurred on various consultants for feasibility studies by the assessee. 25. Brief facts of the case is that the assessee is a multi state Co-operative Society substantially owned by the Government of India registered under the Multi State Co-operative Societies Act, 1984, and is engaged in the business of manufacturing of fertilizers such as Urea and Ammonia at its plant at Hazira in Gujarat. The assessee also does trading of other fertilizers on behalf of Government of India. The assessee claimed legal and professional charges incurred to payment of consultant for feasibility studies for acquiring phosphate manufacturing abroad as revenue expenditure, which was not accepted by the AO. Aggrieved by the said order of the AO, the assessee....
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.... assessee commenced the setting up of a spinning and weaving unit for the manufacture of fabric and textile during the financial year 1995-96 in the State of Karnataka. The unit was in the line with the assessee's strategy to expand its business operations in the same line of business through vertical integration, by utilizing as raw materials for the proposed new unit, the products such as yarn and polyster, manufactured by the existing units. For setting up the new unit, the assessee identified manpower from the existing pool of resources of the assessee. Furthermore, the unit was proposed to be established under the common control of the board of directors of the assessee and out of the surplus funds generated by the existing business operations. In relation to the setting up of the weaving and spinning unit, the assessee, from time to time, incurred revenue expenditure in the nature of salary, wages, repair, maintenance, design and engineering fee, travelling and other expenses of administrative nature. The proposal of the assessee however, could not see the light of the day since the assessee, could not procure the allotment of requisite land from the Government of Karnata....
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....he society had surplus in the above manufacturing operation and so desired to produce the products of various chemicals by acquiring phosphatic manufacturing facilities outside India and for that society's Board in its 103th meeting held on 21.09.1993, approved that Society may inspect the facilities in USA and open a dialogue with prospective sellers for purchase of a running DAP plant in USA with or without captive mine. M/s. Alutec Inc was engaged as Consultant for initial preparatory work in consultation with Indian Embassy in Washington USA at a fee of USD 27,000. Govt. of India vide letter Ref No. 129/15/93-FDD-II dated 3rd December, 1993 conveyed their approval for payment of USD 27,000 to the Consultant M/s Alutec Inc. for initial preparatory work in USA in connection with purchase of Phosphatic Fertiliser Plant. (II) The Executive Committee of Society in its 39th meeting held in March 12,1994 after review of the proposal for exploring the possibility of acquiring Phosphatic manufacturing facilities abroad Resolved as under: (a) To sign Confidentiality agreements with M/s. Occidental Che....
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....bsequently it was also felt desirable to include the facilities of ACRON in Russia for Due Diligence Process to know the strength and weakness of the company before going for marketing tie up for NItrophosphate and accordingly the scope of work of M/s Alutec Inc. was enhanced by adding the Due Diligence work for Acron in Russia without any extra cost. Government of India, vide letter No. 129/15/93/FDD-II Project-I dated November 10, 1994 approved the proposal to carry out the Due Diligence Process (Preparation of detailed Feasibility Report) to establish the possibility and viability of acquiring interests in a phosphatic manufacturing facility in USA/Russia at an estimated cost of Rs. 3.75 crores. Service Agreement with M/s. Alutec Inc., USA as the lead Consultant for Due Diligence Process in USA and Russia was entered on November 25, 1994. The Expert Sub-consultants were engaged directly by the Society in consultation with the Management consultant, M/s Alutec Inc. on the basis of their experience in the relevant field of mergers and acquisitions and resources of personnel associated with them for Due Diligence Process of Target Companies i....
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....ec Inc.-Target Plants in Russia USD 230,000 USD 92,000 Payment made to Expert Consultants for Target Plants in USA Consultant Fee (USD) Payment made (USD) 1. TEBCO Associates (Engg. for plants) 119000 95200 2. MRA (Engg. for Mines) 71000 56800 3. BDO Seidmen (Finance Services) -Fixed 100000 70000 -Reimbursable Expenses 15000 9000 4. The Busch Firm (Legal Services) 175000 157500 The assessee have paid cess amounting to Rs. 11,47,488.00 to RBI for above in remittances in addition to above. The following is the schedule of payment made: Name of Consultant and sub-consultant Contract in USD Amount paid up to 31.03.96 in USD in Rs. For pre feasibility and search and screen activities i) M/s Alutec Inc. USA ii) -do- 27000 65000 27000 65000 850230 2046200 For the Diligence Process in USA i) M/s Alutech Inc. USA 295250 147625 4668936 Sub-consultants i) M/s M.R.A. II) M/s. Tebco Associates iii) M/s. B.d.O. Seidman iv) M/s. Bush Firm 71000 119000 115000 175000 56800 95200 79000 157500 1792324 3004036 2492420 4965975 For ....
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....97, expenditure had been charged off to Profit and loss account of Financial Year 1995-96 (Assessment Year 1996-97), being the relevant year of decision to abandon the project: Minutes of the 117th board meeting held on 09.10.1995 alongwith Board Agenda No. 117/19 in respect of non pursuing of any investment in phosphatic manufacturing facilities in USA/Russia was produced before the authorities below. Minutes of 106th Board Meeting alongwith supplementary Agenda No. 106/4 for withdrawing from the bidding from M/s NEPA Ltd. for their newsprint project, was also produced before the authorities below. MD's approval for not pursuing the Integrated Aquaculture Project and MD's approval for not pursuing the Mushroom Project too was produced before the authorities below On a perusal of the said decisions, taken by the competent authority of the assessee that the decision not to pursue the projects was taken during Assessment Year 1996-97 and as such the amounts have been charged off to the Profit and Loss account during the relevant Assessment Year under consideration." 30. It was....
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....he technical reports etc. are basically to utilize the surplus money of about Rs. 700 crores lying in banks as deposits of the assessee society. The assessee wants to utilize these money in productive activities for producing more profits which means the self generated fund will be better utilized for producing more profits too the advantage of the assessee to increase its income and also the country ultimately. 34. In this connection a decision in the case of Empire Jute Co. Ltd. Vs. CIT (1980) 124 ITR page 1 (SC), the relevant head note is reproduced below: "There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and, it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists m....
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....ncurred to produce more increase in profits by conveniently carrying on one or more of the above projects to earn more profit. According to the ld AR the Assessing Officer has erroneously held that these projects are not related to production of Urea and so such expenses are not allowable expenditure when the fact is that the assessee has been carrying on manufacturing Urea and Ammonia and integrating the same in agricultural projects including production of Mushroom which are all for the purpose of increasing agricultural production in the country and the money cannot be kept idle so for the larger interest of the nation the assessee society had incurred these expenses which are clearly revenue in nature. 39. It was submitted by the ld AR that sugar project is nothing but exploring Bagasse, as a by-product of the sugarcane from which juice has been extracted in the manufacture of sugar; and Bagasse is sought to be utilized as raw material for production of new product. This means agricultural waste is sought to be utilized by the industry and that has been admitted by the assessee. The assessee has technologists and technocrats who are already engaged in the production of Urea an....
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....refore, the ld AR, contends that the said expense should be treated as revenue expenditure and should be allowed. On the other hand, the ld DR, supported the decision of the Assessing Officer and ld CIT(A) and does not want us to interfere with it. 42. We have heard both sides and perused the records and have gone through the case laws cited by both parties. In the light of the ratio laid in the aforesaid decisions when one has to decide whether expenditure is capital or revenue, the essential purpose for which such expenditure is incurred has to be looked into. If the expenditure is incurred for starting a new business which was not carried out by the assessee in earlier year, then such expenditure is held to be of capital in nature. In that event it would be irrelevant as to whether project really materializes or not. However, if the expenditure incurred is in respect of the same business which is already carried on by the assessee, even if it is so for the expansion of the business namely to start a new unit which is the same as the existing business and there is unity of control and common fund, then such an expense is to be treated as business expenditure. In such a case whet....
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....ed in not appreciating the fact that the phosphatic fertilizer is also a fertilizer like urea in the same line of business of the assessee and is an essential element in the agricultural production of the country. And since the expenditure incurred is in respect of same business which is already carried on by assessee and it is for the expansion of the business namely to start/ acquire new unit which is in the same line of business as the existing business and there is unity of control and common fund then such expenditure has to be treated as business expenditure. And the assessee who is in the business of production of fertilizer intended to produce more fertilizers of different variant, for ultimate purpose of promotion of agricultural production and though the said attempt was not successful and the fact that it was abandoned is of no consequence and the expenditure has to be treated as business expenditure. From the foregoing facts of all the four items, the assessee made attempt to conveniently carry on some more business activities to produce more profit which it could not and ultimately abandoned. All the payments were made to obtain consultants report, feasibility study fo....