TMI Blog2014 (9) TMI 99X X X X Extracts X X X X X X X X Extracts X X X X ..... ce 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 Act – Decided in favour of Assessee. Interest from IDBI under Investment Deposit u/s 32AB – Held that:- Held that:- Following the decision in CIT Vs. Pandian Chemicals Ltd 2003 (4) TMI 3 - SUPREME Court] - The word “derived from” income in section 80HH of the Act, must be understood as something which has direct or immediate nexus with the assessee industrial undertaking – the contention of the assessee is accepted that the interest derived from IDBI under investment deposit u/s 32AB could not be said to be income derived from the industrial undertaking and we do not see any direct 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 – Decided against Assessee. Claim of legal and professional charges incurred on various consultants for feasibility studies – Held that:- The assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction u/s 80I, the following items: Interest received from employees of ₹ 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 ₹ 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. Eq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) has dealt with the huge claim of the appellant in respect of deduction 80I very lightly and has disposed of the ground in 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 ₹ 2,15,487/- on the buildi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of manufacture. Question No. 2(ii) in respect 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 ₹ 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 candid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 preferred an appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acture 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 Karnataka. Since the setting up of the proposed unit was abandoned during the previous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hatic 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 Chemical Corporation and Ms/. Texasgulf Incorporated. (b) To enter into a dialogue with those parties whose units are not operating at present due to lack of demand. (c) To initi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 ₹ 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 in Russia and USA for the following areas: Engineering, Technology and Environmental Study, Economical, Financial and Accounting Services, Legal Services, Due Diligence Investigation of Target Plants in USA Following sub-consultants were selected for a total fee of USD 480,000 on the lowest techno-commercially acceptable basis and letters were issued on 28.01.1995 for immediate commencement of due ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt Consultants S.No. Description Payment Mode 1. Management Consultant-Alutec a) Fixed Fee (USD295250) USD 147625 b) Reimbursable Expenses USD 137850 Advance USD 27570+ ₹ 709954 (equivalents to USD 22325.15) towards arrangements made by Society during visit of M/s Alutec Inc. in India 2. M/s. Alutec 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t plants in USA/Russia. COSE has recommended that no further payment is due to Consultant/ Expert sub-consultants as there are many deficiencies in the reports submitted by them. This comprises of acquisition of Phosphatic manufacturing facilities in the USA/ Russia. (IV) Claim of ₹ 2,61,05,321/- included in legal and professional charges: ₹ 2,61,05,321.65 comprises of the following amounts debited to the P L A/c under the heading legal and professional charges and claimed as deduction. 1. Integrated Aquaculture project ₹ 1,60,000.00 2. Mushroom Project ₹ 2,83,475.00 3. Integrated Sugar cum Newsprint Project ₹ 1,71,500.00 4. Phosphatic Manufacturing Facilities (DAP) in USA? Russia (Phosphatic Fertilisers) 2,54,90,346.65 Total Rs.2,61,05,321.65 Of the total sum of ₹ 2,61,05,321.65, a sum of ₹ 1,12,9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unts have been charged off to the Profit and Loss account during the relevant Assessment Year under consideration. 30. It was submitted by the ld AR that the Society was already carrying on manufacture and sale of urea and ammonia. And since the Society had surplus in the above manufacturing operation and so desired to further the products of various chemicals by acquiring Phosphatic manufacturing facilities outside India, engaged consultants for preparatory work with Indian Embassy in Washington (USA) at a fees of USD 27,000 to M/s. Alutec Inc. Further, confidentiality agreement was made with M/s. Occidental Chemical Corpn. and M/s. Texas Gulf Incorporated. Also Society was exploring whether similar facilities could be established in South Africa and Russia. For the pre-feasibility and search and screen activities by M/s Alutech Inc., USA two contracts of USD 27,000 and USD 65,000 were entered into and the amounts paid upto 31st March 1996 for these two items were ₹ 8,50,230 and ₹ 20,46,200 respectively. There were due diligence process in the USA by M/s. Alutec Inc., USA for a contracted amount of USD 2,95,250 but amount paid was only USD 1,47,625 i.e. ₹ 46, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case . 35. From a reading of the aforesaid head note it is clear that if the advantage consists merely in facilitating the assessee's trading operation or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future if the project had materlized on ground, which is not the case on hand. 36. The above finding of the Hon'ble Supreme Court clea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee. The assessee has technologists and technocrats who are already engaged in the production of Urea and Ammonia and such technocrats are to do these activities also, because the assessee is in the cooperative sector always projected towards promotion of agricultural production on cooperative lines for encouraging cooperative sector more from the point of view of agricultural products as can be seen that agricultural products are capable of increased production by application of Urea etc. 40. Similarly for Phosphate manufacture, facilities it is phosphate fertilizer. In other words, this is another chemical fertilizer which also is used for increased production of fertilizer i.e. adding existing production of Urea by also engaging production of phosphatic fertilizer. According to the ld AR, these are technical matters, which to be appreciated and understood in the greater interest of the country and better utilization of surplus lying with the assessee for promotion of agricultural production and also in the nation building. Some of the them are successful and some are not. Since an attempt was not successful, these projects have been abandoned. 41. According to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is unity of control and common fund, then such an expense is to be treated as business expenditure. In such a case whether a new business/asset comes into existence or not would become relevant. If there is no creation of new asset, then the expenditure incurred would be of revenue nature. The Hon ble jurisdictional High Court in CIT Vs. Priya Village Roadshows Ltd. (supra) while deciding a case in which the assessee was involved in the business of running cinemas and there was a proposal before the assessee to take over a cinema theatre for conversion into as multiplexes and operation and management thereof. The assessee availed of the services of an architect and paid him ₹ 2,05,000.- as fee. However it was found that the project was not financially, technologically and technically viable and hence the assessee dropped the project. Likewise, there was a proposal to take over cinema theater for the purpose of conversion into a four-screen cinema complex. Detailed technical and financial feasibility study was carried out and building plans were prepared by a consultancy group. In this connection the assessee incurred an expenditure of ₹ 12,39,239/-. On subsequent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore profit which it could not and ultimately abandoned. All the payments were made to obtain consultants report, feasibility study for carrying on same, connected business activity but ultimately had to be abandoned for various reasons as detailed against each case. Since substantially the amounts were paid for getting technical reports, details and feasibility studies, and the amounts have been debited to the existing head legal and professional charges and qualify as revenue expenditure because the said expenditure incurred had direct nexus with the existing business carried on by the assessee it is allowable expenditure u/s 37 of the Act. 43. We find that the ld CIT(A) has not looked into the issue properly and hence passed a cryptic order without analyzing properly the business of the assessee, and therefore we set-aside the impugned order in the light of the decision of the jurisdictional High Court in the case of CIT Vs. Priya Village Roadshows Ltd. (supra) ratio and other case laws discussed above and we have no hesitation to hold that the claim of the assessee was correct and need to have been allowed u/s 37 of the Act. Therefore this ground of the appeal of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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