Vildirect: IncomeTax-caselaws-2005-VIL-361-ITAT-AHM

2005-VIL-361-ITAT-AHM

Equivalent Citation: [2005] 95 ITD 199, [2005] 95 TTJ 867

Income Tax Appellate Tribunal AHMEDABAD

IT APPEAL NO. 4996 (AHD.) OF 1995, IT APPEAL NO. 5131 (AHD.) OF 1995

Date: 25.04.2005

NIRMA INDUSTRIES LTD.

ASSISTANT COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE 2 (1).

BENCH

Member(s) : R. P. GARG., G. D. AGARWAL., R. P. TOLANI.

JUDGMENT

Per G.D. Agarwal, Accountant Member.- The Hon'ble President vide order in UO No. F 12. Jd(AT)/02, dated 8-1-2002 constituted the Special Bench for hearing the appeals in ITA No. 5131/Ahd/95 furnished by the Revenue and ITA No. 4996/Ahd/95 furnished by the assessee. These cross appeals are directed against the order of CIT(A)-VI, dated 12-10-1995.

ITA No. 4996/Ahd/95 - Assessee's Appeal-

2. Ground No.1 of the assessee's appeal reads as under:-

"In law and in the facts and circumstances of the Appellant's case, the learned CIT(A) has grossly erred in points of Law and Facts."

At the time of hearing before us, it is submitted by the learned counsel for the assessee that this ground is of general nature and needs no separate adjudication. Accordingly, the same is rejected.

3. Ground No. 2 of the assessee's appeal reads as under:-

"In law and in the facts and circumstances of the Appellant's case, the learned CIT(A) has grossly erred in confirming disallowance of Consultation Fees Rs. 2,95,000 under section 40A(12) of Income-tax Act."

3.1 The facts of the case are that the assessee made the payment of professional charges of Rs. 3,05,000 as under:-

Fee to G K Chokshi & Co.         Rs. 2,75,000

Fee to K C Patel                 Rs.   25,000

Fee to R D Shah & Co.            Rs.    5,000

                                 ------------

                                 Rs. 3,05,000

                                 ------------

3.2 It was the claim of the assessee that the above payments were partly for income-tax matters and partly for other services which are not covered by section 40A(12). The assessee had worked out the disallowance under section 40A(12) at Rs. 88,750 which was disallowed by the assessee itself while preparing computation of its income. However, the Assessing Officer considered the entire payments of Rs. 3,05,000 to be covered within ambit of section 40A(12). He, therefore, allowed only a sum of Rs. 10,000 as provided in section 40A(12) and disallowed the balance amount of Rs. 2,95,000. The same is sustained by the CIT(A). Hence, this appeal by the assessee.

3.3 At the time of hearing before us it is submitted by the learned counsel that the major payment of professional fees is to M/s. G K Chokshi & Co. amounting to Rs. 2,75,000. It was for retainer-ship which included the preparation of returns, consultancy from time-to-time in the income-tax matters, auditing and company law matters, etc. Therefore only small portion of the fees is relating to the representation of income-tax matters before the tax authorities. That in the immediately preceding years in the case of the assessee itself, i.e., for assessment years 1990-91 and 1991-92, the Tribunal held that 25% of the fees is to be disallowed being professional fees for income-tax matters. He stated that the facts being identical, the same view may be taken in the year under consideration.

The learned DR, on the other hand, relied upon the orders of the authorities below.

3.4 We have carefully considered the arguments of both the sides and perused the material placed before us. Section 40A(12) as it stood at the relevant time reads as under:-

"(12) No deduction shall be allowed in excess of ten thousand rupees for any assessment year in respect of any expenditure incurred by the assessee by way of fees or other remuneration paid to any person (other than an employee of the assessee),-

(a) for services (not being services by way of preparation of return of income) in connection with any proceeding under this Act before any income-tax authority or the Commission constituted under section 245B or a competent authority within the meaning of clause (b) of section 269A or the Appellate Tribunal or any court;

(b) for services in connection with any other proceeding before any court, being a proceeding relating to tax, penalty, interest or any other matter under this Act; and

Thus, the fees or remuneration paid for the services in connection with the proceedings under the Income-tax Act before the Income-tax authorities or any Court and also the fees for any advice in connection with the tax, penalty or interest or any other matter under this Act is covered within the ambit of section 40A(12). However, the services for preparation of return is excluded from the purview of section 40A(12). Deduction permissible under section 40A(12) is only Rs. 10,000. Therefore, the adjudication of this ground would depend upon the nature of services rendered by M/s. G K Chokshi & Co. CAs, Shri K C Patel and R D Shah & Co. The Assessing Officer has considered entire services to be within the ambit of section 40A(12) while it is contended by the assessee that only part of the services were within the ambit of section 40A(12). The Assessing Officer as well as the CIT(A) has not discussed the exact nature of services being rendered by above persons. The assessee has not produced before us the bills issued by above professionals. In view of above, we set aside the orders of the authorities below and restore the matter back to the file of the Assessing Officer. We direct him to examine the nature of fees paid by the assessee to the above persons and thereafter re-adjudicate the matter as per provisions of section 40A(12). Needless to mention that the Assessing Officer will allow an adequate opportunity of being heard to the assessee.

4. Ground No. 3 of the assessee's appeal reads as under:-

"In law and in the facts and circumstances of the Appellant's case, the learned CIT(A) has grossly erred in disallowing Soda Ash Project expenses Rs. 7,22,855."

4.1 The facts of the case are that during the year under consideration, the assessee claimed deduction for expenditure of Rs. 7,32,084 on Soda Ash Project. The details of expenditure incurred read as under:-

Consultation fee                    Rs. 4,49,700.00

Other expenses                      Rs. 2,14,736.96

Travelling expenses                 Rs.   67,646.57

                                    ---------------

                                    Rs. 7,32,083.53

                                    ---------------

4.2 The Assessing Officer found that similar expenditure was claimed by the assessee in the preceding year, i.e., assessment year 1991-92 and it was disallowed by the Assessing Officer after detailed discussion. During the course of assessment proceedings for the year under consideration, it was submitted by the assessee that the facts are similar and therefore, the assessee rely upon the same submissions as were made in assessment year 1991-92. The Assessing Officer following his own order for assessment year 1991-92 held that the expenditure towards Soda Ash Project being incurred by the assessee in connection with setting up of new Industrial Undertaking is to be amortized and deduction under section 35D would be allowed to the assessee in the year in which the Industrial Undertaking commenced production or operation. At the time of hearing before us, the learned counsel for the assessee fairly admitted that in assessment year 1991-92, the Tribunal upheld the order of the lower authorities in this respect and the assessee has accepted the same and has not filed any appeal before the Hon'ble Jurisdictional High Court. However, at the time of hearing before us, the learned counsel stated that the Special Bench is not bound by the decision of the Division Bench and therefore, it should re-adjudicate the matter. He contended that the assessee is manufacturing detergent powder and cake. Soda Ash is one of the important raw material for manufacturing of detergent powder and cake and therefore the expenditure incurred by the assessee for preparation of feasibility report for manufacturing of Soda Ash should have been allowed as a revenue expenditure. In support of this contention, he relied upon the decision of the Hon'ble Calcutta High Court in the case of Asiatic Oxygen Ltd. v. CIT [1991] 190 ITR 328.

4.3 The learned DR, on the other hand, relied upon the orders of the authorities below and he submitted that since the facts are identical, the order of the Tribunal for assessment year 1991-92 should be followed.

4.4 We have carefully considered the arguments of both the parties and perused the material placed before us. The learned counsel has heavily relied upon the decision of the Hon'ble Calcutta High Court in the case of Asiatic Oxygen Ltd. The facts in that case were that the assessee incurred expenditure in the preparation of a feasibility report in connection with a project to produce raw materials required by him and claimed it as a revenue expenditure. The Income-tax Officer allowed the expenditure in the draft assessment order but the Inspecting Assistant Commissioner in the proceedings under section 144B disallowed it and added the amount to the income of the assessee. The Tribunal upheld the addition. On a reference:

"Held, (i) that, in this case, in the draft assessment order, the amount claimed as expenditure was not disallowed by the Income-tax Officer. Therefore, the question of disallowance of the amount in question could not have been covered by the objection raised by the assessee, the direction given by the Inspecting Assistant Commissioner to enhance the assessment was not lawful."

Thus, in that case the Hon'ble Calcutta High Court has allowed relief only on the ground that the Inspecting Assistant Commissioner acting under section 144B of the Act cannot enhance the assessment. Therefore, the above decision has no relevance so far as the facts of the case under appeal before us are concerned. The learned counsel for the assessee has not given any other reason for taking a different view than the view taken by the Tribunal in assessment year 1991-92. The assessee has accepted the order of the Tribunal for assessment year 1991-92. Moreover, the Assessing Officer has already given a finding that section 35D provides for amortization of the expenditure incurred by the assessee for setting up of a new Industrial Undertaking and therefore, the assessee would be entitled to deduction under section 35D as and when Soda Ash Project is set up. In view of above, we do not find any justification to interfere with the order of the lower authorities in this respect. Ground No. 3 of the assessee's appeal is rejected.

5. Ground No. 4 of the assessee's appeal reads as under:-

"In law and in the facts and circumstances of the Appellant's case, the learned CIT(A) has grossly erred in partly confirming disallowance under section 40A(3) of Income-tax Act."

At the time of hearing before us, the learned counsel for the assessee did not press ground No. 4 of the assessee's appeal. Accordingly, the same is rejected.

6. Ground No. 5 of the assessee's appeal reads as under:-

"In law and in the facts and circumstances of the Appellant's case, the learned CIT(A) has grossly erred in confirming that the following Incomes are not entitled to deduction under section 80-I of Income-tax Act, in respect of Vatva Industrial Undertaking:-

(i)   Interest on Fixed Deposit           Rs. 24,39,469

(ii)  Interest from Nirma Ltd.            Rs. 29,45,000

{iii) Transport Rent Income               Rs. 19,03,000

(iv)  Interest on Deposit with IDBI       Rs. 48,57,833

(v)   Profit on sale of Raw material      Rs.     7,585"

6.1 We have heard both the parties and perused the material placed before us. As per section 80-I, profit and gains derived from the Industrial Undertaking, included in the gross total income of the assessee, is eligible for deduction at certain percentage as prescribed in section 80-I. The Hon'ble Apex Court has interpreted the meaning of words 'derived from' in the case of CIT v. Sterling Foods [1999] 237 ITR 579 (SC) and in the case of Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278 (SC). In the case of Sterling Foods their Lordships held as under:-

"There must be, for the application of the words 'derived from', a direct nexus between the profits and gains and the industrial undertaking. In the instant case, the nexus was not direct but only incidental. The industrial undertaking exported processed sea foods. By reason of such export, the Export Promotion Scheme applied. Thereunder, the assessee was entitled to import entitlements, which it could sell. The sale consideration therefrom could not be held to constitute a profit and gain derived from the assessee's industrial undertaking. The receipts from the sale of import entitlements could not be included in the income of the assessee for the purpose of computing the relief under section 80HH of the Income-tax Act, 1961."

In the case of Pandian Chemicals Ltd., their Lordships held as under:-

"It is clear that the words 'derived from' in section 80HH must be understood as something which has direct or immediate nexus with an industrial undertaking.

Although electricity may be required for the purposes of the Industrial undertaking, the deposit required for its supply is a step removed from the business of the industrial undertaking. The derivation of profits on the deposit made with Electricity Board cannot be said to flow directly from the industrial undertaking itself."

6.2 From the above, it is evident that there must be a direct or immediate nexus between the profit and gains and the Industrial Undertaking. Then only the profit and gains can be said to be derived from the Industrial Undertaking. The learned counsel for the assessee could not satisfy us that there was any direct nexus between the earning of interest on fixed deposits, on deposits with IDBI and on deposits with Nirma Limited, with the Industrial Undertaking. The interest was earned because the assessee made fixed deposits with Bank, IDBI and Nirma Limited. The direct or immediate source for earning of interest is the deposits made by the assessee and not the Industrial Undertaking. Though the funds which are deposited by the assessee might have been generated from the profit and gains of the Industrial Undertaking, however then the nexus between the interest income and the Industrial Undertaking is not direct or immediate. The immediate and direct source for earning the interest is the deposits made by the assessee. In view of the above, we hold that the interest on fixed deposits, interest on deposits with Nirma Limited and interest on deposits with IDBI cannot be said to be income derived from the Industrial Undertaking and therefore, the same is not qualified for computing deduction under section 80-I.

6.3 The transport rent income of Rs. 19,03,000 was received by the assessee from letting out the trucks to others. The Assessing Officer has excluded the same from profits and gains of the Industrial Undertaking. On appeal, the CIT(A) in principle, upheld the disallowance. However, he directed the Assessing Officer to consider only net income, i.e., after excluding the expenditure on repair of trucks and depreciation. Both the parties aggrieved with the order of the CIT(A) are in appeal before us. The learned counsel for the assessee fairly admitted that the transport rent income is not the income derived from the Industrial Undertaking and therefore he did not press the assessee's ground of appeal claiming the deduction under section 80-I in respect of the transport rent income. The Revenue's ground against the direction of the CIT(A) to exclude only the net income shall be dealt with separately while disposing of the Revenue's appeal. Subject to this remark, we uphold the order of the CIT(A) disallowing the claim of section 80-I with regard to transport rent income.

6.4 The Assessing Officer has also held that the profit on sale of raw material amounting to Rs. 7,585 is not the profit and gain derived from the Industrial Undertaking. The learned counsel for the assessee could not justify how the profit on sale of raw material has direct or immediate nexus with the Industrial Undertaking. Therefore, we uphold the order of the lower authorities in this respect and hold that the profit on sale of raw material is not the profit derived from the Industrial Undertaking for the purpose of section 80-I. Accordingly, ground No. 5 of the assessee's appeal is rejected.

7. Ground No. 6 of the assessee's appeal reads as under:-

"6. In law and in the facts and circumstances of the Appellant's case, the learned CIT(A) has grossly erred in rejecting the Appellant's ground that the whole of interest expenses of Rs. 85,64,785 should be reduced from the Interest Income to determine the qualifying amount for the purpose of deduction under section 80-I of Income-tax Act. He has allowed interest expenses of Rs. 35,45,000 from the Interest Income for the purpose of aforesaid claim against profits derived from Mandali Industrial Undertaking."

At the time of hearing before us, the learned counsel for the assessee did not press ground No. 6 of the assessee's appeal. Accordingly, the same is rejected.

8. Ground No. 7 of the assessee's appeal reads as under:-

"In law and in the facts and circumstances of the Appellant's case, the learned CIT(A) has grossly erred in not dealing with; Appellant's Ground No. 10(xi) that the Learned Assessing Officer has not allowed deduction under section 80-I of Income-tax Act on Bill Discounting Charges Rs. 25,15,000."

At the time of hearing before us, the learned counsel for the assessee did not press ground No. 7 of the assessee's appeal. Accordingly, the same is rejected.

9. Ground No. 8 of the assessee's appeal reads as under:-

"In law and in the facts and circumstances of the Appellant's case, the learned CIT(A) has grossly erred in confirming disallowance of deduction under section 80HH of Income-tax Act in respect of Mandali Industrial Undertaking."

9.1 The facts of the case are that the assessee had claimed that during the previous year relevant to assessment year 1990-91, it begun to manufacture articles or thing in the backward area as provided in section 80HH and therefore, it claimed deduction under section 80HH in assessment year 1990-91. The Assessing Officer while completing the assessment for assessment year 1990-91 came to the conclusion that the assessee did not begin the manufacturing or production of articles before the 1st day of April, 1990 as provided in section 80HH and therefore it is not entitled to deduction under section 80HH. In the subsequent year, the claim for deduction under section 80HH is disallowed following the finding of the Assessing Officer for assessment year 1990-91. The CIT(A) sustained the finding of the Assessing Officer following his own order for assessment year 1991-92.

9.2 At the time of hearing before us, it is pointed out by the learned counsel that this issue is considered by the Tribunal for assessment years 1990-91 and 1991-92. The Tribunal, vide order dated 21-9-1999 in ITA Nos. 2116 and 4936/Ahd/94 and others, in para 10 held as under:-

"10. The next ground of appeal is regarding deduction under sections 80HH and 80-I in respect of Mandali Unit. The authorities below refused relief to the assessee on the ground that no production was effected during the year under consideration. After hearing both the sides, we find that while deciding the issue of depreciation, we have already decided that the assessee has started manufacturing activity during the year. Therefore, the claim of deduction under selection 80HH and 80-I has to be allowed for the reasons mentioned in earlier paragraphs. This ground of appeal is allowed."

That the disallowance of deduction under section 80HH for the year under consideration was only consequential to the disallowance made by the Revenue in assessment years 1990-91 and 1991-92. Since the Tribunal in the above two years has already allowed the deduction under sections 80HH and 80-I to the assessee, we direct the Assessing Officer to allow deduction under section 80HH in the year under consideration also. Accordingly, ground No. 8 of the assessee's appeal is rejected.

10. Ground No. 9 of the assessee's appeal reads as under:-

"In law and in the facts and circumstances of the Appellant's case, the learned CIT(A) has grossly erred in holding that Appellant Company is not entitled to deduction under sections 80-I and 80HH of Income-tax Act, in respect of the following incomes against profit derived from Mandali Industrial Undertaking:-

i)   Rent                               Rs. 10,000

(ii)  Profit on sale of raw material     Rs. 30,034

(iii) Fixed Deposit Interest             Rs. 10,322

(iv)  Other Interest                     Rs.  1,085"

10.1 At the time of hearing before us, the learned counsel for the assessee did not press his claim with regard to Rent, Fixed Deposit Interest and Other Interest. Accordingly, the same are rejected. The issue relating to profit on sale of raw material is already considered in para 6 above and for the detailed discussion therein, we hold that the profit on sale of raw material is not the income derived from the Industrial Undertaking. Accordingly, ground No. 9 of the assessee's appeal is rejected.

11. Ground No. 10 of the assessee's appeal reads as under:-

"In law and in the facts and circumstances of the Appellant's case, the learned CIT(A) has grossly erred is not adjudicating upon the Appellant's Ground that deduction under sections 80-I and 80HH of Income-lax Act should be allowed on the addition in respect of withdrawal from Investment Deposit Assessment orders under section 32AB(6) of Income-tax Act."

It is submitted by the learned counsel that this ground is only alternate claim of the assessee and that this will survive only if Ground No. 1(vi) of Revenue's appeal is allowed and the addition on account of withdrawal from IDBI Account is upheld under section 32AB(6). In view of above, this ground will be considered only after adjudicating Ground No. 1(vi) of the Revenue's appeal.

12. Ground No. 11 of the assessee's appeal reads as under:-

"In law and in the facts and circumstances of the Appellant's case, the learned CIT(A) has grossly erred in confirming withdrawal of interest under section 244 of Income-tax Act."

Ground No. 11 of the assessee's appeal was not pressed at the time of hearing. Accordingly, the same is rejected.

13. Ground No. 12 of the assessee's appeal reads as under:-

"Your Appellant reserves the right to add, alter, amend or vary all or any of the above Ground of Appeal as may be decided from time-to-time."

Ground No. 12 of the assessee's appeal is of general nature and which was not pressed at the time of hearing. Accordingly, the same is rejected.

ITA No. 5131/Ahd/95 - Revenue's Appeal:-

14. In this appeal by the Revenue, the following grounds are raised:-

1. The ld. CIT(A) has erred in law and on facts in-

(i) deleting the disallowance made under Rule 6B

(ii) deleting the disallowance out of interest

(iii) deleting the disallowance made under section 4OA(2)(b)

(iv) directing to allow deduction under section 80-I as guide line laid down in the order

(v) directing to allow deduction under sections 80HH and 80 separately

(vi) deleting the addition on account of withdrawal from IDA A/c under section 32AB(6).

15. With regard to the disallowance under rule 6B, it was pointed out by the learned counsel for the assessee that this issue is covered in favour of the assessee by the decision of the Tribunal in assessee's own case for assessment years 1990-91 and 1991-92. He also submitted that a specific statement was made before the Assessing Officer that the presentation articles did not bear the logo of the assessee company and therefore, it does not have any evidentiary value.

15.1 The learned DR fairly accepted that the facts are identical to the earlier years and the CIT(A) has allowed the relief following his own order in assessment year 1991-92. We find that the Tribunal in assessment year 1991-92 sustained the order of the CIT(A) holding that no advertising element as there was no logo on the said gifts articles. While taking this view, the Tribunal relied upon the decision of the Hon'ble Mumbai High Court in the case of CIT v. Alana Sons (P.)

Ltd. [1995] 216 ITR 690. Since the facts in the year under consideration are identical to assessment year 1991-92, the CIT(A) rightly followed the order of his predecessor for assessment year 1991-92 which is I sustained by the Tribunal. In view of above, we do not find any merit in Ground No. 1(i) of the Revenue's appeal. The same is rejected.

16. The next ground is against the deletion of the disallowance of interest. The Assessing Officer found that the assessee has withdrawn money for payment of income-tax from the bank over draft. He was of the opinion that the money borrowed for the payment of income-lax was not borrowed for the purpose of business and therefore, he disallowed the proportionate interest amounting to Rs. 2,46,575. On appeal, the CIT(A) deleted the same following his own order in the case of Norma Detergent Ltd. for assessment year 1992-93.

16.1 At the time of hearing before us, it was brought to our knowledge that the Revenue had challenged the order of the CIT(A) in the case of Norma Detergent Ltd. before the Tribunal, and the Tribunal upheld the order of the CIT(A) and dismissed the Revenue's appeal on this point.

16.2 We find that the Tribunal considered this issue in the case of Norma Detergents Ltd. vide. The Tribunal found that the daily collection of the assessee are deposited in the over draft account and if the collection of the day of the withdrawal and the subsequent day which is deposited in the same account is considered, the same would be sufficient for withdrawal for payment of income-tax. It was pointed out by the learned counsel that the facts are identical in the case under consideration before us. The entire income of the assessee which is Rs. 14.69 crores as per the income returned is deposited in the same bank account. Out of such income, which is deposited in the same bank account, the withdrawal for payment of income-tax was made. The withdrawal is much less than the income deposited during the year under consideration. He also pointed out that the above income is net returned income after various deductions under section 80-I and depreciation, etc., and therefore, cash income is even more. That the withdrawal for income-tax is much less than the above income deposited in the bank account. The above statement made by the learned counsel is not controverted before us. Since the assessee has deposited its entire income in the same bank account from where the withdrawal for payment of income-tax is made, therefore, we accept the assessee's claim that the withdrawal for payment of tax was out of the income generated during the year under consideration and not out of the borrowed funds. Accordingly, we uphold the order of the CIT(A) on this point and reject the Revenue's ground.

17. The next ground of Revenue's appeal is against the deletion of the disallowance made under section 40A(2)(b). The facts of the case are that during the year under consideration, the assessee company claimed an expenditure of Rs. 40 lakhs for payment to Nirma Management Services as service charges. In assessment year 1991-92, the assessee paid service charges of Rs. 13 lakhs to Nirma Management Service. The Assessing Officer considered the same to be excessive and allowed only Rs. 9 lakhs as reasonable and disallowed the balance sum of Rs. 4 lakhs. In the year under consideration, the Assessing Officer following his own order for assessment year 1991-92, held the service charges of Rs. 14 lakhs to be reasonable. He therefore disallowed the sum of Rs. 26 lakhs. On appeal, the CIT(A) deleted the disallowance following his own order for assessment year 1991-92.

17.1 At the time of hearing before us, while the learned DR relied upon the order of the Assessing Officer; the argument of the learned counsel was two fold:

(i) That Nirma Management Services is not a person covered with the meaning of 'related person' as given in section 40A(2)(b).

(ii) That in assessment year 1991-92, the Tribunal upheld the order of the CIT(A) and dismissed the Revenue's appeal.

17.2 We have carefully considered the arguments of both the sides and perused the material placed before us. Section 40A(2) reads as under:-

"(2)(a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the [Assessing] Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction.

(b) The persons referred to in clause (a) are the following, namely:-

(i)   where the assessee is an individual  any relative of the assessee;

(ii)  where the assessee is a company,     any director of the company,

      firm, association of persons or      partner of the firm, or

      Hindu undivided family               member of the association or

                                           family, or any relative or such

                                           director, partner or member;

(iii) any individual who has a substantial interest in the business or profession of the assessee, or any relative of such individual;

(iv) a company, firm, association of persons or Hindu undivided family having a substantial interest in the business or profession of the assessee or any director, partner or member of such company, firm, association or family, or any relative of such director, partner or member;

(v) a company, firm, association of persons or Hindu undivided family of which a director, partner or member, as the case may be, has a substantial interest in the business or profession of the assessee; or any director, partner or member of such company, firm, association or family or any relative of such director, partner or member;

(vi) any person who carries on a business or profession,-

(A) where the assessee being an individual, or any relative of such assessee, has a substantial interest in the business or profession of that person; or

(B) where the assessee being a company, firm, association of persons or Hindu undivided family, or any director of such company, partner of such firm or member of the association or family, or any relative of such director, partner or member, has a substantial interest in the business or profession of that person.

Explanation.-For the purposes of this sub-section, a person shall be deemed to have a substantial interest in a business or profession, if,-

(a) in a case where the business or profession is carried on by a company, such person is, at any time during the previous year, the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) carrying not less than twenty percent of the voting power; and

(b) in any other case, such person is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the profits of such business or profession."

17.3 The Assessing Officer held Nirma Management Services to be a concern covered within the meaning of 'related concern' as provided in clause (b) of section 40A(2). However, he has not specified under which sub-clauses of clause (b) of section 40A(2) Nirma Management Services falls? The assessee had claimed that Nirma Management Services is not covered within the persons specified in section 40A(2)(b). However, neither the name of the Directors nor the details of shareholdings of assessee or Nirma Management Services have been given so as to arrive at the finding whether Nirma Management Services falls within the persons specified in section 40A(2)(b). Similarly the nature of services rendered by Nirma Management Services has not been given to us. No justification has been given for increase of service charges from Rs. 13 lakhs paid in the last year to Rs. 40 lakhs in the year under consideration. The Assessing Officer has also not examined the facts in detail. He made the disallowance following his own order for assessment year 1991-92. The CIT(A) also did not examine the facts in the year under consideration but he deleted the disallowance following his own order for assessment year 1991-92. The CIT(A) even did not bother to see that last year the service charges were only Rs. 13 lakhs while it has increased to Rs. 40 lakhs in the year under consideration. Reasons for such increase is not given at any stage. In view of above, we deem it proper to set aside the order of the authorities below and restore the matter back to the file of the Assessing Officer. We direct him to examine (i) whether Nirma Management Services falls within the category of persons specified under section 40A(2)(b); and (ii) The nature of services rendered by Nirma Management Services and then arrive at the conclusion whether the payment of service charges is excessive or unreasonable having regard to the fair market value of such services rendered to the assessee. (iii) The reasons for increase of service charges from Rs. 13 lakhs last year to Rs. 40 lakhs in the year under consideration. After examining above facts, he will re-adjudicate the matter in accordance with law. Needless to mention that the Assessing Officer will allow adequate opportunity of being heard to the assessee.

18. The next ground of Revenue's appeal is against the direction of the CIT(A) to allow deduction under section 80-I on certain incomes. The facts of the case are that the assessee is entitled to deduction under section 80-I in its Vatva Industrial Undertaking and also Mandali Unit, The Assessing Officer while computing the deduction under section 80-I excluded certain incomes. The CIT(A) directed the Assessing Officer to include the following items in the profit of the Industrial Undertaking while computing the deduction under section 80-I:-

Vatva Industrial Undertaking:

(a) Late payment interest received from debtors    Rs. 1,25,23,324

(b) Insurance Refund                               Rs.      75,951

(c) Transport rent income                          Rs.   19,03,000

(d) Sale of Bardana                                Rs.   22,40,750

(e) Sale of Waste material                         Rs.   16,25,646

Mandali Unit:

(a) Late payment interest received from Debtors    Rs.   53,67,140

(b) Bardana Sale                                   Rs.   49,92,405

(c) Waste Sales                                    Rs.    5,78,198

18.1 We have heard both the parties with regard to each of above items and our finding in this regard is as under:-

Regarding late payment interest received from Debtors:

18.2 The learned DR stated that this issue is squarely covered in favour of the Revenue by the decision of the Tribunal Ahmedabad Bench 'A' in the case of Dy. CIT v. Mira Industries [2003] 87 ITD 475 and also the decision of the Hon'ble Apex Court in the case of Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278. The learned counsel for the assessee vehemently contended that the decision of the Tribunal Ahmedabad Bench in the case of Mira Industries needs reconsideration. He stated that the ITAT Ahmedabad Benches have taken the contrary view in the following cases of the assessee OR Group concern:

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Sr. No.  Name of Assessee                 Asst. Year      IT Appeal No.

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1.       M/s Nirma Pvt. Ltd.                 89-90      4576/A/92 & 4567A/92

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2.       Nirma Chemical Works (P.) Ltd.     90-91      2116 and 4936/A/94

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3.                -do-                      91-92       2443 & 5156/A/94

         (Assessee)

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4.       ACIT vs Harsiddh Sp Family Trust,  88-89&      2440/A/93 and 2188/A/

         Ahmedabad                          89-90       94 and 2441/A/94

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5.       Norma Detergents (P.) Ltd.         89-90       4574/A/92 and 4517/A/92

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6.                -do-                      90-91       2174 & 2439/A/94

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7.                -do-                      91-92       5172 & 5857/A/94

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8.                -do-                      92-93       4995 & 4843/A/95

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18.3 He also pointed out that the Hon'ble Jurisdictional High Court rejected the Department's Tax Appeal in the case of Nirma Pvt. Ltd. and Harsiddh Specific Family Trust. While the Revenue had not challenged this ground before the High Court in the case of Norma Detergents (P.) Ltd. He further submitted that in the case of Nirma Specific Family Trust and K Kacharadas Patel Specific Family Trust, the Hon'ble Jurisdictional High Court in IT Reference Nos. 61, 59 and 59A of 1993 held that the excess of recoveries of advertisement expenses is eligible for deduction under section 80-I. The learned counsel for the assessee also relied upon the decision of the Hon'ble Jurisdictional High Court in the case of Mayank Electro Ltd., wherein their Lordships rejected the Department's appeals holding that no substantial question of law arises against the order of the Tribunal. He also relied upon the decision of the Hon'ble Madras High Court in the case of CIT v. Madras Motors Ltd. [2002] 257 ITR 60, wherein their Lordships held the interest received on bank deposit to be not eligible for deduction under section 80-I but the interest received from the customers on belated payment to be eligible for deduction under section 80-I. The learned counsel has further contended that the Tribunal is bound to follow the solidary decision of any other High Court when there is no decision of the jurisdictional High Court. In support of this contention, he has relied upon the decision of the Hon'ble Jurisdictional High Court in the case of CIT v. Maganlal Mohanlal Panchal (HUF) [1994] 210 ITR 580 (Guj.).

18.4 We have carefully considered the arguments of both the sides and perused the material placed before us. While disposing of Ground No. 5 of assessee's appeal, we have discussed at length that for the purpose of 80-I, the income which has direct or immediate nexus with the Industrial Undertaking only is eligible for computing deduction as provided in that section. This conclusion is reached on the basis of the decision of the Hon'ble Apex Court in the cases of Sterling Foods and Pandian Chemicals Ltd. Therefore, the limited issue which needs examination is whether the interest from debtors for late payment of sale consideration has direct or immediate nexus with the Industrial Undertaking. We find that the Tribunal Ahmedabad Bench has considered this issue in the case of Mira Industries. In that case the Tribunal considered various decisions of Hon'ble Apex Court, High Courts and Tribunal and thereafter in para 55(vii) has recorded the finding with regard to the nature of interest recovered from the debtors for late payment of sale price. The same is reproduced hereunder for ready Reference:

"55(vii) Interest recovered from debtors for late payment for the sale price- Interest, in general terms, is the return or compensation for the use or retention by one person of a sum of money belonging to or owed to another- Halsbury's Laws. It is payment for commercial compensation for non-payment of the debt on time. When a sale is effected the money consideration thereof becomes due and payable and interest starts running as per the terms stipulated. Such interest is not a consideration of sale of goods of the industrial undertaking, even though it has its origin in sale. Had sale of goods manufactured been not made, there would not be debt and consequently no interest, but the immediate source is the debt owed which takes it away a degree away from the industrial undertaking. In the light of the Privy Council in the case of Raja Bahadur Kamakhaya Narayan Singh the immediate and effective source would be the debt itself. In Govind Choudhury & Sons' case the interest paid is held to be an accretion to assessee's receipts and attributable to and incidental to the business carried by him and not de hors the business carried on by the assessee. It was therefore held to be not income from other sources. This is not the case near to the case of Cambay Electric Supply Industrial Co. Ltd. The question whether interest was derived from the execution of contracts was not there before the Supreme Court in this case. See also in this connection two decisions of the Supreme Court relating to levy of excise duty in the case of Government of India v. Madras Rubber Factory AIR 1995 SCW 2654 and in the case of VST Industries Ltd. v. Collector Central Excise, Hyderabad, AIR 1998 (SC) 1441 the observations wherein clearly show that when goods are sold on credit arid interest is received that does hot form part of the price on which excise duty is payable."

18.5 In the above case the Tribunal has clearly held that the direct and immediate source of interest is debt owed by the customer which is a degree away from the Industrial Undertaking. The sale consideration has a direct nexus with the Industrial Undertaking but not the interest which is payable on the above sale consideration if it is not paid within the stipulated time.

18.6 We find that in the case of Pandian Chemicals Ltd.'s, the Hon'ble Apex Court has applied the decision of Privy Council in the case of CIT v. Raja Bahadur Kamakhaya Narayan Singh [1948] 16 ITR 325. In that case the dispute was whether the interest on the arrears of rent can be said to be agricultural income. It was contended by the assessee that the interest has its origin in the tenancy of the agricultural land because if there had been no tenency, there would have been no arrears of rent and if there had been no arrears of rent, there would have been no interest. However, the Privy Council did not accept the assessee's contention and held that-

"... the interest clearly is not rent. Rent is a technical conception, its leading characteristic being that it is a payment in money or in kind by one person to another in respect of the grant of a right to use land. Interest payable by statute on rent in arrear is not such a payment. It is not part of the rent, nor is it an accretion to it, though it is received in respect of it.

Equally cleanly the interest on rent is revenue, but in their Lordships' opinion it is not revenue derived from land. It is no doubt true that without the obligation to pay rent- and rent is obviously derived from land- there could be no arrears of rent and without arrears of rent there would be no interest. But the affirmative proposition that interest is derived from land does not emerges from this series of facts. All that emerges is that as regards the interest, land rent and non-payment of rent stand together as causae sine quibus non. The source from which the interest is derived has not thereby been ascertained.

The word 'derived' is not a term of art. Its use in the definition indeed demands an enquiry into the genealogy of the product. But the enquiry should stop as soon as the effective source is discovered. In the genealogical tree of the interest land indeed appears in the second degree, but the immediate and effective source is rent, which has suffered the accident of non-payment. And rent is not land within the meaning of the definition."

18.7 In the case under appeal before us, the assessee sold detergent powder/cake to various customers. The sale proceeds has a direct/immediate nexus with the Industrial Undertaking. If the amount of sale proceeds is not paid within the credit period allowed, the buyer has to pay interest on such delayed payment. The interest is not arising because of manufacturing of detergent powder/cake by the Industrial Undertaking but because the sale proceeds remained unpaid for a Stipulated period. The interest cannot be said to flow directly from the Industrial Undertaking. In the case CIT v. Raja Bahadur Kamakhaya Narayan Singh [1948] 16 ITR 325 (PC) a similar dispute arose before the Privy Council, In that case the assessee received the interest on the arrears of rent. It was the claim of the assessee that the character of the interest is similar to that of the rent of the agricultural land both should be treated as income derived from agricultural land. Similar is the case under appeal before us. The assessee has sold the product of the industrial Undertaking and since the sale proceeds was not paid within time, on the arrears of sale proceeds, interest is received. The Hon'ble Privy Council denied the assessee's claim and it was stated that in the genealogical tree, the interest is received from rent and the land appears in the second degree. Identical is the situation herein. The immediate and effective source of interest is the sale proceeds which remained unpaid for a stipulated credit period. The industrial undertaking comes in the second degree. Therefore, the above decision of the Hon'ble Privy Council would be squarely applicable with regard to interest on the arrears of sale proceeds. In the case of Sterling Food, the assessee was engaged in processing of prawns and other sea food, which was exported.

On the export of such processed seafood, the assessee received import entitlement, which was sold by it. However, the Hon'ble Apex Court held that the sale proceeds of the import entitlement is not the income derived from the Industrial Undertaking, even though the import entitlement was received by the assessee on the export of goods produced by the assessee in the industrial undertaking. In the case of Pandian Chemicals Ltd., the assessee was required to deposit the money with the Electricity Board for supply of electricity. The Hon'ble Apex Court agreed that the deposit was made with the Electricity Board for supply of electricity for running of the Industrial Undertaking. Still, their Lordships held that the interest cannot be said to flow directly from the Industrial Undertaking. From the above decisions, it is evident that the words 'derived from' are to be given a narrow meaning. 'Derived from' means something which has a direct or immediate nexus with the Industrial Undertaking. The sale proceed has a direct nexus with the Industrial Undertaking, but not the interest on the arrears of sale proceeds. The interest was paid by the buyer only because he did not make the payment of sale proceeds within time.

18.8 The learned counsel for the assessee has relied upon the decision of the Tribunal in assessee's own case for assessment years 1990-91 and 1991-92. However, we find that the above decision was delivered by the Tribunal on 21-9-1999. Thus, on the above date the decision of the Hon'ble Apex Court in the case of Pandian Chemicals Ltd. was not available. Similar is the position with regard to the Tribunal decisions in the cases of Nirma Pvt. Ltd., Harsiddh Specific Family Trust and Norma Detergents (P.) Ltd. All these decisions were delivered before the decision of the Hon'ble Apex Court in the case of Pandian Chemicals Ltd. The learned counsel for the assessee has also relied upon the rejection of Department's Tax Appeals, by the Hon'ble Jurisdictional High Court in the cases of Nirma (P.) Ltd. and also Harsiddh Specific Family Trust. We find that in the case of Nirma (P.) Ltd. the Revenue has preferred the appeal raising five grounds which included allowability of deduction under sections 80HH and 80-I on interest from trade debtors. However, the Hon'ble Jurisdictional High Court admitted the appeal only on one ground, i.e., "whether the Appellate Tribunal is right in law and on facts in directing to allow separate relief under sections 80HH and 80-I of the Act". Thus, there is no decision by the Hon'ble Jurisdictional High Court on the allowability of deduction under sections 80HH and 80-I on interest from trade debtors. Similarly the Tax Appeal of Harsiddh Specific Family Trust was dismissed by the Hon'ble Jurisdictional High Court holding that no question of law much less a substancial question of law arises out of the impugned order of the Tribunal.

18.9 The question therefore is what is the effect of dismissal of a Tax Appeal by the High Court holding that no substantial question of law arises? Section 260A prescribes the provision for an. appeal to the High Court. Sub-sections (1) to (5) of section 260A read as under:-

"260A. (1) An appeal shall lie to the High Court from every order passed in appeal by the Appellate Tribunal, if the High Court is satisfied that the case involves a substantial question of law.

(2) [The Chief Commissioner or the Commissioner or an assessee aggrieved by any order passed by the Appellate Tribunal may file an appeal to the High Court and such appeal under this sub-section shall be-]

(a) filed within one hundred and twenty days from the date on which the order appealed against is [received by the assessee or the Chief Commissioner or Commissioner]

(3) Where the High Court is satisfied that a substancial question of law is involved in any case, it shall formulate that question.

(4) The appeal shall be heard only on the question so formulated, and the respondents shall, at the hearing of the appeal; be allowed to argue that the case does not involve such question:

Provided that nothing in this sub-section shall be deemed to take away or abridge the power of the court to hear, for reasons to be recorded, the appeal on any other substantial question of law not formulated by it, if it is satisfied that the case involves such question.

(5) The High Court shall decide the question of law so formulated and deliver such judgment thereon containing the grounds on which such decision is founded and may award such cost as it deems fit."

From the above, it is clear that under sub-section (1) an appeal shall lie to the High Court from every order passed in appeal by the Appellate Tribunal, only if the High Court is satisfied that the case involves a substantial question of law. Sub-section (2) of the said section permits a party aggrieved by any order passed by the Appellate Tribunal to file an appeal to the High Court and it has to be in the form of Memorandum of appeal precisely stating therein the substantial question of law involved. Sub-section (3) provides that where the High Court is satisfied that a substantial question of law is involved in any case, it shall formulate that question and the appeal shall thereafter as provided in sub-section (4) be heard on the question so formulated and at the time of hearing the respondent is also permitted to argue on the appeal that the case docs not involve such question without taking away or to abridge the power of the High Court to hear, for reasons to be recorded, the appeal on any other substancial question of law not formulated by it. Sub-section (5) of this section further provides that the High Court shall decide the question of law so formulated and deliver such judgment thereon containing the grounds on which such decision is founded and may award such cost as it deems fit. From these provisions, it is clear that an appeal lies to the High Court only where a substantial question of law is involved. In an appeal filed by the party, when the High Court dismisses the same by stating that no substantial question of law arises, it cannot, in our opinion, be said that it was a decision of the High Court on merits. What the High Court can be said to have observed is that they declined to entertain/admit the appeal in the absence of any substantial question of law, which is pre-requisite for assuming the jurisdiction of the High Court. If there is no substantial question of law, in the opinion of the High Court, then by virtue of provision of sub-section (1) of section 260A, there lies no appeal. Therefore, when the High Court dismisses an appeal stating that no substantial question of law arises it only mean that the High Court has declined to entertain/admit the appeal in the absence of any substantial question of law. There is no decision on merits by the Jurisdictional High Court on the issues raised by the parties.

18.10 In the case of K. Kacharadas Patel Specific Family Trust, the Hon'ble Jurisdictional High Court in IT Reference Nos. 59 and 59A of 1993, upheld the order of the Tribunal allowing deduction under section 80-I on the amount relating to excess recovery on account of advertisement expenditure. In this case, the Hon'ble Jurisdictional High Court held as under:

"9. As can be seen from the impugned order of the Tribunal, the Tribunal has taken into consideration terms of the agreement entered into by the assessee with the consignee distributors and recorded a finding to the effect that the recoveries made from consignee distributors were directly related to net sales of the detergent powder made by the consignee distributors. The Tribunal has also taken into consideration the converse situation, namely, in a case where if the expenditure had exceeded the recoveries, whether the difference arising on excess of expenditure over recoveries would have been allowed as business expenditure referable to the activities of the Industrial undertaking, and answered the question by holding that it had direct nexus with the activities of the Industrial Undertaking.

10. In the light of the aforesaid findings recorded by the Tribunal, it is not possible to accept the contention raised on behalf of the applicant revenue that the activity amounted to a different business altogether. Once it is found by the Tribunal that the recovery was directly linked with the sales of the detergent powder, it is not possible to find any infirmity in the process of reasoning adopted by the Tribunal for holding that the excess amount of recoveries made towards advertisements issued by the assessee would be a permissible item to be considered for computing deduction under section 80-I of the Act."

18.11 From the above it is evident that the Tribunal has recorded the finding of fact that the excess of expenditure over the recoveries had direct nexus with the activities of the Industrial Undertaking. The Hon'ble Jurisdictional High Court has decided the issue in the light of the aforesaid finding of fact recorded by the Tribunal. Therefore, the above decisions would be of no help to the assessee to adjudicate whether the interest from the debtors on the delayed payment of sale proceeds has a direct nexus with the Industrial Undertaking or not.

18.12 The learned counsel has also relied upon the decision of Hon'ble Madras High Court in the case of Madras Motors Ltd. However, we find that in the above decision also the decision of Hon'ble Apex Court in the case of Pandian Chemicals Ltd. was not considered. From the decision of Hon'ble Privy Council in the case of Raja Bahadur Kamakhaya Narayan Singh, decision of Hon'ble Apex Court in the cases of Pandian Chemicals Ltd. and Sterling Foods, it is clear that an income which has direct and immediate nexus with the Industrial Undertaking only is eligible for deduction under section 80-I/80HH. After detailed discussion, we have held in para 18.7 that interest from debtors, does not have either direct or immediate nexus with the Industrial Undertaking. Therefore, we hold that the interest on the delayed payment of sale proceeds cannot be said to be the income derived from the Industrial Undertaking. We therefore, reverse the order of the CIT(A) on this point and restore that of the Assessing Officer.

Regarding Insurance Refund:

19. At the time of hearing before us, both the parties fairly agreed that in fact the finding of the CIT(A) is that the assessee is not entitled to deduction under section 80-I on the Insurance Refund. However, the CIT(A) has found that the actual expenditure incurred by the assessee on the repairs of the trucks was much more than the Insurance Refund and therefore he directed the Assessing Officer not to exclude the Insurance Refund from the profit and gains of business.

19.1 After considering the arguments of both the parties, we entirely agree with the reasoning of the CIT(A). The vehicles of the assessee met with an accident and therefore the claim was made with the Insurance Authorities. The assessee received certain Insurance claim and has also incurred expenditure on the repairs of vehicles. The expenditure incurred by the assessee on the repairs of vehicles is admittedly more than the Insurance Refund and therefore in fact there was no income to the assessee in the nature of Refund from Insurance. Therefore the question of excluding any amount from the profit and gains of business does not arise. Accordingly, we uphold the direction of the CIT(A) in this respect.

Regarding Transport rent income:

20. With regard to the transport rent income also the finding of the CIT(A) is that the assessee is not entitled for deduction under section 80-I on the transport rent income but he directed the Assessing Officer to exclude depreciation of Rs. 10,87,973 from the above income of Rs. 19,03,000 and thereafter he held that the assessee is not entitled for deduction under section 80-I on Rs. 8,15,027 (Rs. 19,03,000 - Rs. 10,87,973).

21. After considering the arguments of both the sides, we entirely agree with this finding of the CIT(A). The transport rent income is not income derived from the Industrial Undertaking. However, the net income from transport is to be excluded from the profit and gains of business. The net income can be worked out only after reducing the depreciation claimed on the trucks by the assessee. The CIT(A) has rightly calculated the net income from transport business at Rs. 8,15,027. We therefore uphold the order of the CIT(A) on this point.

Regarding Sale of Bardana and Sale of Waste material:

22. At the time of hearing before us, it is submitted by the learned counsel that sale of Bardana and Waste material has generated during the course of production of the Industrial Undertaking. Therefore, it has direct and immediate nexus with the Industrial Undertaking. The learned DR could not controvert the above statement made by the learned' counsel for the assessee. Moreover it was pointed out by the learned counsel for the assessee that the Hon'ble Jurisdictional High Court has decided identical issue in favour of the assessee in the case of Dy. CIT v. Harjivandas Juthabhai Zaveri vide. Since the Bardana Waste material has generated during the course of production of the Industrial Undertaking, we hold that it has a direct and immediate nexus with the Industrial Undertaking and therefore entitled to deduction under section 80HH/80-I. Accordingly, we uphold the order of the CIT(A) in this respect.

Mandali Unit:

23. For the detailed discussion in para 18 above, we reverse finding of the CIT(A) for allowing deduction under section 80-I in respect of late payment interest received from the debtors in Mandali Unit. However, for the detailed discussion in para 22 above, we uphold the finding of the CIT(A) for allowing deduction under section 80-I in respect of sale of Bardana and Waste material in Mandali Unit.

24. The next ground of Revenue's appeal is against the deletion of an addition of Rs. 1,30,80,000 made by the Assessing Officer on account of withdrawal from Investment Deposit Account under section 32AB(6). The facts of the case are that the assessee was claiming deduction under section 32AB of the Act by depositing amounts in the Investment Deposit Account with IDBI as per the provisions of section 32AB(1)(a). The balance of the assessee in the Investment Deposit Account as on 1-4-1991 was Rs. 565 lakhs. Out of the same, amount of Rs. 42.35 lakhs was withdrawn by the assessee on 11-4-1991 and amount of Rs. 88.48 lakhs was withdrawn by the assessee on 14-11-1991. Out of the withdrawal of Rs. 42.35 lakhs, amount of Rs. 30 lakhs was used by the assessee for repayment of term loan against land, building and equipment and amount of Rs. 12.35 lakhs was used for repayment of term loan contracted with State Bank of India against trucks and tankers. Out of the other withdrawal of Rs. 88.48 lakhs, amount of Rs. 15 lakhs was used for repayment of term loan contracted with State Bank of India against land, building, plant and machinery, amount of Rs. 24.7 lakhs was used for repayment of loan contracted with State Bank of India against trucks and tankers and amount of Rs. 48.78 lakhs was used for repayment of loan contracted with Kalupur Commercial Co-op. Bank Ltd. against trucks and tankers. The Assessing Officer found that the assessee utilised the amount withdrawn from the Investment Deposit Account for the purpose of making repayment of loans which were not term loans utilised for the purchase of new ship, new aircraft, new plant or new machinery. Therefore, the Assessing Officer treated the above withdrawal as income of the assessee under section 32AB(6) of the Act. On appeal, the CIT(A) deleted the addition following his own order in the case of Norma Detergents Ltd. for assessment year 1992-93. The Revenue aggrieved with the order of the CIT(A) is in appeal before us.

25. At the time of hearing before us, it was vehementhly contended by the learned DR that as per section 32AB(1) deduction is permissible (i) if the amount is utilised for purchase of new ship, new aircraft, new plant or new machinery; or (ii) if the amount is deposited in the Deposit Account maintained by the assessee with the Development Bank. That when the above amount deposited with the Development Bank is withdrawn, the same can be utilised for repayment of term loan taken from the Bank. It is contended by the learned DR that such term loan which is repaid by the assessee should have been taken by the assessee for the purchase of new ship, new aircraft, new plant or new machinery. That sub-section (4) of section 32AB provides that no deduction under sub-section (1) shall be allowed in respect of an amount utilised for purchase of any road transport vehicle. Therefore, if an assessee purchases trucks, the same will not be considered to be eligible for deduction under section 32AB(1). The amount withdrawn from the Deposit Account has been utilised by the assessee mainly for the repayment of loans which were taken for the purchase of trucks. Therefore, the amount has been utilised in violation of section 32AB(4). The assessee cannot enlarge the scope of section 32AB(1) just by depositing the same in the Deposit Account. He further submitted that section 32AB replaced section 32A and even section 32A which had provided certain exemptions for purchase of new plant and machinery, the expenditure on purchase of road transport vehicle was not entitled to deduction. He contended that the assessee purchased road transport vehicle by borrowing the money from the bank, deposited the money in Deposit Account with Development Bank and claimed deduction under section 32AB, thereafter withdrew the money from the Deposit Account of the Development Bank and repaid the loans to the State Bank/Kalupur Commercial Co-op Bank Ltd. Thus, in fact the amount has been utilised for purchase of road transport vehicle for which deduction under section 32AB is not permissible. He therefore submitted that the Assessing Officer rightly made the addition as per section 32AB(6).

26. The learned counsel for the assessee submitted that there is separate requirement for claiming deduction under section 32AB and for utilization of the withdrawal from the Deposit Account under section 32AB. If the assessee fulfils the conditions of section 32AB(1), he will get the deduction in the year of deposit. When the money is withdrawn from the Deposit Account, the assessee has to fulfil the conditions as provided in section 32AB(6) read with the Scheme framed by the Government in this regard. If the assessee fails to utilize the amount as per the Scheme, the amount can be added to the income of the assessee in the year of withdrawal. However, in the year of withdrawal the assessee need not satisfy the conditions provided in section 32AB(1).

27. We have carefully considered the arguments of both the parties and perused the material placed before us. Sections 32AB(1), (4) and (6) which are relevant for the purpose of disposal of this ground of appeal, read as under:

"32AB. (1) Subject to the other provisions of this section, where an assessee, whose total income includes income chargeable to tax under the head "Profits and gains of business or profession", has, out of such income,-

(a) deposited any amount in an account (hereafter in this section referred to as deposit account) maintained by him with the Development Bank before the expiry of six months from the end of the previous year or before furnishing the return of his income, whichever is earlier; or

(b) utilised any amount during the previous year for the purchase of any new ship, new aircraft, new machinery or plant, without depositing any amount in the deposit account under clause (a),

in accordance with, and for the purposes specified in, a scheme 38 (hereinafter in this section referred to as the scheme) to be framed by the Central Government, or if the assessee is carrying on the business of growing and manufacturing tea in India, to be approved in this behalf by the Tea Board, the assessee shall be allowed a deduction 39 [(such deduction being allowed before the loss, if any, brought forward from earlier years is set off under section 72)] of-

(i) a sum equal to the amount, or the aggregate of the amounts, so deposited and any amount so utilised; or

(ii) a sum equal to twenty per cent of the profits of 40[***] business or profession as computed in the accounts of the assessee audited in accordance with sub-section (5), whichever is less:

41 [Provided that where such assessee is a firm, or any association of persons or any body of individuals, the deduction under this section shall not be allowed in the computation of the income of any partner, or as the case may be, any member of such firm, association of persons or body of individuals:]

42 [Provided further that no such deduction shall be allowed in relation to the assessment year commencing on the 1st day of April, 1991, or any subsequent assessment year.]

(4) No deduction under sub-section (1) shall be allowed in respect of any amount utilised for the purchase of-

(a) any machinery or plant to be installed in any office premises or residential accommodation, including any accommodation in the nature of a guest-house;

(b) any office appliances (not being computers);

(d) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head 'profits and gains of business or profession' of any one previous year;

51[(e) any new machinery or plant to be installed in an industrial undertaking, other than a small-scale industrial undertaking, as defined in section 80HHA, for the purposes of business of construction, manufacture or production of any article or thing specified in the list in the Eleventh Schedule.]

(6) Where any amount, standing to the credit of the assessee in the deposit account, released during any previous year by the Development Bank for being utilised by the assessee for the purposes specified in the scheme or at the closure of the account 38[[in circumstances other than the circumstances specified in clauses (b), (c) and (e) of sub-section (5A)]], is not utilised in accordance with 59[, and within the time specified in,] the scheme, either wholly or in part, 60[***] the whole of such amount or, as the case may be, part thereof which is not so utilised shall be deemed to be the profits and gains of business or profession of that previous year and shall accordingly be chargeable to income-tax as the income of that previous year."

28. The Investment Deposit Account Scheme, 1986 was notified by the Central Government vide Notification No. GSR 945(E), dated July 15, 1986. Clause 9 of the Scheme reads as under:-

"9. Utilisation of the amounts for the purposes of section 32AB.-(1) An assessee, whose total income includes income chargeable to tax under the head 'profits and gains of business or profession', may utilize-

(a) the whole or any part of the amount deposited by him in a deposit account under clause (a) of sub-section (1) of section 32AB of the Income-tax Act, or

(b) any amount out of such income, without depositing the same under clause (a) of sub-section (1) of section 32 AB of the Income-tax Act,

in accordance with this Scheme, for any of the following purposes, namely:-

(i) purchase of new ship or new aircraft or new machinery or new plant for the purposes of the business or profession carried on by the depositor;

(ii) purchase of new computers to be installed either in the office or at a place where the depositor carries on business or profession;

(iii) repayment of the principal amount of term loans contracted after the 31st March, 1986, and taken for a period of three years or more from a financial corporation which is engaged in providing long-term finance for industrial development in India or from a scheduled bank or from any such other institution as the Central Governments may, by notification in the Official Gazette, specify in this behalf.

(2)(e) Withdrawal from the deposit may be made by a depositor not more than once in every three calendar months, by making an application in Form 'D':

Provided that no such application shall be granted unless the depositor has, for a minimum period of one year prior to the date of such withdrawal, in this account a minimum balance of an amount which is not less than the amount to be withdrawn.

(b) On receipt of the request for withdrawal, the deposit office shall, as soon as may be, pay the amount to the depositor through a credit to the designated account.

(c) The amount credited to the designated account under clause (b) shall be utilised by the depositor within fifteen working days from the date of such credit for the purpose for which the amount has been withdrawn; [and the amount or any part thereof which has not been so utilised shall be refunded to the Development Bank] and on such refund, the amount or part thereof, as the case may be, shall be treated as a fresh deposit in the account for the purposes of withdrawal under clause (a) of sub-paragraph (2) of paragraph 9 above."

29. From the above, it is clear that section 32AB(1) is applicable in the case of an assessee whose total income includes the income chargeable to tax under the head 'Profits and gains of business or profession'. Out of such business income, he can either deposit the amount in the Deposit Account with the Development Bank or utilize any amount for the purchase of new ship, new aircraft, new machinery or new plant. In either case he is entitled to deduction of an amount which is equal to the amount deposited with the Development Bank and the amount utilised for purchase of any new ship, new aircraft, new machinery or new plant. However, above deduction is subject to 20 per cent of the profit of the business of the assessee. Subsection (4) debars the assessee to claim deduction under sub-section (1) in respect of certain plant and machinery which are installed in the office premises or which are office appliances, road transport vehicles, etc. Subsection (6) provides that where any amount is withdrawn from the Deposit Account, if it is not utilised in accordance with the Scheme, the same is chargeable to income-tax as income of the previous year in which the amount was withdrawn. Therefore, in our opinion, in the year of withdrawal the only requirement is about the utilization of the amount as provided in the Scheme. In the year of withdrawal, the assessee is not required to utilize the amount again in conformity with sub-section (1) of section 32AB. As per the Scheme the amount withdrawn by the assessee can be utilised for purchase of new ship, new aircraft, new machinery or new plant or new computers. The amount can also be utilised for repayment of principal amount of term loan contracted after 31st March, 1986. The term loan must have been taken for a period of three years or more from the Financial Corporation which is engaged in providing long-term finance for industrial development in India or from a Scheduled Bank or from any other institution as the Central Government may notify. When the amount is utilised for repayment of term loan, there is no such requirement that the term loan was taken by the assessee for purchase of new ship, new aircraft, new machinery or new plant. This condition is imposed by the Assessing Officer which was not in the Scheme. It is not disputed by the Revenue that the assessee has fulfilled the conditions as provided in clause 9(1)(iii) of the Scheme by utilizing the amount withdrawn from the Deposit Account for the repayment of the term loan as per the Scheme. Therefore, in our opinion, the Assessing Officer was not justified in making the addition of the amount withdrawn from the Deposit Account amounting to Rs. 1,30,80,000 under section 32AB(6).

30. The CIT(A) has allowed the relief following his own order in the case of Norma Detergents Ltd. for assessment year 1992-93. We find that the Revenue carried the matter to the Tribunal in the case of Norma Detergents Ltd. and the Tribunal vide order dated 7-10-1999 in ITA No. 4995/A/95 and ITA No. 4843/A/95 upheld the order of the CIT(A). The Revenue has canvassed that the above decision of the Tribunal need reconsideration. However, for the detailed discussion in para 29 above, we agree with the finding of the Tribunal in the case of Norma Detergents Ltd. and hold that since the amount withdrawn from the Deposit Account with the Development Bank has been utilised for the repayment of term loan as provided in clause 9(1)(ii) of the Scheme, the CIT(A) rightly deleted the addition. Accordingly, ground No. 1(vi) of the Revenue's appeal is rejected.

31. Ground No. 10 of the assessee's appeal, which is reproduced in para 11 above, was only an alternate ground, and it was stated by the learned counsel for the assessee that this ground would survive only if ground No. 1(vi) of the Revenue's appeal is allowed in favour of Revenue. Since we have rejected ground No. 1(iv) of Revenue's appeal, ground No. 10 of the assessee's appeal has become infructuous. Accordingly, the same is rejected.

32. In the result, both the appeals are partly allowed.

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