2012 (12) TMI 322 - AT - Income Tax

Deduction of u/s 80IB - excluding interest received on loans and advances from the computation - Held that - AS in agreement with the proposition that ginning and pressing is an activity of manufacturing. However, so far as earning of interest is concerned, there should be direct and proximate nexus with the business activity. Therefore, on the issue of interest, the issue is need to be remanded to the file of the AO as for claiming deduction u/s 80IB there must be direct nexus between the activity/business and is should be derived from the business activity of the assessee. Disallowance out of oil mill hammali, pressing expenses, ginning Ludai expenses and Kapas freight and hammali - Held that - Disallowance of these expenses were done or the reason that these were not supported by verifiable documents and were based on self made vouchers & hammali charges were disallowed on the ground that there was steep increase approximately it was 4 times in such expenses in comparison to preceding year though there was increase of quantity of purchase by about 2 times only and even the self made vouchers were not signed by the payees.

Summary

Issues:
1. Disallowance of deduction under section 80IB of the Income Tax Act.
2. Disallowances related to oil mill hammali, pressing expenses, ginning Ludai expenses, and Kapas freight and hammali.

Issue 1: Disallowance of deduction under section 80IB of the Income Tax Act:
The appellant, engaged in ginning and pressing of raw cotton, claimed deductions under section 80IB of the Income Tax Act for two assessment years. The Assessing Officer disallowed a portion of the claimed deductions, following precedents such as the decision in the case of Pandian Chemicals Limited and the Indore Bench of the Tribunal in Design Auto System Limited. The appellant appealed to the first appellate authority, which upheld the assessment order. The Tribunal noted that in previous years, the appellant was directed to prove the nexus of funds borrowed and used for advancing. Considering principles of natural justice, the Tribunal remanded the issue to the Assessing Officer for the appellant to establish the nexus of interest received and paid. The Tribunal emphasized the need for a direct nexus between the business activity and the interest earned for claiming deductions under section 80IB. The Assessing Officer was directed to examine the nature of interest earned from funds advanced and paid. The Tribunal allowed the appellant to provide evidence to substantiate its claim, remanding the issue for further consideration.

Issue 2: Disallowances related to oil mill hammali, pressing expenses, ginning Ludai expenses, and Kapas freight and hammali:
The appellant contested disallowances of expenses related to oil mill hammali, pressing expenses, ginning Ludai expenses, and Kapas freight and hammali. The appellant argued that the disallowed expenses were a small portion of the turnover and should not be disallowed. However, the disallowances were made as the expenses lacked verifiable documents and were based on self-made vouchers. For instance, hammali charges were disallowed due to a significant increase in expenses without a proportional increase in purchases, and the self-made vouchers were not signed by the payees. The Tribunal affirmed the stand of the first appellate authority on these disallowances for both assessment years. Ultimately, both appeals were partly allowed for statistical purposes.

This judgment highlights the importance of establishing a direct nexus between business activities and claimed deductions under tax laws. It also emphasizes the need for proper documentation to support expense claims to avoid disallowances.