2014 (10) TMI 111 - HC - Income Tax

Allowability of expenses Payment made to M/s. Akerrald Investments Ltd. nexus between the payment made for the services rendered by them and the consultancy services for which they received the payment - Held that - In order to render consultancy services and achieve performance parameters, all of them entered into an agreement with M/s. Akerrald Investments Ltd. who in turn submitted a report giving analyses about the biscuit market in Pakistan, Nepal, Srilanka, Bangladesh and Maldives - The sizes of the various markets have been estimated broadly on the available data on population and consumption and GDP per capita figures - All of them have paid a sum as the fee for the services rendered by M/s. Akerrald Investments Ltd. - all the three authorities have concurrently held in the first place, there was no obligation on the part of the assessees to have such a report from M/s. Akerrald Investments Ltd. - even if they have obtained report, there is no nexus between the said report and a consultancy service they were expected to render under the agreement between them and BIL - the consultancy service was only for the period from 1.10.2000 to 30.9.2001 - The report of M/s. Akerrald Investments Ltd. is dated 28.9.2001, two days prior to the expiry of the period of consultancy service the order of the Tribunal is upheld Decided against assessee.

Summary

Issues:
1. Disallowance of payment made to M/s. Akerrald Investments Ltd.
2. Legality and propriety of interest levy under Section 234-D when assessment made under Section 147.

Issue 1: Disallowance of payment to M/s. Akerrald Investments Ltd.:
The assessees, as individuals and promoters of Kwality Biscuits Pvt. Ltd., entered into agreements with Britannia Industries Ltd. (BIL) involving payments for consultancy services. The dispute arose regarding the disallowance of a payment made to M/s. Akerrald Investments Ltd. The assessees claimed the payment was for services related to consultancy fees received. However, authorities found no obligation for such a report from M/s. Akerrald Investments Ltd., and no nexus between the report and the consultancy services expected under the agreement with BIL. The agreement specified that expenses for consultancy services were to be borne by BIL, not the promoters. The report submitted by M/s. Akerrald Investments Ltd. was dated just before the consultancy service period ended, further weakening the claim. Consequently, the courts upheld the disallowance of the payment, ruling in favor of the revenue and against the assessees.

Issue 2: Legality of interest levy under Section 234-D:
The second substantial question of law pertained to the legality and propriety of levying interest under Section 234-D when the assessment was made under Section 147 of the Income Tax Act. However, due to a subsequent retrospective amendment, the relevance of this question diminished. The court found that the assessees were liable to pay the interest, thereby dismissing the question. Consequently, the court concluded that there was no merit in the appeals, leading to their dismissal.

In conclusion, the judgment by the Karnataka High Court addressed the issues of disallowance of payment to M/s. Akerrald Investments Ltd. and the legality of interest levy under Section 234-D. The court upheld the disallowance, emphasizing the lack of nexus between the payment and consultancy services. Additionally, the court ruled that the assessees were liable to pay the interest under Section 234-D, dismissing the related question of law. Ultimately, the court dismissed the appeals, affirming the decisions of the lower authorities and ruling in favor of the revenue.