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2016 DIGILAW 1249 (GUJ)

Commissioner of Income Tax v. Nirma Ltd.

2016-07-05

G.R.UDHWANI, K.S.JHAVERI

body2016
JUDGMENT : K.S. Jhaveri, J. 1. By way of this appeal under section 260A of the Income-tax Act, 1961, the appellant-revenue has challenged the order dated 24.3.2006 passed by the Income-tax Appellate Tribunal, Ahmedabad, (hereinafter referred to as "the Tribunal") whereby the Tribunal has partly allowed the appeal of the assessee by confirming the order of the Commissioner (Appeals). 2. While admitting the appeal, this court framed the following substantial question of law: "Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that the payment to GEDA is revenue expenditure as ownership is not vested with the assessee?" 3. The facts of the case are that the assessee filed its return of income declaring total income at Rs. 19,26,06,270/-. The return was processed and the Assessing Officer determined the income of the assessee. While making the assessment, the Assessing Officer found that the assessee claimed deduction in respect of contribution of Rs. 1.25 crore made to Gujarat Energy Development Corporation. The Assessing Officer treated the said expenditure as capital expenditure. Being aggrieved, the assessee went in appeal before the Commissioner (Appeals) who held in favour of the assessee by directing the Assessing Officer to allow the contribution paid to GEDA. On appeal to the Tribunal, the Tribunal has held the said expenditure is revenue in nature on the ground that ownership is not vested with the assessee. 4. The learned counsel for the appellant-revenue has taken us to the reasoning adopted by the Assessing Officer for treating the expenditure as capital expenditure at paragraph No. 11 of the assessment order which is extracted below: "During the year the assessee has paid Rs. 1,25,00,000/- to Gujarat Energy Development Board Authority towards their share of cost of power evacuation system and for sanctioned capacity for its wind farm project at Dhank, Bhavnagar District, Gujarat. The assessee has claimed the above amount paid to Gujarat Energy Development Board Authority as revenue expenses and debited to profit and loss account. The assessee was asked to explain as to why the expenditure should not be treated as capital as it is meant for power evacuation system and for it's sanctioned capacity for it's wind farm project and before commencement of production of the energy. In reply to this query, the assessee has submitted vide letter dated 26.3.1998 that the above expenses should be allowed as revenue expenditure. In reply to this query, the assessee has submitted vide letter dated 26.3.1998 that the above expenses should be allowed as revenue expenditure. In case the claim of the assessee is not allowed and treated as capital expense, depreciation at the rate of 50% on total amount should be given as payment of the amount has been made after September, 1994. On examination of the documents and submission of the assessee there is no doubt that the expenses made by the assessee in respect of power evacuation system and sanctioned capacity of its wind farm project before the commencement and production of the energy are capital in nature. Therefore, the assessee's contention is not acceptable. However, alternative claim of the assessee to allow depreciation at the rate of 50% on the total amount is acceptable." 5. The learned counsel for the revenue has, therefore, contended that expenditure which is meant for evacuation system and for its sanctioned capacity for its wind farm project is in the nature of capital expenditure and not in the nature of revenue expenditure. Moreover, the Tribunal has committed error in holding that for the purpose capital expenditure, ownership is necessary. The learned counsel for the appellant therefore contended that the Tribunal has committed in confirming the view taken by the Commissioner (Appeals). The view taken by the Assessing Officer is required to be accepted. 6. The learned counsel for the respondent-assessee Mr. Soparkar, senior advocate, has taken us to the order of the Commissioner (Appeals), particularly, paragraph Nos. 17 and 17.1 which are extracted below: "17. Ground No. 16 is regarding disallowance of contribution paid to Gujarat Development Authority (GEDA) for Rs. 1,25,00,000/-. The Authorized Representative submitted that contribution of Rs. 1,25,00,000/- was paid for laying down pipelines. Company has set up Wind Farm Project in Saurashtra. The ownership of the said pipelines was not with the appellant company but with the said authority GEDA. Reliance was placed on the decision in the case of Uma Textiles 46 TTJ 52 (Ahd). The Assessing Officer has treated the said expenses as capital expenses and depreciation @ 50% was allowed. 17.1 I found the contention of the Authorized Representative is correct. Once the contribution is paid to any authority, for which ownership of the assets belong to the third party and not with appellant company, the said expense is allowable expenses. The Assessing Officer has treated the said expenses as capital expenses and depreciation @ 50% was allowed. 17.1 I found the contention of the Authorized Representative is correct. Once the contribution is paid to any authority, for which ownership of the assets belong to the third party and not with appellant company, the said expense is allowable expenses. The said proposition is also held by Supreme Court in the case of CH v. Madras Auto Services (P) Ltd. 230 ITR 468. Hon'ble Supreme Court allowed the cost of construction Rs. 2,13,000/- to the lessee as ownership of the said property belongs to the lessor. Relying on the same, I direct the Assessing Officer to allow contribution paid to GEDA Rs. 1,25,00,000/-. Depreciation allowed should be withdrawn consequently." 7. The learned counsel for the respondent-assessee has therefore contended that the Commissioner (Appeals) has rightly treated the expenditure as revenue expenditure which the Tribunal has upheld. He has relied on the decision of this court in the case of Commissioner of Income-tax v. Abs Industries Ltd. reported in (2010) 323 ITR 350 (Gujarat) where contribution to GIDC effluent channel project was allowed as revenue expenditure i.e. in favour of the assessee. In case of Tax Appeal No. 1365 of 2006, this court, while considering the issue, has held as under: "Whether the amounts referred in the questions should be allowed as capital expenditure or revenue expenditure, the Tribunal has considered this issue as under: We have heard the learned DR and perused the material placed before us. From the above ground of appeal, it is evident that in this appeal the dispute is with regard to allow ability of following two payments: (i) Compensation for Forest & Environment Department amounting to Rs. 7,26,126/. (ii) Contribution to Master Pollution Plant amounting to Rs. 2,53,000/. With regard to the payment of Rs. 7,26,126/, we find this issue is covered in favour of the assessee by the decision of the Tribunal in the case of Mahalaxmi Fabrics Mills Ltd. v. ACIT in ITA No. 723/Ahd/2002, wherein the Tribunal has held as under: "We have heard the rival submissions and perused the record. As the facts emerge, the Revenue has not brought on record anything to suggest any criminal action or any penal action was contemplated against the assessee. As the facts emerge, the Revenue has not brought on record anything to suggest any criminal action or any penal action was contemplated against the assessee. The compensation has been paid as per the direction of High Court, looking at the industrial general conditions of the area and as a direction, all the industrial for socioeconomic upliftment. In case of penalty of infraction of law, first step is to frames charges against the assessee, asking the explanation on this behalf and impose the penalty/fine as per the provisions prescribed for the penal breach. In the instant case, no such action has been taken. The High Court has awarded compensation for socio-economic upliftment of population of affected village based on turnover. We are, therefore, of the view that the same can not constitute a penalty or imposition in view of infraction of law. Our view is fortified upon the judgment in the cases of Eveready Industries and Navsari Cotton & Silk Mills Ltd. (supra), which we respectfully follow. In view thereof, we hold that no infirmity is found in the order of the CIT(A), which is upheld, Revenue's ground is dismissed. In the result, Revenue's appeal for the A.Y 1997-98 is dismissed." With regard to the payment of Rs. 2,53,000/, we find this issue is also covered in favour of the assessee by the decision of the Tribunal in the case of JCIT v. M/s. Deversons Industries Limited in ITA No. 2008/Ahd/99, wherein the Tribunal has held as under: "14. We take up the matter of examination of Rs. 3,70,000/- first. The obligation of the assessee, as an industrial unit, under the law, being only to treat the effluent to the required degree prior to its discharge in the public drainage, the contribution made by it, on the direction of the Hon'ble Gujarat High Court, to contribute towards the laying of the network of pipelines required for the conveyance of the discharge, in view of the high cost the project entails, being outside the financial capacity of the relevant authority, being AMC, Ahmedabad, is only an obligation that it assumes as responsible citizen, as in its absence, the entire scheme, as sought to be put in place by the said court, to alleviate a continuing hardship/problem, would become unworkable/unfeasible. That, it may have also been motivated, as a part of the group of participating industrial units of the area, to buy peace with the State Industries, or the Pollution Control Department, or to safeguard themselves from the penal consequences that may visit on account of their violation of the law in the past, though relevant from business standpoint, are irrelevant to the purpose of the nature and scope of the obligation under the law. Rather, if at all, these considerations only go to support its (assessee's) argument of the said contribution being made only to protect its business as a ongoing entity, and thus, its business interests/profitability, with no concomitant financial benefit/interests, so that the expenditure is only a revenue expenditure incurred wholly and exclusively for its business. As such, we are inclined to agree with the arguments of the learned AR that the said expenditure is revenue in nature, the only advantage the assessee deriving from the said expenditure being avoidance of protracted litigation and enabling its smooth conduct, and thus, protecting its business profits and assets; it being not charged under law to do so, and thus, is revenue expenditure allowable in full. In doing so, we are aware that the cost of the pipeline would also include that from the respective polluting unit to the common ETO, which strictly speaking, lies in the area of responsibility of the discharging unit. However, considering the totality of the facts, where the cost arises only on account of the assessee agreeing for various business reasons, to participate in a scheme framed by the Hon'ble Court, as a remedy to a perpetual public hazard i.e. a social cause, the same would form a part and parcel of the envisaged project, and thus, the entire expenditure incurred for the purpose of the conveyance of its discharge would be deductible. 15.1 No we take up the second aspect of the matter i.e. the contribution of Rs. 50,000/- for setting up of the common ETP facility to effect the treatment of the effluent being discharged by the respective units. 15.1 No we take up the second aspect of the matter i.e. the contribution of Rs. 50,000/- for setting up of the common ETP facility to effect the treatment of the effluent being discharged by the respective units. As it appears the Hon'ble High Court, on being seized of the matter, addressed itself to the root of the continuing problem, and finding the same to be a social problem, with economic dimensions, being cost-prohibitives, required all the affected units to come together to set up a common facility for the purpose, charging the Gujarat Industrial Development Corporation (GIDC) as a Government agency to monitor the process, with OPEL acting as the agency for the actual execution of the work. In view of the same, we find this payment to be essentially as nothing more than the contribution by each individual member to the facility thus generated for the benefit of the smooth conduct of the business of the individual members who may otherwise i.e. individually, not be in a position to install such a facility, or being even otherwise more economical. The consideration that the said units were statutorily obliged to do so, i.e. under law, though relevant, gets diluted in view of the order of the jurisdictional High Court which the impugned units of which the assessee's unit is one, can fail to comply with only at their own peril. Once the matter becomes sub-judice, it is the writ of the court that shall hold the field, so that even as the assessee's primary obligation to treat its discharge may have been the factor weighing unit(s) to contribute also towards the pipeline, only goes to show that it looked at the larger picture, and did not adjudicate in the matter on the basis of that primary obligation alone. And the considerations that would have weighed on the said units in accepting the court's directions, could only be that of business. As such, the contribution of Rs. 4,20,000, even though comprising of two separate amounts for different purposes, has to be viewed as a composite sum, serving the same end, and forming part of the same common scheme formulated by the court, so that one cannot be divorced from, or looked at independent of the other as, for want of either, the said scheme becomes in-operational. 4,20,000, even though comprising of two separate amounts for different purposes, has to be viewed as a composite sum, serving the same end, and forming part of the same common scheme formulated by the court, so that one cannot be divorced from, or looked at independent of the other as, for want of either, the said scheme becomes in-operational. 5.2 Further, no rights or property in the said facility (ETP) ensures to the assessee. The nature of the right that accrues, i.e. to get the discharge treated, has not been spelled out in any definite terms, so that as far as we understand, it is limited to just that, with no further rights, as say of transferability etc. in the absence of which the benefit/advantage cannot be regarded as one lying in the capital field, even as held by the Hon'ble Supreme Court in the case of Alembic Chemical Works Co. Ltd. v. CIT (1989) 177 ITR 377 . In the facts of that case, it may be useful to recapitulate the payment/expenditure was for acquisition of technical know-how , and considered by the Apex Court as revenue in nature, in view of the assumption of a transient character by the knowledge acquired thereby in an environment of rapid development in the scientific arena, as no definitiveness of any benefit for any extended period of time could be ascribed to the same, as that it was only a case of application of principles as enunciated in Empire Jute Co. (supra). 20. In view of the foregoing, we hold the entire contribution of Rs. 4,20,000 by the assessee for the setting up of the common ETP facility and for the laying of the pipeline network for conveyance of the discharge, in the facts and circumstances of the case, as a revenue expenditure. We order accordingly, upholding the order of the learned CIT(A) Respectfully following the above decisions of the ITAT, we uphold the order of the CIT(A). Considering the above facts, we see no merit in this appeal. No substantial question of law does arise. The appeal stands dismissed." 8. In view of the above, learned counsel for the respondent-assessee has contended that the payment made to GEDA for the electric connection may be treated as revenue expenditure. 9. We have heard learned counsel for the parties. Considering the above facts, we see no merit in this appeal. No substantial question of law does arise. The appeal stands dismissed." 8. In view of the above, learned counsel for the respondent-assessee has contended that the payment made to GEDA for the electric connection may be treated as revenue expenditure. 9. We have heard learned counsel for the parties. We have also perused the order of the Tribunal as well as the decisions cited by the learned advocate for the parties. Taking into consideration the above decisions and the fact that the payment is made to GEDA towards electric connection, in our view, the expenditure incurred by the assessee is in the nature of revenue expenditure. The Tribunal as well as the Commissioner (Appeal) has, therefore, rightly held the expenditure as revenue expenditure. In that view of the matter, we answer the question in favour of the assessee and against the revenue. The appeal is dismissed accordingly.