2024 (6) TMI 1478 - AT - Income Tax

Infrastructure facilities eligible for deduction u/s 80IA(4) - undertakings titled as Landfill-II in AY 2017-18 and Incinerator-II in AY 2017-18 2018-19 - assessee was set up to create and operate a Centralised Secured Land fill facility for disposal of solid waste generated by the Industries in District Bharuch Gujarat - activities were executed through separate undertakings viz. Land Fill and Incinerators. HELD THAT - We notice that this issue has been decided by the coordinate bench in favour of the assessee in AY 2012-13 2023 (10) TMI 909 - ITAT MUMBAI wherein the Tribunal has followed the decision rendered by Surat bench of Tribunal in the assessee s own case in AY 2008-09 2021 (12) TMI 1292 - ITAT SURAT as held Landfill-I and Landfill-II as separate and independent undertakings. Incinerator Project-II is a separate undertaking eligible for deduction u/s 80IA(4) of the Act starting from AY 2012-13. Disallowance of Provision for pit closure expenses - As noticed earlier the AO restricted the claim of the assessee to the amount of actual expenses holding that the Provision for Post Closure expenses is a contingent liability - CIT(A) deleted addition - HELD THAT - We notice that the Tribunal is consistently holding that the Provision for Pit closure expenses is allowable as deduction. Since the Ld CIT (A) has followed the decision rendered by the Tribunal in the assessee s own case we do not find any infirmity in the order passed by him on this issue. Disallowance of Provision for Pit covering expenses - HELD THAT - Identical claim was examined by the co-ordinate bench in the assessee s own case viz. Bharuch Enviro Infrastructure Ltd (Earlier name of the assessee) 2016 (11) TMI 1721 - ITAT AHMEDABAD and it was decided in favour of the assessee as held that as soon as the assessee dig the pits its liability to refill them arose and it was entitled to deduction of the expenses incurred for filling those pits as the assessee was following mercantile system of accounting - Assessee appeal allowed.

Summary

The core legal questions considered in this judgment are:

1. Whether the undertakings titled "Landfill-II" and "Incinerator-II" qualify as separate and distinct infrastructure facilities eligible for deduction under section 80IA(4) of the Income Tax Act for the assessment years 2017-18 and 2018-19.

2. Whether the deduction claimed under section 80IA(4) of the Act for these undertakings should be disallowed on the ground that the agreements with Gujarat Industrial Development Corporation (GIDC) were executed after the commencement of activities.

3. Whether provisions created for pit covering expenses and post-closure expenses are allowable as deductions or should be treated as contingent liabilities, restricting deduction to actual expenses incurred.

4. The treatment and allowance of provision for post-closure care expenditure and pit covering expenses under the Income Tax Act and their impact on book profit under section 115JB.

Issue-wise Detailed Analysis

Issue 1 & 2: Eligibility of "Landfill-II" and "Incinerator-II" as Separate Undertakings under Section 80IA(4)

Relevant legal framework and precedents: Section 80IA(4) of the Income Tax Act provides deduction for profits derived from infrastructure facilities. The key question is whether each undertaking qualifies as a separate infrastructure facility. The Tribunal's earlier decisions for assessment years 2007-08, 2008-09, and 2012-13 in the assessee's own case have recognized "Landfill-II" and "Incinerator-II" as distinct undertakings eligible for deduction.

Court's interpretation and reasoning: The Tribunal examined the facts that "Landfill-II" and "Incinerator-II" were established on separate land plots allotted by GIDC, with distinct agreements and separate plant and machinery. The commencement dates of activities were different, and separate agreements with GIDC were executed, albeit some retrospectively. The Tribunal rejected the revenue's contention that backdated agreements and similarity of nature of work negate the separate undertaking status.

Key evidence and findings: The Tribunal relied on the allotment of separate plots, separate agreements dated 16th October 2012 effective from earlier dates, commencement of activities in different years, and purchase of separate fixed assets. The CIT(A) had earlier disallowed deductions relying on predecessor orders, but the Tribunal reversed those findings based on the detailed evidence.

Application of law to facts: The Tribunal applied the principle that each infrastructure facility established on separate land with distinct agreements and assets qualifies as a separate undertaking under section 80IA(4). Earlier Tribunal rulings in the assessee's own case were followed, which had consistently allowed deductions for these undertakings.

Treatment of competing arguments: The revenue argued that the agreements were executed after commencement and that the undertakings were not separate. The Tribunal rejected this, holding that the nature of the agreement's execution date does not negate the separate identity of the undertaking, especially when activities commenced earlier and separate assets were used.

Conclusions: The Tribunal upheld the CIT(A)'s decision allowing deduction under section 80IA(4) for "Landfill-II" and "Incinerator-II" for AY 2017-18 and 2018-19, following consistent precedents.

Issue 3 & 4: Allowance of Provisions for Pit Covering and Post-Closure Expenses

Relevant legal framework and precedents: The question was whether provisions created for pit covering and post-closure expenses are allowable deductions or contingent liabilities. The Tribunal referred to earlier decisions in the assessee's own case for AY 2007-08, 2008-09, and 2012-13, which consistently held these provisions as allowable deductions under the mercantile system of accounting.

Court's interpretation and reasoning: The Tribunal noted that the liability to incur these expenses arises as soon as pits are dug and that the expenses are ascertainable liabilities, not contingent. The Tribunal relied on judicial precedents including the Rajasthan High Court's decision in Udaipur Mineral Development Syndicate Pvt. Ltd., which held that such expenses are allowable deductions under the mercantile system.

Key evidence and findings: The assessee provided explanations that the liability arises immediately upon digging pits and that the expenses are incurred as per guidelines issued by Gujarat Pollution Control Board (GPCB). The AO had restricted deductions to actual expenses incurred, treating the balance as contingent liabilities, which the Tribunal rejected.

Application of law to facts: The Tribunal applied the principle that under the mercantile system, expenses are deductible when the liability arises and is ascertainable, not only when paid. The provision for pit covering and post-closure expenses was thus held to be allowable in full.

Treatment of competing arguments: The revenue contended that the excess provision over actual expenses was unascertained and hence not deductible. The Tribunal, however, relied on consistent precedents and factual findings that the liability was definite and the provision was a genuine expense.

Conclusions: The Tribunal upheld the CIT(A)'s order allowing full deduction for provisions relating to pit covering and post-closure expenses for both assessment years.

Significant Holdings

"Landfill-II is a distinct and separate undertaking from Landfill-I and is eligible for deduction under section 80IA(4) of the Act from AY 2008-09 onwards."

"Incinerator-II, established on separate land with distinct assets and agreements, qualifies as a separate infrastructure facility eligible for deduction under section 80IA(4) starting AY 2012-13."

"Provision for pit covering expenses and post-closure care expenditure are allowable deductions under the mercantile system of accounting as they represent ascertainable liabilities, not contingent liabilities."

"The date of execution of agreement with GIDC, even if retrospective, does not negate the eligibility of the undertaking for deduction under section 80IA(4) if the infrastructure facility was operational and separate."

"The consistent judicial and Tribunal precedents in the assessee's own case establish that provisions for environmental restoration expenses are deductible in full, and the AO cannot restrict deduction to actual expenses incurred."

The Tribunal dismissed the revenue's appeals, affirming the CIT(A)'s orders allowing deductions under section 80IA(4) for the specified undertakings and allowing provisions for pit covering and post-closure expenses as deductions for the assessment years 2017-18 and 2018-19.