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Effluent Channel Projects Ltd., Vadodara and others Versus DCIT, Cir. 1 (2) , Vadodara and others

2015 (7) TMI 932 - ITAT AHMEDABAD

Accrual of income - Contribution received from the members - whether is to be assessed in the year of receipt or assessee is to be permitted to spread over, over a period of five years? - whether CIT(A) has erred in confirming the addition received as capital contribution from members for discharge through effluent channel constructed by the assessee? - Held that:- As decided in earlier years of assessee's own case [2010 (10) TMI 717 - ITAT, Ahmedabad] a clear right is given by the assessee-comp .....

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ss an equivalent part of the agreed services by the receiver is rendered. - Following the decision of Asst. CIT v. Mahindra Holidays and Resorts (India) Ltd. (2010 (5) TMI 524 - ITAT, CHENNAI) we hold that the assessee was justified in deferring the revenue for taxation for four years.

Respectfully following the above order of the ITAT, we set aside the issue as far as determination of taxability of the receipts received in this year to the file of the AO. The ld. AO shall re-work th .....

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n that the amount as income on the basis of claim made in earlier years, i.e. whatever amount representing the alleged 1/5th ought to be offered for taxation in this year. The ld.First Appellate Authority has rightly made the enhancement. - Decided partly in favour of assessee for statistical purposes. - ITA No.1945/Ahd/2011,ITA No.1948/Ahd/2011 - Dated:- 24-7-2015 - Shri G.D. Agrawal and Shri Rajpal Yadav, JJ. For the Petitioner : Shri M.K. Patel For the Respondent : Smt.Sonia Kumar, Sr.DR ORDE .....

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members for discharge through effluent channel constructed by the assessee. It is also pleaded that the ld.CIT(A) has further erred in making addition of ₹ 23,95,082/- by enhancing the income. On the other hand, the grievance of the Revenue is that the alleged capital contribution from the members received by the assessee is to be treated as revenue receipt in the hands of the assessee and the total amount received by the assessee during the year is to be taxed in this year. The ld.CIT(A) .....

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filed its return of income electronically on 27.9.2008 declaring an income of ₹ 2,60,660/-. The assessee has constructed channel which is 15 kilo-meters in length. It ends upto the gulf of Cambay. There are about 300 industrial members, to whom the assessee company provides channel for effluent disposal of member industries. The assessee has received contribution from the members which were shown by the assessee as revenue receipt in the first year. But it recognizes the income to the exte .....

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ution is to be assessed as income of the assessee in the year of receipt, whereas, in this year, the assessee alleged that it is capital contribution and no liability can be fastened upon the assessee. 5. On appeal, the ld.First Appellate Authority has rejected the contentions of the assessee that it is capital contribution by following the order of the Tribunal in the Asstt.Year 2001-02. However, the ld.CIT(A) observed that the assessee did not follow the method as followed in earlier years. It .....

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, the ld.CIT(A) had issued notice for enhancement of the income. The ld.First Appellate Authority after hearing the assessee, and following the order of the ITAT in earlier years as well as Special Bench order in the case of Mahindra Holidays and Resort (I) Ltd., (2010) 131 TTJ (Chennai) (SB), made the addition of ₹ 23,95,082/-. 7. With the assistance of the learned representative, we have gone through the record carefully. We find that in the first assessment year i.e. Asstt.Year 2001-02, .....

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the basis of quantity of annual effluent emission, a member pays capital contribution to the assessee company which is treated by the assessee company as Revenue receipt but is deferred for being taxed over a period of five years and thus offering for tax only 1/5th thereof and rest 4/5th in ensuing four years. The Revenue intends to tax the entire receipt in the year of receipt on the ground that concept of deferring revenue receipt is alien to Income-tax Act and sections 4,5 & 9 do not pro .....

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t was reduced to 25 years and therefore, 60% of membership fees was sought to be offered for tax in last 22 years whereas 40% was offered to be taxed in first three years. Revenue sought to tax entire receipt in the year of receipt. Hon. Special Bench referred to the decision of Hon. Supreme Court in E.D. Sassoon & Co. Ltd. vs. CIT (1954) 26 ITR 27 (SC) and referred to observation of their Lordships on page 52 of 26 ITR, wherein the Hon. Apex Court observed that unless and until managing age .....

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s earn their commission it will not accrue to them. But in order that the income can be said to have accrued to or earned by the assessee, it is not only necessary that the assessee must have contributed to its accruing or arising by rendering services or otherwise but he must have created a debt in his favour. A debt must have come into existence and he must have acquired a right to receive the payment. Unless and until his contribution or parenthood is effective in bringing into existence a de .....

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, and (ii) a debt must have come into existence and assessee must have acquired a right to receive the payment. Another point which was made out by the Special Bench was that the income does not accrue merely on signing of the agreement for enrolling as a member. There is a continuing liability on the part of the assessee not only to provide accommodation but also to provide other incidental services attached with the accommodation. Hon. Special Bench then referred to the decision of Hon. Suprem .....

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resources. It also observed that for a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation. From this observation of Apex Court it was observed that there is a definite liability cast on the assessee to fulfill its promise i.e. to continue to provide facilities to members and, therefore, it cannot be said that entire fee received from the new enrolled members had accrued as income in the yea .....

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n lead to distortion. Somewhat similar, though not exactly identical situation was faced by the Supreme Court in the case of Madras Industrial Investment Corporation Ltd. vs. CIT (supra). In that case, the assessee had issued debentures of ₹ 1.5 crores at a discount of 2 per cent redeemable after 12 years. At p. 813 of the report, the court observed that ordinarily revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in th .....

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a. The only difference is that in the case of Madras Industrial Investment Corporation (supra), the distortion was supposed to be on account of expenditure, in the present case in the distortion is on account of the entire income being accounted in the year of receipt. Earlier, we have also discussed as to how difficult it is to estimate the liability which is likely to be incurred in future, more so in the absence of any scientific basis or historical data. Therefore, the only way to minimize t .....

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accounts whereas the distortion the Supreme Court talked about and which we are inclined to follow, is vis-à-vis the real taxable income for a particular year. Therefore, in view of the foregoing discussion, we accept the proposition of the assessee that it is not justifiable to tax the entire income in a single year as is the case of the Department. Thus the above judgment clearly lays down a principle that where fees is received by an assessee for rendering services in future then enti .....

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ds of assessee. Quid pro quo is giving a right to the members to use the effluent discharge channel according to the capacity purchased by them. Thus by this one time payment the members are made eligible to utilize the present capital set up of the assessee company as well as further expansion thereof, if any, or modification thereof, if made by the assessee company in future. 12. Now we refer to the user agreement which the new member signed with the assessee company. Following clauses are con .....

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ECT LIMT1ED (ECPL) provided for the conveyance of treated effluent as per the GPCB conditions up to the safe disposal, received from the participants. (12) COMMITTED QUANTITY means the quantity of effluent per day, to be discharged by each participant as agreed and specified in his application. PERIOD OF AGREEMENT : (13) This AGREEMENT shall come into force from the date it is signed and shall remain operational for a period of 99 years. DELIVERY OF EFFLUENT : (14) That the PARTICIPANT is a priv .....

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ny EFFLUENT containing any pollutant beyond permissible limits from his Company or his Sister Company or any other Company for short or long duration. The treated EFFLUENT of PARTICIPANT shall conform to the GPCB consent conditions. The PARTICIPANT shall not discharge effluent exceeding his (18) The discharge of treated effluent into EFFLUENT CHANNEL of the EFFLUENT CHANNEL PROJECT LIMITED shall be as per committed quantity as in "Application" by the participant to company. (19) The PA .....

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charges as per actual discharge within stipulated time limit, and the rates as applicable. Thus a clear right is given by the assessee company to the members to utilize its capital facilities for a period of 99 years for discharge of agreed quantities of effluent. In other words, assessee company has to perform its part of obligation for next 99 years and to keep the capital set up intact and allow the use thereof by the members. This is akin to hiring the capital structure of the assessee compa .....

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even though it might have received it in one year. Merely receipt does not ensure accrual unless equivalent part of agreed services by the receiver is rendered. In fact by paying one time fees a part of debt is created against the assessee which has to be discharged by meeting equivalent obligation in the form of continuing to provide use of the capital structure for efficient discharge of effluent emitted by member-industries. Even accounting standard -9 provides such deferring of revenue for t .....

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