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2016 (5) TMI 251 - ITAT CHENNAI

2016 (5) TMI 251 - ITAT CHENNAI - [2016] 49 ITR (Trib) 353 - Treatment of income from trial run receipts - revenue receipt OR capital receipt - Held that:- The source need not be continuously productive and it is sufficient if the income is flowing from some exercise or operation by the appellant and in ordinary parlance which can be considered as income. To constitute income, the receipt need not necessarily have their origin in business activity or investment or under an enforceable obligation .....

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may assume cannot exhaustively be enumerated and so in each case the decision of the question as to whether any number of receipt is income or not must depend upon the nature of the receipt and the scope of relevant taxing provision. In the present case, the income earned by the assessee by operation of plant and machinery for treating the effluent water and collected the income from the customer on commercial basis and it cannot be considered as a capital receipt as the assessee operated the p .....

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machinery by Government of India through subsidy and it is not for carrying on the business of the assessee rather than setting up of the industry. Hence, in our opinion the cost of fixed asset to be reduced to that extent of subsidy received bythe assessee.Since the subsidy received for setting up of industries by installing plant and machinery would definitely reduce the cost of the plant and machinery from the side of the assessee and it is to be reduced from the cost of plant and machinery i .....

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ipt from the cost of fixed asset. Thereafter, he recomputed the depreciation, finally resulted increase in loss, then returned loss by the assessee. There is no any revenue loss to the Department and this is only a technical breach, which cannot be reason to levy penalty. Accordingly, placing reliance in the judgment of Apex Court in the case of M/s.Reliance Petro Products Pvt Ltd in [2010 (3) TMI 80 - SUPREME COURT ](SC), we are inclined to delete the penalty - Decided in favour of assessee - I .....

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the assessee i.e ITA Nos.805 & 824/Mds./15 are taken first for adjudication. The ground raised in these appeals is with regard to the action of the Ld.CIT(A) on upholding the treatment of income from trial run receipts as revenue receipt instead of capital receipt and also with regard to treatment of subsidy received from Government of India as a deduction from cost of fixed asset. The other two appeals i.e ITA Nos.806 & 823/Mds./15 is with regard to levy of penalty on these additions u .....

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atment plant. These companies joined together contributing a capital of ₹ 50,00,000/- divided into 50,000 equity shares with the face value of ₹ 100/- each. Five individuals who are the Directors of the assessee company have taken 200 equity shares each and the remaining equity shares were allotted to the four companies. The Individuals, who are allotted equity shares, are Directors in the four companies also. The erstwhile companies have also leased their premises to the assessee co .....

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ced commercial operation of the company from 24.03.2010. Income for the current year has been admitted for the period 24.03.2010 to 31.03.2010. The depreciation for plant and machineries has been claimed at 50% of eligible depreciation on the cost of plant and machineries. 3.2 On examination of books of account, ld. Assessing Officer noticed that the assessee has prepared and filed two accounts for the financial year under consideration, one for the trial period, another for commercial operation .....

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1/- with the unabsorbed depreciation of ₹ 83,91,18,651/-. However, the surplus generated during trial run has been capitalized and shown under the head Reserves and Surplus . When clarification was sought on the issue, the representative has stated that the expenses has been collected from the shareholders for the escalation of cost and also contribution by the share holders and the surplus arisen during the trial run has been capitalized. The written submission made by the assessee dated .....

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ious government authorities. In the meantime till COD, the company had to carry out trial runs and test runs to prove its preparedness to achieve zero Liquid discharge. While doing so, the company incurred various overheads like trial/experimental run expenditure, administrative expenses, interest and financial charges and depreciation. Collections were made from members towards such overhead and for escalation of project cost. After deducting overheads from such collection the balance represent .....

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he fact that amounts collected from members include not only charges for overheads but also towards additional project cost and escalation, in project cost are enclosed. 3.4 It was also submitted by assessee before AO that even if the receipts from trial runs and expenditure incurred from the same are to be treated as revenue, ignoring the nature of excess capital contribution from members, then depreciation has to be allowed, which will once again result in huge loss only. 3.5 Contrary to the s .....

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processing charges of dyeing effluent on committed capacity . It is also learnt that there was some minimum committed quantity of effluent water every month from each member using the facility. The charges levied for minimum quantity has also been claimed as revenue, expenses by the users and the charges were paid to the assessee for deducting TDS if the surplus created by the trial run is capitalized and kept as Reserve and Surplus of the company, then the revenue expenses claimed by members w .....

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settled position of law that a technical parameter or a quality check which are mandatory requirements to commence full commercial operation cannot come in the way of income tax provision. There is no denying the fact that there were restrictions imposed by the Pollution Control Board and the Courts at different point of time, for releasing the affluent Water without treating it. But it is to be born in mind that the requirement to satisfy other statutory obligation does not take away the right .....

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turing units of the users. The expenses for treating the water was claimed as revenue expenses which was allowed to be deducted from their income. It does not matter who are the contributors for the generation of income, whether they are the share holders of the cornpany, or an outsider. Here, the assessee has done the services of treating the effluent water for which the money has been received at the rate of ₹ 45/- per 1000 litres of effluent water and that money paid to the assessee com .....

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ing the assessment year in discussion. Before the machinery is put in to commercial use, the assessee is not entitled to claim any expenses in the revenue account except where the Act has specifically provided for. The claims made by the assessee as discussed above is an evidence for the commencement of the commercial operation by the assessee. So far as interest payment is concerned, the application of provisions of S.36 (iii) is a settled issue in view of the Hon. Supreme Court decision in the .....

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assessee. 3.8 It is also noticed by AO that the assessee has received subsidy to the tune of ₹ 19,19,00,000/- from the Government . The subsidy was meant for machineries such as CETP, Evaporator and Reverse Osmosis. Copy of one of the letters written by Tamilnadu Industrial Development Corporation Limited to the Tamilnadu Water Investment Company Ltd dated 15.12.2006, clearly mentioned that the sanction of ₹ 1000 lakhs is to part finance the project for setting up CETPS/Reverse Osma .....

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he assessee from the government for the purpose of claiming deduction on depreciation. During the course of assessment proceedings , the assessee has furnished revised working of depreciation by reducing the cost of plant and machinery to an extent of subsidy received. 3.9.1 Further, though the assessee claimed depreciation at 50%, allowed the depreciation 100% in respect of plant and machinery which is operative from 01.04.2009 and 50% on plant and machinery which are installed on 21.01.2010. A .....

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eived from the Governrnent, the CIT(A) observed that it is evident from the letter submitted by the Tamil Nadu industrial Corporation Limited to the Tamilnadu Water Investment Co Ltd dated 15.12.2006 that the Sanction Of ₹ 1,000 Lakhs is to Part Finance The Project For Setting Up Cetps/Reverse/Evaporator Plants At Tirupur. Therefore, from the above it is clear that the capital subsidy from the Government was granted only to meet out the cost of machinery such a CEPT, Evaporator and Reverse .....

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ot brought before the Assessing Officer, further, it did not form part of the grounds of appeal before the CIT(A). The assessee has not recorded the receipt of subsidy in the published results of the company for A.Y. 2009-10. The assessee has also not reduced the capital subsidy received in working of the depreciation in the earlier years i.e. A.Y. 2009-10. In the absence of any evidence regarding receipt of capital subsidy earlier, grant of claim of the assesses was not entertained by the CIT(A .....

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seen that the conditions laid out by them has to go with certain minimum standards for treating the effluents Till such time the minimum standards are achieved, the assessee cannot go in a large scale operation. In other words, the service is to ensure minimum standards for effluent treatment. Hence, it cannot be argued that commercial production commences after certification. 4.4 Further, the Assessing Officer clearly stated in Pars 5.1 of the assessment order that Trial Processing Charges of D .....

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en minimum capacity of the plant is sufficient for commencement of the business. Just because the taxi has not run for the minimum kilometer, the taxi owner cannot claim that the car was not put to use. Therefore, it has to be concluded that by paying the minimum amount by each of the persons who availed the water treatment facility, the business of the assessee has commenced and such receipts will have to be taken as revenue receipts. 4.5 For example, in a spinning mill, if yarn is produced dur .....

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pital subsidy was received during the F.Y 2008-09 in which year also there was trial/experiment operations from October 2008. Hence, this issue does not relate to the year under appeal (A.Y 2010-11). Trial operations were conducted from 2008 pending completion of performance test and for demonstrating compliance of ZLD norms. Since necessary permission was not forthcoming from TNPCB, the High Court of Madras was approached by way of writ petitions to permit the company to run the unit on Trial b .....

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10. Till 24.03.2010 Trial Operations were summarized an per Statement of Incidental Expenditure Pending Capitalization. The Gross collections or ₹ 27.06 crores represented collections towards overheads and for escalation of project cost, From out of the total collections a sum of ₹ 4.64 crores was appropriated towards contribution for cost of additional work and escalation in Project Cost. This amount is shown as Non Refundable Contribution of Capital Nature from members of promoter .....

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ent of Effluent but also for the over run of cost of the project. In normal circumstances one would pay only for the actual services and nothing more unless there is an agreement as to some other component for which also one had to pay. 5.4 The ld.A.R further submitted that as per para 9.4 of AS-10 expenditure incurred on test runs and experimental productions has to be capitalized as an indirect element of construction cost. AS-10 is silent about treatment of income earned during trial operatio .....

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. Sasisri Extractions Ltd V. ACIT [2008] 119 TTJ 0976 (Vis) 3. CIT Vs. Rasoi Ltd [2014] 40 CCH 0685 (Kol. Trib.) 5.5 Regarding treatment of subsidy, the ld.A.R submitted that the assessee received a sum of ₹ 19.19 crores from Government of India vide Ministry of Commerce letter dated 11.09.2007. According to the ld.A.R , it is a capital receipt cannot be deducted from the cost of machinery. According to the ld.A.R Explanation 10 to Sec.43(i) cannot be applied and the cost of plant and mach .....

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er dated 28.10.2010. 6. On the other hand, ld.D.R submitted that the claim of assessee that from October, 2008 to March, 2010 is a trial run period cannot be accepted. The assessee running the unit in a commercial manner un-authorizedly, though there is no permission from the Pollution Control Board (PCB). The assessee fixed the rates for treatment of effluent water on commercial basis that itself shows that the assessee is carrying on the business in a commercial manner and it is to be treated .....

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o use to commercial use, the assessee is not entitled to claim any expenditure in the revenue account except the Act is specifically provided for. He relied on the judgement of Supreme Court in the case of Challapally Sugar Ltd. Vs. CIT reported in 98 ITR 67(SC). 7. Regarding the treatment of subsidy, he submitted that the assessee received the subsidy for setting up a project as per the sanctioned letter dated 11.09.2007 from the Ministry of Commerce and Industry, Government of India. As such, .....

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f plant and machinery installed in the undertaking of the assessee.While the plant was run in the said way, the assessee generated surplus income to the tune of ₹ 4,64,47,766/- and gross receipt was Rs. 40,25,08,572/-. According to the assessee, this income is during the trial run as a capital receipt, not liable to tax. However, the AO treated the same as revenue receipt and the same was confirmed by the CIT(A). The contention of the ld.A.R is that the above income should be treated as a .....

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re so, the assessee already claimed the expenditure incurred to earn this income as a revenue expenditure as recorded by the AO in his order at para-6, the assessee cannot take two stands , one for expenses, another for the income generated by the same unit, hence surplus income generated during the running of the unit un-authorizedly without requisite permission to be treated as a revenue receipt. In our opinion, the definition of income in section 2(24) is an inclusive definition. It adds seve .....

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s of widest amplitude, and it must be given its natural and grammatical meaning. The scheme of section 2(24) read with sections 4 and 10, seems to be that given its ordinary natural meaning the word income will take in any monetary return coming in . It will take in voluntary and gratuitous payments, which are connected or linked with the office, vocation or occupation. Income under the Act connotes a periodical a monetary return coming in with some sort of regularity or definite source. The sou .....

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as income. To constitute income, the receipt need not necessarily have their origin in business activity or investment or under an enforceable obligation. The conclusion in construing the word income one has to ask whether having regard to all the circumstances surrounding the particular payment and receipt in question, what is relevant is of the character of income according to the ordinary meaning of that word in the common language or whether it is merely a casual receipt. The word income is .....

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water and collected the income from the customer on commercial basis and it cannot be considered as a capital receipt as the assessee operated the plant and machinery without the requisite permission and it is to be revenue receipt to be considered for levying the tax after giving necessary deduction for earning that income. Accordingly, this ground raised by the assessee is dismissed. 9. Regarding the receipt of subsidy, the subsidy was sanctioned by the Government of India for setting up of co .....

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an asset acquired by the assessee has been met directly or indirectly by the Central Government or a State Government or any authority established under any law or by any other person, in the form of a subsidy or grant or reimbursment (by whatever name called), then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee : Provided that where such subsidy or grant or reimbursement is of such nature that .....

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machinery from the side of the assessee and it is to be reduced from the cost of plant and machinery in terms of above Explanation to Sec.43(1) of the Act. Being so, we do not find any infirmity in the order of the lower authorities. The same is confirmed. This ground of assessee is dismissed in ITA No.805/Mds./2015. The facts in ITA No.824/Mds/2015 are as in ITA No.805/Mds./2015. Hence, applying the all findings in ITA No.805/Mds./2015, the appeal of assessee in ITA No.824/Mds./2015 is also dis .....

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the ld.A.R, for both the assessees case there is returned loss of income even u/s.115JB of the Act while computing book profit, penalty cannot be levied. Further he submitted that there is no concealment of income or furnishing of inaccurate particulars of income. He relied on the judgments of Supreme Court in the case of M/s.Reliance Petro Products Pvt Ltd in [2010]322 ITR 158(SC) wherein held that merely because the assessee claimed deduction of interest expenditure which has not been accepted .....

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payable under the deemed provisions of the section 115JB of the Act, then penalty u/s.271(1)(c) of the Act could not be imposed with reference to additions/disallowances made under the normal provisions. 12. On the other hand, ld.D.R submitted that even assessment resulted in loss, the penalty could be levied. For this purpose he relied on the judgment of Supreme Court in the case of CIT Vs. Gold Coin Health Food Pvt Ltd. (304 ITR 308) wherein held that even where the assessed income and returne .....

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Ltd., reported in [2010] 327 ITR 543 is not applicable in view of the Explantion-4 to Sec.271(1)(c) of the Act inserted with effect from 01.04.2003 by Finance Act, 2002 and this judgement CIT Vs. Nalwa Sons Investments Ltd., related to assessment year 2001- 02, being so, it has no application. He relied on the following case laws. i) UOI And Others V. Dharmendra Textiles Processors And Others reported in 306 ITR 277(SC) ii) CIT v. Escorts Finance Ltd. [2010] reported in 328 ITR 044(Del.) iii) CI .....

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