2013 (2) TMI 767 - AT - Income Tax

Disallowance of water expenses to 10% - Reason for disallowance of water expenses by the AO is that the assessee is having well and there is no need for purchase of water from outside - AO had not given any opportunity to the assessee to show that the water expenses incurred by the assessee are excessive - Hence the disallowance is restricted to 5% of the claim - Decided partly in favor of assessee Disallowance of fire wood expenses to 10% - Held that - wood was purchased from local labourers and farmers - It is very difficult to obtain third party vouchers - AO has disallowed 100% of the cash purchase and 25% of the total expenses on purchases from regular registered dealers - As regard to registered dealers The AO has not verified any details and disallowance disallow was not based on any adverse evidences - thus AO is directed to delete the addition - in respect of cash purchases, the disallowance of 5% would meet the ends of justice - Decided partly in favor of assessee Whether to consider the claim of interest free suppliers credit as capital receipt or revenue receipt - Held that - An agreement with windmill supplier states that in case wind mill fails to generate electricity of the units mentioned in the agreement, the supplier of the wind mill shall compensate the assessee for such failure of generation - As per Ao the said amount received is only a compensation for loss of profit and hence a revenue receipt - The performance guarantee clause of agreement clearly suggests that compensation would be paid for generation loss which is loss of earnings only - Thus is is revenue receipt exigible to tax - Decided against the assessee

Issues Involved:
1. Disallowance of water expenses.
2. Disallowance of firewood expenses.
3. Deduction under sec. 80IA read with sec. 80AC.
4. Treatment of interest-free suppliers' credit as capital receipt.

Issue-wise Analysis:

1. Disallowance of Water Expenses:
The first common issue in the appeals of the assessees is that the Commissioner of Income Tax (Appeals) erred in restricting the disallowance of water expenses to 10%. The Assessing Officer disallowed 50% of water expenses incurred by the assessees for their Dyeing Units on the grounds that the persons from whom the assessees purchased water were not available at the provided addresses and that the assessees had a captive well with sufficient water. The Counsel for the Assessee argued that 70% of the water was sourced from their well, and 30% had to be purchased due to water shortages. The Commissioner of Income Tax (Appeals) restricted the disallowance to 10%, considering the historical incurrence of water expenses and lack of evidence from the Assessing Officer. The Appellate Tribunal further reduced the disallowance to 5%, considering the totality of facts and circumstances.

2. Disallowance of Firewood Expenses:
The next common issue is the disallowance of firewood expenses. The Assessing Officer disallowed 100% of cash purchases and 25% of purchases from regular dealers, citing self-made vouchers and weighbridge slips from the assessees' HUF. The Commissioner of Income Tax (Appeals) restricted the disallowance to 10%, noting that the weighbridge bills from the assessees' HUF were not a reasonable ground for disallowance and that the purchases were from local villagers who supplied firewood in bullock carts. The Appellate Tribunal upheld the deletion of disallowance for purchases from registered dealers and reduced the disallowance for cash purchases to 5%.

3. Deduction under sec. 80IA read with sec. 80AC:
One of the grounds raised by the assessee was that the Commissioner of Income Tax (Appeals) erred in not considering the claim for deduction under sec. 80IA read with sec. 80AC of the Act. However, the Tribunal found that this ground was not raised before the Commissioner of Income Tax (Appeals) and, therefore, declined to adjudicate this ground.

4. Treatment of Interest-Free Suppliers' Credit as Capital Receipt:
The final issue is whether the interest-free suppliers' credit received as compensation for the failure of wind mills to generate the required units of electricity should be treated as a capital receipt. The Assessing Officer treated the compensation as revenue receipt, arguing it was for loss of profit. The Counsel for the Assessee contended that the compensation was for the deficiency in the performance of a capital asset and should be treated as a capital receipt. The Tribunal examined the agreements and found that the compensation was linked to the generation of electricity and was not a lump sum for non-performance. It concluded that the compensation was for loss of earnings and, therefore, a revenue receipt exigible to tax.

Conclusion:
The appeals of the assessees and the Revenue were partly allowed, with specific disallowances being adjusted as per the Tribunal's findings. The Tribunal provided a detailed analysis of each issue, considering the historical context, evidence provided, and relevant legal precedents.

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