2012 (5) TMI 698 - AT - Income Tax

Summary

Issues Involved:
1. Treatment of Rs. 35,49,091/- received as sinking fund.
2. Allowability of expenditure of Rs. 40,88,455/- on replacement of air conditioning plant.
3. Nature of sinking fund receipts as capital or revenue receipts.
4. Usage of sinking fund amounts.

Summary:

Issue 1: Treatment of Rs. 35,49,091/- received as sinking fund
The Ld. Commissioner of Income Tax (Appeals) erred in enhancing the income by Rs. 35,49,091/- received as sinking fund for the replacement of capital goods, treating it as revenue receipts. The assessee argued that this amount, received from flat owners/tenants for capital asset replacement, had always been treated as capital receipts and accepted by the Assessing Officer in previous assessments.

Issue 2: Allowability of expenditure of Rs. 40,88,455/- on replacement of air conditioning plant
The Ld. Commissioner of Income Tax (Appeals) did not allow the expenditure of Rs. 40,88,455/- incurred on the replacement of the air conditioning plant, treating it as capital expenditure and allowing depreciation instead. The assessee contended that the expenditure should be adjusted from the sinking fund and not treated as revenue expenditure.

Issue 3: Nature of sinking fund receipts as capital or revenue receipts
The Ld. Commissioner of Income Tax (Appeals) held that the sinking fund receipts are revenue receipts, as they are part of the total maintenance receipts and utilized for day-to-day activities. The assessee argued that the Rs. 2 per sq. ft. collected for the sinking fund is specifically for capital asset replacement and should be treated as capital receipts.

Issue 4: Usage of sinking fund amounts
The Ld. Commissioner of Income Tax (Appeals) observed that the sinking fund amounts were not exclusively used for their intended purpose and were merged with other maintenance receipts. The assessee maintained that the sinking fund was utilized for capital repairs and replacements as per the agreement with the flat owners/tenants.

Judgment:
The Tribunal found that the system followed by the assessee, where Rs. 2 per sq. ft. is collected and held in a sinking fund for asset replacement, is cogent and has been accepted by the Revenue in previous years. The Tribunal held that the Rs. 35,49,091/- collected during the year as sinking fund contribution is a capital receipt and not liable to be taxed as revenue receipt. The expenditure of Rs. 40,88,455/- incurred for the replacement of air conditioners should be adjusted from the sinking fund and not allowed as revenue expenditure. The appeal filed by the assessee was partly allowed.