2012 (9) TMI 436 - AT - Income Tax

Addition on account of treating receipt as income - Assessee is engage in civil construction works Receives capital & revenue grants from government - Follow cost plus method for revenue recognition - Held that - Where the receipt is treated as revenue corresponding expenditure actually incurred wholly and exclusively for doing the work for which the revenue was received must be allowed. Appeal decided against revenue.

Summary

Issues:
Appeals by department against deletion of additions on account of grants received during the year.

Analysis:
The case involved appeals by the department for Assessment Years 2004-05, 2005-06, and 2007-08 against orders passed by the CIT (A)-I, Dehradun. The main issue was the deletion of additions totaling significant amounts made by the Assessing Officer on account of grants received by the assessee Nigam. The Assessing Officer treated the grants as revenue receipts, adding them to the assessee's income for the respective years. However, the CIT (A) disagreed and deleted the additions, leading to the department's appeals.

The assessee Nigam, functioning under the Uttaranchal [U.P. Water Supply and Sewerage Act, 1975 (Adoption and Modification)] Order, 2002, was engaged in infrastructure development for water supply, sewerage, and related projects in Uttarakhand. The grants received were claimed to be capital grants for specific projects, with funds earmarked for designated purposes. The Assessing Officer, though, viewed the grants as revenue in nature, as they were utilized for operational or maintenance costs, not capital expenditure. Consequently, the amounts were added to the assessee's income.

The CIT (A) disagreed with the Assessing Officer's treatment, highlighting that the receipts should be considered income after deducting corresponding expenditure. The CIT (A) emphasized that the assessee's income should be determined commercially, accounting for all receipts and allowing related expenditure. The CIT (A) noted that the Assessing Officer erred in not considering the expenditure while treating the grants as income, leading to the deletion of the additions.

The CIT (A) further explained that the Assessing Officer's treatment of the grants and corresponding expenditure as capital was incorrect from an accounting and legal perspective. The CIT (A) clarified that the grants, though revenue in nature, should be offset by expenses incurred for the work done by the assessee. The CIT (A) upheld that the grants did not constitute income, as the corresponding expenditure was legitimately incurred for the projects funded by the grants.

Ultimately, the Tribunal confirmed the CIT (A)'s orders, rejecting the department's appeals for all three years. The Tribunal agreed with the CIT (A)'s detailed reasoning that the grants, though revenue receipts, did not qualify as income due to the corresponding legitimate expenditure incurred by the assessee. The decision emphasized the commercial determination of income, accounting principles, and the necessity to allow deductions for expenses related to revenue receipts.