2013 (9) TMI 606 - AT - Income Tax

Disallowance of provision of Sludge Disposal Charges - Held that - Sludge is generated in the Effluents treatment, which has to be disposed off as per the rules and regulation of GPCB, and the liability of sludge disposal .charges accrues the moment sludge gets generated. The Company is following mercantile system of accounting and accordingly provided for the sludge disposal charges to be incurred on the sludge generated upto 3I.March of the relevant year but could not be disposed off as on that date. The Average rate of sludge disposal works out to Rs.430/- per MT, to be on the conservative side the provision for disposal charges have been made at the rate of Rs.330.72 per MT on 5371.820 MT of sludge that could not be removed as on 31.03.2001 - assessee digs the pits, the liability does arise and it is entitled for deduction of the expenses which it is supposed to incur for filling those pits, as the assessee is following the mercantile system of accounting. It can claim the expenses incur as soon as it digs the pits. In view of the aforesaid facts and circumstances and relying upon the decision of Rajasthan High Court in case of Udaipur Mineral Development Syndicate Pvt. Ltd. vs. DCIT 2002 (8) TMI 26 - RAJASTHAN High Court , we allow the liability of sludge disposal charges accrues the moment the sludge is generated and accordingly the provision for sludge disposal charges ought to be allowed as deduction under section 37 of the Act as the same is provided following the mercantile system of accounting. In the result, the issue is decided in favour of the assessee - Decided in favour of assessee. Assessee has considered 10% of interest income amounting to Rs. 2,53,882/- as being expenses incurred for earning the interest income. We find that whether the expenditure incurred has a connection or nexus with the interest receipt has not been examined by lower authorities and there is no finding to that effect - Assessing Officer is therefore directed to verify the nexus between the expense incurred and the interest income and thereafter consider its allowability the same as per law and after giving a reasonable opportunity of hearing to the Assessee - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of provision made for sludge disposal charges.
2. Disallowance of expenditure while claiming deduction under Section 80IA.

Detailed Analysis:

1. Disallowance of Provision Made for Sludge Disposal Charges:
- Facts and Background: The Assessee, engaged in treating industrial effluents, filed returns for AY 2006-07 and 2007-08. The provision for sludge disposal charges was disallowed by the Assessing Officer (AO) and upheld by CIT(A) based on previous years' disallowance, treating it as a contingent liability.
- Assessee's Argument: The Assessee argued that the provision was based on the closing stock of sludge generated and that the liability to dispose of sludge accrues as soon as it is generated, per GPCB norms. The Assessee cited a favorable decision from the Tribunal for AY 2005-06 on identical facts.
- Tribunal's Decision: The Tribunal noted that the facts were identical to AY 2005-06, where the provision for sludge disposal charges was allowed. It referenced the Tribunal's earlier decision, which emphasized that the liability accrues upon sludge generation and should be allowed as a deduction under Section 37 of the Act. The Tribunal followed the earlier decision and allowed the Assessee's claim for both AY 2006-07 and 2007-08.

2. Disallowance of Expenditure While Claiming Deduction Under Section 80IA:
- Facts and Background: The AO noticed discrepancies in the interest income considered for deduction under Section 80IA. The Assessee had reduced interest income by 10% as expenses incurred to earn it but did not provide detailed justification.
- CIT(A)'s Decision: The CIT(A) upheld the AO's decision, stating that the Assessee failed to justify the reduction in interest income and did not provide details of expenses incurred to earn the interest.
- Assessee's Argument: The Assessee argued that 10% of expenses were considered based on the Special Bench decision in Lalson Enterprises and requested a re-examination of the issue.
- Tribunal's Decision: The Tribunal found that the nexus between expenses incurred and interest income was not examined by the lower authorities. It remitted the issue back to the AO to re-examine it in light of the Special Bench decision in Lalson Enterprises, directing the AO to verify the nexus and consider the allowability of expenses.

Conclusion:
- The Tribunal allowed the Assessee's appeal regarding sludge disposal charges for both AY 2006-07 and 2007-08, following the precedent set in AY 2005-06.
- The issue of disallowance of expenditure while claiming deduction under Section 80IA was remitted back to the AO for fresh examination and verification of the nexus between expenses and interest income.

Order Pronounced: The appeals of the Assessee were allowed for statistical purposes.