2017 (9) TMI 811 - AT - Income Tax

Liquidated damage received/receivable - revenue receipt chargeable to tax - Held that - We have observed that in the case of CIT Vs. Saurashtra Cement Ltd. (2010 (7) TMI 11 - SUPREME COURT) the assessee was to be paid compensation at a rate of 0.5% of the price of the respective portion of the machinery for each month of delay by way of liquidated damages from the supplier, without proof of actual loss. Whereas, in the instant case damages in the EPC contract agreement between the assessee and suppliers, have been computed at ₹ 10,61,281 /- on per day basis. The liquidated damages payable to GUVNL are also on per day basis. We find that the assessee itself in its letter dated 17/02/2012 addressed to M/s. Enfinity which is available on page 15 of the paper book, has referred clause 8.6 (b) of the EPC contract agreement which states that contactor should indemnity the assessee for the net present value for any reduction in the tariff received by the plant as a result of contactors failure to achieve substantial completion by 31st December 2011. The back to back arrangement of liquidated damages in EPC contract as noted by the Ld. CIT-(A) in the impugned order, manifest that the primary objective behind introduction of the liquidated damages clause in EPC contract agreement was to protect the assessee from actual business losses. The act of shifting of site by the assessee and consequently non-availability of transmission lines also contributed, resulting into those business losses. In view of above discussion, we are of the opinion that order of the Ld. CIT-(A) on the issue in dispute is well reasoned and no further interference is required. Liquidated damage received/receivable by the assessee, is revenue receipt chargeable to tax. Not allowing the claim of depreciation under Income-tax Act on full cost of assets (without liquidated damages sought to be taxed as revenue receipt) - Held that - As already held that the liquidated damages are in the nature of revenue receipt, then same cannot be reduced out of the cost of asset and hence the assessee is eligible for claiming depreciation on the full cost of the asset (without reducing the liquidated damages). In the interest of justice, we feel it appropriate to restore the issue to the file of the Assessing Officer with the direction to allow the depreciation on the cost of the asset without reducing the liquidated damages. We also direct the Assessing Officer to verify from the supplier M/s Enfinity , the cost of asset charged to the assessee and liquidated damages. The assessee shall be afforded adequate opportunity of being heard. The ground No. 5 of the appeal is accordingly allowed for statistical purposes. Deduction under section 80I on enhanced income due to treating liquidated damages as revenue receipt and depreciation disallowed - non-filing of form No. 10CCB in respect of the amount of income - Held that - We are not agreed with the Ld. CIT- (A) in view of the decision of the Tribunal in the case of Eagle Synthetics (Pvt.) Ltd. (2010 (2) TMI 719 - ITAT, Ahmedabad) wherein the Tribunal directed the Assessing Officer to grant opportunity to file the audit report in form No. 10CCB on the basis of enhanced income Rejection of the reduction of section 80IA deduction that income was not derived from the undertaking - Plain reading of the sec 80IA(1) provision, it is clear that any profit and gains derived by an undertaking or enterprise from eligible business is the only allowed for deduction under section 80IA of the Act. In the case of CIT Vs. Sterling Foods 1999 (4) TMI 1 - SUPREME Court the Hon ble Supreme Court has held that for the profit to be derived from the eligible business there should be nexus of first- degree between the profit and the eligible business In the instant case, the receipt is from liquidated damages as a result of contractual obligation between the assessee and EPC contractor. In our opinion, there is no direct nexus between the profit and gains of the undertaking and the receipt from liquidated damages, and thus, assessee is not eligible for deduction under section 80IA of the Act on the said receipt. Since the enhancement of the profit is not as a result of the eligible business, the CBDT Circular No. 37/2016 by the Ld. counsel is also not applicable over the facts of the instant case. Accordingly, we uphold the finding of the Ld. CIT-(A) on the issue in dispute and dismiss grounds No. 6 of the appeal. Disallowance of depreciation on solar power plants - Held that - We find that the assessee has submitted power generation on 31/03/2012 as 52.976 unit from combined 10 MW capacity, but it has not bifurcated the electricity generated from 6 MW plant and 4 MW plant on 31/03/2012. In absence of such bifurcations, is not possible to know whether the 6 MW plant generated any electricity on 31/03/2012 or not. In view of above facts, in the interest of Justice, we feel it appropriate to restore the issue to the file of the Assessing Officer, who is directed to examine the documentary evidences submitted by the assessee and also to verify from the respective authorities whether the solar power plants in question generated any electricity on or before 31/03/2012 and decide the issue in dispute in accordance with law.

Summary

Issues Involved:
1. Treatment of liquidated damages receivable as revenue receipt.
2. Disallowance of depreciation on Plant and Machinery.
3. Deduction under section 80-IA of the Income-tax Act, 1961.
4. Consequential levy of interest.

Issue-wise Detailed Analysis:

Issue 1: Treatment of Liquidated Damages Receivable as Revenue Receipt
The assessee argued that liquidated damages of ?7,58,05,766/- receivable from Enfinity Solar Solutions Pvt. Ltd. for delay in the construction of the solar power plant should be treated as capital receipt and not chargeable to tax. The AO treated these damages as revenue receipts, citing that the delay caused a loss of revenue from electricity sales. The CIT-(A) upheld the AO's decision, distinguishing the case from Commissioner of Income Tax Vs. Saurashtra Cement Ltd. (325 ITR 422) (SC), noting that the contracts were interconnected and part of the business process. The Tribunal agreed with the CIT-(A), stating that the liquidated damages were compensatory for the loss of revenue and thus revenue in nature. Consequently, grounds No. 1 to 4 of the appeal were dismissed.

Issue 2: Disallowance of Depreciation on Plant and Machinery
The AO disallowed depreciation of ?4,02,28,060/- on the solar power plant, asserting that the plant was not put to use during the relevant period. The CIT-(A) concurred, noting a letter from GUVNL indicating the project was not ready by the scheduled date. The Tribunal found inconsistencies in the evidence and restored the issue to the AO for verification of whether the solar power plants generated electricity on or before 31/03/2012. The AO was directed to allow depreciation if the plants were operational. Thus, grounds No. 7 to 9 were allowed for statistical purposes.

Issue 3: Deduction under Section 80-IA of the Income-tax Act, 1961
The assessee sought deduction under section 80-IA on the enhanced income due to treating liquidated damages as revenue receipts. The CIT-(A) denied the deduction, citing non-filing of form No. 10CCB and the income not being derived from eligible business operations. The Tribunal disagreed with the first ground, directing the AO to allow the filing of form No. 10CCB. However, it upheld the second ground, stating there was no direct nexus between the liquidated damages and the eligible business operations, thus dismissing grounds No. 6 and 10.

Issue 4: Consequential Levy of Interest
The grounds regarding the consequential levy of interest under sections 234B and 234C were deemed consequential and dismissed as infructuous.

Conclusion:
The appeal was partly allowed for statistical purposes, with the Tribunal directing the AO to verify specific facts and allow appropriate claims based on the findings. The decision was pronounced in open court on 11th Sept., 2017.