2019 (1) TMI 868 - HC - Income Tax

Claim of deduction as interest - amount credited to decommissioning Reserve fund - assessee collected decommissioning costs from its customers - Assessee had to account for 12% interest on such decommissioning charges collected by it - Held that - We are in agreement with the view of the Tribunal. As noted, the assessee was under directives of the Government of India to collect and create decommissioning reserves which would be utilized for decommissioning of the plant at the end of its useful life. The amount so collected from the customers would be in the possession of the assessee and would be utilized for the purpose of its business. The Government of India, therefore, required the assessee to account for the interest which was also specified at 12% p.a. on said funds. The interest expenditure was claimed by the assessee by way of deduction. This interest expenditure was clearly business expenditure. The situation is akin to the assessee borrowing from the market, utilizing such borrowed funds for the purpose of business and paying interest to the creditors. No question of law arises

Summary

Issues:
- Whether the Tribunal was justified in allowing the deduction of interest credited to decommissioning Reserve fund?

Detailed Analysis:

Issue 1: Deduction of interest credited to decommissioning Reserve fund
The case involved an appeal by the Revenue against the Tribunal's judgment regarding the deduction of interest credited to the decommissioning Reserve fund. The assessee, a Nuclear Power Corporation, set up nuclear power plants with a fixed life that required decommissioning after a certain period. The Government allowed the assessee to collect decommissioning costs from customers, with interest on such charges to be accounted for. During the relevant year, the assessee credited an amount towards interest on decommissioning reserves and claimed it as a deduction. The Assessing Officer denied this claim, leading to an appeal by the assessee. The Tribunal allowed the appeal, stating that the interest expenditure was rightly claimed as a deduction since the funds collected were used for business purposes, following the directives of the Government of India.

Issue 1 Analysis:
The Tribunal considered the background of the decommissioning charges collection and the directive from the Government of India regarding interest on decommissioning reserves. It noted that the funds did not belong to the assessee but were used for business purposes, with interest paid at the instance of the Department of Atomic Energy. The Tribunal concluded that the interest was notional and the expenditure was rightfully claimed as a deduction by the assessee. The High Court agreed with this view, emphasizing that the funds collected were meant for decommissioning the plant at the end of its useful life, and in the interim, were utilized for business purposes. The interest expenditure, as specified by the Government, was considered a legitimate business expense, akin to borrowing funds from the market, utilizing them for business, and paying interest to creditors. Consequently, the High Court dismissed the Income Tax Appeal, affirming the Tribunal's decision to allow the deduction of interest credited to the decommissioning Reserve fund.

This comprehensive analysis outlines the key aspects of the judgment, including the background of the case, the arguments presented, and the reasoning behind the decision to uphold the deduction of interest as a legitimate business expenditure.