2019 (2) TMI 705 - AT - Income Tax

Nature of receipt - Income recognition - Consumer Security Deposit and Service Line deposits - whether the amount received from the customers for service line is revenue in nature as the same is part of the selling of electricity during normal business operation and does not qualify to be capital receipt? - Held that - As decided in assessee s own case we find substance in the submission of the assessee as there is no dispute on the facts of the case. Discussing these submissions of the assessee and meeting out the observations of the Assessing Officer, we are of the view that the Learned CIT(Appeals) following the ratios laid down in the cited decisions has rightly come to the conclusion that the amounts received for installation of service lines are to be treated as capital receipts in the hands of the assessee. In result, the Learned CIT(Appeals) was justified in deleting the addition made on account of service line deposits from customers. The same is upheld - The issue is covered against the revenue in Hoshiarpur Electric Supply Co. vs. CIT 1960 (12) TMI 6 - SUPREME COURT . Allowability of legal claims - deduction of expenditure u/s 37 - Held that - As decided in assessee s own case e find that the Learned CIT(Appeals) has deleted the addition made on account of disallowance of legal claim on the basis that the Assessing Officer has not highlighted a single instance that the charges were of penal nature. We find that the Assessing Officer has made the disallowance on estimate basis at 25% of the expenditure claimed. No basis has been assigned for making such ad hoc disallowance. Noting these material aspects, we are of the view that the Learned CIT(Appeals) has rightly deleted the disallowance in absence of any instance that there was any penalty which would fall under the Explanation to Sec. 37 of the Income-tax Act, 1961 - Assessee appeal allowed.

Issues Involved:
1. Deletion of disallowance of Consumer Security Deposit and Service Line deposits.
2. Deletion of addition on account of legal claims.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance of Consumer Security Deposit and Service Line Deposits:

The revenue contested the deletion of disallowance of Consumer Security Deposit and Service Line deposits amounting to ?57,56,69,642/-. The Assessing Officer (AO) had treated the amount received from customers for service lines as revenue in nature, arguing that it was part of the selling of electricity during normal business operations and did not qualify as a capital receipt. The Ld. CIT(A) had deleted this addition by following the order for the preceding assessment years 2006-07 and 2007-08.

The Tribunal observed that the assessee received ?19,65,18,794/- as service line deposits from customers for setting up service lines, which included costs of GI pipes, bricks, sand, etc., as per the provisions of the Electricity Act, 2003, and regulations framed by DERC. The Tribunal referred to its consolidated order dated 05/10/15 for Assessment Years 2005-06 to 2008-09, which concluded that the amounts received for installation of service lines were to be treated as capital receipts. This conclusion was based on the nature of the service line charges, which were levied to recover the costs of service lines and were capitalized under the head 'meter accessories' or 'plant and machinery'. The Tribunal upheld the CIT(A)'s decision, noting that the service line charges were capital receipts and should be reduced from the relevant cost of plant and machinery in accordance with sec. 43(1) of the Income-tax Act, 1961.

Further, the Tribunal noted that the Hon’ble Delhi High Court had approved its order on 14/09/16, which upheld the finding that service line deposits were capital receipts. The Tribunal observed that the facts and circumstances of the current year were identical to those of the preceding years and no distinguishing features were presented by the Ld. Sr. DR. Therefore, the Tribunal upheld the CIT(A)'s view and dismissed the revenue's ground on this issue.

2. Deletion of Addition on Account of Legal Claims:

The revenue contested the deletion of an addition amounting to ?95,83,279/- on account of legal claims, arguing that the amounts involved were penal in nature and thus not allowable. The Ld. AO had disallowed 25% of the legal expenses claimed by the assessee, considering them to be penal in nature without specifying any particular expenditure.

The Tribunal noted that the Ld. CIT(A) had deleted the addition by following the order for the preceding assessment years 2006-07 and 2007-08. The Tribunal referred to its order dated 05/10/15, which concluded that the AO had failed to identify any specific expenditure that was penal in nature and had made an ad-hoc disallowance based on assumptions. The Tribunal observed that payments made to customers and others in lieu of civil claims or arbitration were compensatory in nature and allowable under section 37 of the Act. The Tribunal cited several judicial decisions supporting this view, including Prakash Cotton Mills vs. CIT and CIT vs. Indian Copper Corporation Ltd.

The Tribunal found that the CIT(A) had rightly deleted the disallowance in the absence of any evidence that the charges were penal. The Tribunal noted that the revenue had not raised this issue before the Hon’ble Delhi High Court, and thus it had attained finality. Therefore, the Tribunal upheld the CIT(A)'s order and dismissed the revenue's ground on this issue.

General Ground:

The Tribunal noted that the third ground raised by the revenue was general in nature and did not require adjudication.

Conclusion:

The appeal filed by the revenue was dismissed, and the order pronounced in the open court on 08th February, 2019, upheld the CIT(A)'s decisions on both issues.

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