2017 (3) TMI 884 - AT - Income Tax

Income generated on sale of goods generated on trial run - AO held that same had to be treated as income earned by the assessee - as argued that AO should be directed to allow the underlying expenditure from the receipts which had been taxed - Held that - As decided in Bokaro Steel Ltd. 1998 (12) TMI 4 - SUPREME Court the advances which the assessee made to the contractors to facilitate the construction activity of putting together a very large project was as much to ensure that the work of the contractors proceeded without any financial hitch as to help the contractors. The arrangements which were made between the assessee-company and the contractors pertaining to these three receipts were arrangements which were intrinsically connected with the construction of its steel plant. The receipts had been adjusted against the charges payable to the contractors and had gone to reduce the cost of construction. They had, therefore, been rightly held as capital receipts and not income of the assessee from any independent source. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditure. By the same reasoning if the assessee receives any amounts which are inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. These are receipts of a capital nature and cannot be taxed as income. We find that while deciding the appeal, the FAA has directed the assessee to allow the expenditure from the taxable receipts. Thus, he has followed the very basic principle of taxation jurisprudence and that principle stipulates that all the expenditure incurred by the assessee have to be compulsorily allowed from the income taxed by the AO. If the AO wants to tax a particular income, he cannot disallow the expenditure incurred by the assessee to earn the said income. Considering the above,we are of the opinion that the order of FAA does not suffer from any legal or factual infirmity. Therefore, confirming the same we decide the effective Ground of appeal against the AO.

Summary

Issues:
1. Addition made by the AO amounting to ?8.45 crores
2. Treatment of pre-operative domestic sales derived from trial runs
3. Allowance of underlying expenditure from the receipts that have been taxed

Analysis:
1. The Assessing Officer (AO) made an addition of ?8.45 crores to the income of the assessee, which included pre-operative domestic sale derived from trial-runs, notional income from inter-division transfer of power, and sale of scrap. The AO held that the receipts should be taxed, disregarding the underlying expenditure. The First Appellate Authority (FAA) directed the AO to allow the underlying expenditure from the taxed receipts, emphasizing that income tax is leviable on profits and gains, not gross receipts. The FAA's decision was based on the principle that expenditure incurred by the assessee must be allowed from the income taxed. The FAA's order was upheld, dismissing the AO's appeal.

2. The case referred to the judgment of Bokaro Steel Ltd., where the Supreme Court held that certain receipts directly connected to construction activities were considered capital receipts and could be set off against capital expenditure. The FAA in this case directed the assessee to allow the expenditure from the taxed receipts, following the principle that all expenditure incurred must be allowed from the income taxed. The Tribunal confirmed the FAA's decision, emphasizing the importance of allowing expenditure related to income taxed by the AO.

3. The Tribunal's decision highlighted the fundamental principle of taxation jurisprudence that all expenditure incurred by the assessee must be allowed from the income taxed by the AO. By following this principle, the Tribunal upheld the FAA's order and decided the effective ground of appeal against the AO. The appeal filed by the AO was dismissed, affirming the FAA's directive to allow underlying expenditure from the taxed receipts.

In conclusion, the judgment focused on the treatment of income and expenditure in relation to the taxation of receipts, emphasizing the necessity of allowing expenditure incurred by the assessee from the income taxed. The decision upheld the FAA's order and dismissed the AO's appeal, underscoring the fundamental principles of taxation jurisprudence.