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TMI Blog2004 (12) TMI 635X X X X Extracts X X X X X X X X Extracts X X X X ..... State Government for the purpose of Centralized Effluent Treatment Plant (CETP). The Assessing Officer had disallowed the claim for the following reasons: (a)Payment of Rs. 20 lakhs as one time charge for construction of CETP, which is not wholly and exclusively for the business of assessee, therefore, the same is not allowable as business expenditure. (b)The creation of CETP will provide enduring nature of benefit, hence, expense liability is of capital nature. (c)The assessee has been regularly paying and is required to pay cess on account of pollution control and the said cess of being recurring nature is being allowed as revenue expenses, therefore, the liability of Rs. 20 lakhs is not of revenue nature and same cannot be allowed. (d)Condition for installation of CETP was that the assessee accepted the liability as voluntary obligation for payment of Rs. 20 lakhs as a one time payment for construction of CETP. (e)The assessee has accepted the voluntary contribution of Rs. 20 lakhs to be incurred in future, hence, the liability does not pertain to the assessment year under consideration. Further, it pertains to construction of CETP of which construction had begun during the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer's finding that the charge is voluntary is not correct. (ii)The contention of the Assessing Officer that the liability is not wholly and exclusively for the purpose of the business of the assessee is incorrect on the fact of it. As per various Supreme Court decisions, in the changing scenario, concern of the Government with regard to pollution and legal liability in contravention of law dealing with the pollution, it is wholly necessary for a businessman to meet with such obligation. (iii)The Assessing Officer, on the one side, held it to be (a) voluntary charge (b) liability not in present and on the other, liability of the capital nature. In regard to the capital nature liability, we would like to submit that the ownership of asset vest in Government and, therefore, it is not capital liability rather while mentioning it to be capital liability the Assessing Officer accepted that it is a present liability of the assessee. (iv)In regard to the present liability, we would like to submit that moment the liability is accepted after series of discussion and negotiations by the assessee, it becomes legal obligation for it to pay such charge. From the discussion mentioned above an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wing submissions before the ld. CIT(A), as reproduced by the ld. CIT(A) at page 9 of her order: "It is evident from the facts of the case and above submissions that: (i )The liability to pay Rs. 20 lakhs was undertaken to fulfil the legal obligation of effluent treatment of water as a measure of water pollution control and thus was not a voluntary contribution but a business expediency and also wholly and exclusively related to assessee's business is absolutely beyond doubt. (ii)The liability undertaken or the payment made in this behalf, has not at all resulted in creation of any capital asset in favour of the assessee and, thus, is not a capital expenditure. (iii)The liability was accepted and the payment was made in order to curtail the revenue expenditure of current and subsequent years. It is well founded law that when the contributions are made which do not result in creation of any ownership rights and when the payment is in lieu of revenue expenditure, may be for current or subsequent years, the same bears the nature of revenue expenditure." 9. In this case, the Assessing Officer found that the sum of Rs. 20 lakhs had been claimed to be paid to the State Government for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the running of its motor vehicles and other means employed for transportation of sugarcane to its factories and was therefore incurred for running the business or working it with a view to producing profits without the assessee gaining any advantage of an enduring benefit to itself." (c) L.H. Sugar Factory & Oil Mills (P.) Ltd.'s case (supra): In this decision, the Hon'ble Apex Court at page 294 held: "that the sum of Rs. 50,000 contributed under the sugarcane development scheme was deductible expenditure under section 10(2)(xv)." (d) Associated Cement Companies Ltd.'s case (supra): In this decision, the Hon'ble Supreme Court, inter alia, at page 258 held: "that the advantage secured by the respondent by incurring the expenditure was absolution or immunity from liability to pay municipal rates or taxes for a period of 15 days: if these liabilities had to be paid, the payments would have been on revenue account; and, therefore, the advantage secured was in the field of revenue and not capital." (e) Rajasthan Spg. & Wvg. Mills Ltd.'s case (supra): In this decision, the Hon'ble Jurisdictional High Court held that the assessee had contributed for construction of building whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of such business. (vi)It should not be in the nature of capital expenditure. (Refer page 892 Volume-I-Ninth Edition " The Law & Practice of Income-tax by Kanga, Palkhivala & Vyas). 14. We find that the expenditure for deduction being claimed is not of the nature of expenditure described in sections 30 to 36. We also find that this expenditure had not been incurred in the accounting year, nor it had been crystallized or quantified during the year under appeal, as already mentioned above. It is not enough that the expenditure is merely connected with the trade - it must be really incidental to the trade itself. We find that it was not a legal obligation on the assessee to make the payment, rather it was a voluntary contribution made by the assessee. Therefore, the order of the ld. CIT(A) is reversed and that of the Assessing Officer is restored. Ground No. 2 - Second Part - Deletion of addition of Rs. 135 lakhs made on Account of loan guarantee amount (Assessing Officer Pages 6 to 10 and CIT(A) Pages 11 to 13): 15. The brief facts of the case are that in the Profit & Loss Account, the assessee had debited a sum of Rs. 1,35,00,000 being expenses for arrangement with the Financial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrangements with M/s. DML. The working arrangements were later extended up to 31-12-1980. The working arrangements were that the Company was running the DML and after the working arrangement was over, the assessee hired to M/s. DML the plant and machinery having original cost of Rs. 1.55 crores. Later on, the operations of the Mills of M/s. DML came under lockout and it became a Sick Company. The case of M/s. DML got covered by Sick Industrial Companies (Special Provisions) Act, 1985 and, thus, the matter of DML came before the Board of Industrial Financial Reconstruction (BIFR). Various dues of the assessee-company aggregating to Rs. 218 lakhs became irrecoverable from M/s. DML. Later on, the assessee-company had given unconditional and irrevocable guarantee as under: (i)I.F.C.I. for the term loan of Rs. 90 lakhs to DML Guarantee given by Maharaja Shree Umaid Mills on 1-12-1983. (ii)IDBI term loan of Rs. 110 lakhs for DML Guarantee given on 19-4-1984. (iii)IRBI term loan of Rs. 60 lakhs to DML Guarantee given on 15-2-1984. Although the working arrangement expired on 31-12-1980, yet the assessee stood as Guarantor after a lapse of more than 3 years. 18. The ld. DR submitted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances of the case in the context of which the aforesaid contractual liability of expenses for arrangements with the Financial Institutions as a consequence of settlement, has been incurred, are replete through with considerations of commercial expediency and mutuality; and (iii)Thirdly, on the ground that since assessee had to agree to be guarantor, under the facts and circumstances of the case mentioned in the earlier paragraphs, in favour of the Financial Institutions on behalf of DML and eventually had to have the settlement, was all in the course of and for the purpose of its business. 2.The Assessing Officer himself has allowed payment of Rs. 190 lakhs to SBBJ paid on account of similar obligation in immediately preceding year (Paper Book 78-79). The relevant para 16 of assessment order for assessment year 1992-93 reads as under: "The assessee-company entered into an agreement dealing with composite issue with the bank on 31-3-1992. This agreement is the outcome of a series of discussion and communication with the bankers. The arrangement on the one side provided that the bankers would released the embargo on grant of encashment of working capital limits to restore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the carrying of a business. As the end the ld. AR submitted that in view of the above, the disallowance made by the Assessing Officer should be deleted and order of the CIT(A) be upheld. 21. We heard the rival submissions and also perused the record. The facts of this case have already been narrated in detail by us. We agree with the reasons given by the Assessing Officer in his order and also with the submissions of the ld. DR that the assessee had stood guarantor for loan to M/s. DML. Standing surety for other is not incidental to the carrying on business of the assessee. We find that the Assessing Officer had placed reliance on the decision of Hon'ble Supreme Court in the case of Madan Gopal Bagla (supra). In this case, it was held: "that the custom set up did not mean that mutual accommodation by business was necessarily an ingredient part of that custom, the transaction in question could not be deemed to be one entered into by the appellant in the course of carrying on his timber business but was one entered into for the purpose of financing the business of another person and, in any event, the loss, being one suffered by reason of having to pay a debt borrowed for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s was a voluntary contribution and was not a levy enforceable by law. Therefore, we reverse the order of the CIT(A) and restore that of the Assessing Officer. Thus, the appeal of the Revenue is allowed. C.O. No. 25/JP/2003 (Assessee's Appeal): 23. The assessee has agitated on the following Ground of Appeal: "Under the facts and circumstances of the case, the learned Commissioner of Income-tax (Appeals) has erred in confirming the disallowance of Rs. 23,16,136, being the accrued liability on account of encashable leave of the employees on the basis of actuarial valuation, alleging it to be not a present liability." 24. This issue has been subject-matter of appeal in the assessment year 1993-94 where CIT(A), on the above basis, disallowed the provision for leave encashment. The assessee preferred appeal against the order of CIT(A) for assessment year 1993-94 before the ITAT. The Tribunal, vide its order dated 20-12-2001 in ITA No. 2025/JP/1994, set aside the issue to the file of the Assessing Officer to examine the issue in the light of decision of Hon'ble Supreme Court in the case of Bharat Earth Movers v. CIT [2000] 245 ITR 428 . In set aside assessment, the Assessing Officer, ..... 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