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TMI Blog2011 (2) TMI 1594X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. On the facts and in the circumstances of the case, the CIT(A) erred in deleting the addition of ₹ 7, 14, 274/- being the claim of repair expenses consisting of expenditure in the nature of Capital. 3. The brief facts leading to the above issue are that assessee is a limited company engaged in the business of treatment of industrial effluents of small scale industries located at Ankleshwar Industrial estate and providing common effluents treatment overhead for the treatment of effluents generated from 225 member industries. During the year under consideration assessee filed its return of income on 04-11-2003, which accompanied by audited accounts, tax audit report u/s 44AB, original TDS certificate, audit report u/s.115JB of the Act and other enclosures. The Assessing Officer after issuing notice u/s 143(2) of the Act on 07-10-2004, required the assessee to explain expenses debited towards repair and maintenance of plant machinery at ₹ 38, 31, 372/-. After noticing from the details, the Assessing Officer required the assessee as to why certain expenses not treated as capital in nature, which are as under:- Date Particulars ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of Tribunal in assessee s own case in ITA No.2464/Ahd/2006 for assessment year 2002-03 dated 09-04-2007, wherein the Tribunal has allowed the claim of assessee vide para-5, as under:- 5. We have heard the parties and perused the materials on record. The law in the mater we consider as an amply clear, and where there is an enduring benefit to the assessee arising from the expenditure, so as to result in an advantage in the capital field; an accretion to its profit-making apparatus, the same would only be an expenditure of revenue nature. In the present case, only a proper verification of each expenditure could lead to a proper finding whether the same resulted in a new asset, or an addition to an existing asset, by way of an enhancement in its capacity or otherwise, or the same was by way of a substantial replacement of the whole of the relevant existing assets, each of which would only have a life-term, so that the same would only need to be replaced on the expiry thereof; the capital cost being recouped by way of the capital allowance in the form of depreciation; it being nobody s case that any asset means permanence or everlastingness. Or, as contended by the assessee, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ahd/2006 by assessee (for A.Y. 03-04). 1. DISALLOWANCE OF PROVISION MADE FOR SLUDGE DISPOSAL CHARGES AMOUNTING TO ₹ 10, 95, 250/-: 1.1 On the facts and in the circumstances of the case and in law, the Commissioner of Income Tax (Appeals) erred in upholding the action of the Assistant Commissioner of Income Tax, disallowing the provision made for sludge disposal charges amounting to ₹ 10, 95, 250/- 1.2 In doing so, the Commissioner of Income Tax (Appeals) erred in the following respects: 1.2.1 In not appreciating the fact that provision made for the sludge disposal charges amounting to ₹ 10, 95, 250/- has been made on the basis of closing stock of sludge as on the last day of the previous year generated after giving treatment to the effluent processed. 1.2.2 In not appreciating the fact, that as per the norms of GPCB, liability to dispose off the sludge accrues as soon as the sludge is generated during the process. ITA No.734/Ahd/2007 by assessee (for A.Y.99-00) 2. DISALLOWANCE OF SLUDGE TESTIBILITY STUDY CHARGES OUT OF THE SLUDGE DISPOSAL CHARGES AMOUNTING TO ₹ 2, 00, 000 BY TREATIG THE SAME AS CAPITAL EXPENDITURE:- 2.1 On the facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on made for sludge disposal charges amounting to ₹ 16, 32, 903/-: 1.1 On the facts and in the circumstances of the case and in law, the Commissioner of Income Tax (Appeals), Baroda erred in confirming the disallowances made in respect of provision made for sludge disposal charges amounting to ₹ 16, 32, 903/- 1.2 In doing so, the Commissioner of Income-tax (Appeals) erred in following respects: 1.2.1 In not appreciating the fact that the respondent complied the matching concept of Income and expenses following the mercantile system of accounting which is being followed consistently since 2001-02 and in subsequent years. 1.2.2 In wrongly observing that the stock of sludge remained without effluent treatment whereas sludge generated only after the effluent treatment and only expenses for it s disposal is provided based on the method which has been consistently followed: 1.3 In view of the above grounds of appeal, the respondent prays that the Assessing Officer be directed to delete the addition made on account of disallowance of provision for sludge disposal charges amounting to ₹ 16, 32, 903/- 7. The brief facts leading to the abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ually been incurred during this year may be allowed and referred case law of Hon ble Rajasthan High Court in the case of Udaipur Mineral Development Syndicate Pvt. Ltd. v DCIT And Another (2003) 261 ITR 706 (Raj). The CIT(A) also confirmed the action of Assessing Officer by relying the decision of CIT(A) in assessment year 2002-03 as under:- 4.3 I have carefully considered the rival contentions and also the judicial decisions cited in this regard. It is a fact that the appellant has in A.Y 1999- 2000 debited the sludge disposal charges on actual basis and departing from the same subsequently the assessee started making provisions. It has not been argued in assessment or established in appeal that said liability can be estimated with reasonable certainty. In other words the provision made for future disposal of sludge when the actual liability has not arisen is not found to be bonafide. A similar view has been held by my colleague CIT(A)-XIX, Ahmedabad in order No. CIT(A) XIX/CAB/VI-84/05-06 dated 28.8.2006 in appellant s own case for A.Y 2002-03. The disallowance by Assessing Officer is therefore confirmed. The relevant order of CIT(A) in assessment year 2002-03, wherein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r which provision was made and same was disallowed in Assessment Year 2001-02. Whatever the actual expenses incurred for sludge shown in closing balance in Assessment Year 2001-02 and explained to have carried out effluent treatment in this accounting year may be allowed in this yea. Thus, disallowance made by the Assessing Officer for provision is confirmed. However, provision of early year which was disallowed may be allowed on actual expenditure basis after verification of such actual expenses claimed t have incurred during this year. The Assessing Officer may ensure that no double allowance of such expenses may take place. Aggrieved, assessee came in second appeal before us on this issue. 9. We have heard the rival contentions and gone through the facts of the case. We find that the assessee-company Enviro Technology Limited is engaged in Common Effluent Treatment Facility for the treatment of effluent (Waste Water) generated from 225 member industries. The assessee explained the sludge generation process along with justification on sludge disposal charges by stating that the waste water is in the highly acidic nature and also containing organic chemicals. The waste wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd upon the quality and quantity of the effluent i.e. its acidic and toxic nature. Thus the treatment charges received and sludge disposal charges incurred are not comparable with each other because of the complex nature of the effluent. Further, the company has entered into an agreement with each member for providing common effluent treatment facility. Every member has to pay un-availed tanker charges. In case, he does not fulfill the commitment about the number of tankers that he has agreed to bring as per the terms and conditions of the said agreement during the year, the un-availed tanker charges received have been reduced from ₹ 31, 36, 5007- to Rs, 25, 96, 000/- which again justifies the increase in Sludge generation and consequently the increase in Sludge Disposal charges. In view of the above facts and procedure the sludge disposal charges incurred in March, 2000 and March, 2001 are higher compare to whole of the year, as the sludge generated has to be dried up in Sun and accordingly the sludge disposal charge of year. The assessee has enclosed the details of sludge dispatched during the month, which justifies aforesaid facts. It can be observed that sludge dispatched ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as it digs the pits. In view of the aforesaid facts and circumstances and relying upon the aforesaid decision of Rajasthan High Court, we allow the liability of sludge disposal charges accrues the moment the sludge is generated and accordingly the provision for sludge disposal charges ought to be allowed as deduction under section 37 of the Act as the same is provided following the mercantile system of accounting. In the result, the issue is decided in favour of the assessee. 11. The next issue in this appeal of assessee in ITA No.734/Ahd/2007 is against the order of CIT(A) confirming the adjustment made by Assessing Officer to the book profit by treating the provision of doubtful debt as unascertained liability while computing the book profit u/s 115JB of the Act. For this, assessee has raised the ground No.1:- 1. MAKING ADJUSTMENT TO THE BOOK PROFIT BY TREATING PROVISION FOR DOUBTFUL DEBTS AMOUNTING TO ₹ 6, 01, 265/- AS AN UNASCERTAINED LIABILITY WHILE COMPUTING THE BOOK PROFIT UNDER SECTION 115JB OF THE ACT. On the facts and in the circumstances of the case the learned CIT(Appeals) erred in law and on facts in considering the provision for doubtful debts amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13. Aggrieved against the action of Assessing Officer treating the provision of doubtful debt as income, assessee preferred appeal before CIT(A). The CIT(A) also confirmed the action of Assessing Officer by giving following findings in para-6.3 of his appellate order:- 6.3 I have gone through the contentions of the appellant and the assessment order. The moot point here is whether the provision made can be treated as unascertained liability. No doubt that these payments pertain to charges due to the appellant for the relevant previous year. However the appellant has not been able to indicate how the previous years charges can be treated as doubtful debts. It has also not been established that the debtors are not in a position to pay these amounts or these charges were disputed. These debts have not been shown as irrecoverable. The debts pertain to relevant previous year and in facts the services were provided as late as November, 1997 to Acme Petrochem and September, 1997 in the case of Colourman Dye Chem Ind. Pvt. Ltd. In other words the debts are not shown to be bad or doubtful. Thus there was no question of quantification of liability in that regard, much less an ascerta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e order of CIT(A) in not allowing the adjustment of WDV on capital subsidy. For this, assessee has raised the following ground No.3:- 3. ADJUSTMENT TO THE COST OF OPENING W.D.V.AND ADDITION TO THE FIXED ASSETS DURNG THE YEAR ON ACCOUNT OF CAPITAL SUBSIDY. 3.1 On the facts and in the circumstances of the case and in law the Commissioner of Income Tax (Appeals) erred in upholding the action of the Assistant Commissioner of Income Tax in computing the Depreciation allowance after reducing the capital subsidy amounting to ₹ 1, 62, 40, 000/- from the cost of the capital assets. 3.2 On doing so, the Commissioner of Income Tax (Appeals) erred in not appreciating the fact that Explanation 10 to Section 43(1), which is inserted by the Finance Act, 1998 w.e.f. 01.04.1999 is not applicable in the instant case as the relevant assets on which the capital subsidy is received are acquired before 31.03.1998 and also not appreciating the fact that though the appellant had received the capital subsidy during the previous year, it was sanctioned prior to 31.03.1998. 16. The brief facts leading to the above issue are that Assessing Officer during the course of assessment p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - - 4, 07, 271 40, 827 3, 66, 444 4a Furniture 21, 978 - - 21, 978 1, 099 20, 879 Total / s 583, 20, 261 162, 40, 000 420, 80, 361 99, 60, 475 321, 19, 586 Aggrieved, assessee preferred appeal before CIT(A). The CIT(A) confirmed the action of Assessing Officer by giving following findings in para-10.3.1 of his appellate order:- 10.3.1. It is clear that if a portion of the cost of assets acquired by the assessee is met directly by Central Government or State Government in the form of subsidy the same is required to be rd\reduced from the actual cost of the assets. The said provision is applicable with effect from 1.4.1999 i.e. A.Y. 1999-2000. It is nowhere questioned that the subsidy was in relation to the assts acquired by the appellant. Thus the Assessing Officer was justified in reducing the allowable depreciation to ₹ 99, 60, 475/- in place of ₹ 1, 38, 28, 286/- as cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sets is required only in case where the capital assets on which capital subsidy received are acquired on or after 01-04-1998. But in the present case, the capital subsidy is acquired before 1-4-1998 as is evident from the documents and evidences produced before us. We find that this issue is in favour of the assessee and we decide accordingly. 18. The next issue in this appeal of assessee in ITA No.735/Ahd/2007 is as regards to the order of CIT(A) confirming the disallowance of repair and maintenance. For this, assessee has raised the following ground No.2:- 2. DISALLOWANCE OF REPAIRS AND MAINTENANCE EXPENSES AMOUNTIING TO RS 527, 839/- NET OFF DEPRECIATION AMOUNTING TO ₹ 77, 090/- OUT OF THE TOTAL EXPENSES OF RS26, 89, 569/- 2.1 On the facts and in the circumstances of the case and in law the Commissioner of Income Tax (Appeals) erred in upholding the action of the Assistant Commissioner of Income Tax, disallowing repairs and maintenance expenses amounting to ₹ 527, 839/- (net of depreciation amounting to ₹ 77, 090/-) by treating the same as being capital in nature. 2.2 In doing so, the Commissioner of Income Tax (Appeals) erred in not appreci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so high due to the nature of business of the company. During the year under consideration, the assessee has incurred ₹ 26, 89, 569/- towards repairs and maintenance to plant machinery compare to ₹ 17, 11, 176/- incurred in the immediate preceding previous year. In this respect assessee has incurred expenditure on plant machinery amounting to ₹ 26, 69, 439/- compare to ₹ 9, 33, 510/- made in the current previous year. This has resulted in increase in the cost of maintenance in the current previous year compare to the immediately preceding previous year. Thus, it becomes clear from the above facts that the cost of repair and maintenance incurred in the current previous year cannot be compared with the cost of repair and maintenance incurred in the immediately preceding previous year. Further, the plant machinery comprises of metal pipes through which the liquid waste is floated during the process of effluent treatment. The liquid waste contains various hazardous and corrosive chemicals that corrode the said pipes, which in turn truncates its life and thus requires to be replaced from time to time. The pipes also require painting on a regular basis to avo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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