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Income Tax Appellate Tribunal, “ B ” BENCH, AHMEDABAD
Before: SHRI RAJPAL YADAV & SHRI AMARJIT SINGH
आदेश / O R D E R
PER SHRI RAJPAL YADAV, JUDICIAL MEMBER : The Revenue is in appeal before us against the order of Ld.Commissioner of Income Tax(Appeals)-1, Vadodara [‘CIT(A)’ in short] dated 20/01/2016 passed for Assessment Year (AY) 2012-13.
The Revenue has raised following grounds of appeal:
ITA No.766/Ahd/2016 The ACIT vs. M/s.Vadodara Enviro Channel Project Ltd. Asst.Year – 2012-13 - 2 -
“On the facts and in the circumstances of the case and in law, the Ld.CIT(Appeals) erred in allowing the assessee to spread the capital contribution received over a period of five years beginning from the year in which such contributions were received initially treating the same as deferred revenue income without appreciating the provisions of section 4(1), section 5(1)(a) and section 5(1)(b) and section 9(1)(i) of the Income-tax Act, 1961.” 2. The appellant craves leave to add to, amend or alter the above grounds as may be deemed necessary. 3. The brief facts of the case are that assessee had filed its return of income electronically declaring total income at Rs.90,48,660/- after set off of losses of Rs. 56,97,848/-. The case of the assessee was selected for scrutiny assessment and notice u/s.143(2) of the Income Tax Act, 1961 (hereinafter referred to as "the Act") was issued and served upon the assessee.
It is pertinent to observe that the assessee at the relevant time was engaged in the business of conveyance of industrial effluent and maintenance of channel. It has constructed a channel which is 15KMs in length. It ends up to the Gulf of Cambay. There are about 300 industrial members to whom the assessee-company provides channel for effluent disposal of member industries. The assessee has received contribution from the members which were shown by the assessee as revenue receipt in the first year. But it recognized the income to the extent of 1/5th and rest of the amount was deferred for five years. In this year, it
ITA No.766/Ahd/2016 The ACIT vs. M/s.Vadodara Enviro Channel Project Ltd. Asst.Year – 2012-13 - 3 - has received a sum of Rs.6,65,88,064/-. The assessee has not offered even 1/5th for taxation. It was of the view that receipts are capital in nature. The Ld.AO has observed that starting from AY 2001-02, these receipts have been treated as revenue receipt and they were taxed in the year of receipt.
However, on appeal, the ld.first appellate authority has restricted the taxation to the extent of 1/5th in the year of receipt. In other words, the assessee was allowed to spread over taxability of receipts in five assessment years from the year of receipt. This aspect has been upheld upto the ITAT in earlier years. The CIT(A) in this year followed the order of his predecessor as well as ITAT in earlier years. At this stage, finding of the Ld.CIT(A) is worth to note which reads as under:-
“4.2.1. From the details submitted by the appellant, it is seen that an amount of Rs.1,70,25,850/- being 1/5th of the subscription amounts received during the AY 2008-09 to AY 2011-12 should have been offered by the appellant as its income in the current assessment year which it has not done. The appellant has also not objected to the proposed enhancement to be made in the current year. Hence, the appellant’s income is enhanced by the amount of Rs.1,70,25,850/-. As has been already discussed, the appellant has accepted that 1/5th portion of contribution of AY 2008-09 to AY 2011-12 had not been offered by the appellant as its income in the return of income for AY 2012-13. Since, the appellant has failed to disclose this amount of Rs.1,70,25,850/- as its income in the current year and the income of the current year has already been directed to be enhanced by this amount, hence, I am satisfied that the appellant had concealed the particulars of such income while filing its return of income for the current assessment
ITA No.766/Ahd/2016 The ACIT vs. M/s.Vadodara Enviro Channel Project Ltd. Asst.Year – 2012-13 - 4 - year. Therefore, penalty proceedings u/s.271(1)(c) rws 274 of the Act for concealment of particulars of income are also initiated separately in respect of the above enhanced income of Rs.1,70,25,850/-.”
The Revenue is of the view that whole receipt deserves to be taxed in this assessment year. The ld.counsel for the assessee contended that identical issue was considered in AY 2008-09. He placed on record copy of Tribunal’s order in the case of Effluent Channel Projects Ltd. vs. DCIT in ITA Nos.1945 & 1948/Ahd/2011 (cross-appeals) dated 24/07/2015 passed for AY 2008-09.
We have duly considered the rival contentions and gone through the record carefully. We find that verbatim facts except variation in quantum are available between this assessment year as well as AY 2008- 09. The discussion made by the Tribunal in AY 2008-09 reads as under:
“3. Brief facts of the case that the assessee is a company. It is engaged in the business of conveyance of industrial effluent and maintenance of channel. It has filed its return of income electronically on 27.9.2008 declaring an income of Rs.2,60,660/- . The assessee has constructed channel which is 15 kilo-meters in length. It ends upto the gulf of Cambay. There are about 300 industrial members, to whom the assessee company provides channel for effluent disposal of member industries. The assessee has received contribution from the members which were shown by the assessee as revenue receipt in the first year. But it recognizes the income to the extent of 1/5th and the rest of the amount was deferred for five years. During the Asstt.Year 2008- 09, the assessee has received contribution of Rs.1,70,76,612/- from new members for life-time membership to avail effluent disposal facility offered by the assessee- company.
ITA No.766/Ahd/2016 The ACIT vs. M/s.Vadodara Enviro Channel Project Ltd. Asst.Year – 2012-13 - 5 - 4. The issue before us is whether the contribution received from the members is to be assessed in the year of receipt or assessee is to be permitted to spread over, over a period of five years. According to the AO, the contribution is to be assessed as income of the assessee in the year of receipt, whereas, in this year, the assessee alleged that it is capital contribution and no liability can be fastened upon the assessee.
On appeal, the ld.First Appellate Authority has rejected the contentions of the assessee that it is capital contribution by following the order of the Tribunal in the Asstt.Year 2001-02. However, the ld.CIT(A) observed that the assessee did not follow the method as followed in earlier years. It has not spread over receipts over a period of five years. Accordingly, the ld.First Appellate Authority has confirmed the addition of Rs.1,03,15,000/-.
The ld.First Appellate Authority further found that as far as the amount received by the assessee in earlier years and spread over, over a period five years, has not been offered for tax in this year. In other words, 1/5th of the amounts received in earlier years, which are to be offered for taxation in this year, not offered. Therefore, the ld.CIT(A) had issued notice for enhancement of the income. The ld.First Appellate Authority after hearing the assessee, and following the order of the ITAT in earlier years as well as Special Bench order in the case of Mahindra Holidays and Resort (I) Ltd., (2010) 131 TTJ (Chennai) (SB), made the addition of Rs.23,95,082/-.
With the assistance of the learned representative, we have gone through the record carefully. We find that in the first assessment year i.e. Asstt.Year 2001-02, the Tribunal has considered this issue in detail and rejected the contentions of the assessee. The issue in dispute is clearly covered by the order of the ITAT. The discussion made by the Tribunal in ITA No.4280/Ahd/2007 reads as under:
“10. We have considered the rival submissions and perused the material on record. So far as the facts are concerned there is no dispute. The assessee company is entirely set up for enabling member industries to discharge their effluents in the Gulf of Cambay. On the basis of quantity of annual effluent emission, a member pays capital contribution to the assessee company which is treated by the assessee company as Revenue receipt but is deferred for being taxed over a period of five years and thus offering for tax only 1/5th thereof and rest 4/5th in ensuing four years. The Revenue intends to tax the entire receipt in the year of receipt on the ground that concept of deferring revenue receipt is alien to Income-tax Act and sections 4,5 & 9 do not provide for such deferment. However, the Special Bench of the Tribunal, Chennai in
ITA No.766/Ahd/2016 The ACIT vs. M/s.Vadodara Enviro Channel Project Ltd. Asst.Year – 2012-13 - 6 - ACIT vs. Mahindra Holidays & Resorts (India) Ltd. (supra) has considered the issue in great length. In that case admission share membership fees was receivable from the new members at the time of their entry or enrolment. The assessee company had offered 40% of such receipts in three initial years and 60% in remaining years out of the life time of membership. General membership was for 33 years but in that case it was reduced to 25 years and therefore, 60% of membership fees was sought to be offered for tax in last 22 years whereas 40% was offered to be taxed in first three years. Revenue sought to tax entire receipt in the year of receipt. Hon. Special Bench referred to the decision of Hon. Supreme Court in E.D. Sassoon & Co. Ltd. vs. CIT (1954) 26 ITR 27 (SC) and referred to observation of their Lordships on page 52 of 26 ITR, wherein the Hon. Apex Court observed that unless and until managing agents complete their performance, viz., the completion of the definite period of service of a year which was a condition precedent to their being entitled to receive the remuneration or commission stipulated thereunder, no debt payable by the companies was created in their favour and they had no right to receive any payment from the companies. Thus no remuneration or commission could therefore be said to have accrued to them at the dates of the respective transfers. Thus unless and until the agents earn their commission it will not accrue to them. But in order that the income can be said to have accrued to or earned by the assessee, it is not only necessary that the assessee must have contributed to its accruing or arising by rendering services or otherwise but he must have created a debt in his favour. A debt must have come into existence and he must have acquired a right to receive the payment. Unless and until his contribution or parenthood is effective in bringing into existence a debt or a right to receive the payment or in other words unless there is a debitum in praesenti, solvendum in futuro, it cannot be said that any income has accrued to the agents. From this observation of Hon. Apex Court the Special Bench of the Tribunal observed that two conditions are necessary to be satisfied to say that income has accrued or earned by the assessee. They are –(i) it is necessary that the assessee must have contributed to its accruing or arising by rendering services or otherwise, and (ii) a debt must have come into existence and assessee must have acquired a right to receive the payment. Another point which was made out by the Special Bench was that the income does not accrue merely on signing of the agreement for enrolling as a member. There is a continuing liability on the part of the assessee not only to provide accommodation but also to provide other incidental services attached with the accommodation. Hon. Special Bench then referred to the decision of Hon. Supreme Court in the case of Rotork Controls India (P) Ltd. vs. CIT 314 ITR 62 (SC) wherein it is observed that liability is defined as a present obligation arising from past events, the
ITA No.766/Ahd/2016 The ACIT vs. M/s.Vadodara Enviro Channel Project Ltd. Asst.Year – 2012-13 - 7 - settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. It was further observed that a past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It also observed that for a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation. From this observation of Apex Court it was observed that there is a definite liability cast on the assessee to fulfill its promise i.e. to continue to provide facilities to members and, therefore, it cannot be said that entire fee received from the new enrolled members had accrued as income in the year of receipt. Finally the Special Bench observed as under :-
“31. We have held that there is a definite liability cast on the assessee to fulfill its promise and therefore, it cannot be said that the entire fee received by it has accrued as income. We have also considered the peculiar nature of the activity along with the complexity attached to it as result of which no reasonable provision for the liability can be made. Therefore, recognizing the entire receipt as income in the year of receipt can lead to distortion. Somewhat similar, though not exactly identical situation was faced by the Supreme Court in the case of Madras Industrial Investment Corporation Ltd. vs. CIT (supra). In that case, the assessee had issued debentures of Rs.1.5 crores at a discount of 2 per cent redeemable after 12 years. At p. 813 of the report, the court observed that ordinarily revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. It is this distortion we have talked about in the earlier part of this para. The only difference is that in the case of Madras Industrial Investment Corporation (supra), the distortion was supposed to be on account of expenditure, in the present case in the distortion is on account of the entire income being accounted in the year of receipt. Earlier, we have also discussed as to how difficult it is to estimate the liability which is likely to be incurred in future, more so in the absence of any scientific basis or historical data. Therefore, the only way to minimize the distortion is to spread over a part of the income over the ensuing years. At this juncture, we may deal with one of the arguments made on behalf of the assessee and the intervener. It was argued that accounting for the
ITA No.766/Ahd/2016 The ACIT vs. M/s.Vadodara Enviro Channel Project Ltd. Asst.Year – 2012-13 - 8 - whole of the income in one year would give a distorted view of the profits of the company which will be against the true and fair principle required for the annual accounts. Well, the distortion the learned counsel talked about was vis-à-vis the presentation of published accounts whereas the distortion the Supreme Court talked about and which we are inclined to follow, is vis-à-vis the real taxable income for a particular year. Therefore, in view of the foregoing discussion, we accept the proposition of the assessee that it is not justifiable to tax the entire income in a single year as is the case of the Department.”
Thus the above judgment clearly lays down a principle that where fees is received by an assessee for rendering services in future then entire such fees cannot be taxed in the year of receipt because the assessee had not performed its part of obligation in the year of receipt. It has to be performed in ensuing year and incur expenditure for such performance. Therefore, entire receipt of membership fees cannot be taxed in one year.
When we apply the above principle to the facts of the present case, we notice that what the assessee has received is termed as capital contribution by the members but it is a revenue receipt in the hands of assessee. Quid pro quo is giving a right to the members to use the effluent discharge channel according to the capacity purchased by them. Thus by this one time payment the members are made eligible to utilize the present capital set up of the assessee company as well as further expansion thereof, if any, or modification thereof, if made by the assessee company in future.
Now we refer to the user agreement which the new member signed with the assessee company. Following clauses are considered as important :-
“(8) CAPITAL CONTRIBUTIONS means contribution towards capital/ expenditure incurred/ lobe incurred by EFFLUENT CHANNEL PROJECT LIMITED for its activities.
(9) M&R CONTRIBUTION means payment of fees for the Maintenance and Repairs of the EFFLUENT CHANNEL annually.
(10) TREATED EFFLUENT means Liquid Effluent discharged after treatment as per the GPCB Consent conditions into the EFFLUENT CHANNEL OF EFFLUENT CHANNEL PROJECT LIMITED.
ITA No.766/Ahd/2016 The ACIT vs. M/s.Vadodara Enviro Channel Project Ltd. Asst.Year – 2012-13 - 9 - (11) COMPANY means EFFLUENT CHANNEL PROJECT LIMT1ED (ECPL) provided for the conveyance of treated effluent as per the GPCB conditions up to the safe disposal, received from the participants. (12) COMMITTED QUANTITY means the quantity of effluent per day, to be discharged by each participant as agreed and specified in his application. PERIOD OF AGREEMENT :
(13) This AGREEMENT shall come into force from the date it is signed and shall remain operational for a period of 99 years.
DELIVERY OF EFFLUENT :
(14) That the PARTICIPANT is a private limited; public limited/ partnership/ proprietorship company.
(15) PARTICIPANT should be made liable only for not meeting the effluent discharged to the ECPL and not for any violation arose at ECPL in conveyance to gulf of Cambay.
(16) The PATICIPANT shall get the consent from the Gujarat Pollution Control Board directing the PARTICIPANT to send its TREATED EFFLUENT to the EFFLUENT CHANNEL OF EFFLUENT CHANNEL PROJECT LIMITED for safe disposal.
(17) The PATICIPANT shall not send in any case any EFFLUENT containing any pollutant beyond permissible limits from his Company or his Sister Company or any other Company for short or long duration. The treated EFFLUENT of PARTICIPANT shall conform to the GPCB consent conditions. The PARTICIPANT shall not discharge effluent exceeding his
(18) The discharge of treated effluent into EFFLUENT CHANNEL of the EFFLUENT CHANNEL PROJECT LIMITED shall be as per committed quantity as in "Application" by the participant to company.
(19) The PARTICIPANT shall be bound to pay M&R charges calculated on its committed quantity and in the event of discharge being less than [he committed quantity, the PARTICIPANT will have
ITA No.766/Ahd/2016 The ACIT vs. M/s.Vadodara Enviro Channel Project Ltd. Asst.Year – 2012-13 - 10 - to pay M&R/ Capital/ Other charges as per committed effluent quantity, within stipulated time limit.
(20) The PARTICIPANT shall be bound to pay M&R/ Other charges calculated on its committed effluent quantity and in the event of high (more than committed) discharge, participant will have to pay M&R/ Other charges as per actual discharge within stipulated time limit, and the rates as applicable.”
Thus a clear right is given by the assessee company to the members to utilize its capital facilities for a period of 99 years for discharge of agreed quantities of effluent. In other words, assessee company has to perform its part of obligation for next 99 years and to keep the capital set up intact and allow the use thereof by the members. This is akin to hiring the capital structure of the assessee company for the next 99 years by making one time hiring charges. Since the assessee company has to ensure use of capital structure by the members during the term of agreement, it is bound to discharge its obligation in future. Thus one time membership fee is not in fact in return for any obligation or services rendered by the assessee in one year. It is a receipt in advance for an obligation to be rendered in future. Thus it cannot be said that income has actually accrued to the assessee in one year even though it might have received it in one year. Merely receipt does not ensure accrual unless equivalent part of agreed services by the receiver is rendered. In fact by paying one time fees a part of debt is created against the assessee which has to be discharged by meeting equivalent obligation in the form of continuing to provide use of the capital structure for efficient discharge of effluent emitted by member-industries. Even accounting standard -9 provides such deferring of revenue for taxation. Accounting Standard 9 has been referred above and para 6 thereof is relevant.
Following the above decision of Special Bench in the case of ACIT vs. Mahindra Holidays & Resorts (India) Ltd. (supra) we hold that the assessee was justified in deferring the revenue for taxation for four years. Accordingly this ground of assessee is allowed.” 8. Respectfully following the above order of the ITAT, we set aside the issue as far as determination of taxability of the receipts received in this year to the file of the AO. The ld. AO shall re-work the amount out of the contribution received in this year on the basis of the Tribunal’s findings in the Asst.Year 2001-02. In other words, the receipt received by the assessee during the accounting period relevant for this assessment year is also to be spread over, over a period of five years. The total
ITA No.766/Ahd/2016 The ACIT vs. M/s.Vadodara Enviro Channel Project Ltd. Asst.Year – 2012-13 - 11 - receipt cannot be assessed in this year. As far as the enhancement made by the ld.CIT(A) is concerned, we do not find any error in the order of the ld.CIT(A), because, the assessee ought to have shown that the amount as income on the basis of claim made in earlier years, i.e. whatever amount representing the alleged 1/5th ought to be offered for taxation in this year. The ld.First Appellate Authority has rightly made the enhancement. 9. In view of the above discussion, the appeal of the assessee is treated as partly allowed, whereas, the appeal of the Revenue is dismissed.” 8. As observed earlier, there is no disparity of facts, the ld.first appellate authority has also considered this order as well as other orders of ITAT on this issue. Therefore, respectfully following the order of the ITAT, we do not find any merit in this appeal of the Revenue, it is dismissed. 9. In the result, Revenue’s appeal stands dismissed. Order pronounced in the Court on 19th February-2019 at Ahmedabad. Sd/- Sd/- ( AMARJIT SINGH ) ( RAJPAL YADAV ) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad; Dated 19/ 02 /2019 ट�.सी.नायर, व.�न.स./T.C. NAIR, Sr. PS आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त(अपील) / The CIT(A)-1, Vadodara �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 5. 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy// उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील�य अ�धकरण, अहमदाबाद / ITAT, Ahmedabad