Loading judgment…
Facts
The assessee, Vapi Green Enviro Limited, is in the business of treatment and disposal of industrial waste. The PCIT passed an order under Section 263 of the Income-tax Act, 1961, holding the assessment order dated 31.03.2022, passed under Section 147 r.w.s. 144B, to be erroneous and prejudicial to the revenue. The PCIT found that the assessee had credited grant income and claimed depreciation on assets acquired from grant funds, which was not considered by the AO.
Held
The Tribunal held that the Gujarat High Court, in assessee's own case, has upheld the principle of mutuality and ruled that income/surplus is not liable to tax. Consequently, disallowance of depreciation is not required to be considered. The PCIT's order was set aside.
Key Issues
Whether the PCIT's order under Section 263 was justified in setting aside the assessment order on grounds of grant income and depreciation, when previous judicial pronouncements including the High Court's decision upheld the principle of mutuality and its applicability to the assessee's case.
Sections Cited
263, 147, 144B, 40(a)(ia), 28(iv)
AI-generated summary — verify with the full judgment below
Before: SHRI T. R. SENTHIL KUMAR & SHRI BIJAYANANDA PRUSETH
आदेश / O R D E R
PER BIJAYANANDA PRUSETH, AM:
This appeal by the assessee emanates from the order passed under section 263 of the Income-tax Act, 1961 (in short, ‘the Act’), dated 20.03.2024, by the learned Principal Commissioner of Income-tax, Valsad [in short ‘PCIT’] for the Assessment Year (AY) 2014-15.
Grounds of appeal
raised by the assessee are as under: “1. The Ld. Principal Commissioner of Income Tax, Valsad, has grossly erred in law as well as on facts and circumstances of the case by passing order u/s. 263 of the I.T. Act, 1961, dated 20.03.2024, holding that the assessment order dated 31.03.2022, passed u/s. 147 r.w.s. 144B of the LT. Act, 1961 by the Ld. Assessing Officer, NFAC for A.Y.2014-15, determining assessed income at Rs.13,66, 47,780/-, is erroneous and prejudicial to the interest of the revenue.
2. The Ld. Commissioner of Income Tax, Valsad, has erred in law and on facts and circumstances of the case by holding that the Ld. Assessing Officer has passed the aforesaid assessment order without making inquiries or verification on the issues which were required to be made.
The Ld. Principal Commissioner of Income Tax, Valsad has also erred in law and on facts by rejecting the submissions and explanation by the Appellant that, Grant from Govt. of India was received for purchase/acquisition/construction/maintenance of capital assets, being plant and machineries forming part of Common Effluent Treatment Plant, which is in use solely for main objects of effluent treatment and therefore, Govt. grant was for acquisition of capital assets and not for revenue expenses and hence, receipt of capital nature cannot be treated as revenue income.
The Ld. Principal Commissioner of Income Tax, Valsad has also erred in law and on facts by rejecting the submissions and explanation by the Appellant that, Grant from Govt. of India has been received for acquiring/running/maintaining Common Effluent Treatment Plant which is providing effluent treatment services to the members on basis of mutuality concept and therefore, funds received specifically towards Common Effluent Treatment Plant as well as use of such plant for common purpose of effluent treatment services to the members and effluent treatment charges received from members are integral and undistinguishable parts of activities of effluent treatment being carried out on the basis of mutuality principle held applicable to the case of the Appellant and accordingly, effluent treatment charges received from members have been held to be not taxable. 5. The Ld. Principal Commissioner of Income Tax, Valsad has also erred in law and on facts by not properly appreciating the submissions and explanations by the Appellant that out of total depreciation of Rs.3,26,23,333/- on assets acquired out of Grant from Govt. of India and own funds, proportionate amount of depreciation of Rs.2,02,34,458/- is relating to assets of Common Effluent Treatment Plant acquired out of Grant from Govt and in respect of adjustment entry has been passed in the books of accounts of the Appellant whereby an amount of Rs.2,02,34,458/- , equivalent to depreciation relating to assets of Common Effluent Treatment Plant acquired out of Grant from Govt. of India, has been deducted from Grant from Government of India directly shown as capital receipts in the Balance Sheet and correspondingly, same amount of Rs.2,02,34,458/- has been shown as credited to Income & Expenditure Account as Grant Income, so as to reduce equivalent amount from total depreciation debited to Income & Expenditure Account. 6. The Ld. Principal Commissioner of Income Tax, Valsad has also erred in law and on facts by not properly appreciating the submissions and explanations by the Appellant that Grant from Govt. of India was received for purchase /acquisition/ construction/maintenance of capital assets, being plant and machineries forming part of Common Effluent Treatment Plant, which is in use solely for main objects of effluent treatment and /AY.2014-15 Vapi Green Enviro Limited therefore, Govt. grant was for acquisition of capital assets and not for revenue expenses and hence, such receipt of capital nature cannot be treated as revenue income only because some portion thereof has been considered as relating to and utilized for meeting revenue expenditure by way of depreciation.
The Ld. Principal Commissioner of Income Tax, Valsad has further erred in law and on facts by passing order u/s 263 of the 1.T. Act, 1961 on 20.03.2024, without considering the fact that, the appeal filed by the Appellant against original assessment order u/s.143(3) dated 26.12.2016, has been allowed by the Hon'ble CIT(A) by order dated 24.09.2018, holding that principle of mutuality is applicable to the Appellant and its income by way of effluent treatment charges received from the members is exempt and also holding that addition of Rs.2,66,90,799/- made by disallowing depreciation is to be deleted.
The Ld. Principal Commissioner of Income Tax, Valsad has also erred in law and on facts by passing order u/s.263 of the I.T. Act, 1961 on 20.03.2024, without considering the fact that, further appeal filed by the department has been dismissed and the Hon'ble ITAT, in common order dated 09.11.2021, for AY 2013-14 & 2014-15, has confirmed the order passed by the Hon'ble CIT(A) and the Hon'ble ITAT has further held that, though depreciation was debited to Income & Expenditure Account in the books, deduction for such depreciation was not claimed from taxable income shown in the return of income and as such, it is held that once the expenses is not claimed as deduction, no disallowance is sustainable.
The Ld. Principal Commissioner of Income Tax, Valsad has also erred in law and on facts by passing order u/s.263 of the I.T. Act, 1961 on 20.03.2024, without considering the fact that, the assessment order dated 31.03.2022 passed u/s. 147 r.w.s. 144B of the 1.T.Act, 1961 by the Ld. Assessing Officer for A.Y.2014-15 which is sought to be revised, is subject matter of appeal filed by the appellant and is still pending consideration by the Hon’ble CIT(A).
The Appellant prays to reserve the right to add, alter, amend or withdraw any of the above grounds of appeal
.”
3. Brief facts of the case are that the assessee was engaged in the business of treatment and disposal of industrial waste. It filed its return of income for the AY 2014-15 on 19.11.2014, declaring total income of Rs.2,13,24,680/-. Assessment u/s 143(3) of the Act was completed on 26.12.2016, assessing the total income at Rs.11,87,47,780/- by making /AY.2014-15 Vapi Green Enviro Limited addition of Rs.7,02,40,298/- due to denial of concept of mutuality, disallowance of depreciation of Rs.2,66,90,799/- and addition of Rs.4,92,000/- u/s 40(a)(ia) of the Act. Subsequently, the case was reopened vide notice u/s 148 dated 31.03.2021 and assessment was completed u/s 147 r.w.s. 144B of the Act on 31.03.2022 determining total income at Rs.13,66,47,780/- after making addition of Rs.1,79,00,000/- u/s 28(iv) of the Act on account of the grant from notified area authority for road upgradation project, which had not been credited to the income and expenditure statement. Thereafter, the ld. PCIT called for the records and verified the financial statements, assessment order, computation of income and 3CD report and observed that appellant had credited ‘grant income’ of Rs.2,02,34,458/- in its profit and loss account under the head ‘Other income’ and the same was adjusted for depreciation and impairment against the grant from Govt. of India in the balance sheet. In computation of income, grant income of Rs.2,02,34,458/- had been reduced and not offered for tax. It was noticed in the significant accounting policies of grants that grants that grants related to specific project for depreciable assets are to be treated as deferred income which is recognized in the income and expenditure on a systematic and rational basis over the useful life of the assets. Appellant had purchased assets mentioned in fixed assets out of grant and own funds in the proportion of 64:36. The appellant had claimed depreciation of Rs.3,26,23,333/- on fixed assets purchased out of grant and /AY.2014-15 Vapi Green Enviro Limited own funds and 64% of depreciation amounting to Rs.2,02,34,458/- (64% of Rs.3,26,23,333) was treated as deferred income and credited in the profit and loss account. The appellant had wrongly claimed depreciation of Rs.2,02,34,458/- on assets purchased from grant income. The grant income should not be reduced while computing total income, which was not done by the AO. Hence, the ld. PCIT found that in the order passed u/s.147 r.w.s. 144B of the Act dated 31.03.2022, the aforesaid issues had not been considered by the AO and thus, the income has been under assessed. 3.1 In view of the above facts, the ld. PCIT issued a show cause notice on 27.02.2024, which is at para 3 of the order u/s 263 of the Act. In response, the appellant filed written submission on 12.03.2024, which is at para 4 of the 263 order. In the submission, the appellant stated that since the grant fund was for acquisition for capital asset and not for revenue expenses, the same cannot be treated as revenue income. The depreciation of Rs.2,02,34,458/- was in respect of the capital asset acquired out of the grant fund. Further, such proportionate depreciation on assets acquiried out of grant fund is not on allowable deduction from income of assessee because such income is an exempt income. To reduce the depreciation amount debited in the Income & Expenditure account, an amount of Rs.2,02,34,458/- has been credited to the Income and Expenditure account by way of adjustment entry for deferred income from government grant. The ld. PCIT found claim of assessee as contradictory to the significant /AY.2014-15 Vapi Green Enviro Limited accounting policies in respect of such receipts of grant. The ld. PCIT observed that the Department has not accepted the income received for effluent treatment charges as exempt income and charged the same to tax by denying the benefit under the principle of mutuality. The Department filed appeal before the Hon’ble jurisdictional High Court against order of ITAT in favour of assessee by arguing that the said income is not covered under concept of mutuality. The order of Hon’ble High Court was still pending. Accordingly, the ld. PCIT concluded that the order dated 31.03.2022 passed by the AO u/s 147 r.w.s. 144B of the Act was erroneous in so far as it was prejudicial to the interests of Revenue. Therefore, the aforesaid order was set aside u/s 263 of the Act to the extent of disallowance of Rs.2,02,34,458/- not considered by the AO while finalizing the assessment u/s 147 r.w.s. 144B of the Act and AO was directed to frame fresh assessment order to the extent as discussed above. Accordingly order u/s 263 of the Act was passed by ld. PCIT on 20.03.2024, for the AY 2014- 15.
4. Aggrieved by the order of PCIT, the appellant has filed appeal before this Tribunal. The learned Authorised Representative (ld. AR) of the appellant filed two paper books, i.e., (i) giving details of notices and replies/documents submitted to the lower authorities and (ii) paper book containing copies of order passed u/s 143(3) of the Act, order passed by CIT(A), order passed by ITAT, and High Court, assessment order passed u/s /AY.2014-15 Vapi Green Enviro Limited 147 r.w.s. 144B of the Act, etc. The ld. AR also submitted in the paper book acknowledgement of ROI and computation of income for AY 2014-15, audited financial statements, show cause notice u/s 263 issued by PCIT, reply filed by the appellant on 12.03.2024, etc. She submitted that no depreciation was claimed by the appellant, which is clear from page 2 of the paper book, where the depreciation of Rs.5,72,27,528/- has been added back to the profit before tax as per the Income & Expenditure account. She further submitted that AO has already examined the issue and hence revision u/s 263 of the Act is not permissible. She also submitted that the Hon’ble High Court has passed order in R/Tax Appeal No.689 of 2012, dated 14.10.2024 in favour of the assessee after order of the PCIT u/s 263 of the Act on 20.03.2024. In view of these facts, she submitted that the order of PCIT cannot be upheld.
On the other hand, the learned Commissioner of Income-Tax - Departmental Representative (ld. CIT-DR) of the Revenue supported the order of the PCIT.
We have heard both the parties and perused the materials available on record. We have also deliberated on the decisions relied upon by the parties. On perusal of the records, it is evident that the appellant had credited Rs.4,26,91,364/- including the grant of Rs.2,02,34,458/- in the Income & Expenditure account as “Other income” (Page Nos.14 & 20 of PB). The appellant followed the Accounting Standard and treated the /AY.2014-15 Vapi Green Enviro Limited proportionate depreciation of Rs.2,02,34,458/- (i.e., 64% of Rs.3,26,23,333/-) on grant-funded assets as deferred income, thereby neutralizing the effect of grant in a systematic manner over the useful life of the assets. The grant was neither claimed as deduction nor directly reduced from the cost of assets, but was treated has deferred revenue income. The appellant submitted that the entire income arising from the effluent treatment charges received from the members of the appellant company was treated as exempt income on principle of mutuality and the appellant has not claimed deduction of any expenditure debited to the Income & Expenditure account including the impugned depreciation and, therefore, the question of any disallowance for addition will not arise. We find that the ld. PCIT in the order u/s 263 at para 6.2 has observed that the Department has not accepted the income received by way of effluent treatment charges as exempt income and has charged the same to tax by denying benefit of the principle of mutuality. The Department has filed appeal before the Hon’ble jurisdictional High Court and appeal was still pending before the Hon’ble High Court. Hence, the contention of the appellant was not accepted. The ld. AR submitted that the Hon’ble High Court has subsequently passed order in favour of the appellant. She has enclosed copy of the said order, which is at pages 32 to 44 of the paper book. We find that the Hon’ble Gujarat High Court in its decision dated 24.10.2024 (supra) has dismissed appeal of the revenue and upheld the /AY.2014-15 Vapi Green Enviro Limited applicability of the principle of mutuality in case of the appellant. It also held that if the income is not liable to tax on principle of mutuality, the disallowance of depreciation is not required to be considered. The relevant portion of the decision is reproduced below for ready reference and clarity: “31. All the above factors and the facts found by the CIT(A) would fall outside the scope of destroying the basic ingredients of the principle of mutuality. The objects of the company also make it clear that the surplus, if any, would not be paid to its members and in case of dissolution of the respondent company, only Rs.100/- would be paid to its members. Thus, the submissions made by the learned advocate for the appellant revenue relying upon the findings arrived at by the CIT(A) are contrary to the settled legal position and the Tribunal has rightly therefore held in favour of the assessee by applying the principle of mutuality by holding that the income/surplus of the respondent assessee company would not be liable to tax on principle of mutuality. We are therefore, of the opinion that no question of law much-less and substantial question of law has arisen from the impugned orders passed by the Tribunal. The Tribunal has also rightly held that if the entire income/surplus of the respondent assessee company is not liable to be taxed on the principle of mutuality, the disallowance of depreciation and deduction u/s 80IA of the Act is not required to be considered. The questions are answered accordingly against the revenue and in favour of the assessee. The appeals filed by the revenue are accordingly dismissed.”
The Hon’ble High Court has held that the “principle of mutuality” is applicable in case of the appellant and the income/surplus of the assessee company would not be liable to tax on principle of mutuality. It has also held that if the entire income/surplus is not liable to the tax on principle of mutuality, disallowance of depreciation and deduction u/s 80IA of the Act is not required to be considered. In view of the facts discussed above and respectfully following the decision of the Hon’ble jurisdictional High Court in assessee’s own case for difference AYs including the impugned AY 2014- 15 (supra), we do not find any substance in the order of the ld. PCIT.
/AY.2014-15 Vapi Green Enviro Limited Accordingly, the order passed u/s 263 of the Act dated 24.03.2024 is set aside and appeal of the assessee is allowed. 8. In the result, appeal of the assessee is allowed. Order is pronounced under provision of Rule 34 of ITAT Rules, 1963 on 12/08/2025.