2010 (7) TMI 554 - AT - Income Tax

Appeals Affirm Deduction Under Section 80-IA(4) and Addition Under Section 41(1)

The appeals for the assessment years 2004-2005 and 2005-2006 were dismissed, affirming the deduction under Section 80-IA(4) for compensatory payments ... Deduction u/s 80-IA(4) - minimum guaranteed charges received by the assessee - Held that: - For the sake of proper understanding, we are splitting this 5000 kgs. into two parts viz., 4000 kgs. actually treated by the assessee and 1000 kgs. which are not treated but payment is made as per agreement with MCGM. Deduction has been negatived by the AO on the income from receipts towards 1000 kgs. by assigning the reason that it can not be held as derived from the eligible undertaking. - Whole of the amount is operational income, be it from actual or notional operation of undertaking. As the relation between income from notional operation and undertaking is direct and not indirect or remote, by no standard can it be viewed as anything other than not derived from the eligible undertaking. - Deduction u/s 80IA allowed.Addition u/s 41(1) - it was noticed by the A.O. that an amount was outstanding since accounting year 2001-2002 - The assessee claimed that there was some dispute with M/s.PHE Consultants which was not yet settled and hence the amount was outstanding. - AO made the addition as deemed income u/s 41(1) - Held that: - it becomes patent that the provisions of section 41(1) are rightly attracted here inasmuch as the assessee claimed deduction for the same in an earlier year and subsequently the amount ceased to be payable as is manifest from the information supplied by M/s PHE Consultants who erased the amount due from assessee by showing Nil balance as recoverable. - Order of AO making addition upheld. Issues Involved:1. Deduction under Section 80-IA(4) for compensatory payments received by the undertaking.2. Addition under Section 41(1) for cessation of liability.Issue-wise Detailed Analysis:1. Deduction under Section 80-IA(4) for Compensatory Payments Received by the Undertaking:The core issue in the appeals for the assessment years 2004-2005, 2005-2006, and 2006-2007 revolves around the deduction under Section 80-IA(4) of the Income-tax Act, 1961. The assessee was awarded a project for Biomedical Waste Treatment (BMW) on a BOOT basis by the Municipal Corporation of Greater Mumbai (MCGM). The assessee claimed the entire profit of the business as deductible under Section 80-IA(4), which included compensatory payments for the minimum guaranteed load of BMW treatment.The Assessing Officer (AO) noted that the assessee received payments not only for the actual work done but also for the guaranteed supply of BMW for treatment. The AO excluded the excess receipts from the eligible profit for deduction, arguing that they were not derived directly from the eligible business. This was based on the interpretation that the term 'derived from' has a narrower meaning than 'attributable to,' as supported by judicial precedents like Pandian Chemicals Ltd. Vs. CIT and Liberty India Vs. CIT.The Commissioner of Income-tax (Appeals) [CIT(A)] disagreed with the AO, allowing the deduction on the entire minimum guaranteed charges, reasoning that the entire receipt was directly related to the eligible business. The Revenue appealed against this decision.The Tribunal upheld the CIT(A)'s decision, emphasizing that the entire receipt, whether for actual or notional treatment of BMW, had a direct relation with the eligible enterprise. The Tribunal noted that the payment for notional treatment was not from a different scheme but from the same contract with MCGM, making it operational income derived from the eligible business.2. Addition under Section 41(1) for Cessation of Liability:For the assessment year 2006-2007, the AO added Rs.7,50,000 under Section 41(1) of the Act, which was shown as payable to M/s PHE Consultants since the accounting year 2001-2002. The AO made this addition based on the information that the amount was no longer payable due to a dispute, and M/s PHE Consultants had squared up the account, showing Nil balance.The CIT(A) deleted this addition, but the Tribunal reversed this decision. The Tribunal found that the amount had ceased to be payable, as evidenced by the information from M/s PHE Consultants, and since the assessee had claimed this amount as an expenditure in an earlier year, the provisions of Section 41(1) were rightly attracted. Therefore, the Tribunal restored the AO's action, making the addition under Section 41(1) justified.Conclusion:- Appeals for assessment years 2004-2005 and 2005-2006 were dismissed, upholding the deduction under Section 80-IA(4) for compensatory payments.- Appeal for assessment year 2006-2007 was partly allowed, upholding the addition under Section 41(1) for cessation of liability.