2012 (4) TMI 813 - AT - Income Tax

ITAT: Effluent Treatment Receipts Classified as Business Income, Mutuality Principle Not Applied

The ITAT upheld the classification of effluent treatment receipts as business income due to the company's surplus and dealings with non-members. The ... - Issues Involved:1. Exemption of effluent treatment receipts on the principle of mutuality.2. Classification of effluent treatment receipts as business income.3. Non-granting of set off for carried forward losses.4. Non-granting of deduction u/s 80IA.5. Disallowance of non-business expenditure as donations.6. Allowance of depreciation.Summary:1. Exemption of Effluent Treatment Receipts on Principle of Mutuality:The assessee argued that the effluent treatment receipts should be exempt from income based on the principle of mutuality. The A.O. observed that the assessee was engaged in normal business activities and not exclusively dealing with its members, hence the principle of mutuality was not applicable. The CIT(A) upheld this view, noting that the complete identity between contributors and participants was missing, and the company undertook projects without direct nexus to member contributions. The ITAT directed the A.O. to verify if any non-members received services, and if so, tax those receipts accordingly.2. Classification of Effluent Treatment Receipts as Business Income:The A.O. classified the effluent treatment receipts as business income, noting that the company earned a significant surplus and dealt with non-members. The CIT(A) agreed, stating that the income derived from specific services performed for members is chargeable u/s 28(iii). The ITAT upheld this classification but directed the A.O. to verify the services provided to non-members.3. Non-Granting of Set Off for Carried Forward Losses:The assessee contended that the A.O. did not grant set off for carried forward losses of earlier years. The CIT(A) did not address this ground due to the rejection of the mutuality claim. The ITAT did not specifically address this issue in its final remarks, implying it was secondary to the mutuality principle.4. Non-Granting of Deduction u/s 80IA:The assessee claimed deduction u/s 80IA, which the A.O. disallowed as it was not claimed in the return. The CIT(A) upheld this disallowance, citing the Supreme Court decision in GOETZE (INDIA) LTD. The ITAT noted that this ground had no meaning once the principle of mutuality was accepted.5. Disallowance of Non-Business Expenditure as Donations:The A.O. disallowed donations as non-business expenditure, which the CIT(A) partly upheld. The ITAT did not specifically address this issue in its final remarks, implying it was secondary to the mutuality principle.6. Allowance of Depreciation:The A.O. disallowed depreciation, which the CIT(A) allowed. The ITAT upheld the allowance of depreciation, stating it had no bearing once the principle of mutuality was accepted.Conclusion:The ITAT directed the A.O. to verify the claim of services provided to non-members and tax accordingly. The principle of mutuality was accepted, affecting the treatment of other grounds such as deduction u/s 80IA and disallowance of operating expenses. The appeals were set aside for statistical purposes.