2016 (4) TMI 379 - AT - Income Tax

Tribunal rules in favor of assessee, recognizing initial connection charges, depreciation eligibility, and more.

Deputy Commissioner of Income Tax, Gandhinagar Circle, Gandhinagar Versus Sabarmati Gas Co. Ltd. and Vica-Versa and Asstt. Commissioner of Income Tax, Gandhinagar Circle, Gandhinagar Versus Sabarmati Gas Co. Ltd.

Deputy Commissioner of Income Tax, Gandhinagar Circle, Gandhinagar Versus Sabarmati Gas Co. Ltd. and Vica-Versa and Asstt. Commissioner of Income Tax, ... Issues Involved:1. Deletion of addition made on account of initial connection charges.2. Estimation of the value of closing stock of natural gas.3. Disallowance of depreciation on meters and instruments.4. Treatment of additional depreciation for the process of compression of natural gas.5. Treatment of liquidated damages received from suppliers and vendors of machinery.Detailed Analysis:Issue 1: Deletion of Addition Made on Account of Initial Connection ChargesThe Revenue challenged the deletion of an addition of Rs. 5,28,72,901/- related to initial connection charges. The Assessing Officer (A.O.) had considered these charges as revenue receipts, arguing that the meters and equipment remained the property of the assessee. The CIT(A) deleted this addition, noting that Rs. 4,76,62,071/- was collected on behalf of BPCL and shown as current liabilities, while Rs. 52,50,830/- was a capital receipt netted off against the value of plant and machinery. The Tribunal upheld CIT(A)'s decision, emphasizing that the Revenue failed to provide evidence to counter these findings.Issue 2: Estimation of the Value of Closing Stock of Natural GasThe A.O. added Rs. 15,97,186/- to the assessee's income, estimating the value of closing stock of natural gas. The assessee argued that there was no closing stock because the gas was sold immediately upon purchase. The CIT(A) deleted the addition, agreeing with the assessee's explanation that no storage facility existed and the gas was sold directly from the delivery point. The Tribunal upheld this decision, noting the Revenue's failure to disprove the assessee's claims.Issue 3: Disallowance of Depreciation on Meters and InstrumentsThe A.O. disallowed Rs. 44,95,071/- claimed as depreciation on meters and instruments, arguing that the assessee was not the owner of these assets. The CIT(A) reversed this disallowance, confirming that the assessee owned the meters and instruments and had claimed depreciation after reducing the initial connection charges. The Tribunal upheld CIT(A)'s decision, finding no evidence to contradict the assessee's ownership of the assets.Issue 4: Treatment of Additional Depreciation for the Process of Compression of Natural GasThe A.O. denied additional depreciation of Rs. 80,87,323/-, arguing that the compression of natural gas did not constitute manufacturing. The CIT(A) upheld this view, citing that the process did not change the gas's composition or properties. However, the Tribunal reversed this decision, relying on precedents that recognized similar processes as manufacturing. The Tribunal directed the A.O. to allow the additional depreciation, aligning with decisions in similar cases.Issue 5: Treatment of Liquidated Damages Received from Suppliers and Vendors of MachineryThe A.O. added Rs. 48,689/- received as liquidated damages to the assessee's income, treating it as a revenue receipt. The CIT(A) upheld this addition but directed the A.O. to grant depreciation on the amount. The Tribunal reversed this decision, treating the liquidated damages as a capital receipt, following the precedent set by the Supreme Court in the case of Saurashtra Cement Ltd. The Tribunal directed the A.O. to delete the addition and reverse any depreciation granted.ConclusionThe Tribunal dismissed the Revenue's appeals and allowed the assessee's appeal, providing relief on all contested issues. The key takeaways include the recognition of initial connection charges as either liabilities or capital receipts, the non-existence of closing stock for immediate sales, the eligibility for depreciation on owned assets, the classification of compression of natural gas as manufacturing, and the treatment of liquidated damages as capital receipts.