Effluent Treatment Plant eligible for 100% Depreciation

ORDER

Sanjay Arora, Accountant Member – This is an Appeal by the Assessee directed against the Order by the Commissioner of Income Tax (Appeals)-22, Mumbai (‘CIT (A)’ for short) dated 17.3.2011, partly allowing the Assessee’s appeal contesting its assessment u/s.143(3) of the Income Tax Act, 1961 (‘the Act’ hereinafter) for the assessment year (A.Y.) 2006-07 videorder dated 11.12.2008.

2.1 The issue in this appeal is the validity or otherwise in law of the assessee’s claim for depreciation on what it calls an Effluent Treatment Plant (ETP), costing Rs. 29,13,344/-. While the Revenue considers it as an item of plant and machinery, allowing depreciation thereon at the normal rate of 15%, plus additional depreciation @ 20% (i.e., at a total of 35%), the assessee agitates for allowance of depreciation at 100%, pressing its claim under clause III(ix)[(e) & (q)] of Part A of Appendix I prescribed under rule 5 of the Income Tax Rules, 1962 (‘the Rules’ hereinafter), raising the following Grounds:

2.2 At the first appellate stage, the assessee sought to refurbish its said claim by furnishing a certificate from a Chartered Engineer (dated 18.12.2009) as well as the Environmental Audit Report (EAR) dated 25.01.2008 qua an audit carried out by Ahmedabad Textile Industry’s Research Association (ATIRA) – an independent body appointed by Gujarat Pollution Control Board, Gandhi Nagar (GPCB) in compliance with the orders dated 20.12.1996 and 13.3.1997 of the Hon’ble High Court of Gujarat, as further modified vide its order dated 16.9.1999. The same, despite being objected to by the Assessing Officer (A.O.), were admitted as additional evidence by the ld. CIT(A) under r. 46A of the Rules. Copies of invoices of various bought out materials – ETP having been fabricated in-house, were also submitted, even as the assessee claimed of having submitted the same during the assessment proceedings itself. On merits, the A.O. vide his remand report dated 04.2.2011 to the ld. CIT(A), observed as follows:—

‘v. Without prejudice to the above, the submissions made by the assessee are examined. Even in the said additional evidences, the assessee has not furnished the evidences of the said ETP plant, the expenditure incurred, the components/apparatus/equipments forming part of the said ETP and the cost incurred on the assembly and putting to use of the same. The assessee has relied upon a certificate of a Chartered Engineer and some audit report without producing the actual invoices and evidences for the acquisition/construction of the said ETP, on which the assessee has claimed depreciation @ 100%. Hence, the claim is still unsubstantiated and, accordingly, disallowable.’

The ld. CIT(A), on a consideration of the materials before him, held as under:

‘From the above report of the A.O. it may be noted that the assessee failed to furnish the evidence regarding expenditure incurred, equipments forming part of ETP, cost incurred on assembling, etc. even during the opportunity given in remand proceedings before A.O. This ETP as claimed by appellant is an in-house developed ETP and not purchased from outside agency and hence assessee had to maintain all details of expenses incurred on its construction. Since the claim of 100% depreciation made by the appellant could not be verified by the A.O. for non-submission of details, the same is not allowable as deduction and accordingly the disallowance made by the A.O. is upheld.’

Aggrieved, the assessee is in second appeal.

3. We have heard the parties, and perused the material on record.

The Revenue’s case, as apparent from the foregoing, is that the assessee’s claim (for depreciation on ETP) is unsubstantiated inasmuch as it has not been able to conclusively show that what was fabricated was an ETP, i.e., the assessee had not been able to adduce sufficient evidence to establish that an ETP was installed by it during the relevant previous year. In our view, in view of the bills for material and labour submitted (PB pgs. 46-76); the assessee’s audited accounts, coupled with the certificate of the Chartered Engineer and the EAR (for the year 2007), there could reasonably be no doubt in the matter. On the Bench questioning the ld. Authorized Representative (AR), the assessee’s counsel, as to why the environmental audit was conducted, admittedly for the first time, only in the year 2007 and not in the year 2006, being mandatory, with the installation of the ETP having been completed and, rather, stated as having been put to use (for the first time) by 30.9.2005, he could furnish no satisfactory answer, stating that the issue of the date of installation and of being put to use for the first time by 30.9.2005 is not in dispute; the Revenue having itself allowed depreciation at the normal rate of depreciation, in full. We will visit this aspect of the matter later.

The question, however, is: Even granting that an ETP was set up and put to use during the relevant year, would it qualify to be a Water Pollution Control (WPC) Equipment, i.e., in terms of the relevant clauses of Appendix I, which read as under, so as to be eligible for depreciation @ 100%:

‘(ix) Water pollution control equipment, being –

(a) to (d)

(e) Mechanical flocculators and mechanical reactors

(f). . . . . . . . . . . . . . . . . . . . .

(q) Activated carbon column’

Clearly, it is not any WPC equipment, but one which is constituted or comprised of any of the specified systems, that would qualify for depreciation at the enhanced rate. In other words, an ETP is without doubt a WPC equipment, set up to treat the fluid effluent and waste prior to its discharge from an industrial unit. The very fact that an environment audit was carried out in the present case, which bears abundant reference to the ETP (including its flow chart at Ann. 8 thereto), along with an examination of its various aspects as Water (per a separate section (C)); Quality of Effluent; Energy consumption of ETP; Analysis Reports, etc., establishes so. Whether it, however, constitutes or is comprised of any of the systems stated in the relevant clauses has not been subject to examination by the Revenue at any stage. The ld. AR would toward this state that the certificate (supra) by the Chartered Engineer, clearly mentioning of the ETP as made up by, to quote ‘assembling the systems, namely, Mechanical Flocculators and Mechanical Reactors and Activated Carbon Column’, i.e., the systems as specified under the relevant clauses, has not been doubted by the Revenue. If that were the case, how we wonder could the Revenue disallow the assessee’s claim in the first place? At the same time though, we are inclined to agree with the assessee’s case. It has furnished all the materials it considered proper and relevant for the purpose. No further queries were raised, asking it to substantiate a particular aspect, by the Revenue. The assessee under the circumstances should not be put to the rigmarole of fresh proceedings before the A.O., who had another occasion during the remand proceedings to question and examine the assessee’s claims. This is more so as there is nothing on record to suggest otherwise, with the assessee having placed all the materials it is reasonably expected to before the Revenue authorities. We accordingly accept the assessee’s claim of the ETP installed and being used at its industrial unit as falling under the relevant sub-clauses of clause A (III)(ix) of Appendix-I and, thus, eligible for depreciation @ 100%.

Coming back to the aspect of the date of the ETP being put to use for the first time, we find that despite having been allowed depreciation in full (at the normal rate), the following bills/vouchers indicate otherwise:

The ld. AR, on being confronted therewith, would submit that these bills are for labour, which are raised much after the actual conduct of the work and, accordingly, are not indicative of when the work was actually completed. We are unable to agree. The bills are, firstly, also for materials. Again, a delay in raising bills is understandable only for a few days, stretching up to a week to ten days, while in the instant case the bills continue to be raised even up to March, 2006. Then, again, as a matter of practice, it could be that the bills are raised for a month, at its end. There is in fact a labour bill for 30.9.2005 itself (PB pg. 52), by Mamta Engg. Works, suggesting raising of bills on a regular basis. In fact, even if not so, the bills, where the work is scheduled to be completed by a particular date, would normally be issued by that date or otherwise indicate to the work date. There is further nothing on record which could positively establish the use of the ETP from 01.10.2005, as in the form of commissioning report; ETP power consumption (which is separately metered); consumption of chemicals for use in ETP, et. as. The EAR contains specific reference to the ETP records. The EAR is also silent in this regard, being, as aforenoted, only for the period January 2007 onwards. We are, at the same time, conscious that there has been no verification qua this aspect of the matter by the Revenue, who has proceeded by accepting the assessee’s claim. The assessee, therefore, has not got an opportunity to properly represent its case in the matter. We, accordingly, restrain from issuing any final finding in the matter, and consider it only proper to restore this aspect of the matter back to the file of the A.O. The assessing authority, where not satisfied with the assessee’s explanation, or if the assessee itself concedes not to press this aspect, shall, in giving effect to this order, allow deprecation at 50% of the cost for the current and the following year inasmuch as we have confirmed it to be eligible for depreciation @ 100%. This, it would be appreciated, is even otherwise incumbent on him inasmuch as he has to, while allowing additional depreciation for the current and/or the following year, withdraw the depreciation for the subsequent years; the issue at hand concerning the rate of depreciation, so that the issue in essence involves timing difference. We decide accordingly.

As regards our competence to issue such a direction, i.e., qua the date of installation and put to use for the first time (of the ETP), we may clarify that as explained by the Hon’ble Courts, the tribunal is empowered to frame issues it considers as arising out of the impugned order. The matter under reference is a matter of fact, relevant to the issue, and on which we observe no finding by the Revenue. Reference for the purpose of law in the matter may be made to the decision by the Hon’ble Apex Court in Kapurchand Shrimal v. CIT [1981] 131 ITR 451 (SC) and by the Hon’ble jurisdictional High Court in Ahmedabad Electricity Co. Ltd. v. CIT [1993] 199 ITR 351 (Bom.) (FB), rendered relying on a series of decisions by the Apex Court.

4. In the result, the assessee’s appeal is partly allowed.