2005 (11) TMI 483 - AT - Income Tax

Disallowance u/s 37 - Loss on account of valuation of non-moving stores and spares - Prior Period Adjustments - Interest on electricity duty' falls u/s 43B - Peripheral Development Expenses - Payment towards contribution to Mineral Development Fund set up by Government of India - Water charges' payable to Government of Orissa and interest on 'Water charges' payable to Government of Orissa) as 'fees' - Contribution towards Mineral Development Fund set up by Government of India - Contribution towards benevolent fund. HELD THAT - From reading of the notes on accounts of the 3 public sector undertakings we are of the opinion that the diminution of value because of obsolescence at 20 per cent of historical cost cannot be said to be without any basis. Neither this can be said to be improper. We are further of the opinion that although the stores and spares relate to past years, the appellant had made the revaluation during the current year and subsequent years on the basis of audit objections by the C AG when they pointed out that the profit has been overstated. Accordingly, the bona fides of such change also should not be doubted. The change effected by the assessee is bona fide and aimed at obtaining correct business profit as such obsolete stocks/non-moving spare parts went on losing their values thereby distorting the true profits of the appellant. Relying on the case of Chainrup Sampatram vs. CIT 1953 (10) TMI 2 - SUPREME COURT , we set aside the order of the CIT(A) on this ground and direct the AO to allow the claim of loss on account of value of non-moving stores and spares. We direct accordingly. The ground of appeal No. 1 by the appellant is accordingly, allowed. Prior Period Adjustments - We find that the learned CIT(A) had confirmed an amount under other manufacturing expenses and under 'administrative, selling and distribution expenses'. As regards other manufacturing expenses, we find that the appellant had issued 18.675 kgs. of nitric acid for consumption during the financial year 1992-93. However, by mistake the issue voucher was prepared at 1867.5 kgs. This difference was found out during the inventory verification in the financial year 1993-94 and the amount short charged during the financial year 1992-93 was debited to the P L a/c during the financial year 1993-94 as prior period expenses. We find that this is the only way in which the assessee could rectify this mistake by debiting the prior period expenses. Accordingly, we direct the AO to delete the above addition. As regards administrative, selling and distribution expenses, we find that the appellant during the course of appeal hearing had filed only item-wise expenses amount on 14 items. However, no further details were filed for which it was impossible on the part of the learned CIT(A) to conclude that liability in regard to the above items had crystallized in the relevant previous year. We further find that at the time of hearing before us, apart from the said submissions, the appellant had not furnished any further evidence to this effect. Accordingly, considering the totality of the facts of the case and in the interest of justice, we restore the issue back to the file of the AO directing him to give one more opportunity to the appellant to produce the details. Accordingly, the grounds raised by the appellant are partly allowed for statistical purposes. In the result, the appeal file by the assessee for the asst. yr. 1994-95 is partly allowed. Interest on electricity duty' falls u/s 43B - delay in payment - We are of the considered opinion that the interest on electricity duty is compensatory in nature and has to be allowed as a general business expenditure. The provision of s. 43B is not applicable for such interest. The AO is directed to allow the same as business expenditure. Accordingly, the ground by the appellant is allowed. Peripheral Development Expenses - We find that the appellant had incurred certain expenses on its employees and persons who have been displaced when the plant was constructed. We further find that some of the expenses have been incurred on the directions of the authorities like Orissa State Pollution Control Board, Ministry of Environment and Forest as per condition to review its clearance certificate. We also find that money has been spent by the appellant as a good corporate citizen and to earn the goodwill of the society thereby creating an atmosphere in which the business can succeed in a greater measure with the aid of such goodwill. In the result, the appeal filed by the appellant is partly allowed. Water charges' payable to Government of Orissa and interest on 'Water charges' payable to Government of Orissa) as 'fees' - We find that the appellant has made provisions towards water charges as per the notification of the Government of Orissa, Ministry of Water Resources. We further find that there is no dispute that the water charges are in the nature of statutory liability. We further find that the learned CIT(A) while deciding the appeal against the assessee relied upon the decision of the Hon'ble Calcutta High Court in the case of Orient Paper Industries Ltd. 1994 (1) TMI 14 - CALCUTTA HIGH COURT . Thus, we are of the considered opinion that the remaining amount has to be allowed as business expenditure u/s 37 of the IT Act. We direct accordingly. The ground of appeal No. 3 by the appellant is accordingly, allowed. Provision of unpaid interest on water charges amount , we are of the considered opinion that the same is compensatory in nature and does not fall within the purview of s. 43B as per our earlier findings in ground of appeal No. 2 for the asst. yr. 1995-96 on account of interest on electricity duty. Accordingly, we direct the AO to allow the interest on such unpaid water charges as a general business expenditure u/s 37(1) of the IT Act. We direct accordingly. The ground raised by the appellant is partly allowed. Contribution towards Mineral Development Fund set up by Government of India - We find that the payment is not a voluntary one and it is a payment on the basis of the direction given by the Government of India, Ministry of Mines, under which the appellant comes and has been paid as per the proven deposit of Bauxite on the basis of proven data. When a Government undertaking is under the obligation to make certain payments as per specific direction of the Government of India, it cannot but be in the business interest of the assessee-company to abide by such directions of the Government of India which also owns the assessee-company. Accordingly, in our considered opinion, the above payment is a statutory requirement and the expenditure has been incurred wholly and exclusively for the purpose of business and has got a direct nexus with the business activity of the company. We further find that the above amount has been released on 31st Dec., 1998. Since the assessee is following the mercantile system of accounting and the provision has been made on the basis of office order, the same has been rightly accounted for in the year of accruing of the liability. Thus, we are of the considered opinion that the above expenditure has to be allowed as a business expenditure u/s 37(1) of the IT Act. We direct accordingly. The grounds of appeal filed by the appellant is accordingly, allowed. In the result, the appeal filed by the assessee is partly allowed. Contribution towards benevolent fund - We find from the said scheme that the membership is voluntary. We further find that as per the said scheme the deceased person's family shall get @ ₹ 10 multiplied by the number of employees. The sum of ₹ 10 includes contribution by each member @ 5 and matching contribution of ₹ 5 by the company per employee. Thus, we direct the AO to allow the expenditure as a deductible expenditure. In the result, all the appeals filed by the appellant are partly allowed.

Summary

Issues Involved:
1. Allowability of loss on account of valuation of non-moving stores and spares.
2. Allowability of prior period adjustments.
3. Treatment of interest on electricity duty under Section 43B.
4. Allowability of peripheral development expenses.
5. Allowability of contributions to benevolent schemes.
6. Allowability of advertisement and publicity expenses.
7. Allowability of loss on account of unserviceable materials.
8. Allowability of liability for post-retirement medical benefits and leave encashment based on actuarial valuation.
9. Computation of profits from power generation for deduction under Section 115JA.
10. Computation of deduction under Section 80HHC, specifically regarding excise duty inclusion in total turnover.
11. Charging of interest under Section 115P for delay in payment of dividend tax.

Detailed Analysis:

1. Allowability of Loss on Account of Valuation of Non-Moving Stores and Spares:
The Tribunal allowed the assessee's claim for loss on valuation of non-moving stores and spares, emphasizing that the method adopted by the assessee was consistent and bona fide. The Tribunal cited various case laws, including the Kerala High Court's decision in CIT vs. Travancore Cochin Chemicals Ltd., which supported the change in valuation method if it was bona fide and consistently followed.

2. Allowability of Prior Period Adjustments:
The Tribunal partially allowed the assessee's claim for prior period adjustments. It directed the AO to delete the addition on account of other manufacturing expenses, as it was a rectification of a past mistake. However, for administrative, selling, and distribution expenses, the Tribunal restored the issue to the AO for re-examination, as the assessee failed to provide sufficient details.

3. Treatment of Interest on Electricity Duty Under Section 43B:
The Tribunal held that interest on electricity duty is compensatory in nature and should be allowed as a general business expenditure. It ruled that the provisions of Section 43B do not apply to such interest, citing the Calcutta High Court's decision in CIT vs. Orient Beverages Ltd.

4. Allowability of Peripheral Development Expenses:
The Tribunal allowed the assessee's claim for peripheral development expenses, emphasizing that such expenses were incurred to maintain industrial harmony and promote business interests. The Tribunal cited various case laws, including the Madras High Court's decision in CIT vs. Madras Refineries Ltd., which supported the deduction of such expenses as business expenditure.

5. Allowability of Contributions to Benevolent Schemes:
The Tribunal allowed the assessee's claim for contributions to benevolent schemes, ruling that such expenses were in the nature of staff welfare expenses and allowable under Section 37(1). The Tribunal relied on the Calcutta High Court's decision in CIT vs. National Engineering Industries Ltd., which supported the deduction of expenses incurred for the welfare of employees.

6. Allowability of Advertisement and Publicity Expenses:
The Tribunal allowed the assessee's claim for advertisement and publicity expenses, directing the AO to delete the disallowance. It emphasized that the expenses were supported by proper vouchers and were fully verifiable. The Tribunal cited the Delhi High Court's decision in Delhi Cloth & General Mills Co. Ltd. vs. CIT, which supported the deduction of such expenses.

7. Allowability of Loss on Account of Unserviceable Materials:
The Tribunal allowed the assessee's claim for loss on account of unserviceable materials, ruling that the loss was a revenue expenditure. The Tribunal cited various case laws, including the Supreme Court's decision in Chainrup Sampatram vs. CIT, which supported the deduction of such losses.

8. Allowability of Liability for Post-Retirement Medical Benefits and Leave Encashment Based on Actuarial Valuation:
The Tribunal allowed the assessee's claim for liability for post-retirement medical benefits and leave encashment based on actuarial valuation, ruling that such liabilities were not contingent. The Tribunal relied on the Supreme Court's decision in Bharat Earth Movers Ltd. vs. CIT, which supported the deduction of such liabilities.

9. Computation of Profits from Power Generation for Deduction Under Section 115JA:
The Tribunal upheld the AO's method of computing profits from power generation, ruling that the assessee cannot claim notional profit from internal consumption of power. The Tribunal emphasized that Section 115JA does not visualize the exclusion of profit determined notionally.

10. Computation of Deduction Under Section 80HHC, Specifically Regarding Excise Duty Inclusion in Total Turnover:
The Tribunal ruled in favor of the assessee, holding that excise duty should not be included in the total turnover for computing deduction under Section 80HHC. The Tribunal cited various High Court decisions, including the Madras High Court's decision in CIT vs. Wheels India Ltd., which supported the exclusion of excise duty from total turnover.

11. Charging of Interest Under Section 115P for Delay in Payment of Dividend Tax:
The Tribunal upheld the AO's imposition of interest under Section 115P for delay in payment of dividend tax, ruling that the date of declaration of dividend was the date of the board resolution, not the date of payment. The Tribunal emphasized that the approval of the Central Government was not obtained, and the liability arose on the date of the board resolution.