2014 (8) TMI 1112 - AT - Income Tax

Disallowance of legal fee - Held that - The assessee was already exploiting the mining lease and doing business by virtue of the lease. The litigation expenditure incurred by the assessee to defend the suits did not in any way create a new asset nor help in improving the lease in such a manner so as to give it an advantage which was in the capital field. Hon ble Apex Court in the case of Sree Meenakshi Mill Ltd. 1966 (9) TMI 34 - SUPREME Court has clearly held that taxability of expenditure must depend on the purpose of the legal proceeding, in relation to the business and cannot be computed by the final outcome of the proceedings. We are therefore, of the opinion that the CIT(A) was justified in holding that the expenses of litigation expenses are revenue in nature. Claim of mines development expenditure - Held that - CIT(A) had not looked into the aspect whether expenditure having been incurred long back, could be allowed on a piecemeal basis in subsequent years. He has simply mentioned that the assessee s ground of appeal was allowable based on the facts of the case, contents of the assessment order and written submissions furnished by the assessee. He has also not discussed as to how the assessee could have raised an alternative claim before him, when all along he had made the claim before the AO u/s 35E of the Act. We are therefore, of the opinion, the matter needs a fresh look by the CIT(A). We therefore, set aside the order of the learned CIT(A) on this aspect and remit the issue back to the learned CT(A) for disposal in accordance with law. Addition made to the closing stock - Held that - There is no dispute that unprocessed lumps and fines were valued by the assessee at ₹ 50-/ per MT, whereas the AO considered the whole of the stock as processed and valued it at ₹ 390/- per MT. Rate of ₹ 390/-per MT was arrived by the AO by adding expenditure in the nature of afforestation expenses, mines office expenses, road maintenance charges, repairs and maintenance, plot transportation and loading charges as part of the cost. There is nothing on record to show how the assessee had worked out the value of ₹ 50/- per MT for the sub-grade Iron Ore. Addition made by the AO was not only on account of difference in valuation but also for difference in quantity. Learned CIT(A) deleted the whole of the disallowance except for enhancing the value of the sub-grade Iron Ore in stock from 50/- per MT to ₹ 80/- per MT. No reason has been given by him for enhancing the value and no finding has been given as to whether there indeed was any substandard stock. He has also not addressed the issue regarding difference in closing stock quantity, vis- -vis what was returned by the assessee. In other words, learned CIT(A) in our opinion, has not properly adjudicated the issue regarding the addition made to the closing stock. We are therefore, of the opinion that the matter requires a fresh look by the CIT(A)

Summary

Issues Involved:
1. Disallowance of legal fees.
2. Disallowance of mines development expenditure.
3. Valuation of closing stock.

Issue-wise Detailed Analysis:

1. Disallowance of Legal Fees:
The revenue appealed against the deletion of disallowance of legal fees amounting to Rs. 2,35,64,266/- for AY 2008-09 and Rs. 98,11,890/- for AY 2009-10. The assessee incurred legal expenses defending Writ Petitions challenging the government-granted mining lease. The AO considered these expenses capital in nature, arguing they were for protecting the source of income rather than business interest. The AO cited judgments from the Apex Court and Calcutta High Court to support his view. However, the CIT(A) disagreed, stating that the expenses were for defending an already granted lease and thus were revenue in nature. The CIT(A) relied on the Apex Court's decisions in Empire Jute Co., Ltd., and Maheshwari Devi Jute Mills Ltd., to support his conclusion. The Tribunal agreed with the CIT(A), noting that the expenses were for protecting existing rights and did not create a new asset or improve the lease, thus dismissing the revenue's grounds.

2. Disallowance of Mines Development Expenditure:
The revenue contested the CIT(A)'s decision to allow mines development expenditure of Rs. 68,37,553/- for AY 2008-09 and Rs. 1,36,75,066/- for AY 2009-10. The assessee claimed these amounts as net present value (NPV) paid to the Forest Department for afforestation and iron ore extraction, treating it as deferred revenue expenditure under Section 35E of the IT Act, 1961. The AO disallowed the claim, stating the payment was a pre-condition for mining and did not qualify under Section 35E, also noting the absence of a prescribed audit report. The CIT(A) allowed the claim under Section 37(1) based on a decision by the Kolkata Tribunal in Rungta Sons (P) Ltd., which treated NPV payments as business expenditure. The Tribunal found that the CIT(A) had not independently assessed whether the expenditure could be allowed on a piecemeal basis and remitted the issue back to the CIT(A) for fresh consideration.

3. Valuation of Closing Stock:
The revenue and the assessee both challenged the CIT(A)'s decision regarding the valuation of closing stock. The AO found a discrepancy between the closing stock quantity reported in the books (40,596 MT) and the return filed with the Director of Mines & Geology (45,728 MT). The AO revalued the stock at Rs. 390 per MT, including various indirect costs, and rejected the assessee's valuation of sub-standard stock at Rs. 50 per MT. The CIT(A) partially agreed with the assessee, maintaining the consistent valuation method but increased the value of sub-standard iron ore to Rs. 80 per MT. The Tribunal noted that the CIT(A) did not adequately address the quantity discrepancy or provide a basis for the valuation adjustments and remitted the issue back to the CIT(A) for a thorough reassessment.

Conclusion:
The Tribunal's decision resulted in the revenue's appeal being partly allowed for statistical purposes, and the assessee's cross-objection also being allowed for statistical purposes. The CIT(A) was directed to re-examine the issues related to mines development expenditure and the valuation of closing stock in accordance with the law. The judgment was pronounced in open court on 28-08-2014.