2016 (2) TMI 1118 - AT - Income Tax

Compensation paid to farmers for using their land for mineral extraction - justification for claim of revenue expenditure - Held that - We find that the issue raised in this ground has already been decided by the ITAT in assessee s own case for earlier AYs holding that the payment made by the assessee to farmers is a part of cost of Gypsum only and no capital asset is acquired by the assessee by incurring this expenditure. Nature of loss to farmers is immaterial while judging the nature of expense in the hands of assessee and therefore same cannot be basis for treating the expenditure as capital in nature - Decided in favour of assessee Contribution to State Renewal Fund - allowable revenue expenditure - Held that - This issue raised in this ground has already been decided by the ITAT in assessee s own case for earlier AYs holding that that the contribution made by the assessee to a Public Welfare Fund which is connected or related with his business is an allowable deduction u/s 37 as it was provided for the benefit of the employees - Decided in favour of assessee Deduction for prior period expenses - Held that - In our view the case of the revenue is required to be dismissed as the case of the assessee is squarely covered by the earlier order of the Tribunal for AY 2009-10 even otherwise in view of the judgment in the matter of CIT vs. Excel Industries Ltd. (2013 (10) TMI 324 - SUPREME COURT) the appeal of the revenue is required to be dismissed as the rate of tax remain the same in the present year as well as in the subsequent year. Therefore there will not be any tax effect and the entire exercise of the revenue is only academic in nature. Addition on account of donations - Held that - CIT (A) correctly deleted the disallowance by holding that the same were contributions made for various activities which also involved display of appellant s banner and therefore these expenses had advertisement and publicity value for the appellant. However the ld. CIT (A) confirmed the disallowance of 50, 000/- in respect of payment made to Rose Society by relying on the decision of Hon ble ITAT in assessee s own case for AY 2008-09 where the disallowance made by AO in respect of payment made to Rose Society was confirmed by Hon ble ITAT Disallowance of social welfare expenses - Held that - The payment made to Rose Society amounting to 50, 000/- in our view is not in respect of any activity connected necessarily and exclusively for the purpose of business and do not qualify the expenditure u/s 37 of the IT Act. Even otherwise similar ground of the assessee has been dismissed by the Tribunal in its earlier order. Disallowance in respect of amortization of mining land and leasehold land - allowable expenditure u/s 37 - contention of the assessee is that the sole purpose of acquisition of mining land is to exploit it for extraction of mineral resources and extraction of such mineral is the only economic use of the land for the assessee - Held that - With the passage of guidelines for protecting the environment now it is the duty of the lesser/assessee to submit and execute the mine closing plan so as to ensure that the land is used subsequent to the closure of the mining operation. Even otherwise the mining activity is done not on the surface of the earth but on the core towards the lower side of the surface. The surface can be put to use for beneficial purposes after the term of lease/mining activity is over and it can be exploited for commercial purposes by the owner/appropriate authority. The assessee was taxed on the basis of the submission made by it before the AO before the assessment for the A.Y. 2010-11 is finalized. The mere acceptance of the methodology by the AO for A.Y. 2011-12 will not withhold us to decide the issue on merit and in law for the A.Y. 2010-11. As per the law and principle the authorities situated in lower ladder/tire of hierarchy is required to abide law/adjudication done by the superior authority. This is the only way the judicial system works. The AO is a quasi judicial authority and bound to follow the principle laid down by the Tribunal and not the vice versa. Therefore the submission of the ld. A/R for the assessee on this count is also rejected. However it is made clear that the assessee would be entitled to all benefits as available in law and the assessee will not be subjected to double taxation for the A.Y. 2011-12. The AO is directed to give effect to the above said direction and nullify the effect of double taxation if any as claimed by the assessee. In the light of the above ground of the assessee is dismissed. Disallowance paid to the DMG for computerization of its data - Held that - It is an admitted fact that the assessee is one of the beneficiaries of the computerization. There are other lakhs of mine owners/licencees who are/will be benefitted by way of computerization of the department. Moreover it is the bounden duty of the Government to computerize its department. Once the assessee is paying the lease rent and other charges to the Government for acquiring the rights to mines and minerals the department is not expected to ask any amount over and above the statutory charges. Any contribution made by the assessee to the Government for computerization would be at its own cost and pay-roll. That cost incurred by the assessee for computerization of the department in our view is not going to benefit the assessee exclusively and wholly. It may be a good-will gesture or an effort to oblige the bureaucrats by the assessee. We are not expressing any opinion/requirement of paying such huge amount to the department for the purpose of computerization Reduction of claim u/s 80IA by not considering the income from sale of CERs and liquidated damages as derived from the business of power generation undertaking - Held that - The products or the articles supplied are goods. Excise duty if not exempt is payable in many cases on ad valorem basis. Similarly sales tax if not exempt is also payable. The standing charges obviously do not form part of the supply made and are not treated as sale consideration or the price of the goods on which excise duty or the sales tax etc. would be or is payable. Keeping in view the nature and character of the standing charges evidence and finding regarding nature and character of the manufacturing activity undertaken it cannot be said that the said charges were paid for or towards sale consideration of the goods supplied. This is not a case where goods were produced but not purchased or supplied etc. The factual matrix as found does not support the claim of the appellant under Section 80IC of the Act. We add by way of caveat that in a given case and depending upon the factual matrix/evidence charges similar to standing charges may represent cost/sale price or price for failure to purchase produced/manufactured goods. - Decided against assessee Not allowing the income of the assessee from sale of CERs as capital receipt - Held that - CER is capital receipt and the AO is directed to treat the sale of CER as capital receipt. Thus the ground of the assessee on account of sale of CER is allowed. Deduction in respect of mines closure expenses - Held that - As per matching principle as well as the mercantile system of accounting the liability is allowable in principle under section 37 of the Act. In view of the above the ground of the assessee is allowed and the AO is directed to give the benefit of deduction towards mines closure expenses in the A.Y. 2010-11.

Summary

Issues Involved:
1. Compensation paid to farmers for using their land for mineral extraction.
2. Disallowance of contribution to State Renewal Fund.
3. Prior period expenses.
4. Disallowance of contribution to social welfare activities.
5. Disallowance of social welfare expenses.
6. Disallowance of amortization of mining and leasehold land.
7. Disallowance of payment to the Department of Mining and Geology for computerization of data.
8. Reduction of claim under section 80IA for income from sale of CERs and liquidated damages.
9. Treatment of income from sale of CERs as capital receipt.
10. Deduction for mines closure expenses.

Detailed Analysis:

1. Compensation Paid to Farmers:
The issue was whether the compensation paid to farmers for using their land for mineral extraction should be treated as a capital or revenue expenditure. The Tribunal found that this issue had been previously decided in favor of the assessee in earlier years. The Tribunal upheld the CIT (A)'s decision, stating that the payment made to farmers is part of the cost of gypsum and is a revenue expenditure, not a capital expenditure. Therefore, this issue was decided against the revenue.

2. Contribution to State Renewal Fund:
The AO disallowed the contribution to the State Renewal Fund, treating it as an application of income rather than a business expenditure. The CIT (A) allowed the deduction, relying on previous ITAT decisions where such contributions were considered allowable under section 37(1) as they were for the benefit of employees. The Tribunal upheld the CIT (A)'s decision, dismissing the revenue's appeal.

3. Prior Period Expenses:
The AO disallowed part of the prior period expenses claimed by the assessee. The CIT (A) deleted the disallowance, following earlier ITAT decisions that allowed such expenses for government undertakings in the year they were sanctioned and approved. The Tribunal upheld the CIT (A)'s decision, dismissing the revenue's appeal.

4. Contribution to Social Welfare Activities:
The AO disallowed the contribution to social welfare activities, questioning the business expediency of such expenses. The CIT (A) allowed part of the expenses, recognizing their advertisement and publicity value, but disallowed the payment to the Rose Society. The Tribunal upheld the CIT (A)'s decision, finding no infirmity in the order.

5. Social Welfare Expenses:
The Tribunal dismissed the assessee's appeal regarding the disallowance of Rs. 50,000 paid to the Rose Society, as it was not connected exclusively for business purposes.

6. Amortization of Mining and Leasehold Land:
The AO disallowed the amortization of mining and leasehold land expenses, treating them as capital expenditures. The CIT (A) confirmed the disallowance. The Tribunal upheld this decision, stating that the expenses were capital in nature and not allowable under section 37(1). The Tribunal also directed the AO to treat the amount as capital expenditure and provide appropriate benefits.

7. Payment to Department of Mining and Geology:
The AO disallowed the payment made to the Department of Mining and Geology for computerization, considering it not exclusively for business purposes. The CIT (A) upheld the disallowance. The Tribunal agreed, stating that the contribution did not directly benefit the assessee's business and was not allowable under section 37(1).

8. Reduction of Claim under Section 80IA:
The AO disallowed the claim under section 80IA for income from the sale of CERs and liquidated damages, stating they were not derived from the eligible business. The CIT (A) confirmed this view. The Tribunal upheld the disallowance, citing the lack of direct nexus between the income and the business operations of the power generation undertaking.

9. Treatment of Income from Sale of CERs:
The AO treated the income from the sale of CERs as revenue instead of capital receipt. The CIT (A) agreed. However, the Tribunal held that the sale of CERs is a capital receipt and directed the AO to treat it as such.

10. Deduction for Mines Closure Expenses:
The AO disallowed the deduction for mines closure expenses, considering it a contingent liability. The CIT (A) upheld the disallowance. The Tribunal disagreed, stating that the liability was ascertainable and should be allowed under section 37(1). The Tribunal directed the AO to allow the deduction for mines closure expenses.

Conclusion:
The Tribunal dismissed the revenue's appeal and partly allowed the assessee's appeal, providing detailed reasoning for each issue based on legal precedents and the specific facts of the case.