2014 (1) TMI 1515 - AT - Income Tax

Expenses as NPV of compensation paid to the Forest Department for utilization of forest land for non-forest purpose - Held that - Decision on T.N. Godavaram Thirumalpad vs.- Union of India 2005 (9) TMI 591 - SUPREME COURT followed - Though NPV payment is a one-time payment the same was not made to acquire any asset - Forests are vital components to sustain life support system on the earth - There is an absolute need to take all precautionary measures when forest lands are sought to be directed for non-forest use - The User Agency be required to make payment of Net Present Value (NPV) of such diverted land so as to utilize the amounts so received for getting back in long run the benefits which are lost by such diversion - The Ministry of Environment and Forests formulated a scheme providing that whenever any permission is granted for change of use of forest land for non-forest purposes there should be compensatory afforestation - The responsibility of the same should be that of user agency - The money so received towards NPV should be used for natural assisted re-generation forest management protection infrastructure development wildlife protection and management supply of wood and other forest produce saving devices and other allied activities. Such payments of NPV as compensation were levied for rendering service which the state considers beneficial in public interest - It is a fee which falls in entries 47 of List-III of 7th Schedule of the Constitution - The fund set up is a part of economic and social planning which comes within Entry 23 of List III and the charge which is levied for that purpose would come under Entry 47 of List III - Levy of NPV is a fee that means every mining agency using and converting forest land to non-forest purpose has to pay a fee for continuing carrying on of the business. The said 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 assessee-company comes - When a payment is made as per specific direction of Government of India it is in the business interest of the assessee-company - This payment is a statutory requirement and the expenditure has been considered wholly and exclusively for the purpose of business and has got a direct connection with the business activity of the Company - The same was allowable as business expenditure under section 37(1) of the Act Decided against Revenue.

Summary

Issues Involved:

1. Allowability of Net Present Value (NPV) paid to the Forest Department as a business expenditure under Section 37(1) of the Income Tax Act, 1961.
2. Deletion of addition made for delayed payment of Employees' Contribution to the Provident Fund (P.F.).

Issue-wise Detailed Analysis:

1. Allowability of Net Present Value (NPV) as Business Expenditure:

The Department contested that the Net Present Value (NPV) paid by the assessee to the Forest Department for utilizing forest land for non-forest purposes should not be allowable as business expenditure under Section 37(1) of the Income Tax Act, 1961. The Department argued that NPV is a one-time levy categorized by the Hon'ble Supreme Court as a fee, which is linked to the period for which mine owners extract ores from the earth, and thus should be considered capital expenditure.

The assessee, engaged in mining operations, claimed that the NPV was paid to comply with statutory obligations and to continue its mining operations. The payment was not for acquiring any asset but for the smooth running of the business, making it revenue in nature. The CIT(A) accepted the assessee's argument, stating that the payment was a statutory requirement and did not result in acquiring any additional capital asset or fresh right to mining.

The Tribunal upheld the CIT(A)'s decision, referencing the Hon'ble Supreme Court's observation in the case of Bikaner Gypsums Ltd. that any expenditure made to remove restrictions or obstructions in carrying on a business is on revenue account, provided it does not acquire any capital asset. The Tribunal noted that the NPV payment was a statutory obligation necessary for the continuation of the mining business and did not result in any tangible asset creation. Therefore, it was considered revenue expenditure allowable under Section 37(1) of the Act.

2. Deletion of Addition for Delayed Payment of Employees' Contribution to P.F.:

The Department's second ground of appeal was against the CIT(A)'s deletion of the addition made for delayed payment of Employees' Contribution to the P.F. The CIT(A) had held that the delayed payment was covered under the provisions of Section 43B of the Income Tax Act, which allows certain deductions only on actual payment.

During the hearing, the assessee's representative conceded to the Department's objections. Consequently, the Tribunal reversed the CIT(A)'s order and restored the Assessing Officer's finding, allowing the Department's appeal on this ground.

Conclusion:

The Tribunal concluded that the payment of NPV by the assessee was a statutory requirement for continuing its mining operations and was, therefore, revenue in nature and allowable as business expenditure under Section 37(1) of the Act. However, the Tribunal allowed the Department's appeal concerning the delayed payment of Employees' Contribution to the P.F., restoring the Assessing Officer's addition. Thus, the appeal was partly allowed.