2014 (3) TMI 682 - AT - Income Tax

Disallowance of mine closure obligation Expenses accrued bases on the quantity extracted - Whether the CIT(A) has erred in disallowing the mine closure obligation to the extent relating to the project under construction or not having any production during the year Held that - There is a categorical finding given by the CIT(A) that there are certain mines not yet commenced - Relying upon Udaipur Mineral Development Syndicate Pvt. Ltd. Versus Deputy Commissioner Of Income-Tax (Assessment) And Another 2002 (8) TMI 26 - RAJASTHAN High Court On that mine closure obligation cannot be allowed - mines at Kumaraswamy and Lalpur where there is no production, being so, no obligation is allowable - assessee has not given year-wise break-up - the CIT(A) directed the AO to ascertain the account of year-wise mining, which has been done from the remaining mines and allow mine closure obligation to the extent mining done corresponding to the current year - He further gave a direction to the AO if the assessee fails to provide such data, then, prorata has to be applied - there is no infirmity in the order passed by the CIT(A) Decided against Assessee. Disallowance of transitional liability Held that - The decision in CIT Vs. Insilco Ltd. 2009 (2) TMI 31 - DELHI HIGH COURT followed if a liability arises within the accounting period, the deduction should be allowed though it may be quantified & discharged at a future date - the provision was estimated based on actuarial calculations, deduction claimed is to be allowed - the provision for a liability is amenable to a deduction, if there is an element of certainty that it shall be incurred and it is possible to estimate liability with reasonable certainty even though actual quantification may not be possible, such a liability is not of a contingent nature thus, the liability relating to the AY is to be quantified by the AO and the same is to be allowed - Decided in favour of Assessee. Disallowing of depreciation on intangible assets Held that - The decision in East India Minerals Ltd. Vs. JCIT 2014 (3) TMI 249 - ITAT CUTTACK followed - the denial of claim of depreciation has been made on misinterpretation of law and the applicability - Explanation to Section 32(1)(ii) leans in favour of the assessee to the extent that it is the actual action of put to use which entitles the assessee to claim depreciation - All expenses are incurred for the purpose of business and are incidental to the holding of rights were claimed u/s.32(1)(ii) being the license to carry out the mining therefore could not be denied insofar as the Government and the lessee are in control of the asset thus, the assessee is entitled to depreciation as charged to the P & L account in accordance with its business exigencies the AO is directed to delete the addition made Decided in favour of Assessee. Disallowance of expenses - Payment of stamp duty and registration charges Held that - The decision in Shri Jitendra Nath Patnaik Vs. DCIT 2014 (3) TMI 248 - ITAT CUTTACK followed - the assessee is not acquiring any asset nor enduring benefit but is having only a right to work of mining in the land given to him for a specific period on lease - the amount is practically a revenue expenditure incurred by the assessee while doing his trade of mining operation - the claim of the assessee to allow the same as revenue expenditure is very much within the provisions of the Act thus, the order of the CIT(A) set aside and the AO is directed to allow the expenditure Decided in favour of Assessee. Disallowance of expenses on corporate social responsibility Held that - The contribution is only a welfare measure for the upliftment of the Adivasis in the locality where the mining unit was situated and also for the welfare of the employees of the assessee - This contribution would definitely go a long way in conducting the assessee s mining business in a profitable manner - indirectly all the contribution made by the assessee takes care of the education of the employees children - This would certainly be a welfare measure on the part of the assessee for carrying out the business in an effective and efficient manner thus, the contribution has to be treated as revenue expenditure for the purpose of the business thus, there is no justification in disallowing the amount Decided in favour of Assessee. Disallowance of claim of preoperative expenses Held that - The CIT(A) gave a categorical finding that these expenses are definitely capital and have been rightly categorized so by the appellant and also certified as capital expenditure by the auditors - It is only at the time of computation of income the assessee claimed this expenditure as revenue without providing any details or reasons - the assessee has not placed any evidence to establish the expenditure incurred as revenue expenditure thus, there was no infirmity in the order of the CIT(A) Decided against Assessee. Disallowance of PF contribution Held that - In case of payment of contribution to PF is made before the due date prescribed in PF Act and the Scheme the deduction can be claimed and the right of deduction would be lost u/s 43B read with Explanation if the same is paid after the due date, i.e., after the due date of filing of return u/s 139(1) of the Act, as per the amended provisions of section 43B - only provision has been made which is not allowable in terms of section 43B Decided against Assessee. Valuation of closing and opening stock Held that - CIT(A) held that With respect to closing stock, there is no ambiguity about the fact that the appellant is to recognize the same on cost or the market value, whichever is less - the Assessing Officer has not reduced the valuation of lump but has increased the valuation of fine iron are from zero to 20 Crores - This is incorrect as it increases the overall valuation - The fact that the market price of fine iron are has increased does not have anything to do with the closing stock valuation thus, any reallocation of closing stock cost between fine iron are and lump will necessarily have to be tax neutral - There is no circumstances which compels the Assessing Officer to revalue to closing stock of fine ore - as the fine iron ore is sold, the revenue so generated will be accounted for in the receipts - There was no infirmity in the findings of the CIT(A) with respect to closing stock valuation of lumps and fine iron ore thus, the order of the CIT(A) upheld Decided against Revenue.

Summary

Issues Involved:
1. Disallowance of Mine Closure Obligation
2. Disallowance of Transitional Liability as per AS-15
3. Disallowance of Depreciation on Intangible Assets
4. Disallowance of Stamp Duty and Registration Charges on Leasehold Land
5. Disallowance of Expenses on Corporate Social Responsibility (CSR)
6. Disallowance of Pre-operative Expenses
7. Disallowance of PF Contributions on Wage Revision
8. Closing Stock Valuation of Lumps and Fine Iron Ore

Issue-Wise Detailed Analysis:

1. Disallowance of Mine Closure Obligation
The appellant, a public sector undertaking engaged in mineral exploration, debited Rs. 19,62,86,171/- towards mine closure obligation in its Profit and Loss Account. The Assessing Officer (AO) disallowed this provision, considering it a contingent liability rather than an ascertained one. The CIT(A) disagreed, citing that the mine closure obligation is an ascertained liability under section 37 of the IT Act, as it accrues when mining operations commence. The CIT(A) allowed the obligation for mines with production but disallowed it for mines without production. The Tribunal upheld the CIT(A)'s decision, confirming the partial allowance based on actual mining done.

2. Disallowance of Transitional Liability as per AS-15
The appellant claimed Rs. 27.11 crores towards transitional liability under AS-15 for employee benefits. The AO disallowed it, stating it related to past service and should be charged from reserves. The CIT(A) partially agreed, allowing the liability to the extent it pertained to the current year. The Tribunal directed the AO to allow the liability for the current year, citing the Delhi High Court's decision in CIT Vs. Insilco Ltd., which allows actuarially calculated liabilities.

3. Disallowance of Depreciation on Intangible Assets
The appellant claimed Rs. 6,48,42,067/- as depreciation on leasehold land, treating it as an intangible asset. The AO disallowed it, stating land is not a depreciable asset under the Income Tax Act. The CIT(A) upheld the AO's decision. The Tribunal, following the ITAT Cuttack's decision in East India Minerals Ltd. Vs. JCIT, allowed the depreciation, treating leasehold rights as intangible assets.

4. Disallowance of Stamp Duty and Registration Charges on Leasehold Land
The appellant claimed Rs. 1,36,93,552/- towards stamp duty and registration charges on leasehold land. The AO disallowed it as capital expenditure. The CIT(A) confirmed the AO's decision. The Tribunal, referencing CIT Vs. Cinceita (P) Ltd., allowed the expenditure as revenue, except for first-time expenditures on capital assets.

5. Disallowance of Expenses on Corporate Social Responsibility (CSR)
The appellant incurred Rs. 21,74,75,417/- on CSR activities, with Rs. 12,18,99,548/- disallowed by the AO as non-business-related donations. The CIT(A) confirmed the disallowance. The Tribunal, citing its own decisions in the appellant's previous years and other case laws, allowed the CSR expenses, except for Rs. 3,48,04,548/- shown as miscellaneous expenses without details.

6. Disallowance of Pre-operative Expenses
The appellant claimed Rs. 5,43,27,455/- as pre-operative expenses. The AO disallowed it, treating it as capital expenditure. The CIT(A) upheld the AO's decision. The Tribunal confirmed the disallowance, noting the appellant failed to provide evidence to establish the expenditure as revenue.

7. Disallowance of PF Contributions on Wage Revision
The appellant made ad-hoc provisions of Rs. 4,04,77,426/- for PF contributions on wage revision. The AO disallowed it due to lack of details. The CIT(A) confirmed the disallowance. The Tribunal upheld the decision, stating only actual payments made before the due date are allowable under section 43B.

8. Closing Stock Valuation of Lumps and Fine Iron Ore
The AO added Rs. 20,86,61,392/- to the appellant's income, revaluing fine iron ore stock. The CIT(A) directed the AO to delete the addition, noting any reallocation of closing stock cost between fine iron ore and lumps should be tax-neutral. The Tribunal confirmed the CIT(A)'s decision.

Conclusion:
The Tribunal's judgment addressed multiple issues, providing detailed rulings on each, often referencing prior case laws and decisions. The appellant's appeal was partly allowed, while the revenue's appeal was dismissed. The Tribunal emphasized the principles of ascertained liability, revenue expenditure, and tax neutrality in its decisions.