2012 (5) TMI 862 - AT - Income Tax

Summary

Issues Involved:
1. Assumption of jurisdiction u/s 263 by the CIT.
2. Disallowance of net present value (NPV) as capital expenditure.
3. Disallowance of periphery development expenses as prior period expenses.

Summary:

1. Assumption of Jurisdiction u/s 263 by the CIT:
The appeals for AYs 2007-08 and 2008-09 challenge the CIT's orders u/s 263 of the I.T. Act, 1961, dated 1st March 2012. The assessee contends that the CIT's orders are not maintainable and should be quashed. The CIT issued a show cause notice u/s 263 questioning the allowance of NPV and periphery development expenses by the Assessing Officer (AO).

2. Disallowance of Net Present Value (NPV) as Capital Expenditure:
The CIT questioned the deduction of NPV paid to the Divisional Forest Officer (DFO), considering it capital in nature. The assessee argued that the NPV paid for deforestation on leased mining land cannot be considered capital expenditure as it does not create a capital asset. The ITAT, Cuttack Bench, in the case of Orissa Mining Corporation, held that such payments are revenue expenditures. The Tribunal found that the CIT's assumption of jurisdiction u/s 263 was void ab initio as the AO had already examined and allowed the expenditure, and no error prejudicial to the revenue was demonstrated.

3. Disallowance of Periphery Development Expenses as Prior Period Expenses:
The CIT also questioned the deduction of periphery development expenses, arguing they pertained to an earlier period. The assessee contended that these expenses were part of the lease agreement and were paid based on demand notices from the Government authorities, crystallizing only at the time of payment. The Tribunal held that the AO had verified and allowed these expenses correctly, and the CIT's assumption of jurisdiction u/s 263 was improper.

Conclusion:
The Tribunal quashed the CIT's orders for both AYs under consideration, allowing the appeals of the assessee. The Tribunal found that the CIT's assumption of jurisdiction u/s 263 was not proper and that the expenditures in question were rightly considered as revenue expenditures by the AO.