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2016 (3) TMI 500 - AT - Income TaxAddition of expenditure towards payment of NPV - allowance u/s 37(1) - revenue v/s capital expenditure - Held that - Considering a decision of the Hon ble ITAT, Kolkata Bench in the case of ACIT vs M/s. Ghanashyam Mishra 2014 (1) TMI 1581 - ITAT KOLKATA for A.Y.2005-06 and 2006-07 order dated 27.01.2014 wherein in respect of an identical payment made by an assessee engaged in the business of mining this Tribunal had allowed the deduction holding that the same as revenue expenditure. - Decided in favour of assessee Addition of amount utilized for starting a new project - Held that - The facts of the assessee s case are identical to the decision rendered by the Hon ble Bombay High Court in the case of CIT-5 vs M/s. Essar Oil Ltd 2008 (10) TMI 649 - BOMBAY HIGH COURT . In the aforesaid decision the Hon ble Bombay High Court took a view that the expenditure of a similar nature was revenue expenditure. The assessee in that case was in the business of operation of rigs for extraction of oil. The assessee explored the chances of development in the field of oil exploration for which it had to submit tenders and incur expenditure in that regard. The assessee was not a successful bidder. The expenditure in question was disallowed by the revenue by treating them as capital expenditure. The Hon ble Bombay High Court upheld the order of Tribunal holding that the expenditure was revenue expenditure. In our view the facts of the aforesaid case are identical to the case of the assessee. - Decided in favour of assessee Addition of bad debts written off although it does not qualify the provisions of Sections 36(2) read with Section 36(1)(vii) - Held that - We are of the view that the amount in question was admittedly connected with the business of the assessee and the sum in question was spent by the assessee for the purpose of business. The assessee could neither get refund of the aforesaid sums nor the services for which the aforesaid payments were made. We are therefore of the view that the CIT(A) rightly treated these expenditure as one incurred for the purpose of business of the assessee and allowable as deduction u/s 37(1) of the Act. We do not find any ground to interfere in the order of CIT(A).- Decided in favour of assessee Addition on or period expenses - Held that - The sum of ₹ 2,00,000/- was incurred as consultation charges paid as advance in the financial year 2004-05 for implementation of ERP and in the financial year 2005-06 was implemented and advance payment adjusted as part of software expenses. The accrual of expenditure was therefore rightly shown in A.Y.2006-07 by the assessee and also a sum of ₹ 3,474/- was treated as allowable in A.Y.2006-07, when the sum in question was ultimately settled.- Decided in favour of assessee
Issues Involved:
1. Deletion of addition of 'Net Present Value' (NPV) of Rs. 1,68,94,820. 2. Deletion of addition of Rs. 1,34,08,905 utilized for starting a new project, later abandoned. 3. Deletion of addition of bad debts written off amounting to Rs. 60,976. 4. Deletion of addition of prior period expenses amounting to Rs. 2,03,474. Detailed Analysis: 1. Deletion of Addition of 'Net Present Value' (NPV) of Rs. 1,68,94,820: The primary issue was whether the payment of Rs. 1,68,94,820 towards NPV, made to the Divisional Forest Officer as per the Forest (Conservation) Act, 1980, should be classified as capital or revenue expenditure. The Assessee argued that this payment was essential for continuing its mining operations and did not result in any tangible asset. The AO considered it a one-time, non-recurring payment and thus capital in nature. However, the CIT(A) allowed it as revenue expenditure, a decision upheld by the Tribunal. The Tribunal referenced a similar case (ACIT vs M/s. Ghanashyam Mishra) where such payments were deemed necessary for business continuity and classified as revenue expenditure. The Tribunal emphasized that the payment was a statutory requirement, did not create any new asset, and was essential for removing operational restrictions, thus qualifying as revenue expenditure under Section 37(1) of the Income Tax Act. 2. Deletion of Addition of Rs. 1,34,08,905 Utilized for Starting a New Project, Later Abandoned: The Assessee incurred Rs. 1,34,08,905 on bidding for a tender by Eastern Coalfields Ltd. (ECL) for mining expansion, which was ultimately unsuccessful. The AO treated this expenditure as capital in nature, referencing cases where expenses for new projects were capitalized. However, the CIT(A) and the Tribunal viewed these expenses as part of the Assessee's ongoing business operations in mining. The Tribunal noted that the expenditure did not result in acquiring any capital asset or enduring benefit and was necessary for exploring business expansion. The Tribunal cited the Bombay High Court's decision in CIT-5 vs M/s. Essar Oil Ltd, which treated similar expenses as revenue expenditure, thereby dismissing the AO's addition. 3. Deletion of Addition of Bad Debts Written Off Amounting to Rs. 60,976: The AO disallowed Rs. 60,976 claimed as bad debts, arguing these amounts were never treated as income. The Assessee contended these were business-related payments that could not be recovered, thus allowable under Section 37(1) as business expenditure. The CIT(A) accepted this argument, noting the payments were genuine business expenses incurred in earlier years. The Tribunal upheld this view, emphasizing the business connection and the inability to recover or benefit from the services paid for, thus dismissing the AO's addition. 4. Deletion of Addition of Prior Period Expenses Amounting to Rs. 2,03,474: The AO disallowed Rs. 2,03,474 as prior period expenses, related to software implementation costs. The Assessee clarified that Rs. 2,00,000 was an advance payment for ERP implementation, completed in the relevant financial year, and Rs. 3,474 was settled in the same year. The CIT(A) accepted this explanation, recognizing the accrual of expenses in the correct period under mercantile accounting. The Tribunal agreed, noting the expenses were appropriately accounted for in the assessment year 2006-07, thus dismissing the AO's addition. Conclusion: The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on all contested grounds, emphasizing the statutory and business necessity of the expenditures and their proper classification as revenue expenses under the Income Tax Act.
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