2018 (3) TMI 1197 - AT - Income Tax

Addition on account of valuation of closing stock - applicability of Accounting Standard - undervaluation of closing stock - Coal India Limited which is a Government of India enterprise holding 100% shares of the assessee company and similar shareholding in other subsidiarie - Held that - We found that the holding company Coal India Limited is also following same method of valuation for his inventories as discussed in their Annual report and similar method of accretion/deccretion of stock is dealt in the profit and loss account which is also not disputed and available in the public domain. Ld A.R. also emphasised that similar additions were made by the assessee upto assessment year 2013-14 and for subsequent assessment years there is no addition in the assessment as the book value mine-wise was more than valuation as a group. We considering the overall circumstances and uniform accounting policy issued by Coal India Limited and the submission of ld A.R. alongwith documentary evidence and the undisputed fact that the assessee company is a 100% subsidiary of Coal India Limited and similar accounting policy is adopted by the other subsidiaries are of the opinion that the method of valuation has to be test checked by the Assessing Officer so that this uniform Accounting Policy applicable to the assessee as a subsidiary company. The policy of valuation of mines independently and has been accepted by the parent company i.e. Coal India Limited and independently reflects in financial statements. The change in valuation policy is for realisation of values and the assessee being Government Enterprises the accounts are audited by the Statutory Auditors and Comptroller and Auditor General of India. We are of the substantive view that the lower authorities have to verify the uniform Accounting Policy adopted by other subsidiaries which are in the similar line of business as per Coal India Ltd letter dated 31.3.2010 (supra). Accordingly we remit this disputed issue to the file of the Assessing Officer for reconsideration. Change in valuation of closing stock and overburden removal adjustment debit/credit - Held that - Valuation of closing stock has been changed due to Uniform Accounting Policy of Coal India Limited. We found that a reference made by the Assessing Officer on the audited accounts that Reduction in value of stock is due to overall adjustment is as per the Uniform Accounting Policy adopted by the Coal India Limited. Ld A.R. demonstrated before us with a copy of letter of Uniform Accounting Committee recommendation and supported with paper book. Accordingly we consider it appropriate to restrict our view on the method of valuation of closing stock mine-wise and the valuation of closing stock of coal are interconnected and since we have discussed on the applicability of the provisions facts and reasons for valuation of stock centre on the first disputed issue. Hence this issue for the assessment years 2010-11 to 2014-15 is restored to the file of the Assessing officer for fresh adjudication. Interest paid to foreign institution through CIL - Held that - As perused the audit report at page 10.0 (a) at page 99-100 where these facts were explained that the assessee company has not identified the customers to whom the refund is to be made and therefore the finalisation of liability to refund the same is yet to be done. We are of the opinion that this vital fact needs to be verified and examined as explained by ld A.R. that from assessment year 2012-13 this interest claim was allowed. Accordingly in the interest of justice we remit this issue to the file of the Assessing Officer who shall verify the different payments of interest made to World bank as covered by the letter of Govt. of India vide letter dated 26.3.1998 and direct the Assessing Officer to verify the payment of interest in the hands of the recipients are offered to tax. Lease hold rights are not eligible for depreciation u/s.32(1)(ii) of the Act considering it as intangible rights and accordingly dismiss the ground of appeal of the assessee. Disallowance of Prospecting 1181.54 crores u/s. 194A and 0.65 crore u/s. 193 totaling to 1182.19 crores which is much lower than the amount of interest income shown by the assessee. From the above it is clearly established that there is difference in the 26AS and income shown by the assessee. Moreover the assessee is correctly accounting its income and expenditure on accrual basis irrespective of amount reflected in 26AS. In view of above we remit the matter to the file of the Assessing officer to verify the amount shown by the assessee and reflected in 26AS statement. If the contention of the assessee is found to be correct the Assessing Officer is directed to allow the claim of the assessee Addition made due to change in accounting method for repair job- Held that - We find force in the submission of ld A.R. that due to change in accounting method the profit has been reduced and the expenditure is only for repair jobs but same could not be substantiated and accordingly we restore the issue to the file of the Assessing Officer and the Assessing Officer shall examine the case and pass the order on merits. This ground of appeal of the assessee for assessment year 2011-12 is allowed for statistical purposes. Not allowing the correct depreciation after considering the sale of assets as per block assets concept and depreciation thereon - Held that - The assessee company has shown the gain on sale of assets as profit for accounting purpose. As per section 32 of the Act the gain on sale of assets is not taxable if the remaining assets are more than that and the depreciation should be allowed thereon. Therefore we remit this issue to the file of the Assessing Officer allow the correct depreciation by reducing the value of block of assets by sale value. Allowability of other expenditure - Held that - The expenditure is appearing under note 25 of welfare expenses . Ld A.R. submitted that the assessee has sufficient materials to justify the expenditure. Accordingly we consider it appropriate to remit this issue to the file of the Assessing Officer for verification and allow this ground of appeal of the assessee for statistical purposes. Addition made towards VRS - Held that - CIT(A) correctly deleted the addition observing that the claim of the assessee is in conformity with section 35DAA which relates to amortization of expenditure incurred under VRS. Community development expenses allowed Addition towards compensation of land - Held that - Since the amount has been paid for the purpose of business operation the CIT(A) has rightly deleted the addition. Addition towards environment/ecology/improvement expenses - Held that - . We find that the expenditure incurred are in respect of tree plantation other environmental expenses environmental monitoring cost of air water and noise and dust mitigating equipment etc which is necessitated in the areas where coal mines are situated as per the guidelines of Corporate Social Responsibility. Hence we find no error in the order of the CIT(A) as the expenditures are audited by the auditors and reflected in the balance sheet of the assessee Addition towards social facilities expenses - Held that - CIT(A) has deleted the addition made by the Assessing Officer that in order sheet it has been mentioned that the required details have been furnished by the assessee before the Assessing officer. Hence it cannot be said that the details as called for have not been furnished. We also find that the in subsequent years identical claim of the assessee has been allowed by the revenue. Hence we do not find any reason to interfere with the order of the CIT(A) Loss on sale of discarded assets - Held that - CIT(A) on perusal of Annual reports 1589.25 lakhs under the head other income as per Schedule-4 to P 33.11 lakhs. Therefore the CIT(A) deleted the addition. Before us Ld D.R. could not point out any specific mistake in the order of the CIT(A) Addition towards prospecting and boring expenses deleted Allowability of CMPDIL expenses to be allowed Addition towards cost of exploration and development expenditure - Held that - CIT(A) refers to section 35E(1) of the Act and relying on the judicial decisions observed that in the case of winning of minerals exploration is an essential pre-activity. Expenses incurred towards exploratory and prospecting activities are normally of capital expenditure but amortization thereof over a period of ten years has specially been provided for and same will be allowed in equal instalments over a period of 10 years against the profit arising from the commercial exploitation of any mine. Hence the CIT(A) directed to work out the amortisation of qualifying expenditure as per section 35E(1) of the Act. This finding of fact was not controverted by ld D.R. during the course of hearing Overburden removal expenditure to be allowed Disallowance of the claim of additional depreciation on the ground that the assessee is not engaged in the business of manufacturing or production of any article or thing - Held that - Since the coal is coming under the purview of mining ore and is treated as production following the decision of the Hon ble Supreme Court in the case of Sesa Goa (2004 (11) TMI 14 - SUPREME Court ) we hold that the CIT(A) is fully justified in deleting the addition for the assessment years 2010-11 and 2011-12. Addition towards employee s remuneration - Held that - the liability towards performance related pay and superannuation benefits has accrued and crystallised during the year under consideration which is evident from the Office Memorandum dated 2/7.5.2009 issued by Coal India Limited the holding company of the assessee. Based on the said Office Memorandum and also relying on judicial decisions the CIT(A) correctly deleted the addition. Contribution to rehabilitation fund to be allowed. Prior period expenses allowability - Held that - The term prior period items means material charges or credits which arise in the previous year as a result of errors or omissions in the preparation of financial statements of one or more previous years and also further clarification that the charge or credit arising on the outcome of a contigency which at the time of occurrence could not be estimated accurately shall not constitute the correction of an error but a change in the estimate and such an item shall not be treated as a prior period item. Training expenses to be allowed. Expenditure on renovation of railway siding - Held that - We find that ld D.R. could not point out any specific error in the order of the CIT(A) or place any positive material on record that the amount spent on repair of railway tracks are not allowable expenditure. Disallowance u/s.14A - Held that - AO has not given any reason for calculating the disallowance. The assessee submitted that there were no borrowings except very old for specific purposes. The CIT(A) in the order has also stated that the Assessing Officer has not verified whether the differential amount of the asset has come from any borrowing by the assessee or it is simply the investment from the reserve 7776.03 lakhs upto June 2011. The CIT(A) observed that the assessee has paid the amount more than the provision created for this purpose. Therefore he deleted the addition made by the Assessing Officer. The above findings of the CIT(A) was not controverted by ld D.R. and therefore we are inclined to uphold the order of the CIT(A). Disallowance towards repair expenses of plant and machinery - no documentary evidence - Held that - CIT(A) deleted the addition treating the claim of expenditure as revenue expenditure following the decision in the case of Sarvana Spg. Mills Pvt Ltd.(2007 (8) TMI 16 - SUPREME COURT OF INDIA ) and Vishal Paper Industries (2013 (1) TMI 653 - PUNJAB AND HARYANA HIGH COURT ). No contrary decision was placed on record by the revenue. Addition towards perk tax - Held that - We find that the amount towards Perk Tax is not claimed as an expenditure rather it is reflected in balance sheet under the broad head loans & advance . Since there was no claim by the assessee there is no reason to disallow the same by the Assessing officer. The CIT(A) has rightly deleted the addition Addition being difference in valuation of closing stock as on 31.3.2012 and opening stock as on 1.4.2013 being not satisfied with the explanation given by the assessee - Held that - The assessee s explanation is that the concerned development mines in question was converted to revenue mines and therefore the cost of coal was transferred to opening stock as on 1.4.2013. The stock of coal represents the normal raising cost of the coal which was not charged to the P&L account during the FY 2012-13 and after conversion of mines from Development to Revenue the same was charged to P&L account in the FY 2013-14 by bringing the opening stock under P&L account as the sale proceeds of the same stock was credited to the P&L account in the place of Development expenses. The assessee pleads that this is an established accounting policy being followed by the assessee which will be evident from Note-33 of Significant Accounting Policies wherein at clause 3.4 the accounting policy relating to Development mines is given. The contention of the assessee appears to be correct

Summary

Issues Involved:
1. Valuation of closing stock.
2. Overburden removal adjustment.
3. Interest paid to foreign institutions through CIL.
4. Charges paid for leasehold land and depreciation on leasehold land.
5. Prospecting & boring expenses.
6. Write-off/write-back of different items.
7. Development expenditure.
8. Short credit of TDS.
9. Obsolescence and shortage of stores.
10. Difference between interest income as per accounts and as per 26AS.
11. Site maintenance expenditure.
12. Change in accounting method for repair jobs.
13. CSR expenses.
14. Incorrect interest allowance u/s. 244.
15. Depreciation after considering the sale of assets.
16. Other expenses.
17. VRS provisions.
18. Community development expenses.
19. Compensation for land.
20. Environment/ecology improvement expenses.
21. Social facilities expenses.
22. Loss on sale of discarded assets.
23. CMPDIL expenses.
24. Cost of exploration and development expenditure.
25. Overburden removal expenditure.
26. Additional depreciation.
27. Employee’s remuneration and benefits.
28. Provisions.
29. Contribution to rehabilitation fund.
30. Prior period expenses.
31. Training expenses.
32. Renovation of railway siding.
33. Disallowance u/s. 14A.
34. Reclamation of land and mines closure expenditure.
35. CSR expenses.
36. Service charges to CIL.
37. Grants to school and institution.
38. Central excise duty.
39. Development expenditure.
40. Interest paid to CIL.
41. Repair expenses of plant and machinery.
42. Perk tax.
43. Difference in opening stock of coal.

Detailed Analysis:

Valuation of Closing Stock:
The primary issue was the valuation of closing stock, where the assessee valued the stock mine-wise, while the Assessing Officer (AO) insisted on a company-wide valuation. The CIT(A) upheld the AO's findings. The tribunal remitted the matter back to the AO to verify the uniform accounting policy adopted by other subsidiaries of Coal India Limited (CIL).

Overburden Removal Adjustment:
The AO disallowed the overburden removal expenditure, considering it a capital expense. The CIT(A) deleted this addition, following ITAT's decision in the case of Northern Coalfields Ltd. The tribunal upheld the CIT(A)'s decision, considering overburden removal as a revenue expenditure.

Interest Paid to Foreign Institutions through CIL:
The AO disallowed the interest paid to CIL on loans from foreign institutions due to non-deduction of TDS. The CIT(A) upheld this disallowance. The tribunal remitted the issue back to the AO for verification of the agreements and applicability of DTAA provisions.

Charges Paid for Leasehold Land and Depreciation on Leasehold Land:
The AO disallowed the charges paid for leasehold land and depreciation on leasehold land. The CIT(A) confirmed the disallowance, and the tribunal upheld the CIT(A)'s decision, citing that leasehold rights are not eligible for depreciation under section 32(1)(ii) of the Act.

Prospecting & Boring Expenses:
The AO disallowed the prospecting and boring expenses. The CIT(A) and the tribunal upheld the disallowance, following the ITAT's decision in the assessee's own case for earlier years.

Write-off/Write-back of Different Items:
The AO disallowed the write-off/write-back of different items due to lack of substantiation. The CIT(A) directed the AO to calculate the write-off/write-back as per the provisions of the Act. The tribunal upheld the CIT(A)'s decision.

Development Expenditure:
The AO disallowed the development expenditure. The CIT(A) directed the AO to follow the ITAT's direction regarding segregation of expenses under the head "development expenditure." The tribunal upheld the CIT(A)'s decision.

Short Credit of TDS:
The AO allowed short credit of TDS. The CIT(A) directed the AO to allow full credit after verification. The tribunal upheld the CIT(A)'s decision.

Obsolescence and Shortage of Stores:
The AO disallowed the provision for obsolescence and shortage of stores. The CIT(A) and the tribunal remitted the issue back to the AO for consideration afresh.

Difference Between Interest Income as per Accounts and as per 26AS:
The AO added the difference between interest income as per accounts and as per 26AS. The CIT(A) directed the AO to verify the amount shown by the assessee. The tribunal remitted the matter back to the AO for verification.

Site Maintenance Expenditure:
The AO disallowed the site maintenance expenditure. The CIT(A) upheld the disallowance. The tribunal remitted the issue back to the AO for verification.

Change in Accounting Method for Repair Jobs:
The AO disallowed the expenditure due to change in accounting method for repair jobs. The CIT(A) upheld the disallowance. The tribunal remitted the issue back to the AO for verification.

CSR Expenses:
The AO disallowed the CSR expenses. The CIT(A) deleted the disallowance, and the tribunal upheld the CIT(A)'s decision.

Incorrect Interest Allowance u/s. 244:
The AO did not allow the correct interest u/s. 244. The CIT(A) directed the AO to allow the correct interest. The tribunal upheld the CIT(A)'s decision.

Depreciation After Considering the Sale of Assets:
The AO did not allow the correct depreciation after considering the sale of assets. The CIT(A) directed the AO to allow the correct depreciation. The tribunal remitted the issue back to the AO for verification.

Other Expenses:
The AO disallowed other expenses due to lack of justification. The CIT(A) upheld the disallowance. The tribunal remitted the issue back to the AO for verification.

VRS Provisions:
The AO disallowed the VRS provisions. The CIT(A) deleted the disallowance, and the tribunal upheld the CIT(A)'s decision.

Community Development Expenses:
The AO disallowed the community development expenses. The CIT(A) deleted the disallowance, and the tribunal upheld the CIT(A)'s decision.

Compensation for Land:
The AO disallowed the compensation for land. The CIT(A) deleted the disallowance, and the tribunal upheld the CIT(A)'s decision.

Environment/Ecology Improvement Expenses:
The AO disallowed the environment/ecology improvement expenses. The CIT(A) deleted the disallowance, and the tribunal upheld the CIT(A)'s decision.

Social Facilities Expenses:
The AO disallowed the social facilities expenses. The CIT(A) deleted the disallowance, and the tribunal upheld the CIT(A)'s decision.

Loss on Sale of Discarded Assets:
The AO disallowed the loss on sale of discarded assets. The CIT(A) deleted the disallowance, and the tribunal upheld the CIT(A)'s decision.

CMPDIL Expenses:
The AO disallowed the CMPDIL expenses. The CIT(A) deleted the disallowance, and the tribunal upheld the CIT(A)'s decision.

Cost of Exploration and Development Expenditure:
The AO disallowed the cost of exploration and development expenditure. The CIT(A) directed the AO to work out the amortization as per section 35E(1) of the Act. The tribunal upheld the CIT(A)'s decision.

Overburden Removal Expenditure:
The AO disallowed the overburden removal expenditure. The CIT(A) deleted the disallowance, and the tribunal upheld the CIT(A)'s decision.

Additional Depreciation:
The AO disallowed the additional depreciation. The CIT(A) deleted the disallowance, and the tribunal upheld the CIT(A)'s decision.

Employee’s Remuneration and Benefits:
The AO disallowed the employee’s remuneration and benefits. The CIT(A) deleted the disallowance, and the tribunal upheld the CIT(A)'s decision.

Provisions:
The AO disallowed the provisions. The CIT(A) deleted the disallowance, and the tribunal upheld the CIT(A)'s decision.

Contribution to Rehabilitation Fund:
The AO disallowed the contribution to the rehabilitation fund. The CIT(A) deleted the disallowance, and the tribunal upheld the CIT(A)'s decision.

Prior Period Expenses:
The AO disallowed the prior period expenses. The CIT(A) deleted the disallowance, and the tribunal upheld the CIT(A)'s decision.

Training Expenses:
The AO disallowed the training expenses. The CIT(A) deleted the disallowance, and the tribunal upheld the CIT(A)'s decision.

Renovation of Railway Siding:
The AO disallowed the renovation of the railway siding. The CIT(A) deleted the disallowance, and the tribunal upheld the CIT(A)'s decision.

Disallowance u/s. 14A:
The AO disallowed the expenditure u/s. 14A. The CIT(A) deleted the disallowance. The tribunal remitted the issue back to the AO for verification.

Reclamation of Land and Mines Closure Expenditure:
The AO disallowed the reclamation of land and mines closure expenditure. The CIT(A) deleted the disallowance, and the tribunal upheld the CIT(A)'s decision.

CSR Expenses:
The AO disallowed the CSR expenses. The CIT(A) deleted the disallowance, and the tribunal upheld the CIT(A)'s decision.

Service Charges to CIL:
The AO disallowed the service charges to CIL. The CIT(A) deleted the disallowance, and the tribunal upheld the CIT(A)'s decision.

Grants to School and Institution:
The AO disallowed the grants to school and institution. The CIT(A) deleted the disallowance, and the tribunal upheld the CIT(A)'s decision.

Central Excise Duty:
The AO disallowed the provision for central excise duty. The CIT(A) deleted the disallowance, and the tribunal upheld the CIT(A)'s decision.

Development Expenditure:
The AO disallowed the development expenditure. The CIT(A) deleted the disallowance, and the tribunal upheld the CIT(A)'s decision.

Interest Paid to CIL:
The AO disallowed the interest paid to CIL. The CIT(A) deleted the disallowance, and the tribunal upheld the CIT(A)'s decision.

Repair Expenses of Plant and Machinery:
The AO disallowed the repair expenses of plant and machinery. The CIT(A) deleted the disallowance, and the tribunal upheld the CIT(A)'s decision.

Perk Tax:
The AO disallowed the perk tax. The CIT(A) deleted the disallowance, and the tribunal upheld the CIT(A)'s decision.

Difference in Opening Stock of Coal:
The AO added the difference in the opening stock of coal. The CIT(A) deleted the addition, and the tribunal upheld the CIT(A)'s decision.