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2014 (1) TMI 1581 - AT - Income TaxDisallowance of expenses of Net Present Value as compensation paid - compensation paid by the assessee to Forest Department for utilization of forest land for non-forest purposes. - Held that - Decision in ACIT v. Rungta Sons (P) Ltd. 2014 (1) TMI 1515 - ITAT KOLKATA followed - 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 - When a payment is made as per specific direction of Government, it cannot but be in the business interest of the assessee-company to abide by such directions of the Government of India - 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 expenditure resulting in a capital asset in the hands of a third party, is to be taken as revenue expenditure because no asset arises to the trader by reason of such expenditure - Where law imposes on the assessee, an obligation to incur expenses for being permitted to pursue its trading activity, the expenditure would be an outgoing from the profits of the trade. The said expenditure paid by the assessee as NPV to enable the assessee to carry on its mining business is revenue in nature, which is allowable as business expenditure under section 37(1) of the Act - Decided against Revenue.
Issues Involved:
1. Deletion of disallowance of expenses of Net Present Value (NPV) as compensation paid to the Forest Department for utilization of forest land for non-forest purposes. Detailed Analysis: 1. Deletion of Disallowance of Expenses of Net Present Value (NPV): The Revenue appealed against the orders of the Commissioner of Income-tax (Appeals)-V, Kolkata, which deleted the disallowance of expenses of NPV paid by the assessee to the Forest Department for utilizing forest land for non-forest purposes. The assessments were framed under section 143(3) of the Income Tax Act, 1961 for the assessment years 2005-06 and 2006-07. The Revenue contended that the NPV is a compensation categorized as fees by the Hon'ble Supreme Court, which should not be allowed as a business expenditure under section 37(1) of the Act. They argued that the payment was for acquiring a right to mining over an additional 25 hectares of forest area, thus constituting a capital expenditure. The assessee's counsel argued that the issue is covered in favor of the assessee by previous Tribunal decisions. The CIT(A) observed that the payment did not grant any fresh right to mining but was necessary to continue the existing business operations. The CIT(A) cited the Supreme Court's decision in Bikaner Gypsums Ltd. v. CIT, which held that expenses incurred for removing restrictions or obstructions in an existing business are revenue in nature if they do not result in acquiring a capital asset. The Tribunal upheld the CIT(A)'s decision, agreeing that the payment of NPV was a statutory requirement to continue mining operations and did not result in acquiring a capital asset. The Tribunal referenced the decision in ACIT v. Rungta Sons (P) Ltd., where it was held that NPV payments are revenue expenditures allowable under section 37(1) of the Act. The Tribunal also noted that similar issues were decided in favor of the assessee in other cases, such as ACIT v. Freegrade & Co. Ltd. The Revenue's reliance on the Supreme Court decision in T.N. Godavarman Thirumulpad v. Union of India was addressed by the Tribunal, which noted that the Co-ordinate Bench had already considered this and held NPV payments as revenue expenditures. In conclusion, the Tribunal dismissed the Revenue's appeals, affirming that the NPV payments were allowable as business expenditures under section 37(1) of the Income Tax Act, 1961. The Tribunal's decision was pronounced in the open court on 27/01/2014.
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