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2015 (6) TMI 204 - AT - Income TaxDisallowance of OBR (overburden removal expenses) - revenue expenditure or capital expenditure entitled to deduction on by under Section 35-E of the Act @ 10% amortization - Held that - deduction under section 37(1) could not be declined on the ground that the expenditure in question was eligible for deduction under section 35 E. The deduction under section 35 E is normally available in respect of the expenditure which is not eligible for deduction under section 37 (1) and just because the deduction under section 35 E may be available in respect of an expenditure, even if that be so, cannot be reason enough to decline the deduction under section 37 (1). Of course, it is besides the fact that once the commercial production had commenced in the respective mines, there was no occasion to invoke the provisions of Section 35 E in respect of any expenditure incurred in the years after the year of commercial production. The apprehensions of the Assessing Officer seem to be purely hypothetical and in the realm of conjectures and surmises inasmuch as not one instance is shown in which the overburden removal expenses, booked in the accounts as revenue expenditure, actually pertain to removal of overburden only at the surface level and should be, therefore, treated as capital expenditure. Similarly, while declining the deduction of overburden removal as capital expenditure, the Assessing Officer, as also the CIT(A), has not treated any part of this expenditure, which essentially includes the expenditure incurred on removing overburden in the process of coal mining and production, as revenue expenditure. It seems to be more or less an undisputed position, given the nature of overburden removal expenses as we have discussed earlier, that a part of the overburden removal expenses is admittedly revenue expenditure, but if we have to uphold the stand of the authorities below, entire overburden removal expenses is required to be treated as capital expenditure eligible only for amortization under section 35D. In any case, there is nothing on record to establish, or even suggest, that expenses incurred on removal of overburden at the surface level, which were capital expenditure in nature, have been claimed as revenue deduction on the strength of coal mining in another piece of land within that coal mine. Thus disallowance deleted - Decided in favour of assessee. Disallowance in respect of 1/10th of One Time Lease Payment - Held that - It is not anybody s case that the assessee was not eligible for deduction under section 35E in respect of this expenditure on account of onetime lease rent and afforestation charges, nor is it the case that the entire related expenditure has already been allowed as deduction and nothing survives for being allowed as deduction now. What has been claimed, in our humble understanding, is not expenditure relating to assessment year 2004- 05 but amortization of eligible expenditure which was originally incurred in the assessment year 2004-05. Merely because the expense was originally incurred in the previous year relevant to the assessment year 2004-05, as long as it is otherwise eligible for amortization under section 35E, the deduction under section 35E to the amount so amortized cannot be declined. - Decided in favour of assessee. Disallowance of Education Expenses - CIT(A) deleted the addition - Held that - This issue is covered, in favour of the assessee in assessee s own case for the assessment years 1997-98 and 1998-99 wherein, following the decision of South Eastern Coalfield Limited Vs JCIT (2002 (2) TMI 344 - ITAT NAGPUR , it was held that no disallowance can be made in respect of such expenses as the expenses were not incurred in terms of National Coal Wage Agreement entered into with the employee unions. - Decided in favour of assessee. Disallowance of Community Development Expenses - Held that - s issue is covered, in favour of the assessee, only to the extent that the matter was set aside to the file of the Assessing Officer for examining relevant details and compare these with the items on which expenditure has been allowed in the case of South Eastern Coalfield (supra). - Decided in favour of revenue for statistical purposes. Disallowance of Other Miscellaneous Welfare Expenses - Held that - As long as expenses are incurred wholly and exclusively for the purposes of earning the income from business or profession, merely because some of these expenses are incurred voluntarily and even without there being any legal or contractual obligation to incur the same, those expenses do not cease to be deductible in nature. In other words, it is not necessary that every deductible expense must be directly relevant for earning income but for which such an earning may not be possible. As long as expenses for the purposes of business, whether unavoidable or not, these expenses continue to be deductible. - Decided in favour of assessee. Disallowance of Other Development Expenses and roads, culverts and drains in coal mines - CIT(A) allowed claim - Held that - All the mines, in respect of which these expenses are incurred, are revenue mines from which coal is being extracted. No part of this expenditure, therefore, needs to be capitalized, particularly as there is nothing in the development or initial stage. These are routine expenses for maintenance of a running mine. In any event, there is no material brought on record by the Assessing Officer to demonstrate that these expenses are capital expenses. Keeping in view of these discussions, as also bearing in mind entirety of the case and the accepted past history of the case, we deem it fit and proper to uphold the stand of the CIT(A) on this issue - Decided in favour of assessee.
Issues:
1. Disallowance of Overburden Removal (OBR) Expenses. 2. Disallowance of CMPDIL Expenses. 3. Disallowance of 1/10th of One Time Lease Payment. 4. Disallowance of Education Expenses. 5. Disallowance of Community Development Expenses. 6. Disallowance of Other Miscellaneous Welfare Expenses. 7. Disallowance of Other Development Expenses and Roads, Culverts, and Drains in Coal Mines. Detailed Analysis: 1. Disallowance of Overburden Removal (OBR) Expenses: The primary issue was whether the OBR expenses should be treated as capital or revenue expenditure. The assessee, a coal mining public sector undertaking, argued that OBR is a continuous process necessary for coal extraction and should be treated as revenue expenditure. The Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, treating it as capital expenditure under Section 35E, allowing only 1/10th as amortization. The Tribunal noted that the CIT(A) disregarded binding precedents and emphasized judicial discipline. The Tribunal found that OBR is an ongoing process necessary for coal extraction, thus qualifying as revenue expenditure. The Tribunal directed the AO to delete the disallowance of Rs. 2,05,616.72 lakhs. 2. Disallowance of CMPDIL Expenses: The AO disallowed Rs. 1,973.38 lakhs claimed for technical support services from CMPDIL, treating it as capital expenditure. The CIT(A) upheld this, questioning the linkage to revenue mines. The Tribunal observed that all mines were revenue mines and that CMPDIL services were for ongoing mining operations, thus qualifying as revenue expenditure. The Tribunal directed the AO to delete the disallowance. 3. Disallowance of 1/10th of One Time Lease Payment: The AO disallowed Rs. 123.42 lakhs, treating it as a prior period expense. The CIT(A) upheld this, citing the mercantile method of accounting. The Tribunal clarified that the deduction under Section 35E pertains to amortization of eligible expenditure, not the year of incurrence. The Tribunal directed the AO to delete the disallowance. 4. Disallowance of Education Expenses: The AO disallowed Rs. 880.04 lakhs spent on educational facilities for employees' children, questioning its business relevance. The CIT(A) deleted the disallowance, citing past allowances and contractual obligations under the National Coal Wage Agreement. The Tribunal upheld the CIT(A)'s decision, noting consistency with past rulings and the necessity for business operations. 5. Disallowance of Community Development Expenses: The AO disallowed Rs. 235.49 lakhs spent on community development, questioning its direct business relevance. The CIT(A) deleted the disallowance, citing past allowances and the necessity for smooth business operations. The Tribunal restored the matter to the AO to examine the details in line with principles from a coordinate bench decision in South Eastern Coalfield Ltd. 6. Disallowance of Other Miscellaneous Welfare Expenses: The AO disallowed Rs. 621.14 lakhs spent on staff welfare activities, questioning its business relevance. The CIT(A) deleted the disallowance, recognizing the business purpose of such expenses. The Tribunal upheld the CIT(A)'s decision, emphasizing that voluntary expenses for employee welfare still qualify as business expenditure. 7. Disallowance of Other Development Expenses and Roads, Culverts, and Drains in Coal Mines: The AO disallowed Rs. 31.25 lakhs and Rs. 45.22 lakhs, questioning their revenue nature. The CIT(A) deleted the disallowance, noting these were routine maintenance expenses for running mines. The Tribunal upheld the CIT(A)'s decision, recognizing these as revenue expenses necessary for ongoing operations. Conclusion: The appeal filed by the assessee was allowed, and the appeal filed by the AO was partly allowed for statistical purposes. The Tribunal directed the AO to delete the disallowances related to OBR, CMPDIL, and lease payment expenses, and upheld the CIT(A)'s deletions of disallowances related to education, welfare, and development expenses. The community development expenses issue was remanded to the AO for further examination.
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