2016 (7) TMI 203 - AT - Income Tax

Overburden removal expense - revenue or capital expenditure - Held that - The overburden removal is a continuous process even as the coal extraction is on and there is removal of overburden from between the coal seams as well. It is not a onetime process that the removal of overburden takes the assessee to a stage where the coal can be extracted without any further activities to be carried out so far as overburden removal is concerned. The mechanism of open cast mining, on the first principles, is such that removal of overburden is a continuous process. For these reasons also, removal of overburden cannot seen in an isolated manner as a capital expenditure. Ironically, even as the case involves substantial tax revenue, the manner in which the authorities below have dealt with the matter, as would be evident from extracts reproduced earlier, is somewhat superficial and leaves a lot to be desired. The authorities below have not even set out, or dealt with, break up or the exact nature of expenses or the complete details of nature of work carried out under, what is termed as, mine development. Be that as it may, under the scheme of the Act, it is not for this Tribunal to supplement the work of the Assessing Officer or to go the areas which he has left untouched. Given this legal position, the views of the coordinate bench are equally applicable on the facts before us as well. We, therefore, see no reasons to take any other view of the matter than the view taken by the coordinate bench in the case of Northern Coalfield Ltd (2015 (6) TMI 36 - ITAT JABALPUR). - Decided in favour of assessee Disallowance of corporate social responsibility expenses - CIT(A) deleted the addition - Held that - the amendment in the scheme of Section 37(1) is not specifically stated to be retrospective and the said Explanation is inserted only with effect from 1st April 2015. In this view of the matter also, there is no reason to hold this provision to be retrospective in application. As a matter of fact, the amendment in law, which was accompanied by the statutory requirement with regard to discharging the corporate social responsibility, is a disabling provision which puts an additional tax burden on the assessee in the sense that the expenses that the assessee is required to incur, under a statutory obligation, in the course of his business are not allowed deduction in the computation of income. This disallowance is restricted to the expenses incurred by the assessee under a statutory obligation under section 135 of Companies Act 2013, and there is thus now a line of demarcation between the expenses incurred by the assessee on discharging corporate social responsibility under such a statutory obligation and under a voluntary assumption of responsibility. As for the former, the disallowance under Explanation 2 to Section 37(1) comes into play, but, as for latter, there is no such disabling provision as long as the expenses, even in discharge of corporate social responsibility on voluntary basis, can be said to be wholly and exclusively for the purposes of business . There is no dispute that the expenses in question are not incurred under the aforesaid statutory obligation. For this reason also, as also for the basic reason that the Explanation 2 to Section 37(1) comes into play with effect from 1st April 2015, we hold that the disabling provision of Explanation 2 to Section 37(1) does not apply on the facts of this case. - Decided against the revenue.

Summary

Issues Involved:
1. Disallowance of overburden removal expenses as capital expenditure.
2. Disallowance of corporate social responsibility (CSR) expenses.

Detailed Analysis:

1. Disallowance of Overburden Removal Expenses as Capital Expenditure:
The primary issue in this case was whether the expenditure of ?63,14,66,537 incurred by the assessee on overburden removal should be treated as revenue or capital expenditure. The Assessing Officer (AO) classified it as capital expenditure, arguing that it provided an enduring benefit by making a permanent access to the coal. The AO also noted that under the lease agreement with the Government of Chhattisgarh, the assessee was required to return the land in a habitable condition, which implied that the overburden removal added value to the land.

The CIT(A) disagreed with the AO, treating the overburden removal expenses as revenue expenditure. The CIT(A) referred to several judicial precedents, including decisions from the Supreme Court and various High Courts, which held that such expenses in open cast mining are revenue in nature.

The Tribunal upheld the CIT(A)’s decision, noting that the overburden removal is a continuous process necessary for coal extraction, and not a one-time activity. The Tribunal cited the case of Northern Coalfield Ltd Vs ACIT, where it was held that overburden removal is an ongoing process and should be treated as revenue expenditure. The Tribunal emphasized that the removal of overburden does not create a new asset but is essential for the ongoing extraction of coal.

2. Disallowance of Corporate Social Responsibility (CSR) Expenses:
The second issue was the disallowance of ?24,45,434 claimed by the assessee as CSR expenses. The AO disallowed these expenses, arguing that they were voluntary and not incurred for business purposes. The AO also mentioned that similar claims had been disallowed in the past for other companies in the same industry.

The CIT(A) provided partial relief, allowing most of the CSR expenses as business expenditure. The CIT(A) observed that CSR activities, though voluntary, are aimed at creating goodwill and a favorable environment for the business. The CIT(A) referred to several judicial precedents which held that expenses incurred for community development and employee welfare are admissible as business expenditure.

The Tribunal upheld the CIT(A)’s decision, noting that voluntary expenses can still be considered as incurred wholly and exclusively for business purposes if they are aimed at promoting the business and earning profits. The Tribunal referred to the judgments of the Supreme Court and various High Courts, which supported the deductibility of such expenses. The Tribunal also clarified that the amendment to Section 37(1) of the Income Tax Act, which disallows CSR expenses, is applicable only from 1st April 2015 and does not have retrospective effect.

Conclusion:
The Tribunal dismissed the departmental appeal, affirming the CIT(A)’s decisions on both issues. The overburden removal expenses were rightly treated as revenue expenditure, and the CSR expenses, though voluntary, were considered deductible as they were incurred for business purposes.