2021 (5) TMI 735 - AT - Income Tax

Disallowance of capital work-in-progress - HELD THAT - From the orders of the authorities below, it is clear that the assessee has debited to the capital expenditure in the P L account in respect of those mines which are not in operation or the mines were unsuccessful for coal mines. It is also clear that the breakups were filed before the CIT(A) which has been incorporated by him in his order. We find that in most of the cases mines were closed and no operations could be carried out, the capital work in progress relating to that mine development expenditure could not be capitalized. Therefore, the capital work in progress relating to the mine development expenditure incurred was written off since no asset could be created. Any expenditure which does not bring any additional advantage to the business of the assessee is revenue expenditure. The expenditure was basically of revenue nature and incurred wholly and exclusively for the purpose of business. The assessee had also filed detailed written submissions before the CIT(A) and had relied on number of judgments. We set aside the order of the CIT(A) on this issue and accordingly, allow the grounds raised by the assessee on this issue in the respective AYs. Interest receivable from subsidiary company - HELD THAT - Subsidiary company APHMEL was a sick company as declared by BIFR during January 1993 whose net worth was totally eroded and the interest receivable was also uncertain. Against the BIFR order, M/s APHMEL preferred an appeal before the AAIFR and vide order dated 05/09/2005, the matter was remanded back to BIFR by AAIFR. AO observed that the interest should be offered as income by the assessee on the accrual basis is not correct in respect of the interest receivable from sick company if the matter is pending before the BIFR. There is no certainty in regard to the interest receivable from the sick company. We find substance on the case laws relied upon by the ld. AR on this issue - we delete the addition made on this issue with a rider that the AO is free to make addition when the interest shall be received by the assessee company in the year in which it is received by the assessee. Accordingly, the grounds raised by the assessee on this issue are allowed. Prior period expenditure - HELD THAT - We find that the details were filed before the AO during the course of assessment proceedings and rejecting the details, the AO made the addition. In the appellate proceedings before the CIT(A), again the details were provided and the CIT(A) has called for a remand report from the AO. The details were provided to the AO during the remand proceedings were accepted by the AO and he held that the expenditure should be allowed when it is crystalized. Accordingly, the AO was agreed as per his remand report that these prior period expenditures should be allowed in the year in which it is crystalized. Once, in the remand proceedings, the revenue accepts the plea of the assessee, then, there should not be further scope to confirm the additions made by the AO in this regard. We find substance in the submissions of the ld. AR and case laws relied in this regard quoted supra. Accordingly, we allow this ground of appeal of the assessee. TDS u/s 194A - TDS on interest on land compensation deposited in court as per court order raised in AYs 2009-10 to 2011-12 - AO observed that the assessee company paid interest on land compensation as per court order with a remark amount deposited in courts as per Court orders - HELD THAT - The assessee has deposited the interest as per the court directions on the enhanced compensations to be paid to the pattadars. There is no doubt that the assessee was much aware in regard to the payment of interest to the pattadars, but, the assessee has not paid directly to the pattadars. From the submissions made by the assessee, it is clear that this amount has to be deposited as per the directions of the Court order. A circular has been issued by the Board in regard to the responsibility of the TDS deduction on the interest payment on compensation/enhanced compensation. Now coming to the case on hand, it is clear that the assessee has deposited the amount with the Court, but, it has not actually paid to the actual recipients directly i.e., pattadars. On analysis of the above cited section and Circulars, it is clear that the assessee is not responsible for deducting tax deduction at source and assessee is also not sure that when the amount shall be paid to the actual recipients/pattadars. In our considered opinion, the addition made in this regard is not sustainable in the eyes of law and, therefore, the addition is deleted. Accordingly, grounds raised on this issue are allowed in favour of the assessee. Loss due to exchange fluctuation on interest on capital borrowed in forex for acquisition of machinery, after such asset is put to use - HELD THAT - We find substance in the submissions made by the ld. AR that once capital assets are put to use thereafter interest expenditure in respect of the loan taken for purchase of the capital assets is treated as revenue expenditure as per Explanation 8 to section 43(1) of Income Tax Act. We agree with the submissions made by the ld. AR, but, none has provided the actual date of put to use the machinery into the business of the assessee. Therefore, this issue is remitted back to the file of AO for limited purpose for verification for actual date of put to use the machinery and if the interest paid by the assessee is after the machinery put to use then the claim of the assessee is to be allowed as a revenue expenditure and if it is found otherwise, then AO will decide the issue as per Explanation 8 to section 43(1) of Income Tax Act. This ground is treated as allowed for statistical purposes. Depreciation on mine development to 10% OR 15% claimed - HELD THAT - On perusal of the submission of the AR of the assessee it has been observed that in assessee s own case while granting investment allowance U/s 32A of the IT Act, similar expenditures incurred by the assessee under the head plant and machinery were decided in favour of the assessee and held that it was plant and machinery by the Hon ble jurisdictional AP High Court as relied upon by the assessee. Further the assessee has relied on the decision of the Hon ble SC in case of Karnataka Power Ltd. 2000 (7) TMI 72 - SUPREME COURT is squarely applicable to the facts of the present case. The Ld. CIT (A) has not accepted this judgement of Hon ble SC holding that it relates to Investment Allowance u/s 32A of the Income Tax Act, 1961. Once similar expenditures have been accepted by the Hon ble SC as quoted supra , we are of the view that the expenditures incurred by the assessee were necessary for excavation of coal from mines and shafts . In view of the above observations, we allow this ground of appeal of the assessee by holding that the assessee is entitled to charge depreciation @ 15% under the block of assets plant and machinery , as against 10% made by the AO . Prior period expenditure disallowance enhancement of expenses by CIT-A- HELD THAT - CIT(A) has enhanced the prior period expenditures as claimed by the assessee. In this regard, in our considered opinion, we remit this matter back to the file of the AO for verification when the expenditure was crystalized. If the AO satisfied that the assessee has rightly claimed prior period expenditure and then allow the claim of the assessee following the decision taken by us in for AYs 2005-06 to 2010-11. Accordingly, the AO is directed to decide the issue in accordance with law. Thus, this ground is allowed for statistical purposes. Short deducted the TDS - whether AO has rightly made the disallowance u/s 40(a)(ia)? - CIT(A) deleted the disallowance made by the AO - HELD THAT - The assessee has made payments which were required to be deducted tax at source as per the prescribed rate in force as per chapter XVIIB, which has been narrated by the Tax auditor in Form 3CD as per annexure - IX of the Tax audit report . On perusal of the orders of the authorities below, it is clear that the assessee has deducted TDS on the above payments at lower rate as prescribed in the Act. The section 40(a)(ia) is applicable only in those cases where tax has not been deducted at all. But in the given case, the assessee has deducted tax at lower rate. The assessing Officer is not justified to make disallowance U/s 40(a)(ia) on the payments made and debited into the Profit Loss Account on the ground that assessee has not deducted TDS at full rate as was in force. TDS u/s 194A - HELD THAT - The assessee has made payments which were required to be deducted tax at source as per the prescribed rate in force as per chapter XVIIB, which has been narrated by the Tax auditor in Form 3CD as per annexure - IX of the Tax audit report . On perusal of the orders of the authorities below, it is clear that the assessee has deducted TDS on the above payments at lower rate as prescribed in the Act. The section 40(a)(ia) is applicable only in those cases where tax has not been deducted at all. But in the given case, the assessee has deducted tax at lower rate. The assessing Officer is not justified to make disallowance U/s 40(a)(ia) on the payments made and debited into the Profit Loss Account on the ground that assessee has not deducted TDS at full rate as was in force.

Summary

Issues Involved:
1. Disallowance of capital work-in-progress.
2. Interest accrued on loans to M/s APHMEL.
3. Disallowance of deduction claimed u/s 43B.
4. Disallowance of net prior period expenditure.
5. Prospecting expenditure under section 35E.
6. TDS on interest on land compensation deposited in court.
7. Loss due to exchange fluctuation on interest on capital borrowed in forex.
8. Restriction of depreciation on mine development.
9. Prior period expenditure enhancement by CIT(A).
10. Expenditure on plantations.
11. Disallowance u/s 40(a)(ia) for short deduction of TDS.
12. Disallowance of interest provided to the fund under FBIS scheme.

Detailed Analysis:

1. Disallowance of Capital Work-in-Progress:
The assessee had debited ?4.24 crores towards ‘assets written off’ under ‘provisions and write off’ in the P&L Account. The AO disallowed ?14,54,302/- as it did not represent an allowable deduction. The CIT(A) confirmed this disallowance. The ITAT, however, found that the expenditure was of a revenue nature and incurred wholly and exclusively for business purposes. The ITAT relied on various judgments, including CIT vs. Binani Cements Ltd., and concluded that the expenditure should be allowed as it did not bring any additional advantage to the business.

2. Interest Accrued on Loans to M/s APHMEL:
The AO added ?62.81 lakhs as accrued interest on advances to M/s APHMEL, stating that the cash system of accounting was not justified given the financial improvement of APHMEL. The CIT(A) confirmed this addition. The ITAT, however, found that the interest receivable was uncertain due to APHMEL's status as a sick company under BIFR. The ITAT deleted the addition, allowing the AO to add the interest in the year it is received.

3. Disallowance of Deduction Claimed u/s 43B:
The issue was not elaborated in the judgment provided.

4. Disallowance of Net Prior Period Expenditure:
The AO disallowed ?1,48,99,645/- out of ?2,18,20,357/- claimed as net prior period expenditure. The CIT(A) confirmed this disallowance. The ITAT found that the details were provided and accepted by the AO in the remand report, and thus, the disallowance was not justified. The ITAT allowed the assessee's claim.

5. Prospecting Expenditure under Section 35E:
The AO disallowed ?3,49,19,111/- claimed as revenue expenditure, stating it should be amortized over ten years as per section 35E. The CIT(A) confirmed this disallowance. The assessee did not press this ground before the ITAT, and thus, it was dismissed as not pressed.

6. TDS on Interest on Land Compensation Deposited in Court:
The AO disallowed the interest on land compensation deposited in court for non-deduction of TDS. The CIT(A) confirmed this disallowance. The ITAT found that the responsibility for TDS deduction lies with the authority distributing the compensation, not the assessee. The ITAT deleted the addition.

7. Loss Due to Exchange Fluctuation on Interest on Capital Borrowed in Forex:
The AO disallowed ?1,94,52,069/- as capital expenditure. The CIT(A) confirmed this disallowance. The ITAT found that interest paid after the asset is put to use should be treated as revenue expenditure as per Explanation 8 to section 43(1). The issue was remitted back to the AO for verification of the actual date of use.

8. Restriction of Depreciation on Mine Development:
The AO restricted depreciation on mine development to 10% instead of 15%. The CIT(A) confirmed this restriction. The ITAT found that the expenditure incurred by the assessee on mine development should be treated as plant and machinery, thus eligible for 15% depreciation. The ITAT allowed the assessee's claim.

9. Prior Period Expenditure Enhancement by CIT(A):
The CIT(A) enhanced the prior period expenditure. The ITAT remitted the matter back to the AO for verification of when the expenditure was crystallized and directed to allow the claim if justified.

10. Expenditure on Plantations:
The revenue's appeal involved a disallowance of ?1.19 crore towards expenditure on plantations. The ITAT dismissed the appeal due to the tax effect being less than ?50 lakhs, as per CBDT Circulars.

11. Disallowance u/s 40(a)(ia) for Short Deduction of TDS:
The AO disallowed ?3,49,71,516/- for short deduction of TDS. The CIT(A) deleted the disallowance. The ITAT upheld the CIT(A)'s decision, stating that section 40(a)(ia) applies only where no TDS is deducted, not for short deduction.

12. Disallowance of Interest Provided to the Fund under FBIS Scheme:
The AO disallowed interest provided to the fund under the FBIS scheme for non-deduction of TDS. The CIT(A) deleted the disallowance, noting that the interest per annum was below the threshold limit for TDS. The ITAT upheld the CIT(A)'s decision, dismissing the revenue's appeal.

Conclusion:
The ITAT allowed the assessee's appeals on several grounds, including capital work-in-progress, interest on loans to APHMEL, prior period expenditure, and depreciation on mine development. The ITAT dismissed the revenue's appeals due to low tax effect and upheld the CIT(A)'s decisions on short deduction of TDS and interest under the FBIS scheme.