TMI Blog2004 (8) TMI 364X X X X Extracts X X X X X X X X Extracts X X X X ..... e or more of the articles or things specified in the list in the Fifth Schedule, it would be entitled for development rebate. Items mentioned at Sl. No. 3 of the Fifth Schedule include lignite. Thus, here again the activity of excavation of lignite is treated as production of article or thing. Sec. 80-IB(9) entitles an undertaking engaged in commercial production or refining of mineral oil for purposes of deduction under s. 80-IB. It is noticeable that in the Fifth Schedule noted earlier at Sl. No. 3 along with coal, lignite etc., mineral oil has also been mentioned. Thus, by applying the principle of ejusdem generis it can be reasonably concluded that excavation of lignite would also come within the term production of any article or thing. Deduction u/s. 80-IA in respect of lignite production - In the present case, we find that lignite is found embedded beneath the earth in huge blocks. However, it can be put to use only after it is crushed to a uniform 50 to 150 mm size and after all the impurities are removed and the excavated lignite is blended. Therefore, it cannot be held that the lignite which is put to use is in the same form in which it is found embedded in earth. The test ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration tariffs. One of the items mentioned in the said Annexure is for including the rate of return on equity and internal resources at 12 per cent for both power station and mine. Clause 6 of the agreement deals with the liability in respect of income-tax, if any, on the income stream of NLC. It also lays down the overall limit of income-tax reimbursement by recipient. It is noticeable in this connection that cl. 4 dealing with tariff does not refer to tax liability on income. Clause 4 and cl. 6 are independent clauses. Therefore, it is wrong to conclude that income-tax reimbursement to the limited extent as contained in cl. 6 was part of tariff. The combined reading of all these clauses clearly indicate that it is primarily the income-tax liability of the recipient on its income relating to a particular stream which has to be reimbursed to the assessee. This cannot be held to be income derived from industrial undertaking and, therefore, was rightly held by the learned CIT as not being part of sale-price of power. This ground is accordingly dismissed. In the result, the appeal is treated as partly allowed for statistical purposes. - HON'BLE S.V. MEHROTRA, A.M. AND N. VIJAYAK ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r strike notice dt. 18th April, 2001 raised an industrial dispute against the management of Neyveli Lignite Corporation (NLC) over the issue of finalizing the new wage revision from 1st Jan., 1997. There was a work to rule agitation from 17th May, 2001, a sit on strike on 21st May 2001 and general strike from 22nd May, 2001 to 26th May, 2001. Negotiations on the revised charter of demands of the recognized union commenced on 23rd April, 2001 and the Committee had meetings on various dates and finally on 26th May, 2001 and after protracted discussions on the union s charter of demands, a memorandum of understanding was reached between the representatives of management and recognized union on 27th May, 2001. Consequent to the arriving at a memorandum of understanding between the management of NLC and NLC workers progressive union, the strike was withdrawn. The dispute was ceased in consultations and conciliation provided on various dates as on 2nd May, 2001, 23rd May, 2001, 24th May, 2001, 25th May, 2001, 26th May, 2001 and finally on 29th June, 2001. 4. After protracted and prolonged discussions finally on 29th June, 2001, both the parties agreed to arrive at a settlement under s. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tually accrued prior to March, 2001 and a reasonable estimate in respect of the said liability was possible. In support of his argument regarding reaching at reasonable estimate, the learned counsel referred to p. 35 of the paper book wherein are contained the instructions dt. 25th March, 2001 for revision of pay scales, fitment, DA, fringe benefit, etc., in respect of the executives for implementation with the approval of the Government of India. Thus, the learned counsel submitted that framework for arriving at the revised pay structure had already been framed and, therefore, the assessee had to follow the same parameters for arriving at reasonable estimate of its accrued liability in respect of workers. The learned counsel pointed out that there could not be any conflict between wage revision of employees and executives and since instructions had been received regarding wage revision of executives, on the same lines provision for liability accruing on account of wage revision of employees could reasonably be made as the services had already been rendered by the workers. The learned counsel further referred to p. 15 of the additional paper book wherein a letter dt. 2nd March, 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 3,71,980 had been made by the asst. yr. 1981-82 for additional fuel surcharge. The Hon ble Calcutta High Court, after taking note of cls. 19, 20 and 25(9) of the agreement entered into between the Board and the assessee, wherein it was agreed that fuel charges would form part of the bill issued monthly and would depend upon the units consumed by the assessee during the month, held that the liability accrued under the agreement when the electricity was consumed by the assessee in the previous year relevant to the asst. yr. 1981-82 though quantification was made later. Accordingly, it was held that the assessee was entitled for deduction of additional fuel charge liability in the asst. yr. 1981-82. 11. Bharat Earth Movers Ltd. vs. CIT. The Hon ble Supreme Court observed: If a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied, the liabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ok wherein the memorandum of settlement under s. 12(3) of the Industrial Disputes Act, 1947, between the company and NLC Workers Progressive Union is contained. She pointed out that the said settlement was entered into on 29th June, 2001. The learned Departmental Representative submitted that nothing happened in asst. yr. 2001-02 and, therefore, it could not be allowed. She referred to the decision of the Tribunal in the case of South Eastern Coalfields Ltd. vs. Jt. CIT (2002) 72 TTJ (Nag) 401 : (2003) 260 ITR 1 (Nag)(AT). In this case, the assessee-company had made a provision for interim relief payable to its employees covered by the National Coal Wage Agreement for the period 1st July, 1991 to 31st March, 1994 to the extent of Rs. 3,266 lakhs and amount payable to the employees covered by executives rules for the period 1st Jan., 1992 to 31st March, 1994 to the extent of Rs. 62.49 lakhs. The Tribunal held that as far as provision of Rs. 3,266 lakhs made by the assessee-company in respect of interim relief payable to the employees governed by the National Coal Wage Agreement was concerned, a letter was issued by the holding company, i.e. Coal India Ltd., on 11th Feb., 1994, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1999. In pursuance of this, P A Department of company issued instructions on 26th March, 2001 in regard to revision of pay scales for executive w.e.f. 1st Jan., 1997, Thus, as far as provision in respect of wage revision relating to executives is concerned, there cannot be any dispute that the same has to be allowed. Negotiations with workers trade union were also going on simultaneously and, therefore, that liability also was very much existing because under no circumstances wage revision to employees could be denied. Now we have to see whether the assessee could reasonably make estimate of liability on account of wage revision relating to workers. In this regard the assessee was having instructions of P A Department of company dt. 25th March, 2001 in regard to wage revision of executives and two settlements of public sector undertakings, viz., NTPC and BHEL prior to 31st March, 2001, where also wage revision was to be effected on the same lines as in the case of the assessee. Therefore, the assessee could reasonably estimate its accrued liability as the services had already been rendered by 31st March, 2001. It was, therefore, fully justified in making this provision. It was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... variation in power cost in 1997, 1998 and 1999. On the basis of these variations the assessee had claimed escalation of retention money from 1996-97 onwards aggregating to Rs. 6.97 crores. It is pointed out in the note that this amount was not settled by the Government nor was there any acceptance of claim as on 31st March, 2001. In regard to other items also it is pointed out in the note that it has been the experience of the assessee that even in respect of other claims for escalation, the Government had not accepted the full claim nor did they give reason for reduction or rejection of the claim of the assessee. In regard to change in method of accounting, it is pointed out that earlier the assessee had been accounting its claim for the escalation amount at the time of raising the claim. However, keeping in view the uncertainty of the acceptance of the claim for escalation, profits of the year were not truly reflected by accounting the claim of escalation in the year of making the claim itself. Accordingly, the assessee decided to account for this claim for escalation in respect of cost on various inputs in the year in which the Government accepted the claim. Thus, in sum and su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nuine problems was permissible. The learned counsel therefore submitted that the change in the method of accounting of subsidy on receipt basis was a bona fide change and, therefore,, no interference was called for, with such change in method of accounting. The learned Departmental Representative submitted that the decision of Hon ble Madras High Court in CIT vs. Elgi Equipments Ltd. was rendered with respect to asst. yr. 1981-82. However, thereafter s. 145 has been amended by Finance Act, 1995 w.e.f. 1st April, 1997 and there after the assessee is entitled to either follow the cash or mercantile system of accounting regularly. The learned Departmental Representative submitted that the closing stock has to be valued on the basis of cost or market price, whichever is less. Therefore, the change was not permissible. The learned Departmental Representative submitted that before we consider the bona fides of the change in method of accounting, it should be kept in mind that the assessee had closed its fertilizer unit. The learned counsel in rejoinder submitted that if the learned Departmental Representative s plea is accepted regarding adopting the market price being lower of the cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th uncertainty in receiving the claim. Under these circumstances, the change in method of valuation of closing stock could not be said to be mala fide. There are plethora of judicial pronouncements on the issue that mere lodging of claim does not result in accrual of income. The learned Departmental Representative s objection is that after the amendment in s. 145, the assessee could not adopt the hybrid system of accounting. In our considered opinion, this cannot be said to be deviation from the mercantile system of accounting regularly employed by the assessee. It is only the change in method of valuing of closing stock necessitated on account of uncertainty associated in receiving the claim made by the assessee. In this view of the matter, we set aside the order of the learned CIT. 19. Ground No. 3 is regarding allowability of deduction under s. 80-IA in respect of lignite production. The assessee had claimed deduction under s. 80-IA on the profits arising from its activity relating to mining lignite and generation of power using the mined lignite. The learned CIT examined in detail whether the assessee was the manufacturer or producer of an article or a thing and after elaborate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is excavated in four benches. In the high capacity mines of 10-5 MTPA, the top three benches are operated with maximum bench height of 24m each with high capacity system, consisting of 1400 L. BWE, a number of 2400/2000 mm wide steel cord belt conveyors, 20,000/11,000 t per hr. tripper and spreader. The fourth bench is operated with two 700 L. BWE loading into 2000 mm. vide steel cord belt conveyor and matching spreader of 11,000 t/hr, whereas the 3 MTPA mine has got 700 L BWEs and the connected system in each bench. All the overburden excavation and dumping systems are interlinked so as to operate the excavation side without interruption if any of the connecting dumping system goes under breakdown or planned stoppage. Drilling and Blasting: The overburden of Neyveli mines consists of soft and sticky alluvium and hard Cuddalore sandstone. The deployment of BWE for excavation of sandstone without blasting experience heavy shock load on the machines causing structural damages and cutting teeth worn out in a very short duration. The cutting resistant and the compressive strength of the Cuddalore sandstone are 22 to 250 Kg per cm. and 200 Kg per sq.cm, respectively. The binding media o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the pump well is as follows: (a) Screen diameters (b) Bore hole diameters (c) Gravel packing (d) Screen opening The GWC wells are drilled by Jet Hole Master with rock roller bits to a diameter of 1000mm and depth varies from 80mm to 160mm. The hole is cased with 500 mm casings and 5 to 8 stages of submersible pumps (squirrel cage induction motors of 175 to 250 HP) ore lowered for pumping 1000 GPM continuously. Storm Water Control: The vast open cast mine is in the monotonic belt and experienced 1500 mm/annum of rain on an overage. This rainwater, unconfirmed water and extraneous water are together designated as storm water which poses problem in the mining operation. The storm water is collected in the sumps located suitably at the pit bottom and pumped out by means of float pumps mounted in pontoons, 2000/4000 GPM centrifugal pumps with 170/250 HP motors are mounted on a float, to pump to a head of 42/85 m. The high head pumps are having 350 kw/650 kw motors with the pumping capacity of 2000/4000 GPM to a head of 140 m. Intermediate booster stations are established to pump out the storm water to surface level. Dust Suppression: The dust emanated from the mining activity is well co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he above, the huge streams of lignite is reduced to lump of the size of 500mm at the BWE stage gets crushed to a uniform 50-150mm size at the stacker. Quality control of lignite: This involves Removal Marcasite and impurities; and blending at the production yard to assure acceptable and appropriate quality. Removal of marcasite and impurities: Lignite that is produced from the mines and crushed to appropriate sizes still have impurities embedded in them through layers of marcasite and interburdened waste. Marcasites are dimorphate of pyrite and the physical properties of marcasites are as follows: Chemical composition : FeS2 (Ferric Sulphide) Colour : Pale bronze yellow Appearance : Metal like Shape : Boulder, Lenticular Leins, Platty and Massive Hardness : 6 to 6.5 Specific gravity : 4.89 Compressive strength : 150 to 800 Kg/CM2 Nature : Non Magnetic As could be seen from the above, these are non-magnetic and that compressive strength upto 800 Kg./CM2. The impure lignite with marcasite cannot be fed into the boiler and it would hurt the boiler because of the nature described above. There are also layers of clay and sand which are not combustible also to be removed to make the lign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ze rubbles. This process is also highly technically advanced procedure and after employing the same, huge stream of lignite is reduced to a uniform 50mm to 150mm size. Thereafter comes the procedure of removal of marcasite and impurities and blending at the production yard to assure acceptable and appropriate quality. It is pointed in the procedure noted above that impure lignite with marcasite cannot be fed into the boiler as it would hurt the boiler. Therefore, it is an essential procedure before excavated lignite can be put to use. The blending of lignite is also an essential part of making the lignite useful for thermal power stations. Thus, from the aforementioned discussion, it is evident that though lignite is found embedded in the earth in big blocks, but it is useful only after it has undergone various processes. Before we consider the various precedents cited by both parties, we may point out that we have before us in the form of statutory evidence the Explanation to s. 33B, which was earlier referred to in s. 80-IA for defining the term industrial undertaking. As per the Explanation to s. 33B industrial undertaking means any undertaking which, inter alia, was engaged in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 166 CTR (Mad) 167 : (2000) 246 ITR 737 (Mad) and CIT vs. Bishal Enterprises (2001) 247 ITR 484 (Mad). In the case of Gomatesh Granites the Hon ble Madras High Court held that activity of extracting granite from hill does not amount to manufacturing activity. In this case, the assessee was an exporter of unpolished granite blocks which were excavated from hills and after employing a simple procedure of thoroughly washing with water to see whether there were any cracks in them or not, they were lifted by cranes and exported. In the case of Bishal Enterprises the Hon ble Madras High Court followed the decision in the case of Gomatesh Granites. The learned Departmental Representative further referred to the decision of the Hon ble Supreme Court in CIT vs. Gem India Manufacturing Co. (2002) 172 CTR (SC) 615 : (2001) 249 ITR 307 (SC), wherein it was held that cutting and polishing uncut raw diamonds did not amount to manufacture or production of article or thing. The learned Departmental Representative further referred to the decision in Lucky Minmat (P) Ltd. vs. CIT (2000) 162 CTR (SC) 404 : (2000) 245 ITR 830 (SC) wherein it was held that mining of lime stone and marble blocks and cut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h High Court in CIT vs. Singareni Collieries Co. Ltd. which is evident from its observations contained at p. 744: Though the word production is wider then the word manufacture , and manufacturing activity is not always essential before a process is described as production, nevertheless must involve process which involves labour and skill, and the process involved should also be processes which involve some degree of complexity. Before holding that mica mining and processing amounted to production, the process involved was carefully analysed by the apex Court and it was in the light of the process so set out, which indicated several stages through which the mineral is passed from the time of extraction of crude mica to the stage of split mica which is commercially valuable that it was held that it is on account of the nature of process involved thereon that the term production could be aptly applied to the production of split mica. The learned counsel further pointed out that the decision of the Hon ble Supreme Court in (2002) 172 CTR (SC) 615 : (2001) 249 ITR 207 (SC) is not applicable to the facts of the case. The Hon ble Supreme Court was considering the deduction under s. 80H of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arly held that the term production is of much wider import and, therefore, applying the same principles, we set aside the order of the learned CIT on this point and restore this issue back to the file of the AO to examine the fulfillment of other conditions under s. 80-IB in accordance with law. In the result, this ground is allowed for statistical purposes. 21. The next issue raised in this appeal is regarding the allocation of indirect cost of production of lignite to Stage-II. 22. The learned CIT has noted that the assessee was extracting lignite from the mines located in two sectors, viz. Stage-I and Stage-II. There is no dispute that the income generated from the extraction of lignite from Stage-I is not eligible for deduction under s. 80-IA and the assessee was claiming deduction under s. 80-IA on the income generated from the lignite extracted from Stage-II. The learned CIT has summarized the working of both the stages and the total profits from mining activity as submitted by the assessee during the course of hearing which is reproduced below: Mine II -Workings for IT claim under s. 80-IA Stage-I Stage-II Percentage of difference Physical production (Tonnes) 27,623,343.05 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmissions of both the parties. The assessee had adopted an in-house mechanism for price fixation due to which profits of Stage-II considerably swelled. Therefore, apportionment of cost on the basis of ratio of tonnage of the extraction of lignite was not correct. It should have been done on the basis of actuals. The important aspect is in regard to allocation of power cost. The learned counsel has also submitted that transfer price is fixed on the basis of actual cost involved in the production. Therefore, the assessee should furnish the actual cost of power consumed for Stage-II for computing correct profit of Stage-II. This ground is accordingly allowed for statistical purposes. However, we may clarify that this issue will be relevant only when assessee satisfies the AO regarding fulfillment of conditions under s. 80-IB. 25. The next issue is regarding allowance of deduction under s. 80-IA in respect of grossed-up taxes. Brief facts apropos this issue are that on detailed examination of the working of the claim of the assessee under s. 80-IA, the learned CIT noted that the assessee had included in its eligible income for deduction under s. 80-IA a sum of Rs. 34,94,69,000 in the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned counsel submitted that the agreement was for purchase of power and it was not the actual tax which was recovered but only a component of price. The learned Departmental Representative submitted that the income-tax reimbursement does not form port of tariff. Since this was not income derived from generation of electricity, no deduction was allowed. 27. We have considered the rival submissions and perused the record of the case. Admittedly, agreement was entered into with various electricity boards for supply of power and was titled as bulk power supply agreement. Clause 4 of the said agreement is with regard to the computation of generation tariffs. Annexure-A to the said agreement referred to in cl. 4.1 lays down the principles and parameters for fixation of generation tariffs. One of the items mentioned in the said Annexure is for including the rate of return on equity and internal resources at 12 per cent for both power station and mine. Clause 6 of the agreement deals with the liability in respect of income-tax, if any, on the income stream of NLC. It also lays down the overall limit of income-tax reimbursement by recipient. It is noticeable in this connection that cl. 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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