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TMI Blog2014 (3) TMI 682X X X X Extracts X X X X X X X X Extracts X X X X ..... ure of mines which are exploited by the organization. The appellant explained that this is a statutory liability for which a separate fund had been created by the company with Lie. The Assessing Officer did not agree with the contentions of the appellant and by giving the following reasons, disallowed the mine closure obligation which has been debited to P & L Account: "2.4. The above contentions of the assessee are considered. Any liability which is not accurately estimated could be a contingent liability and is not an ascertained liability. A liability which is dependent on fulfillment of a \' condition which may result in reduction or in extinction of the liability is a contingent liability. It is only the actual liability which is existing in the relevant asst. year which is allowable to be considered as an expenditure. If the liability is contingent, then it would amount to allowing the apprehended losses/ expenditure in future from the profits which is not accepted on any principle of law or accountancy. The question of estimation in a contingent liability does not arise in order to allow the deduction u/s 37 of the I.T. Act. In the case of Indian Molasses Co. Pvt. Limit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n a phased manner to meet the commitment it may adversely affect the bottom line of the company. However, the contingent fund which the assessee has created should be from the accumulated reserves of the company and not from the current revenue. The fund created is for meeting a liability which is contingent upon certain future events like disasters and floods and is therefore not an allowable revenue expense. 5. On appeal, before the CIT(A), the assessee stated as follows: "Any mining activity results in environmental degradation and ecological imbalance on the mining and surrounding area and conscious support, is required to rectify the same. Closure down and restoration costs are a normal consequence of mining and the majority of close down and restoration expenditure is incurred at the end of the life of the mine. Although the ultimate cost to be incurred is uncertain it is necessary to estimate and to provide for the same during periods when the related environmental disturbance occurs. 2. The liability towards mine closure is accrued as soon as the mining operations commence and in compliance with the "matching concept': such liability may be charged over the periods w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bIlity as per the technical assessment. 5. The company is operating mines with varying 'Ore Reserves' having different balance life period and the details of balance minerable ore reserves and their balance life as at pt April, 2004 are given at Annexure-l. 6. The expenditure on mine closure is estimated based on parameters identified as per IBM circular No. 1412003. Bailadila Deposit-lIB is considered as a typical mine and costs assigned for each parameter and final mine closure of cost of Deposit-11B estimated on the basis of existing rates. Based on these parameters, cost of final mine closure per to/me of reserves is arrived. The detailed working of cost per tonne of minerable reserves is given at Annexure-2. Based on this the total mine closure liability for the minerable ore reserves as at 3pt March, 2004 and the proportionate change for the current financial year 2004-05 is worked out and placed at Annexure-3. 7. The final mine closure as per MMDR Act entails commitment of large sums at the time of mine closure and unless a suitable reserve is built up in a phased manner to meet the commitment, it may adversely affect the bottom line of the company at that time. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat once an assessee takes on lease a mine, its closure is inevitable because a mine cannot be exploited infinitely and indefinitely. Secondly, once the mine has been exploited, it has to be closed and rehabilitated. Further, even the amounts to be spent on rehabilitation are more or less determined as per the scheduled of the Indian Bureau of Mines. Therefore, he disagreed with the view of the Assessing Officer that it is a contingent liability. In case of Bharat Earth Movers Limited Vs. Commissioner of Income Tax [2000] 112 Taxman 61, the Hon'ble Supreme Court held that 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 liability is not a contingent one. The liability is in prasenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be dischar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion is in principle an allowable. However, it is not open to the appellant to claim any liability in any year. The matching principle has to be followed. This is illustrated with an example. If a mine "X" is excavated for two years amounting to 4000 cubic feet in year 1 and 5000 cubic feet in year 2, then in year 1 mine closure obligation corresponding to the filling 4000 cubic feet will accrue. In the second year and the accrual will correspond to filling of 500 cubic feet. These will be the allowable accrued expenses. In the current case, the appellant has claimed the obligation as below: 4.4 A reading of the above chart shows that for S.No.2, Deposit No. 11B the production yet to be commissioned. Therefore, this obligation of Rs. 4,98,058/- is not allowable. Similarly, for S.No.6, Kumaraswamy and S.No.8, Lalapur, there is no production. Therefore, obligation is not allowable. For the other mines, the appellant has not given any year- wise breakup. Accordingly, the Assessing Officer is directed to ascertain the amount of year-wise mining which has been done from the remaining mines and allow a mine closure obligation to the extent of mining done corresponding to the current year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvation that the estimate of Rs. 21.31 crore is excessively on a higher side and absolutely no realistic or rational basis for such calculation. 12. The CIT is not correct in invoking the provisions of section 263 as we find that the issue is debatable and when two views are possible the AO has taken one view. The Apex Court in the case of Malabar Industrial Co. Ltd. Vs. CIT reported in 243 ITR 83 as well as CIT Vs. Max India Ltd. reported in 295 ITR 282 has held that when there are two views possible and the AO has taken one view, the order of the AO cannot be considered as erroneous and hence the CIT cannot exercise revisional power u/s 263. As pointed out above, the provisions for an accrued existing liability, even though, the actual expenditure may take place at a later date, is an allowable deduction and the CIT erred in treating it as an unascertained liability. Therefore, we set aside the order of the CIT passed u/s 263 and the order of the AO is restored." 9.1 The above decision relied upon by the AR of the assessee, though, it was delivered in assessee's own case for AY 2006-07 cannot be applied to the facts of the case as that order was delivered by the Tribunal in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave all been valued on actuarial basis in order to comply with the Accounting Standards-15. This liability even if allowable should relate to the current year. It is to be appreciated in the present instance that the assessee has created a liability in respect of gratuity etc on the basis of the number of years of service of each employee taking their Basic, DA etc. Employers contribution towards an approved gratuity fund created exclusively for the benefit of the employees under an irrevocable trust can be allowed as deduction, provided the amount of deduction on account of ordinary annual contribution should not exceed 8.33% of the employee's salary for that year. 4.3. It is mentioned by the assessee itself that any change in the accounting policy which has a material effect in the previous year subsequent to the previous years shall be disclosed. Therefore, the creation of a liability for the company in respect of the employees for their past service is nothing but an expenditure relatable to the past years and not related to the current year." 11.1 In view of the above reasons, the AO held that since the transitional liability does not relate to the current previous year, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessing Officer to look at the calculation and allow the gratuity to the extent it pertain to the current year after taking into account the changes made in AS - 15. 13. Aggrieved, the assessee is in appeal before us. 14. Before us, the AR of the assessee contended that the CIT(A) is not correct to hold the view that entire liability does not pertain to current year and it was stated that accounting standard AS-15 made it mandatory to account it on accrual basis with effect from accounting period commencing from 01/04/2007 i.e. FY 2007-08/AY 2008-09. He referred to the Actuarial report under AS-15, which is enclosed at page 105 of the paper book. He has placed reliance on the following case laws: 1. Bokaro Power Supply Co. (P) Ltd. Vs. ACIT, ITA No. 4921/Del/2010, AY 2007-08, ITA No. 149/Del/2012, Ay 2008-09. 2. CIT Vs. Insilco Ltd., (Delhi-HC) 179 Taxman 55-2009. 15. On the other hand, the DR relied on the order of the CIT(A). 16. We have heard the arguments of both the parties, perused the record and have gone through the orders of the authorities below as well as the decisions cited. The Hon'ble Delhi High Court in the case of CIT Vs. Insilco Ltd., 179 Taxman 55, o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed for a limited period." 18. The assessee had claimed a sum of Rs. 6,48,42,067/- during the year towards depreciation of intangible assets. The assessee was asked to explain the nature of the assets acquired and the allowability of such depreciation. It was replied in the letter dated 16.12.2010 that the intangible assets are mainly lease hold land acquired from various state governments which can be used over a certain period. The AO noted that from the above explanation, it is clear that the lands are not owned by the assessee company but are obtained on lease from' State Government for a certain period. The period for which the land is to be held has not been explained. Further, the AO noted that the purpose for which the land acquired is also not explained. The AO observed that even if it is considered that the land is taken on lease for the purposes of exploitation of mining, it cannot be treated as plant & machinery for which depreciation is available under the Income Tax provisions. The provisions of Sec.32(1) are not applicable to assets which are in the form of land since the assts for which depreciation is admissible under the Income Tax Act is specified under Rule- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the simple reason that the denial of claim of depreciation has been made on misinterpretation of law and the applicability thereof. Explanation to Section 32(1)(ii) leans in favour of the assessee to the extent that it is the actual action of put to use which entitles the assessee to claim depreciation. A straight line method of claiming the writing off of lease hold rights for the period of lease cannot be denied to the assessee for the simple reason it being intangible asset has been written off which pertains to land being a intangible asset. It is nobody's case that the land either belonged to the lessee or to the Government. This simply indicates that a depletion of the land against the payment of premium it was leased has to be claimed after capitalization thereof by the assessee which is for the purpose of its main business. All expenses are incurred for the purpose of business and are incidental to the holding of rights were claimed u/s.32(1)(ii) being the license to carry out the mining therefore could not be denied insofar as the Government and the lessee are in control of the asset. The definition of depreciation therefore has been misconstrued for the purpose o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Plantation Corporation, 205 ITR 364 (Kerala) 27. Learned DR, on the other hand, relied on the orders of the revenue authorities. 28. We have heard the arguments of both the parties, perused the record and have gone through the orders of the revenue authorities as well as the decisions cited. This issue is squarely covered by the Hon'ble Bombay High Court in the case of CIT Vs. Cinceita (P) Ltd. (supra), wherein the Hon'ble Court held as follows: "Although the period of the lease was for 20 years and there was option for renewal the expenditure was the only expenditure required for drawing up of effective deed of lease namely, the expenditure in respect of stamp duty, registration charges and professional fees paid to the solicitors, who prepared and got registered the deed of lease. Further there was no element of premium in the amount claimed as expenditure and the expenditure would have been the same even if the lease had been of a shorter duration provided the period of lease was more than one year. Hence, the period of the lease could not be regarded as decisive of the circumstances as to whether the asset or advantage secured is of an enduring nature. Hence the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The AO noted that the assessee had submitted the details of expenses on corporate social responsibility vide its letter dated 18.10.2010. It is stated that in the present scenario, expenses on Corporate Social Responsibility(CSR) are a statutory obligation to conduct a profitable business in the long run. The assessee company has incurred a sum of Rs.21,74,75,417/- in the name of Corporate Social Responsibility. It is observed that the following are some of the major expenses incurred by the company: 30.1 The AO noted that from the nature of the above expenditure incurred, it can be observed that they are not related to business of the assessee and they are in the nature of donations which is not an allowable expenditure under the provisions of the IT Act. Hence, he disallowed the above amount of Rs. 12,18,99,548/-. 31. On appeal, after considering the submissions of the assessee, the CIT(A) observed that firstly, the issue at hand is not whether corporate responsibility should be there or not. Rather, every expense has to be seen through the prism of the Income Tax Act. An expense can be allowed only if it is incurred wholly and fully for business purpose under the mercantile sy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... grieved, the assessee is in appeal before us. 33. Before us, the learned AR of the assessee submitted that all expenses are in the perferi & district of assessee's plant or operational allowed in all earlier years consistently. He further submitted that Govt. made it mandatory to spend 2% which works out to about Rs. 100 crores and, therefore, the assessee company had spent only 0.24% of profit. He relied on the following decisions of Tribunal in assessee's own case to submit that the issue is squarely covered by these decisions: 1. 2005-06 ITA No. 1791/Hyd/2008, dated30/09/2009. 2. 2006-07 ITA No. 1085/Hyd/2010, dated 05/08/2011. 3. 2007-08 ITA No. 130/Hyd/2011, dtd. 13/04/2011. 33.1 He also relied on the following cases: 1. Orissa Power Generation Co. Ltd., ITA No. 271/CTK/2010. ITAT, Cuttack Bench. 2. Rio Tino India (P) Ltd., ITA No. 363/Del/2012, dt. 22/06/12. 3. CIT Vs. Madras Refineries Ltd., [2004] 266 ITR 170 (Mad.) 4. Mahindra & Mahindra Ltd. Vs. CIT [2003] 261 ITR 501 (Bom.) 5. CIT Vs. Rupsa Rice Mills [1976] 104 ITR 249 (Orissa) 33.2 He also relied on the NMDC CSR Policy and statement of expenditure made for past 7 years. 34. On the other hand, the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the medical college. Therefore, indirectly the contribution made by the assessee takes care of the education of the employees' children. This would certainly be a welfare measure on the part of the assessee for carrying out the business in an effective and efficient manner. Therefore, in our opinion, the contribution of Rs. 5,00,00,000 has to be treated as revenue expenditure for the purpose of the business. Therefore, we do not find any justification in disallowing the sum. Accordingly, we set aside the orders of the lower authorities and delete the entire addition." 36. Since the issue under consideration is identical to that of AY 2005-06, we delete the additions made under the heads from (i) to vii). 36.1 However, we make it clear that the expenditure incurred at Rs. 3,48,04,548/- shown as miscellaneous expenses cannot be allowed as the assessee has not furnished the details of expenditure, therefore, in the absence of requisite information the said expenditure cannot be allowed. Accordingly, this ground is partly allowed. 37. Ground No. 7 relates to disallowance of claim of preoperative expenses of Rs. 5,43,27,455/-. 38. Briefly the facts are that the assessee company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Delhi High Court that preoperative expenses can be claimed as revenue expenditure in one go, when there is common funds and unity of control. (b) DClT vs. ACC Rio Tinto Exploration Ltd. ITA Nos. 4908/Del/2005 The company's contention is also supported by the recent decision of the ITAT in DCIT vs. ACC Rio Tinto Exploration Ltd. ITA Nos. 4908/Del/2005 AY: 2001-02 decided on 26.09.08. (c) ClT vs. Usha Iron and Ferro Metal Corporation Ltd. [(2007) 201 Taxation 434(Del.)] wherein it is decided that expenditure incurred towards expansion of existing business. although treatment given in the books as capital expenditure. is allowable as revenue expenditure. Under para no. 10.30 of page no. 13 of the assessment order. the A.O. disallowed the expenses and added back in the taxable income on the basis that "In the absence of information as to the context in which the expenditure has been incurred, it cannot be considered as allowable expenditure since the company itself has chosen to treat it as capital expenditure in its books". Write-up on pre-operative expenses has been submitted on 16.12.2010. The A.O. has not sought any further information. Even though it was booked in c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the record. While confirming the addition, the CIT(A) gave a categorical finding that "these expenses are definitely capital and have been rightly categorized so by the appellant and also certified as capital expenditure by the auditors. It is only at the time of computation of income the assessee claimed this expenditure as revenue without providing any details or reasons." Even before us also, the assessee has not placed any evidence to establish the expenditure incurred as revenue expenditure. Therefore, we do not find any infirmity in the order of the CIT(A) in confirming the addition of Rs. 5,43,27,455/- on account of preoperative expenses and the order of the CIT(A) is hereby confirmed. This ground is dismissed. 45. The next issue relates to the addition of Rs.4,04,77,426/- on account of disallowance of PF contributions on wage revision.: 46. The assessee had made the following ad-hoc provisions: Adhoc provisions - PF- workmen 2,35,30,446 -do- - PF-JO 16,99,401 -do- - PF-Officers 1,22,15,497 -do- - PF-Workmen 26,35,527 -do- - PF-JO 2,66,208 -do- - PF Officers 4,30,347 Total 4,04,77,426 46.1 The assessee was asked to furnish reasons for the above adhoc provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovision cannot be allowed as deduction. Addition on this account is ordered to be confirmed." 49. According to the AR of the assessee the wage revision provision is allowed by the AO as deduction, therefore, the PF calculation goes with wage. Hence, it is to be allowed as it is ascertained liability with wage. He relied on the following decisions: "1. CIT Vs. Insil Co. Ltd., [2009] 179 Taxman 55 (Delhi) 2. CIT Vs. Bharat Heavy Electricals Ltd., ITA Nos. 278, 807, 1578 & 312/2010, Delhi High Court." 50. We have heard the arguments of both the parties and perused the record. In case of payment of contribution to PF is made before the due date prescribed in PF Act and the Scheme thereof, deduction can be claimed and the right of deduction would be lost u/s 43B read with Explanation if the same is paid after the due date, i.e., after the due date of filing of return u/s 139(1) of the Act, as per the amended provisions of section 43B. In the present case, only provision has been made which is not allowable in terms of section 43B. Accordingly, this ground is rejected. 51. In the assessee appeal in ITA No. 714/H/12 is partly allowed. ITA No. 885/H/12 - Revenue appeal 52. Ground No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the cost of production of the dumped fine ore was absorbed by the saleable product, namely, lumps. Thus, the expenditure relating to the production of fines has been accounted for in the regular accounts of the assessee. The fine ores have been recognized as part of stocks though its value has been adopted as zero. This method of accounting is not proper since the assessee has already availed of the expenditure in production of such fine ores in the earlier years. Thus, the value to be adopted for the fine ores cannot be zero. The value of iron ore is shown at RS.93.13 crs for a quantity of 3918700 WMTs which works out to RS.237.65 per W MT. The value of 8.78 lakh WMTs of fine ore as on 31.03.2007 works out to RS.20,86,61,392/-. This is treated as income relatable to the fine ores which were recognized as saleable products in the current financial year. The same is added to income." 57. During appeal proceedings, the appellant explained that lump and fine iron ore are produced simultaneously in the same process. It was explained that in the earlier years, the fine iron are was not marketable and hence the entire cost of production was imputed to lump. During the current ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been valued at cost, which is zero. Under para 3.4 of page no. 7 of the assessment order the learned A.O. stated that "This method of accounting is not proper since the assessee has already availed of the expenditure in production of such fine ores in the earlier years. Thus, the value to be adopted for the fine are cannot be zero". The contention of the A.O. is not correct. He cannot make any comment on the certified accounts made by CAG. When the cost of fine ore(not marketable) lying in dumps upto 31.03.2007 was absorbed by the saleable product and tax has been paid based on sales and/or value of closing stock of the saleable product, considering the product again in some value is double taxation. The following cases are also presented for kind information of the H'onbleClT(A). a) Assessee has the choice on method, but such method should be shown as regularly followed - The choice of the method of accounting lies with the assessee; but the assessee must show that he has followed the method regularly for his own purposes - C/T v. McMillan & Co.[19581 33 ITR 182 b) A taxpayer is free to employ, for the purpose of his trade, his own method of keeping accounts, and for tha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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