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TMI Blog2016 (2) TMI 1118X X X X Extracts X X X X X X X X Extracts X X X X ..... e Renewal Fund despite the fact that it was an application of income and not expenditure incurred for business expediency. 3) Whether on the facts and in the circumstances of the case and in law the ld. CIT (Appeals) has erred in holding prior period expenses as allowed expense even when it is not coherence with the accounting policies followed by the assessee. 4) Whether on the facts and in the circumstances of the case and in law the ld. CIT (Appeals) has erred in directing to delete addition of Rs. 2,34,990/- made by the AO by disallowing of contribution to social welfare activities despite the fact that it was not an allowable business expenditure. Similarly, in the appeal bearing ITA No. 124/JP/2014, the assessee has raised the following grounds :- 1) Ld. Commissioner of Income Tax (Appeals) has erred on facts and in law in confirming the disallowance of Rs. 50,000/- out of social welfare expenses. 2) Ld. Commissioner of Income Tax (Appeals) has erred on facts and in law in confirming the disallowance of Rs. 1,01,45,489/- in respect of amortization of mining and leasehold land. 3) Ld. Commissioner of Income Tax (Appeals) has erred on facts and in law in confirming t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made to farmers are not for long term benefit rather it is regular payment and an integral part of the cost of Gypsum. Hence the same is allowable as revenue expenditure. Further in earlier years also similar addition was deleted by ld. CIT (A) and department appeal was dismissed by Hon'ble ITAT Jaipur Bench." The AO considered the submission of the assessee but the same was not acceptable to the AO. The AO was of the view that right to sale minerals embedded in the earth lies with the Government and the Government alone can either sale these rights or sale the minerals directly. Therefore, the claim of the assessee that the above mentioned amount has been paid to the farmers for purchase of Gypsum is incorrect. Actually it is a sort of compensation paid to the farmers for using their land, which may become unusable for agricultural purposes. Therefore, treating the contention of the assessee as incorrect, the AO disallowed the claim of Rs. 1,67,47,786/- and added to the income of the assessee. 3. Being aggrieved by the order of AO, assessee filed appeal before ld. CIT (A) who allowed the claim of the assessee by deleting the addition. The observation of the ld. CIT (A) is as un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /JP/2006 dated 26.6.2009, wherein compensation paid to farmers for using their land was allowed. The finding of the Bench in para 40 of the said order is reproduced as under :- "We have carefully heard the rival submissions and find that the payment made by the assessee to farmers is a part of cost of gypsum only and no capital asset is acquired by the assessee by incurring these expenditure. Nature of loss to farmers is immaterial while judging the nature of expense in the hands of the assessee and therefore same cannot be basis for treating the expenditure as capital in nature. The ld. CIT (A) has rightly allowed the expenditure as revenue which does no call for any interference. Thus ground no. 1 of the revenue is dismissed." Again for assessment year 2003-04 and 2004-05, such expenditure were allowed by the ITAT in order dated 26.06.2009. The ld. CIT (A) has allowed the claim of the assessee by following the said decisions. We, therefore, do not find any reason to interfere with the order of CIT (A). The same is thus upheld. The ground of the department is thus dismissed." Therefore this issue is decided against the revenue . Ground No 2 of Revenue in appeal no 144/ 14 : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y transfer part of the net profit to a reserve fund as a requirement of statute, the question arises, whether such amount could be allowed either as a business expenditure or as income diverted by overriding title. The test in such case is the purpose for which the amount is set apart, the beneficiaries of such reserves and the right of the company over such reserves. The AO cited the judgment of Hon'ble Rajasthan High Court in the case of CIT vs. Jodhpur Co-operative Marketing Society (2005) 275 ITR 372 (Raj.) wherein the Hon'ble Court has concluded that such reserves under the control of the society were for the ultimate benefit or the society as well as its shareholders, so that such amount could not be excluded from the income of the society. Hence, it is clear that transfer to renewal fund does not lead to diversion of income by overriding title, it is merely an application of income. Thus the AO held that transfer of Rs. 10,00,000/- to State Renewal Fund is not allowable and the same is added to the total income of the assessee being application of fund. 5.1. On appeal by the assessee before ld. CIT (A), the ld. CIT (A) deleted the addition by observing as under : " 3.3. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ord. We find that as per the memorandum of State Renewal Fund set up by the State Government, it is created with the object of providing a safety net for the workers likely to be effected by restructuring in the State Public Enterprises. We are thus of the view that the contribution made to the said fund is solely for the purpose of welfare and benefit of the employees. The Rajasthan High Court in case of CIT Vs. Rajasthan Spinning and Weaving Mills Ltd. 274 ITR 465 has observed that it is for the assessee to decide whether any expenditure should be incurred in course of business. The expenses can be incurred voluntarily and without necessity. Any contribution made by the assessee to a Public Welfare fund which is connected or related with his business is an allowable deduction u/s 37. Again the Court in case of CIT Vs. Shri Rajasthan Syntax ltd. 221 CTR 410 held that where assessee gave contribution to the Employees Welfare Fund, the same is allowable as business expenditure. The case relied by A.O of CIT Vs. Jodhpur Co-operative Marketing Society 275 ITR 372 (Raj.) is distinguishable as in this case the amount was set apart for the shareholders of the society whereas in the prese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 09-10. Respectfully following Hon'ble ITAT's order in the case of the appellant in AY 2000-01 dated 22.12.2006 in ITA No. 600/JP/2003, the AO is directed to delete the addition of Rs. 4,40,.113/- because the table in the appellant's submission shows that the liability for the expenses got crystallized in the year under consideration." 9. Now the revenue is before us. 9.1. The ld. D/R for the revenue has supported the order passed by the AO and has submitted that the expenses which are not required to be allowed has rightly been disallowed by the AO. 9.2. On the contrary, the ld. A/R relied upon the order passed by the Tribunal in the assessee's own case in ITA No. 33/JP/2013 dated 30.04.2015 whereby the Tribunal has allowed the claim of prior period expenses of the assessee and has dismissed the ground of the revenue. 9.3. We have heard rival contentions and perused the material on record. In our view the case of the revenue is required to be dismissed as the case of the assessee is squarely covered by the earlier order of the Tribunal in ITA No. 33/JP/2013 for AY 2009-10, even otherwise, in view of the judgment in the matter of CIT vs. Excel Industries Ltd. 358 ITR 295 (SC), t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A), we find no infirmity in the order passed by ld. CIT (A), therefore, no interference is called for. Thus the ground of the revenue is dismissed. 13. In the result, Revenue's appeal is dismissed. Ground No. 1 of Assessee : 14. Ground no. 1 related to confirming the disallowance of Rs. 50,000/- out of social welfare expenses. 15. We have heard the rival parties and perused the material on record. The payment made to Rose Society amounting to Rs. 50,000/-, in our view is not in respect of any activity connected necessarily and exclusively for the purpose of business and do not qualify the expenditure u/s 37 of the IT Act. Even otherwise, similar ground of the assessee has been dismissed by the Tribunal in its earlier order. Therefore, respectfully following the order passed by the Tribunal, we dismiss ground no. 1 of the assessee. Ground no. 2 of Assessee : 16. Ground no. 2 relates to confirming the disallowance of Rs. 1,01,45,489/- in respect of amortization of mining land and leasehold land. 17. Brief facts of the case are that the assessee has acquired the mining land from the State Government for excavation of Rock-Phosphate, Gypsum, Lignite and Limestone. These lands ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 37(1), this has to be seen as per the provisions of section 37(1). Under the section no expense of capital nature is allowable. It is not in dispute that expense for mining land and leasehold land is capital expense and the same cannot be claimed as revenue under section 37(1). Once the expense falls in the category of capital expense, it goes outside the purview of section 37(1). There are some deductions available for capital expense such as depreciation under section 32, amortisation under section 35D etc. If no deduction is available in respect of any capital asset under these provisions, the same cannot be claimed under section 37(1) wherein any claim of capital expense is specifically prohibited. The decision relied upon by the appellant in the case of Sun Pharma is on different facts. Nominal lease charges were treated as revenue since the same was considered necessary for conducting business. It nowhere allowed amortisation of land cost on the ground that mining lands are depleting assets. The decision of apex court in the case of Madras industrial investment corporation is also not applicable to the facts of this case. By purchasing mining land, appellant got absolute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parties and perused the record as well as gone through the orders of the authorities below. Similar came up for consideration before the coordinate bench of ITAT, Cuttack in case East India Minerals Ltd. Vs. JCIT in ITA No. 224/CTK/2012, vide its order dated 25/06/2012, on which reliance placed by the assessee, wherein it has been held as follows: "7. We have heard the rival contentions of the parties and perused the material available on record. Considering the facts and circumstances of the case, we uphold the contention of the learned Counsel for the assessee 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the order passed by the ld. CIT (A). 20. Now the assessee is before us. 20.1. The vexed question before us is the amortization of amount paid for getting the mining land / leasehold land by the assessee. Whether it is required to be treated as revenue expenditure and is required to be allowed under sec. 37(1) of the Act or not ? For the purpose of allowing any expenditure, it is necessary to look into the nature of expenditure. Section 37 of the Act provides as under :- " Sec. 37(1) : Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". [Explanation : For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee is that the value of wasting asset will depreciate with the extraction of mineral, in our view, is preposterous. In our view, with the passage of guidelines for protecting the environment, now it is the duty of the lesser/assessee to submit and execute the mine closing plan so as to ensure that the land is used subsequent to the closure of the mining operation. Even otherwise, the mining activity is done not on the surface of the earth but on the core towards the lower side of the surface. The surface, can be put to use for beneficial purposes after the term of lease/mining activity is over and it can be exploited for commercial purposes by the owner/appropriate authority. The contention of the assessee is that the assessee will be double taxed as the AO has already completed the assessment for the A.Y. 2011-12 on the basis of the written back of the amortization of the assets amounting to Rs. 5,79,10,137/-. In our view the assessee was taxed on the basis of the submission made by it before the AO before the assessment for the A.Y. 2010-11 is finalized. The mere acceptance of the methodology by the AO for A.Y. 2011-12 will not withhold us to decide the issue on merit and in la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision is not relevant here since the claim was not treated as capital by the AO. Appellant is an undertaking owned by Government of Rajasthan and payment of contribution was made at the instruction of Government of Rajasthan. The contribution for computerization cannot be held to be an expense incurred wholly and exclusively for the purpose of business. In fact computerization was already carried out from the funds provided to information technology department and this contribution was made subsequently on the ground that it was promised in 2007-08. There is no direct nexus between appellant's business and computerization of mining department. Any upgradation of any Government department may indirectly help any PSU but that does not mean that the public sector undertaking will bear the cost of upgradation of Government department. Expenditure for Government department are met from the budget passed by the state legislature and the same need not be contributed by public sector undertakings. If the controlling department forced any PSU to contribute for the upgradation of the Department, the same will not become business expense of the PSU. It is not the expense incurred by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness of the assessee in coordination with the department of Mines & Geology. It was prayed that the expenditure incurred by the assessee may kindly be allowed. 23.2. On the contrary, the ld. D/R for the revenue supported the order of ld. CIT (A) and has submitted that the expenditure made by the assessee is not wholly and exclusively for the purpose of business of the assessee and is, therefore, required to be disallowed. 23.3. We have gone through the records and have considered the rival contentions and applied our mind. In our view, ground no. 3 of the assessee is required to be dismissed. It is an admitted fact that the assessee is one of the beneficiaries of the computerization. There are other lakhs of mine owners/licencees who are/will be benefitted by way of computerization of the department. Moreover, it is the bounden duty of the Government to computerize its department. Once the assessee is paying the lease rent and other charges to the Government for acquiring the rights to mines and minerals, the department, is not expected to ask any amount over and above the statutory charges. Any contribution made by the assessee to the Government for computerization, would be at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 of his order is as under :- " Reply of the assessee has been considered but it is not satisfactory. As per Section 80 IA of the I.T. act, 1961 deduction is allowed only on the profit and gains derived from eligible business. In the case liquidated damages and sale of CERs are not profit and gain derived from eligible business as these are not trading receipt from the eligible business. The word 'derived from' also explained by the Hon'ble Gauhati High Court in the case of CIT Vs. Meghalaya Steels Ltd., (12 Taxmann.com 451 (Gau.) 2011) as under : " The expression 'derived from' occurring in section 80-IB in relation to the business of an industrial undertaking is narrower in connotation than the expression attributable to' the business of an industrial activity. Therefore, while attributable to' as used in some other sections of the Act, may cover sources of income beyond the first degree. It is keeping this distinction in mind that it must be held that transport subsidy and interest subsidy cannot be said to be 'derived from' the industrial undertaking of the assessee. At best, it can only be ancillary to the profits and gains relatable to or attributable to the business of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icense benefits do not form part of net profits of the Industrial undertaking for the purpose of sec.80IA or 80IB. The nature of Carbon Trading income is also similar to that of duty drawback and DEPB license income. Otherwise also assessee has itself offered income from sale of CERs in its profit and loss account form past many years. He has neither claimed it as capital receipt in the original return nor in the revised return. Therefore in view of the decision Goetze India (Supra) claim of the assessee is not tenable." 24.2. On appeal before ld. CIT (A), the ld. CIT (A) confirmed the disallowance by holding that in view of the judgment of Hon'ble Supreme Court in the case of Liberty India Ltd. vs. CIT, 317 ITR 218 (SC), there is no first degree nexus with the operations of the undertaking and thus the assessee is not entitled to deduction u/s 80IA. 25. Now the assessee is before us. 25.1. The ld. A/R for the assessee has submitted that liquidated damages are the charges paid by M/s. Suzlon Energy Ltd to the assessee due to short fall in minimum guaranteed power generation. These charges are nothing but the income from sale of power only, as it was the commitment of the supplie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dering proposed configuration of maximum and all local conditions, wind speed, directions etc. for evaluation of their offer. However, bids providing net minimum guarantee of generation of less than 16 lacs kwh/MW are unlikely to be considered. 37. For shortfall from the net minimum net minimum guaranteed generation, a levy the following rates from the date of commissioning will be leviable & operative recoverable from their annual instalments. Years Rs. Per kwh 2 yrs 4.50 per kwh 4 yrs 5.00 per kwh 6 yrs 5.50 per kwh 8 yrs 6.00 per kwh 10 yrs 6.50 per kwh 12 yrs 7.00 per kwh 14 yrs 7.50 per kwh 16 yrs 8.00 per kwh 18 yrs 8.50 per kwh 20 yrs 9.00 per kwh " In para 37 of the Agreement, the parties have used the word 'levy' and on the basis of levy, the charges for the shortfall from the net minimum guarantee has been derived. The levy included, in our view, the penalty as well as the compensation for failure to provide the necessary committed energy by the machines. Since the charges are payable by M/s. Suzlon Energy Ltd for failure to perform the contract, in our view, the same would not fall within the first degree of income. The income derived on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computed under clauses 1 to 11. However, as Hindustan Lever Limited was unable to place purchase orders in respect of the normative fixed stipulated number, they were liable to pay and have paid the standing charges. These are not charges payable for the supplies made or towards price of the products sold but for non/under utilization or idle plant/machinery etc. due to lack of orders. The payment was for nonproduction/ manufacture. 17. The products or the articles supplied are goods. Excise duty, if not exempt, is payable in many cases on ad valorem basis. Similarly, sales tax, if not exempt, is also payable. The standing charges obviously do not form part of the supply made and are not treated as sale consideration or the price of the goods on which excise duty or the sales tax etc. would be or is payable. Keeping in view the nature and character of the standing charges, evidence and finding regarding nature and character of the manufacturing activity undertaken, it cannot be said that the said charges were paid for or towards sale consideration of the goods supplied. This is not a case where goods were produced but not purchased or supplied etc. The factual matrix as found doe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... truction work. Principal amount/interest income of the bonds were treated as income derived from business of an industrial undertaking under Section 80HHB of the Act. The said decision is based on peculiar facts and is hardly relevant to the factual matrix in question. Income paid on late payment received from customers has been considered as profit and gains derived by an industrial development undertaking as it partakes and is sale consideration. In CIT v. Vidyut Corpn. [2010] 324 ITR 221 (Bom.), the assessee had discounted the promissory note drawn by the purchaser with its bankers. The discount charges deducted by the banks were subsequently reimbursed to the assessee by the purchasers. Therefore, the reimbursed discounted charges, it was held, were a component of the sale price. It was nothing but interest paid towards delayed payment of the sale price of the goods. The bill discounting charges were, therefore, treated as an eligible deduction under Section 80-IB of the Act as profits and gains derived from an industrial undertaking. 19. In view of the aforesaid discussion, the question of law accordingly has to be answered in affirmative, i.e., against the assessee and in f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity, the following decisions are cited below which clearly show that the sale of CER is a capital receipt :- My Home Power Ltd. vs. DCIT (2013) 21 ITR (Trib.) 186 (Hyd.) CIT vs. My Home Power Ltd. (2015) 365 ITR 82 (AP High Court) Shree Cement Ltd. vs. ACIT 100 DTR 33 (JP Trib.) Lanco Kondapalli Power Ltd. vs. JCIT (2015) 152 ITD 132 (Hyd.Trib.) In the light of the above, it is held that the of CER is capital receipt and the AO is directed to treat the sale of CER as capital receipt. Thus the ground of the assessee on account of sale of CER is allowed. Ground No. 6 of Assessee : 29. Ground no. 6 relates to not allowing deduction of Rs. 2,94,04,000/- in respect of mines closure expenses claimed by the assessee. 29.1. In this regard the AO has mentioned as under :- "3.10. During the assessment proceedings the assessee claimed as under :- " In compliance to guidelines dated 27.08.2009, as amended from time to time, by Ministry of Coal, Government of India, for preparation of Final Mine closure, company has provided sum of Rs. 2,49,04,000/- towards proportionate mines closure expenses for the financial year 2009-10 in the book of accounts prepared for financial year 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntract for mines closure was given and therefore there is no question of any ascertained liability existing during the year. At the most, it can be a contingent liability which is not allowable under income tax act. Accordingly, the claim made by the appellant during assessment proceedings in respect of mines closure liability is held to be not allowable." 30. Now the assessee is before us. 30.1. The ld. A/R for the assessee has submitted that the Government of India, Ministry of Coal introduced guidelines for preparation of mine closure plan in respect of coal and lignite mines on 27.08.2009. As per para 2(iii) of the guidelines, all coal mine owners who have been accorded approval of mining plans/projects reports without the mine closure plans as per these guidelines, are also required to prepare and obtain the approval of mine closure plan as per the guidelines within a period of one year from the issue of these guidelines. The said guidelines have also provided the computation for calculating the annual closure cost in Annexure-1. It is fairly admitted by the ld. A/R for the assessee that neither the expenditure has been debited in the books of account towards the closure of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evelopment Syndicate (P) Ltd. vs. DCIT, 261 ITR 706, Bharat Earth Movers Ltd. vs. CIT, 112 Taxman 61 (SC) and the decision of ITAT Jaipur Bench in the matter of Shree Salasar Overseas (P) Ltd. vs. DCIT, 107 DTR 225. 30.2. On the other hand, the ld. D/R for the revenue has submitted that the liability of mines closing is only a vague liability and has not been crystallized and is only a contingent liability. It was further submitted that unless the appellant started the work in the direction of said Circular/guidelines, there is no question of ascertaining liability. 30.3. We have heard rival contentions and perused the material on record. In our view, once an assessee whether private or government takes on lease a mine, its closure is inevitable. A mine cannot be permitted to be exploited infinitely and indefinitely. In our view, once the mine is exploited, its closure and rehabilitation is necessary. In our view, the Ministry of Coal, Government of India had provided a structure programme/guidelines for closure of mines. In our opinion, the view expressed by the AO and ld. CIT (A) is contrary to law and we disagree with the view of the authorities below that the liability is a co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o earn such revenue has to be provided for. In these circumstances and the legal position, even if expenditure is not actually incurred in the year under consideration but there is an obligation on the assessee to incur the expenditure for which a reliable estimate can be made has to be allowed as deduction. In the assessee's case also it is certain that assessee has to incur the expenditure on closure of mine and for which a reliable estimate has been made and therefore the provision made for mine closure expenses is allowable u/s 37(1) of the Act. 30.5. Further, the judgment in the matter of Bharat Earth Movers Ltd. vs. CIT, 112 Taxman 61 (SC) and Calcutta Company Ltd., 37 ITR are applicable. Besides, in the said judgment it was categorically held that the mines closure liability is a ascertained liability .As per matching principle as well as the mercantile system of accounting, the liability is allowable in principle under section 37 of the Act. In view of the above, the ground of the assessee is allowed and the AO is directed to give the benefit of deduction of Rs. 2,94,04,000/- towards mines closure expenses in the A.Y. 2010-11. 31. In the result, appeal of the revenue is d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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