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TMI Blog2012 (12) TMI 1206X X X X Extracts X X X X X X X X Extracts X X X X ..... the addition of ₹1,10,37,70,526 made by the AO under the head Net Present Value(NPV) treating the same as Capital Expenditure. 2. On the facts and in the circumstances of the case, the Ld. CIT(A) is not justified in holding that payment of NPV does not bring any enduring benefit to the assessee whereas the assessee enjoys long run benefit for years together by raising minerals from the land for which NPV is paid. 3. At the outset the learned Counsel of the assessee submitted that this issue is covered in favour of the assessee by the decision of the ITAT, Cuttack Bench vide consolidated order dt.12.08.2011 in assessee s own case in ITA No.76,226 and 240/CTK/2010 for the AYs 2002-03,2003-04 and 200405, when the issue was with respect to deletion of addition under the head Net Present Value was considered by the Assessing Officer as capital and not revenue as claimed by the assessee. This issue was dealt with by the Tribunal in assessee s own case for the Assessment Year 2007-08 which was before the learned CIT(A) insofar as it was contended that the payment of such amount was for protection of environments and not relating to any proprietary rights which was original ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eral development expenses incurred for construction of BJB Women s Hostel amounting to ₹1 Crore, the learned Counsel of the assessee argued that the peripheral development expenses is a name given to claim this expenditure as directed by the Hon ble Chief Secretary to Govt. of Orissa and Chief Development Commissioner, Govt. of Orissa, Bhubaneswar was were authorised Govt. Officers insofar as incurring of such expenditure was to be controlled by the Govt. of Orissa, which the learned CIT(A) has differed to accept that the expenses were incurred for a College which is situated at Bhubaneswar and therefore had nothing to do with the peripheral development expenses. Therefore, he submitted that the claim was under the provisions of Section 37(1) when the authorities below tried to link the same on a finding whether it could be an expenditure not for the purpose of assessee s business insofar as it was not in conformity of the claiming of expenses as was claimed by other units holding mines such as NALCO, another Public Sector Undertaking when the Tribunal was pleased to allow this expenditure which decision is also being placed on record to distinguish that the inputs for the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee argued that establishing a claim for finding as to what is the basis for establishing mercantile system of accounting has been incorporated in the law itself u/s.145A, Section 43B and one or two more Sections under the Capital gains taxation scheme. In other words, the I.T.Act completely does not allow to bring to tax incomes under the mercantile system of accounting when the learned CIT(A) confined his part sustaining the disallowance on the basis that the assessee was not able to establish as to how the income that had accrued in a particular year was to be accounted for in a subsequent year. The learned Counsel of the assessee argued that it was never the case of the assessee that the expenses had accrued when the emphasis was that the expenditure had crystallized in the impugned year when accrual took more than one year to take shape. 7.2. On the last issue being outstanding expenses, the learned Counsel of the assessee submitted that it is undisputed fact that it was not the endeavour of the Assessing Officer to contravene the provisions of Section 41(1) insofar as the assessee was not able to furnish the details of outstanding liabilities prior to the Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer and the learned CIT(A) that they could be brought to tax under the provisions of Section 41(1) against which the learned Counsel of the assessee as of now has cited case laws which indicate that the same cannot be done unilaterally. She submitted that if given an opportunity, the Assessing Officer will establish that even the purported sum of ₹11.14 Crores paid against this liability was not documented or explained therefore the assessee admittedly did not have any details being a Government undertaking was fit for taxing income in this year only. She argued that on having writing off of bad debt at the instance of the assessee s debtors is claimed as revenue expenditure. Similarly a creditor not even identifiable by the assessee should be allowed by the Assessing Officer to be taxed as income. 9. We have heard the rival submissions. On careful consideration of the facts and circumstances of the case, we are inclined to hold that the peripheral development expenses have been incurred by the assessee as 100% Government of Orissa undertaking at the instance of the Government of Orissa to be incurred as peripheral development expenses which expenditures have been allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part addition on account of prior period expenses have been dealt itemwise by him in his order, which we are inclined to reproduce as follows, has to be considered otherwise. (i) Pay allowances - ₹ 968,561/- : This was stated to be arrear salary paid to Shri Barinder Singh. It is seen that the order of reinstatement was passed on 16.11.2006 in case of this officer and his leave for the preceding period was sanctioned on 16.03.2007 along with sanction of increments for the preceding years on that day. On the basis of these orders passed by the OMC, the liability had crystallized in financial year 2006-07 and in 2007-08; (ii) Arrear salary - ₹ 3,11,927/- :- Arrear salary of ₹ 3,11,927/- consisted of leave salaries only. A copy of the order from AG, Odisha was filed in respect of Dr. Umakanta Mishra amounting to Rs.l,34,610/-. Since this order is dated 10.08.2007, the amount is allowable as the liability crystallized during financial year 2007-08. In respect of the balance amount no details or evidences were furnished; (iii) Miscellaneous expenses:- Miscellaneous expenses relate to supply of explosives during financial year 2004-05 and, hence, provision s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are to be balanced for approval by the share holders within six months of the close of the financial year. Therefore, a concept of claiming them as prior period expenses on the basis they having been actually incurred in the impugned Assessment Year has been declared as prior period expenses in accordance with the concept of mercantile system of accounting. In this view of the matter, we are of the considered view that the prior period expenses are bound to be allowed in the impugned Assessment Year having crystallized in the impugned Assessment Year. Therefore, the part confirmation of the addition made by the learned Assessing Officer on this count is therefore directed to be deleted. 9.2. With respect to the outstanding liabilities it has been submitted by the rival parties that due to incorporating the opening balance of the outstanding liabilities on the computer system it was nobody s case that either the liabilities are bogus or are not for the purpose of business of the assessee having been allowed as expenditure by the Assessing Officer in the years prior to it. Therefore, it was not the case of the Assessing Officer to unilaterally hold them as taxable under the prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on Revenue Recognition issued by the ICAI specifically, inter alia, applies to industries dealing with minerals to which special conditions apply and thus AS-9 is squarely applicable in assessee s case and the application is mandatory in such cases. 5. On the facts and in the circumstances of the case, the Ld. CIT(A) is not justified in ignoring the fact that AS-2(revised) which deals with valuation of inventories does not apply to mineral ores to the extent that they are measured at net realizable value in accordance with well established practices in these industries. 6. On the facts and in the circumstances of the case, the Ld. CIT(A) is not justified in ignoring the fact that AS-9 is mandatory on revenue recognition applies to extraction of mineral ores also. 7. On the facts and in the circumstances of the case, the Ld. CIT(A) is not justified in placing reliance on the case laws mentioned in the appellate order in deleing the impugned addition as they were pronounced in different contexts and not similar to the case. 8. On the facts and in the circumstances of the case, the Ld. CIT(A) is not justified in concluding that the method of valuation adopted by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NPV amounting to ₹4,69,45,200 being held by the Assessing Officer as capital in nature claimed by the assessee on revenue account. Ground No.13 to 16 are with respect to capitalization of ERP software expenses amounting to ₹1,28,91,419 which has been held by the learned as revenue nature to be deleted from disallowance. 13. The learned CIT-DR initiating her arguments submitted that the Assessing Officer proceeded to bring on record the method of valuation by the assessee Company its closing stock by identifying that the assessee had not scrupulously followed the method of valuation of stock insofar as AS-9 issued by the Chartered Accountant Institute of India deals with recognition of revenue which could be extended for valuation of the closing stock though conservatively and the exclusion clause for valuation of closing stock as inscribed in AS-2 does not speak about the valuation of the inventory of net realizable value basis. She submitted that the Assessing Officer therefore took upon himself to derive the net realizable value after considering the policy of the Company in respect of sales and marketing of ore when he considered that the domestic sales and export ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 260,717,490.00 Paradeep(Daitari) 2644 6746 17,839,424.00 Paradeep (GDMN) 2644 14255 37,690,220.00 Daitari Rly Plot 2239 8970 20,083,830.00 Daitari Rly Plot with Gandhamardan Ore 2239 31546 70,631,494.00 SGBK 1794 10760 19,303,440.00 Total 2080115 1,837,333,863.00 Closing stock valuation of Mn Ore for 2007-08 Name Of the mines/Plot Rate Total Qty Total Value Dalkia 4166.52 1810 7,541,401.20 Dubna 4166.52 18 74,997.36 Roida 4166.52 379 1,579,111.08 Seremda ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... GEM stone 1618627 2958757.00 Total Valuation Of closing stock derived by adopting the NRV as per discussion above. i. Iron Ore 1,837,333,863.00 ii Manganese Ore 31,940,542.32 iii Chrome Ore 2,901,595,304.00 iv GEM Stone 29,58,757.00 v Lime Stone 146.00 Total 477,38,28,612.32 1.7 Hence, the difference in valuation of closing stock amounting to ₹ 3,73,89,55,820/- (4,77,38,28,612.32-1,03,48,72,792.25) is added to the total income Of the assessee as under-valuation Of closing stock. [Add: ₹ 3,73,89,55,820/-] She pointed out that the learned CIT(A) tried to take up the case of the assessee appellant before him insofar as he held that the net realizable value has to be adopted against the policy of the assessee to determine the cost of the closing stock held by it insofar as that will be preponing the income of the assessee which would arise t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 2 to 5. The learned CIT(A) has deleted the said addition and the reasoning has been given in Para 4.3 which can be summarized as under: 4.3. The assessee has been consistently valuing a method of valuation i.e. cost or net relizable value whichever is less for the purpose of valuing the closing stock. 4.3.1 That the method of valuation of closing stock is a matter entirely within the discretion of the assessee by making reference to the judgment of the Supreme Court in the case of British Paints Ltd. 188 ITR 44 (SC). 4.3.2 That the closing stock is to be valued at cost or market price whichever is lower and it is now generally accepted as an established rule of commercial practice and accountancy by quoting from the judgment of the Supreme Court in Chainrup Sampatram vs. CIT 24 ITR 481 (SC). The CIT(A) further held that the profit for the purpose of income tax has to be computed in conformity with the accounting principles of commercial accounting, unless of course, such principles have been superseded or modified by legislative enactments. Unrealized profit in the shape of appreciated value of goods remaining unsold at the end of an accounting year and carried over to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 45(1) of the Act, income chargeable under the head profit and gains from business or profession is to be computed in accordance with the system of accounting regularly employed by the assessee. Further in terms of Section 145(2) of the Act, the Central Government has been given power to notify in official gazette from time to time Accounting Standards to be followed by any class of assessee or in respect of any class of income. Further as per sub-section (3) where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or the Accounting Standard as notified under Section 2 have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in Section 144. Accordingly the requirement of the Act is to keep and maintain books of account, to follow a system of accounting which is being regularly employed, and to follow the Accounting Standard as having been notified by the Central Government in this regard. There is no dispute about the fact that the assessee has kept and maintained the books of account. There is no dispu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he fact that being a public sector undertaking it was to maintain its account on mercantile system of accounting when the cost determined by it to value its stock was in accordance with the principles of accounting standard followed by the assessee insofar as the learned Counsel of the assessee has submitted that the method of accounting has been prescribed by the I.T.Act,1961 u/s.145 and the Accounting Standards notified have to be adopted for the provisions of Section 145(2). Therefore, the valuation of inventories as inscribed by the AS-2 indicate that the inventories of mining industries are to be measured at net realizable value in accordance with the well established practice in those industries. This means that the assessee has the option to choose the lower of the cost or net realizable value consistently when the net realizable value has been defined as estimating of selling price in the ordinary course of business being less than estimated cost of completion and the estimated cost necessary to make the sales. It is not the case of the assessee that the net realizable value is not known or could not be known which can be known at the time of sale only. But in order to adop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, do not find any infirmity in the order of the learned CIT(A) who has rightly deleted the addition of ₹373.89 Crores on the facts and circumstances which have been elaborately brought out in his order, which needs no interference. We uphold the same. 16. On the second issue of deletion of the addition of ₹4,69,45,200, we find that the issue stands covered in favour of the assessee by the decision of the ITAT as was also considered for the Assessment Year 2006-07 insofar as it has been rightly brought on record by the learned CIT(A) that the assessee being a public sector undertaking could not claim the land on which the afforestation work has been carried out to claim expenses much less depreciation as was considered in the case of Orissa Forest Development Corporation Ltd. We uphold the impugned order of the learned CIT(A) on this issue. 17. On the last issue being the deletion of addition of ₹1,28,91,419 on the issue of ERP software expenses, we are of the considered view that the learned CIT(A) rightly considered that ARP software expenses were incurred by the assessee as noted by him as under : 9.3.2. The assessee s case in fact is still much si ..... X X X X Extracts X X X X X X X X Extracts X X X X
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