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TMI Blog2021 (5) TMI 735X X X X Extracts X X X X X X X X Extracts X X X X ..... ess for the all the years 2. Interest accrued on loans to M/s APHMEL for AYs 2005-06 & 2006-07 3. Disallowance of deduction claimed u/s 43B 4. Disallowance of net prior period expenditure for AYs 2005-06 to 2010-11. 5. Prospecting expenditure - section 35E for AY 2007-08 to 2010-11. 6. TDS on interest on land compensation deposited in court as per court order for AY 2009-110 to 2011-12. 7. Loss due exchange fluctuation on interest on capital borrowed in forex for acquisition of machinery after such assets is put to use for AY 2009-10. 8. Restriction of depreciation on mine development to 10% as against 15% claim for AY 2011-12. 9. prior period expenditure - enhancement by CIT(A) for AY 2007-08 and 2009-10. 3. When the assessee preferred appeals before the CIT(A) the CIT(A) confirmed the some of the additions/ disallowances and deleted some of the additions/ disallowance made by the AO, against which the assessee and the revenue are in appeals before the ITAT. 4. First we take up the appeals of the assessee. 5. As Regards ground Nos. 1 to 4 regarding capital work in progress raised (in AYs 2005-06 to 2011-12), which has been raised in all the appeals under conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k is in progress and is not subjected to depreciation. This expenditure is capitalized or written off as revenue depending on whether the expansion yields more coal deposits for extraction or not. This expenditure is incurred for the purpose of making the coal deposits accessible and the mines economically viable. In most of the cases mine were closed and no operations could be carried out, the capital work in progress relating to that mine development expenditure could not be capitalized. Consequently, the capital work in progress relating to the mine development expenditure incurred was written off since no asset could be created. The expenditure was basically of revenue nature and incurred wholly and exclusively for the purpose of business. This is a continuous and ongoing process necessary to expand the area of operation in the mine. A mine is divided into districts for operational purposes, at each district expansion are envisaged periodically and development expenses stated above are incurred, for the purpose of coal mining. In case a particular mine ceases to yield coal deposits at an economically viable cost or/and needs to be closed for various safety reasons or where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lating to that mine development expenditure could not be capitalized. Therefore, the capital work in progress relating to the mine development expenditure incurred was written off since no asset could be created. Any expenditure which does not bring any additional advantage to the business of the assessee is revenue expenditure. The expenditure was basically of revenue nature and incurred wholly and exclusively for the purpose of business. The assessee had also filed detailed written submissions before the CIT(A) and had relied on number of judgments. Before us, the ld. AR also relied on the judgments as quoted supra. In support of our decision, we rely on the following judgements: 5.4.1 In case of CIT Vs. Binani Cements Ltd., vs CIT - 380 ITR 116 (Calcutta HC). In ITA No. 265 OF 2009, judgment dated 23/03/2015, similar issue was decided by the Hon'ble High Court of Calcutta wherein it has held as under: "3. Mr. Bajoria, learned senior advocate, appearing for the appellant submitted that the question is partly covered by the decision in CIT v. Graphite India Ltd. [1996] 221 ITR 420 (Cal.). The relevant question referred by the Tribunal to this Court in that case was whether in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticular income in the assessment, he should ask himself, inter alia, two questions, namely : (i) what is the system of accountancy adopted by the assessee, and (ii) if it is the mercantile system, subject to the deeming provisions, when has the right to receive accrued? If he comes to the conclusion that such a right accrued or arose to the assessee in a particular accounting year, he should include the said income in the assessment of the succeeding assessment year. No power is conferred on the ITO under the Act to relate back an income that accrued or arose in a subsequent year to another earlier year, on the ground that that income arose out of an earlier transaction. Nor is the question of reopening of accounts relevant in the matter of ascertaining when a particular income accrued or arose." 5. In Swadeshi Cotton & Flour Mills (P.) Ltd. (supra ) on a similar question the said Court held : "The system of reopening of accounts does not fit in with the scheme of the IT Act. As far as receipts are concerned there can be no reopening of accounts, and the position is the same in respect of expenses". 6. Mr. R.N. Bandopadhyay, learned advocate appearing on behalf of the Revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Supreme Court in considering a claim for deduction on arrear lease rents, ascertained subsequently consequent to a compromise arrived in the suit and paid in the relevant assessment year held, inter alia, as under : "The Tribunal, in the present case, had clearly found that it was only as a result of the compromise that the respondent became entitled to remain in possession of the demised land. Its liability also became ascertained only at that point of time. It cannot be disputed that the respondent incurring the expenditure had acted in the interest of and for the purpose of its business. The expenditure was not laid out for any purpose other than that of carrying on the business. The deduction was properly admissible under s. 10(2)(xv) of the Act and the matter being self-evident the High Court was fully justified in declining to accede to the prayer made under s. 66(2) of the IT Act, 1922." 13. Sec. 10(2)(xv) of the old Act corresponds to s. 37(1) of the present Act. Our above conclusion is fortified by the view expressed by the Supreme Court in the said decision. For the aforesaid reasons the question is answered in the affirmative in favour of the assessee. The appeal i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is being consistently followed and the interest receivable from the subsidiary company is being accounted on a cash basis since the receipt of the interest is uncertain consequent to declaration of the subsidiary company as a sick unit by the BIFR. Further, it was stated that it could change its accounting policy from mercantile system to cash system for recognizing the interest receivable from M/s APHMEL due to the loans and advances to it becoming sticky. In this regard, the assessee relied on few case law, which were mentioned by the AO at page 7 of his order. 6.1 After considering the submissions of the assessee, the AO disallowed the assessee's claim of accrued interest by observing, inter-alia, as under: "4.10 In the light of drastic improvement in the financial performance and health of the Mis APHMEL and the assessee company's assessment about its prospect for recovery of loan and interest, it can no longer be said that cash system of accounting of interest receivable from Mis APHMEL would be justified. It is pertinent to note that the subsidiary company M/s APHMEL continues to debit the interest payable to the assessee company on an accrual basis in its books of acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not out of BIFR, the recovery of interest beings still doubtful, ought to have allowed the method of accounting followed in this respect, consistently in the past years on cash basis and therefore the addition of the accrued interest is not warranted. It is submitted all the liabilities of a sick industrial company remain frozen, while it continues to be under scheme of rehabilitation. It is also submitted since SCCL had accounted for the interest income from APHMEL in subsequent years on receipt basis; the addition in this year would result in double taxation, which is not permitted." We draw your kind attention to the decision in the case of CIT V s Dalmia Industries Ltd. 180 ITR 167 (Del HC) Paper book pages 56 to 58." 6.4 The Ld. DR, on the other hand, relied on the orders of revenue authorities. She submitted that the assessee has changed the method of accounting for treatment in the books of account is not correct. The APHMEL has started earning profits. She submitted that the APHMEL is showing profits from FY 2001-02 and onwards, the winding up order passed by the BIFR in the year 2002 has been set aside by the AAIFR. It was also observed that APHMEL is booking the expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us year. In the earlier years the CIT (A) as well as IT AT has allowed the prior period expenditure as deductible expenses in the subsequent year based on the method of accounting and the volume of transactions and also the fact that these expenditure have been crystallized and determined only after cut off date for the close of the financial year. In the case of your Appellant the Account are subjected to audit by Statutory Auditors as well as C&AG, who, based on the method of Accounting, Accounting Standards and Accounting Policies consistently followed, have considered certain expenditures as prior period expenses for the purpose of presentation of accounts under the Companies Act, 1956, whereas for the purpose of income tax the same are allowable expenses on the crystallization basis or method of accounting. A remand report was called for during the Appellate proceedings and the Assessing Officer after verification of expenditure had allowed part of the prior period expenses. The Assessing Officer in his remand report confirmed that the expenditure which was earlier disallowed was in fact crystallized during the year and was to be allowed as current year expenditure. The CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt on prospecting etc. for development of certain minerals can be amortized and deduction can be claimed over a period of 10 years beginning with the year of commercial production. Further, the amount which is eligible for deduction must have been incurred during the year of commercial production and 4 years immediately preceding the year. The expenditure on prospecting, etc. includes aborted and suspended mines also. But, it was noticed that instead of claiming deduction u/s 35E, the assessee had claimed such expenditure on prospecting, etc. as revenue expenditure. 8.1 After examining the details filed by the assessee as well as referring to the provisions of section 35E, the AO computed the disallowance u/s 35E to the tune of Rs. 3,49,19,111/- by observing as under: "9 2. I have carefully gone through the submissions made by the tax payer. In the instant case, the assessee is engaged in operations relating to prospecting for, or extraction of coal from the mines. The company has incurred the expenditure of KS.11 ,51 ,81 ,916/- on account of drilling done for production support and general exploration expenditure. It is said that the company undertakes operation for the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure is to be dealt in accordance with the provisions of Section 35E of the Income Tax Act, 1961. Hence, the contention of the assessee to treat the expenditure incurred relating to exploring, locating or proving on infructuous or abortive operations should be treated as revenue is not acceptable. As discussed above, under the provisions of sec. 35E, the amount of expenditure spent on prospecting etc. for development of certain minerals can be amortized and deduction can be claimed over a period of 10 years in equal instalments. 5.4 After careful examination of details submitted by the assessee, the prospecting expenses relating to two new mines viz., Gundala Block -III and KTK LW, BHPL sites, the prospecting expenses relating to exploration will squarely fall under the scope of 35E of IT Act, 1961. In the case of Gundala Block -III, the taxpayer has confirmed that no mine is likely to come and operations are aborted and in the case of KTK LW, BHPL, the mine is stated to be a new one and has commenced production during the year under consideration. As per the provisions of sec. 35E, the amount which is eligible for deduction must have been incurred either during the year of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... coal mining and prospecting is an ongoing activity. At this juncture we would like to explain what exactly is prospecting - it is process of drilling holes in order to study the various levels of seams there would be mud, sand, water, rock, gases and minerals. It so happens in a open cast mine after certain level of extraction of coal, we face hard soil or rock then the prospecting department explores to arrive at the conclusion whether there are still any more mineral reserves available or not or to what extent over burden has to be removed in order to extract the coal. Even in underground mines we face similar situation wherein the prospecting department comes to playa major roll. In all these cases commercial production has already commenced and all of them are revenue yielding mines. Hence the company was consistently following the method of accounting of claiming such expenses as revenue expenses and the same was allowed year after year. We would also like to submit that this ground has become only academic; since the company has already received allowance under section 35E in respect of additions made during various years and also modified its accounting policy to be in sy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar No: 08/2011 ( F. No: 275/30/2011-IT(B), dated 14/10/2011 and do not attract TDS provisions." 9.1 After considering the submissions of the assessee, the AO held that the contention of the assessee that the responsibility of making TDS vests with the authority distributing the compensation to the end beneficiary is not acceptable and, therefore, the interest debited to the P&L Account is disallowed by invoking provisions of section 40(a)(ia) wherein it was stated that any amount of interest exceeding prescribed limit paid or credited without deducting tax at source or deducting tax at source but failed to remit the TDS to the Govt. account, such interest has to be disallowed. 9.2 On appeal, the CIT(A) confirmed the said addition. 9.3 Before us, the ld. AR of the assessee filed written submissions on this issue, which are as under: "The Assessing Officer disallowed this amount on the ground that TDS has not been deducted ignoring the fact that the amount was deposited as per the Court Directions and Your Appellant is not aware of the persons who have to be paid at the time of deposit. Hence, the question of TDS on such payment does not arise. CIT (A) confirmed the addition acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. If he fails to deduct tax at source or after deducting fails to pay the tax to the credit of Central Government, he shall be liable to action in accordance with the provisions of section 201. In this connection attention is also invited to the provisions of section 276B of the Income-tax Act, as substituted by the Direct Tax Laws (Amend‐ ment) Act, 1987 according to which if a person fails to pay to the credit of the Central Government the tax deducted at source by him, he shall be punishable with rigorous imprisonment for a term which shall be between 3 months and 7 years and with fine. 2. It has come to notice that various State Development Authorities, the Housing Boards, Public Works Department, etc., acquire immovable property from the public for the purpose of their developmental activities. Huge amounts are disbursed on behalf of these departments as payments of compensation for land acquired including considerable amount of interest on excess compensation as per the Land Acquisition Act.The interest payment made under the Land Acquisition Act are covered by the provisions of section 194A. As a result tax will have to be deducted at source under section 194A fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g that financial year (Emphasis supplied) with effect from 1-4-1975, if the amount exceeded.Rs. 1,000 was not and could not be valid. Such a direction did not get support from section 194A under which Department sought deduction of income-tax at source. The proviso to section 194A of the Act empowers the assessee to receive the income by filing an affidavit or statement in writing declaring that his estimated total income assessable to tax for the assessment year next following the financial year in which the income is credited or paid will be less than the minimum liable to income-tax. The orders under revision did not disclose the break-up in each execution petition about the compensation amount awarded and the interest payable thereon. The orders also did not disclose as to when possession of the land concerned in each execution petition was taken by the Government and the date of depositing the compensation amount. In the absence of those details, it was not possible to determine whether the individual claimants were liable to pay income-tax or not. In view of above it was further held that Circular No. 526, dated 5-12-1988, which is on same line as D.O. stated above, wil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on that Collector, Land Acquisition is the person making payment and as such he is responsible for making deduction at source in terms of section 204( iii) of the Income-tax Act. However, we had requested the Department to confirm the factual position from the Ministry of Rural Development. The Department of Rural Development have stated that the person responsible for payment of compensation under Land Acquisition Act is the Collector. In Baldeep Singh v. UOI [1993] 199 ITR 628 the Punjab and Haryana High Court held that "the Court is not the person responsible for paying any income by way of interest...As per the legal incidents, the legal person responsible for paying income by way of interest is the Land Acquisition Collector who had the money in his possession and was responsible for making the payment of that income to the petitioners....The Court is acting only as a conduit for getting the payment to the petition er in execution of a decree passed in his favour." In view of the above, we confirm the views expressed by us earlier, referred to above. The Administrative Department have stated that while there may be no objection to TDS being made by Collector, in such cases a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n on interest on capital borrowed in forex for acquisition of machinery, after such asset is put to use in AY 2009-10, raised in AY 2009-10 as ground No. 11, the AO observed that the assessee provided interest on the invoice price of the machinery purchased as at 31/03/2009, though the payments were made during the FY 2009-10. The AO stated that the payment is on account of capital asset purchased from Germany and the interest accruing on account of foreign exchange fluctuations towards acquisition of capital asset has to be treated as capital expenditure. In view of the above observations, the AO disallowed interest amount of Rs. 1,94,52,069/- claimed by the assessee in P&L Account treating it as capital expenditure. 10.1 On appeal, the CIT(A) confirmed the addition. 10.2 The ld. AR of the assessee filed written submissions on this issue, which are as under: "During the year SCCL provided Rs. 1,94,52069/- towards interest payable on deferred payment guarantee for machinery purchased from Germany in US Dollars. This was in respect of period after the machinery was put to use. The Assessing Officer treated this as capital expenditure includable in the cost of machinery. It is su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taining wall for sand stowing, Dumper Working Platform, Construction of RCC Bridges, Land levelling, Sand Stowing, Bunker Stowing, construction of Inter Seam Tunnels, Construction of Steel Bunkers, Construction of Water Dams, construction of water tankers for sand stowing, building retention wall for sand stowing, construction bunkers in mines for workers, construction of check dams in mines to prevent water gushing etc. The entire expenditure was incurred within the mines, which are categorized as plant and machinery for the purpose of depreciation. Functionally the expenditure assumes the nature of plant and machinery in the coal mines. Any expenditure incurred to develop/sustain plant and machinery would assume the same character. As percircu1ar No. OFF-43011/22/81 dated 20.04.1981 of department of Coal, Ministry of Energy, Govt, of India expenditure incurred for the development of mine shall be capitalized and depreciated over the life of the mine. Further, as per Schedule XV of the Company's Act, Mines and shafts are eligible for charge of depreciation at the rates applicable to 'P1ant& Machinery'. As Income Tax Act/ Rules does not provide rate of depreciation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture and construction of Water tankers for sand stowing expenditure is incurred in connection with functional development of mining properties that is sinking of shafts and inclines and we also further affirm that the above expenditure under Mines and Shafts is directly related to Coal Mining and incurred towards extracting coal from mines. We draw your kind attention to the following case laws: 1. CIT V s Kamataka Power Corp. 247 ITR 268 (SC) Paper Book Pages 32 to 35 2. CIT Vs Singareni Collieries Co 221 ITR 194 (AP HC) Paper Book Pages 36 to 40 3. CIT Vs Dr B Venkata Rao 243 ITR 0081 (SC)Paper Book Pages 51 to 53 4. S K Tulsi and Sons Vs CIT 187 ITR 685 (Allahabad HC) Paper Book pages 49 to 50. 5. CIT Vs Shashi Nursing Home Ltd 269 CTR 99 (A11ahahad HC) Paper book pages 45 to 48. 6. CIT Vs Sesa Goa Ltd 271 ITR 331 (SC) Paper book pages 41 to 44. 11.3 The Ld. DR, on the other hand, relied on the orders of revenue authorities and submitted that the expenditure incurred by the assessee are in the nature of civil works which are not qualified for depreciation @ 15% as plant and machineries. 11.4 We have considered the rival submissions and perused the material on rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the present case. The Ld. CIT (A) has not accepted this judgement of Hon'ble SC holding that it relates to Investment Allowance U/s 32A of the Income Tax Act, 1961. Once similar expenditures have been accepted by the Hon'ble SC as quoted supra , we are of the view that the expenditures incurred by the assessee were necessary for excavation of coal from mines and shafts . In view of the above observations, we allow this ground of appeal of the assessee by holding that the assessee is entitled to charge depreciation @ 15% under the block of assets "plant and machinery", as against 10% made by the AO . 12. As regards the issue relating to prior period expenditure - enhancement of income by CIT(A), raised as additional ground in AY 2007-08 & 2009-10, the ld. AR of the assessee filed written submissions, which are as under: "a. While disposing off SCCL's appeal in ITA No.235/CIT(A)NJA/09-10 dated 28/2/14, the CIT(A), Vijayawada gave directions for enhancement of income in respect prior period expenditure allowed in assessment order dated 30/12/2009 by the Assessing Officer to the extent of Rs. 15,74,43,344/-. In fact, SCCL had claimed only Rs. 46,16,251/- under Prior period ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... akhs, we are dismissing the same on account of low tax effect with the liberty to the Revenue to seek recall of the order, if any of these cases falls within the exceptions mentioned in the Circulars cited above. 15. In the result, Revenue's appeal is dismissed in above terms. 16. As regards the appeal of revenue in ITA No. 801/Hyd/2014 for AY 2006-07, the revenue has raised a substantial ground that the CIT(A) erred in deleting the disallowance of Rs. 3,49,71,516/-, the AO disallowed this amount u/s 40(a)(ia) of the Act with reference to the short deduction u/S 194C of Rs. 1,91,31,631/- and U/s 194J of Rs. 1,58,39,885/-. The CIT(A) deleted the said disallowance by observing as under: "4.4.5. Coming to the portion of short deduction of TDS u/s.194C and 194J of the Act, there is force in the submissions made by the appellant. The Provisions of section 40(a)(ia) stipulate that "any interest, commission or brokerage [rent, royalty] fees for professional Services or fees for technical services payable to a resident, or amounts payable to a contractor or Subcontractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espect of TDS deduction. The AO observes that the appellant was liable to deduct TDS of Rs. 4,08,954 under section 194C of the Income Tax Act from the total expenditure of Rs. 2,08,88,541 relating to can outwards, labour charges, car hire charges, security charges, advertisement and office decoration charges. However, deduction was made only of Rs. 1,61,856 resulting in short deduction of rupees 2,47,098. Therefore, the proceeded to disallow the sum of Rs. 19,95,048 under section 40(a)(ia) respect of which no TDS was deducted. During the appellate proceedings the AR of the appellant submits that TDS was deducted at a lower rate and hence provisions of section 40(a)(ia) are not applicable in respect of the appellant. Appellant's contentions were carefully analysed. It is observe that the appellant has not come up-with any evidence either before the AO or during the appellate proceedings that it has deducted the due TDS in respect of the impugned sum disallowed by the AO. It is also observed from the assessment order that having" regard to the lower deduction TDS certificates in respect of M/s Maheswari Transport Agency Private Limited and M/s Rohit Transport Organisation, the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2010-11, the revenue has raised an identical ground in both these appeals that the CIT(A) erred in deleting the addition of Rs. 1,59,93,000/- in AY 2009-10 and Rs. 1,45,70,000/- in AY 2010-11, the AO observed that on careful reading of the Notes submitted by the assessee company it is clear that the assessee is providing interest at certain percentage and credited to the fund account. Further, he observed that it is also a fact that the insurance premium is paid out of interest provided by the company against FBIS members. It is also a fact that every member certainly gets the amount contributed by them in addition to the interest provided by the company. Further, it is also a fact that the assessee company failed to give the bifurcation of interest to be paid to each member relevant to the year under consideration. However, the interest provided by the company towards the fund maintained for the purpose of this scheme, without deducting tax surely attracts the provisions of section 40(a)(ia) rws 194 of the Act. In view of the above observations, the AO disallowed the interest provided to the fund under this scheme of Rs. 1,59,93,000/- in AY 2009-10 and Rs. 1,45,70,000/- in AY 2010 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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