2016 (8) TMI 1032 - AT - Income Tax

Allowability of expenditure incurred on removal of overburden - Held that - As relying on assessee s own for Assessment Year 2010-11 we have no hesitation in holding that the expenditure incurred on removal of overburden is to be allowed u/ s 37 (1) of the Income Tax Act, 1961 as against 1/ 10th of the expenditure allowed u/ s 35B of the Act. Before parting, we would also like to put on record our deep sense of anguish on the conduct of the Department for perpetrating a protracted litigation spread over a number of years on an issue which had already attained finality with the department not having preferred appeals before the higher forum.

Issues Involved:
1. Disallowance of overburden removal expenses.
2. Application of Section 35E(2) of the Income Tax Act, 1961.
3. Nature of expenditure (revenue vs. capital).
4. Consistency with previous Tribunal decisions.
5. Matching principle and month-wise expenditure.
6. Rejection of books of accounts under Section 145(3).
7. Reliance on previous judgments and their applicability.
8. Treatment of similar expenditures by other subsidiaries of Coal India Limited.

Detailed Analysis:

1. Disallowance of Overburden Removal Expenses:
The main issue revolves around the disallowance of ?2466.34 crores incurred on the removal of overburden (OBR) by the assessee, a government-controlled coal mining company. The assessee argued that this expenditure is a recurring revenue expenditure necessary for coal production, while the Assessing Officer (AO) and CIT(A) treated it as capital expenditure under Section 35E of the Income Tax Act, 1961.

2. Application of Section 35E(2) of the Income Tax Act, 1961:
The assessee contended that Section 35E(2) was misapplied by the CIT(A). This section pertains to capital expenditure on the development of mines, but the assessee argued that their expenditure was not capital in nature as the mines were already in commercial production. The Tribunal agreed with the assessee, noting that Section 35E(2) applies to development mines, not revenue mines where commercial production has commenced.

3. Nature of Expenditure (Revenue vs. Capital):
The Tribunal consistently found that the expenditure on OBR is a revenue expenditure. It emphasized that this expenditure is necessary for the ongoing production of coal and is not a one-time capital expenditure. The Tribunal reiterated that the OBR expenses are incurred regularly and are essential for coal extraction, thus qualifying as revenue expenditure under Section 37(1) of the Act.

4. Consistency with Previous Tribunal Decisions:
The Tribunal noted that similar disallowances had been deleted in previous assessment years (1997-98, 1998-99, 2008-09, 2010-11, and 2011-12) by the Tribunal. The Tribunal emphasized the importance of consistency and the principle of finality in factual matters that permeate different assessment years. It criticized the Department for ignoring binding precedents and perpetuating protracted litigation.

5. Matching Principle and Month-wise Expenditure:
The CIT(A) had sustained the disallowance based on a supposed mismatch between month-wise OBR expenditure and coal production. The Tribunal found this reasoning flawed, emphasizing that the nature of expenditure does not change based on monthly accounting. The Tribunal highlighted that the matching principle was misapplied and that month-wise production and expenditure do not determine the character of the expenditure.

6. Rejection of Books of Accounts under Section 145(3):
The CIT(A) had rejected the assessee's books of accounts under Section 145(3), claiming that there was an investigation of accounts. The Tribunal found this claim factually incorrect and arbitrary, noting that the accounts were audited by the Comptroller and Auditor General of India and had been accepted in previous years.

7. Reliance on Previous Judgments and Their Applicability:
The CIT(A) had relied on various judgments, including Madras Industrial Investment Corporation vs. CIT, to support the disallowance. The Tribunal found these judgments inapplicable to the assessee's case, emphasizing that the facts and issues were entirely different. The Tribunal also noted that the CIT(A) had selectively quoted judgments to support his conclusions.

8. Treatment of Similar Expenditures by Other Subsidiaries of Coal India Limited:
The Tribunal observed that other subsidiaries of Coal India Limited had similar OBR expenditures allowed by the AO or CIT(A). This inconsistency in treatment further supported the assessee's case that the OBR expenditure should be allowed as revenue expenditure.

Conclusion:
The Tribunal allowed the appeal, holding that the expenditure on removal of overburden is to be allowed under Section 37(1) of the Income Tax Act, 1961, as revenue expenditure. The Tribunal expressed its anguish over the Department's conduct in ignoring binding precedents and perpetuating unnecessary litigation. The appeal was allowed, and the disallowance of ?2466.34 crores was directed to be deleted.

Order Pronounced:
The order was pronounced in the Open Court on 3rd June 2016.

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