2021 (10) TMI 1468 - AT - Income Tax

TDS u/s 194A - disallowance u/s 40(a)(ia) - payment of enhanced land acquisition compensation deposited before the concerned reference court in execution proceedings or before the statutory authority abnd expenditure incurred on closure of the working mine on account of salary wages and civil works etc. routine depreciation claimed @ 15% on coal mine than granted @ 10% - HELD THAT - This tribunal s co-ordinate bench in its consolidated order 2021 (5) TMI 735 - ITAT HYDERABAD own cases in Assessment Years 2005-06 to 2011-12 has decided the same in tax payer s favour and against the department thereby holding that former had no obligation to deduct TDS the expenditure incurred on closure of working mine came under revenue head and it was further entitled for 15% depreciation on mine(s); respectively. We thus adopt judicial consistency to accept all these three substantive grounds in very terms. Assessee s appeal is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal are:

(a) Whether the provisions of Section 194A of the Income Tax Act, 1961, mandating deduction of tax at source (TDS) on interest payments, apply to interest on compensation amounts directly deposited in court or with statutory authorities, and consequently, whether disallowance under Section 40(a)(ia) is justified in such cases.

(b) Whether expenditure incurred on closure of working mines, including salaries, wages, civil works, equipment, stores, spares, proportionate interest, depreciation on assets utilized, and other overheads, should be treated as revenue expenditure eligible for write-off or as capital expenditure.

(c) Whether mine development expenses incurred on working or revenue-generating mines, which have not resulted in revenue-yielding assets with enduring benefit, qualify as revenue expenditure and are allowable as business expenses.

(d) Whether expenditure on development or sustenance of plant and machinery should be treated as capital expenditure eligible for depreciation, and if so, at what rate-specifically, whether depreciation on capital expenditure in coal mines should be allowed at 15% (rate applicable to plant and machinery) or 10% (rate applicable to buildings).

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Applicability of Section 194A TDS provisions on interest on compensation deposited directly in Court or with statutory authorities and consequent disallowance under Section 40(a)(ia)

Relevant legal framework and precedents: Section 194A of the Income Tax Act requires deduction of tax at source on interest payments. Section 40(a)(ia) mandates disallowance of expenditure where TDS is not deducted as required. The key question is whether interest on compensation amounts deposited directly in court or with authorities attracts Section 194A obligations.

Court's interpretation and reasoning: The Tribunal, relying on its coordinate bench's consolidated order dated 20.05.2021 relating to earlier assessment years, held that the assessee had no obligation to deduct TDS under Section 194A on such interest payments. The rationale is that since the interest was deposited directly in court or with statutory authorities (Land Acquisition Officer/Collector/Revenue Officer), the payment mechanism did not constitute a payment triggering TDS deduction obligations under Section 194A.

Key evidence and findings: The interest amounts in question-Rs. 3,59,58,528 and Rs. 21,40,616-were directly deposited in court or with statutory authorities during execution proceedings or related processes. The Tribunal found no dispute on the factual position of direct deposit.

Application of law to facts: Applying the legal principle from the coordinate bench ruling, the Tribunal concluded that no TDS deduction was required, and thus disallowance under Section 40(a)(ia) was not warranted.

Treatment of competing arguments: The Revenue's contention for disallowance under Section 40(a)(ia) was rejected based on judicial consistency and prior binding precedent.

Conclusion: The Tribunal allowed the appeal on this ground, directing the Assessing Officer to exclude disallowance under Section 40(a)(ia) for interest on compensation deposited directly in court or with statutory authorities.

Issue (b) and (c): Nature and treatment of expenditure incurred on closure of working mines and mine development expenses

Relevant legal framework and precedents: The distinction between capital and revenue expenditure is fundamental in income tax law. Expenditure incurred for acquiring or creating enduring assets is capital in nature, while expenses incurred for maintenance or running of business operations are revenue in nature. The Tribunal referred to its earlier consolidated decision dated 20.05.2021, which examined similar facts and held that expenditure incurred on closure of working mines, including salaries, wages, civil works, equipment, stores, spares, proportionate interest, depreciation on assets, and overheads, constitutes revenue expenditure.

Court's interpretation and reasoning: The Tribunal emphasized that these expenses were incurred in the course of business and exclusively for business purposes. The mines were operating mines in the past, and the development expenses did not result in assets with enduring benefit, thus qualifying as revenue expenditure.

Key evidence and findings: The Tribunal noted that the CIT(A) and Assessing Officer did not dispute that the mines were revenue-generating in the past and that the expenses related to mine development and closure were incurred in the course of business.

Application of law to facts: Applying the principle that expenses not resulting in enduring assets but incurred for business operations are revenue expenses, the Tribunal held that the expenditure on closure and mine development should be allowed as revenue expenditure and written off accordingly.

Treatment of competing arguments: The Revenue's attempt to treat these expenses as capital was rejected, consistent with prior judicial pronouncements favoring the assessee's position.

Conclusion: The Tribunal directed that the expenditure incurred on closure of working mines and mine development expenses be allowed as revenue expenditure in the relevant assessment year.

Issue (d): Rate of depreciation on capital expenditure in coal mines

Relevant legal framework and precedents: Depreciation rates under the Income Tax Act are prescribed based on the nature of asset. Plant and machinery attract 15% depreciation, while buildings attract 10%. The question was whether capital expenditure in coal mines should be depreciated at 15% or 10%.

Court's interpretation and reasoning: The Tribunal, following its coordinate bench's consolidated ruling, held that expenditure incurred for development or sustenance of plant and machinery assumes the character of plant and machinery and is therefore eligible for depreciation at the same rate-15%.

Key evidence and findings: The expenditure related to coal mines' plant and machinery, and the Tribunal found no basis to apply the lower depreciation rate applicable to buildings.

Application of law to facts: The Tribunal applied the principle that the character of expenditure on plant and machinery is determinative for depreciation rate, allowing 15% depreciation accordingly.

Treatment of competing arguments: The Revenue's contention to restrict depreciation to 10% was rejected in favor of the assessee's claim.

Conclusion: The Tribunal directed allowance of depreciation at 15% on capital expenditure in coal mines.

3. SIGNIFICANT HOLDINGS

The Tribunal's decision rests on adherence to judicial consistency and coordinate bench precedents, resulting in the following significant holdings:

"The former had no obligation to deduct TDS, the expenditure incurred on closure of working mine came under revenue head and it was further entitled for 15% depreciation on mine(s); respectively."