2025 (7) TMI 369 - AT - Income Tax

Disallowance of payment/grant made to Singareni Educational Society u/s 40A(9) - Assessee submitted that the said educational society is a body constituted for running educational institutions established by the assessee for the benefit of its employees - AO disallowed the claim of the assessee by holding that the payment in question made by the assessee to the educational society would not be an allowable expenses u/s 40A(9) as this payment is not made for the expenses provided u/s 36(1)(iv) (iv) - HELD THAT - We note that this issue has been now considered and decided by the Hon ble jurisdictional High Court in assessee s own case for the A.Ys 2006-07 to 2008-09 2024 (2) TMI 1498 - TELANGANA HIGH COURT held that the benefit extended by the assessee as per the NCWA was an obligation under the statutory document as held in case of Mohan Mahto v. Central Coal Field Ltd 2007 (9) TMI 727 - SUPREME COURT and therefore the same is not considered as an expenditure incurred towards employees welfare but for discharging the statutory obligation. Following the judgement of the Hon ble jurisdictional High Court where the assessee has incurred the expenditure towards electricity expenditure of the employees/ workers as per the terms of the said NCWA the education provided by the assessee to the employees in terms of the NCWA cannot be given a different treatment and therefore the issue is now covered by the judgment of the Hon ble jurisdictional High Court in favour of the assessee. Accordingly the addition made by the AO and sustained by the learned CIT (A) is deleted. Investment Allowance u/s 32AC disallowed - DR submitted AO has not only disallowed the claim of the assessee by treating the same as not falling in the ambit of manufacturing/production of goods or article but also on the factual aspect that the assessee has failed to prove that the alleged plant machinery was set up/installed during the period relevant to the A.Y 2015-16 and 2016-17 - HELD THAT - Despite the amendment in section 32(1)(iia) of the Act no corresponding amendment is made in section 32AC of the Act and therefore the intention of the Legislature is clear that the benefit of section 32AC(1) is not available to a company engaged in the business of generation of power. To maintain the rule of consistency we follow the earlier decision in the case of ACIT vs. Hinduja National Power Corporation Ltd 2025 (4) TMI 81 - ITAT HYDERABAD and consequently this issue is decided against the assessee and the impugned order of the learned CIT (A) for the A.Ys 2015-16 and 2016-17 are upheld. Disallowance u/s 40(a)(ia) - TDS u/s 194A - TDS on interest on land compensation deposited in court as per court order - HELD THAT - we note that this issue is covered by the decision of this Tribunal in assessee s own case for the A.Y 2009-10 to 2011- 12 2021 (5) TMI 735 - ITAT HYDERABAD and further for the A.Ys 2012-13 2021 (10) TMI 1468 - ITAT HYDERABAD AY 2013-14 AY 2014-15 2021 (5) TMI 914 - ITAT HYDERABAD held that Interest received by an assessee on compensation or on enhanced compensation as the case may be shall be deemed to be in the income of the year in which it is received. Now coming to the case on hand it is clear that the assessee has deposited the amount with the Court but it has not actually paid to the actual recipients directly i.e. pattadars. On analysis of the above cited section and Circulars it is clear that the assessee is not responsible for deducting tax deduction at source and assessee is also not sure that when the amount shall be paid to the actual recipients/pattadars. In our considered opinion the addition made in this regard is not sustainable in the eyes of law and therefore the addition is deleted. Accordingly grounds raised on this issue are allowed in favour of the assessee. Disallowance of expenditure incurred for the development of the coal mines which was abandoned - nature of expenses - HELD THAT - As decided in own case for the A.Y 2015-16 assessee has debited to the capital expenditure in the P L account in respect of those mines which are not in operation or the mines were unsuccessful for coal mines. It is also clear that the breakups were filed before the CIT(A) which has been incorporated by him in his order. We find that in most of the cases mines were closed and no operations could be carried out the capital work in progress relating 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. As decided in the case of Hindustan Aluminum Corporation Ltd. 1986 (1) TMI 88 - CALCUTTA HIGH COURT was applicable and following that decision held that the expenditure was allowable as incurred wholly and exclusively for the purpose of the assessee s business. Claim of depreciation @ 15% was restricted by AO to 10% but allowed by the CIT (A) - assessee is engaged in the business of coal mines and he is extracting coal from open cast mines as well as underground mines - HELD THAT - Issue covered by the decision of this Tribunal in assessee s own case for the A.Y 2011-12 2021 (5) TMI 735 - ITAT HYDERABAD A.Ys 2012-13 2021 (10) TMI 1468 - ITAT HYDERABAD AY 2013-14 AY 2014-15 2021 (5) TMI 914 - ITAT HYDERABAD as per the schedule of depreciation the roads are falling in the asset as building and not as plant and machinery. However in the case of the assessee the work carried out by the assessee is within the Mines and very much part and parcel of the coal mines of the assessee. Undisputedly the coal mines are considered as plant and machinery for the purpose of depreciation and therefore any work carried out in the Mines which is essential for the operations of extraction of the coal from the Mines will partake the character of plant and machinery. Accordingly we do not find any merits in the contention of the learned DR on this issue.

Summary

The core legal questions considered by the Tribunal in these cross appeals relate primarily to the applicability and interpretation of provisions under the Income Tax Act, 1961, specifically sections 40A(9), 37, 32AC, 32(1)(iia), and 40(a)(ia). The issues broadly fall into two categories: (1) the allowability of payments made to Singareni Educational Society as business expenditure or disallowance under section 40A(9), and (2) the claim of investment allowance and depreciation on plant and machinery, including the classification of certain expenditures and assets, and (3) the disallowance under section 40(a)(ia) for non-deduction of TDS on interest payments deposited in court. Additionally, the classification of capital versus revenue expenditure on abandoned mine development and the appropriate depreciation rates on certain civil works within coal mines were also examined.

Issue 1: Applicability of Section 40A(9) to Payments Made to Singareni Educational Society

The Tribunal considered whether the substantial grants and reimbursements made by the assessee to the Singareni Educational Society, which runs schools and colleges for employees' children, are deductible business expenditures or disallowable under section 40A(9) of the Income Tax Act, 1961.

Legal Framework and Precedents: Section 40A(9) disallows any payment or contribution made by an employer to any fund, trust, society, association, or person except for expenses provided under sections 36(1)(iv) and (v). The key question was whether the payments constituted voluntary contributions or statutory obligations under the National Coal Wage Agreement (NCWA), which has been held by the Supreme Court to be a statutory and binding settlement under the Industrial Disputes Act, 1947.

Precedents relied upon included the Supreme Court decision in Mohan Mahto v. Central Coal Field Ltd. (2007) which recognized NCWA as binding, and various High Court decisions (including Jharkhand and Bombay High Courts) that affirmed the statutory nature of NCWA and upheld expenditures under it as statutory obligations rather than voluntary welfare contributions.

Court's Interpretation and Reasoning: The Tribunal noted that the payments to the educational society were made to cover deficits in running educational institutions established as per the NCWA, a statutory settlement. The payments were not voluntary contributions but statutory obligations to provide welfare facilities to employees in remote areas. The Tribunal observed that the Assessing Officer and CIT(A) failed to appreciate the binding statutory nature of NCWA and the consequent non-applicability of section 40A(9).

Key Evidence and Findings: The assessee's accounts showed that the society's funds were mainly to cover deficits after government grants and fees, and the infrastructure was provided by the assessee. The payments were thus reimbursements of actual expenses incurred for welfare mandated by NCWA.

Application of Law to Facts: Following the binding effect of NCWA, the Tribunal held that these payments cannot be disallowed under section 40A(9) as they are statutory obligations and allowable under section 37 as business expenses. The Tribunal also relied on the jurisdictional High Court's recent decisions in the assessee's own case for earlier years, which had ruled in favour of the assessee on this issue.

Treatment of Competing Arguments: The Revenue argued that the society was an independent entity providing education to local residents as well, and thus the payments were not wholly for business purposes. The Tribunal rejected this, emphasizing the statutory obligation and the direct nexus to business operations.

Conclusions: The Tribunal allowed the grounds raised by the assessee for the assessment years 2015-16, 2016-17, and 2020-21, deleting the additions made under section 40A(9) in respect of payments to the educational society.

Issue 2: Claim of Investment Allowance under Section 32AC and Depreciation on Plant and Machinery

The Tribunal examined whether the assessee, engaged in power generation, was entitled to investment allowance under section 32AC for new plant and machinery installed, and the correct rate and classification of depreciation on capital works and civil structures within coal mines.

Legal Framework and Precedents: Section 32AC provides investment allowance to companies engaged in manufacture or production of any article or thing, for new plant and machinery acquired and installed within specified periods. Section 32(1)(iia) allows additional depreciation for new machinery or plant acquired and installed by an assessee engaged in manufacture or production of any article or thing or in generation, transmission, or distribution of power. However, the proviso to section 32(1)(iia), granting enhanced depreciation rates (35%), applies only to manufacturing or production undertakings in specified backward areas and excludes power generation businesses.

Key precedents include Supreme Court and High Court decisions recognizing electricity generation as manufacturing or production for sales tax purposes, but the Tribunal noted that the legislature deliberately excluded power generation from the enhanced benefits under sections 32AC and 32AD.

Court's Interpretation and Reasoning: The Tribunal distinguished between the main section 32(1)(iia) and its proviso, emphasizing that the proviso restricts enhanced depreciation benefits to manufacturing enterprises only, excluding power generation. Similarly, sections 32AC and 32AD were interpreted as not extending investment allowance benefits to power generation companies. The Tribunal relied on the principle that provisos qualify the main enactment and cannot be read expansively to include excluded categories.

On factual grounds, the Tribunal found that the assessee failed to prove acquisition and installation of plant and machinery within the prescribed period for claiming investment allowance under section 32AC, as the bills and certificates produced were insufficient or related to escalations rather than original installations. The Tribunal also noted that power generation companies were not included in the Finance Act memorandum as eligible for investment allowance.

Key Evidence and Findings: The Assessing Officer's findings and remand reports established that the plant and machinery were not installed within the relevant period. The Telangana State Power Coordination Committee certificate was considered but insufficient to establish installation dates conclusively.

Application of Law to Facts: The Tribunal upheld the Assessing Officer's and CIT(A)'s disallowance of investment allowance claims under section 32AC for the assessment years 2015-16 and 2016-17. It also rejected the assessee's claim for enhanced depreciation @ 15% on civil works within mines, holding that such works qualify as plant and machinery integral to coal extraction, not buildings, and are eligible for 15% depreciation.

Treatment of Competing Arguments: The assessee relied on various judgments equating power generation to manufacturing for tax benefits; however, the Tribunal distinguished these as addressing different statutes or provisions, not the specific investment allowance under section 32AC. The Revenue relied on legislative intent and specific exclusions in the statute.

Conclusions: The Tribunal held that the assessee was not entitled to investment allowance under section 32AC as a power generation company and on failure to prove installation dates. The enhanced depreciation @ 15% on specified civil works was upheld as correct classification as plant and machinery.

Issue 3: Disallowance under Section 40(a)(ia) for Non-Deduction of TDS on Interest Deposited in Court

The Tribunal addressed whether the assessee was liable to deduct tax at source (TDS) under section 194 on interest paid on land compensation deposited with courts as per court orders, and whether disallowance under section 40(a)(ia) was justified.

Legal Framework and Precedents: Section 194 requires deduction of tax at source on specified payments including interest. Section 40(a)(ia) disallows expenditure where TDS is not deducted or not paid to the government. Circulars and judicial decisions clarify the responsibility for TDS deduction when amounts are deposited in court pending final beneficiary determination.

Court's Interpretation and Reasoning: The Tribunal noted that the assessee deposited amounts with courts as per judicial directions and did not directly pay the interest to the ultimate beneficiaries (pattadars). The responsibility for TDS deduction lies with the authority paying the interest or the ultimate payee once ownership is determined. The Tribunal relied on Circular No. 526/1988, Circular No. 8/2011, and subsequent clarifications, as well as High Court decisions, which held that TDS is not required to be deducted until the ownership of funds is decided by the court.

Key Evidence and Findings: The assessee's submissions and earlier Tribunal decisions in its own case for prior assessment years supported the position that TDS deduction was not applicable at the stage of deposit with the court. The Tribunal also referred to CBDT Circular No. 23/2015 clarifying TDS applicability only after ownership determination.

Application of Law to Facts: The Tribunal found no error in the CIT(A)'s deletion of disallowance under section 40(a)(ia) for non-deduction of TDS on interest deposited in court.

Treatment of Competing Arguments: The Revenue contended that the assessee was aware of the payees and should have deducted TDS. The Tribunal rejected this, emphasizing the legal position and practical difficulties in deducting TDS before ownership determination.

Conclusions: The Tribunal dismissed the Revenue's appeals on this issue, upholding the deletion of disallowance under section 40(a)(ia).

Issue 4: Capital vs. Revenue Expenditure on Abandoned Mine Development and Classification of Civil Works for Depreciation

The Tribunal examined the nature of expenditure incurred on development of coal mines that were abandoned or unsuccessful, and the classification of civil works within mines for depreciation rates.

Legal Framework and Precedents: Expenditure that does not result in creation of an asset or enduring advantage is generally revenue in nature and deductible under section 37. Capital expenditure relates to creation of assets. Depreciation rates differ for plant and machinery (15%) and buildings (10%).

Relevant precedents included CIT v. Binani Cements Ltd. (Calcutta HC) and CIT v. Indian Oxygen Ltd. (SC), which held that expenditure on abandoned projects not resulting in assets is revenue expenditure.

Court's Interpretation and Reasoning: The Tribunal noted that the expenditure on abandoned mines did not bring any asset into existence and was incurred wholly and exclusively for business purposes. Hence, it was revenue expenditure deductible under section 37. Regarding civil works such as retaining walls, land leveling, bunkers, and dams within mines, the Tribunal held these as integral to coal extraction operations and thus qualifying as plant and machinery, eligible for depreciation at 15% rather than as buildings.

Key Evidence and Findings: The assessee provided detailed submissions and breakups of expenditures. The Tribunal relied on earlier decisions of the Hyderabad Bench of the Tribunal and the nature of mining operations.

Application of Law to Facts: The Tribunal allowed the assessee's grounds on these issues, reversing disallowances and confirming correct depreciation rates.

Treatment of Competing Arguments: The Revenue relied on a Madras High Court decision treating similar civil works as buildings. The Tribunal distinguished that case as relating to road construction under BOT and emphasized the functional nexus of the works to mining operations.

Conclusions: The Tribunal allowed the assessee's claims for revenue treatment of abandoned mine development expenditure and depreciation at 15% on civil works within mines classified as plant and machinery.

Significant Holdings:

"The provisions of section 40A(9) of the Act are not attracted in the case of the assessee as this expenditure is not incurred directly or indirectly for setting up or formation or towards contribution to any funds, trust, society etc., but it was only an expenditure towards providing educational facility to the employees as well as local public residing in the area."

"The National Coal Wage Agreement being a statutory document has binding force of law so far as its enforceability is concerned."

"The legislature has deliberately excluded the business of generation, transmission, and distribution of power from the benefit of investment allowance under section 32AC and 32AD, and the enhanced depreciation under the proviso to section 32(1)(iia) is restricted to manufacturing or production undertakings in specified backward areas."

"Expenditure incurred on abandoned mines which do not result in creation of any asset is revenue expenditure deductible under section 37."

"Civil works within coal mines essential for extraction operations are to be treated as plant and machinery for depreciation purposes and not as buildings."

"Where amounts are deposited in court under judicial directions, the responsibility for deduction of tax at source under section 194A does not lie with the depositor until ownership is determined by the court."

In conclusion, the Tribunal allowed the assessee's appeals on the issues of disallowance under section 40A(9) of payments to the educational society, revenue treatment of abandoned mine development expenditure, and depreciation classification of civil works. It dismissed the claims for investment allowance under section 32AC due to statutory exclusions and failure to prove installation dates. The Tribunal also upheld deletion of disallowance under section 40(a)(ia) for non-deduction of TDS on interest deposited in court. The Revenue's appeals were dismissed on these points except for the investment allowance issue, which was decided against the assessee.