TMI Blog2004 (8) TMI 364X X X X Extracts X X X X X X X X Extracts X X X X ..... out that liability had been created in the accounts for the pay revision as per Accounting Standard-4, which deals with the events occurring after the date of balance sheet but before the date of approval of accounts by the board of directors. The assessee also referred to the decision in the case of Bharat Earth Movers Ltd. vs. CIT (2000) 162 CTR (SC) 325 : (2000) 245 ITR 428 (SC) and pointed out that it has been decided in that case that all known liabilities though not fully quantified had to be provided for. Since this was an existing liability, the same was provided. 3. The course of events giving rise to the pay revision was like this. The wage structure of workmen of Neyveli Lignite Corporation was determined through a memorandum of understanding dt. 8th July, 1995 between the management and workmen of the Neyveli Lignite Corporation represented by the joint council of unions. Settlement under s. 12(3), of the Industrial Disputes Act, 1947, was subsequently signed on 26th Aug., 1995 which was valid till 31st Dec., 1996. On account of expiry of the existing settlement, a bipartite committee was constituted on 29th Sept., 1999 and modified on 17th April, 2001, subsequent to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... demands for the ensuing wage revision period starting from 1st Jan., 1997 and decided to furnish the memorandum to the management with request all this demands . He also referred to p. 14 of the paper book, wherein letter dt. 22nd Feb., 1999 from the Director of Ministry of Coal, Government of India, addressed to the Chairman, Coal India Ltd., and CMD., Neyveli Lignite Corporation Ltd., is contained wherein it is pointed out as under: "I am directed to forward herewith the office memorandum issued in the Department of Public Enterprises vide No. 2(11)96-UPE(LC) dt. the 14th Jan., 1999, which contains the decisions of the Government, regarding the policy for the Sixth Enterprises. It may kindly be ensured that the wage settlements are negotiated strictly in accordance with the parameters laid down in the aforesaid O.M. of the Department of public enterprises". The learned counsel further referred to p. 15 of the paper book containing the office memorandum dt. 14th Jan., 1999 referred to in the letter of the director and pointed out that this office memorandum followed for the sixth round of wage negotiations in public sector undertakings and copy of this was endorsed to the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nted and valued as necessary, can be taken into account as trading expenses if they are sufficiently certain to be capable of valuation and if profits cannot be properly estimated without taking them into consideration. An estimated liability under a scheme of gratuity, if properly ascertainable and the present value is discounted, is deductible from the gross receipts while preparing the P L a/c". CIT vs. Coimbatore Cotton Mills Ltd. (1983) 33 CTR (Mad) 301 : (1983) 140 ITR 562 (Mad) In this case it was held that provision for gratuity made on actuarial valuation was the proper deduction from the profits. Hukumchand Jute Industries Ltd. vs. CIT (2000) 158 CTR (Cal) 28 : (2000) 241 ITR 517 (Cal) In this case, the assessee was a public limited company. During the year relevant to the asst. yr. 1981-82, the assessee-company consumed electricity and received a notice of demand for additional fuel surcharge in September, 1983 relevant to the asst. yr. 1984-85. In the original return for the asst. yr. 1981-82, the assessee did not claim deduction in respect of the amount of Rs. 25,48,047 on account of additional fuel surcharge for power consumption. But the assessee claimed it b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of service of workmen employed by the assessee were governed by wards. In October, 1970 the trade union representing the workmen of the assessee gave notice to the assessee terminating the award with effect from four months thereafter. The assessee s board of directors noted this at a meeting held on 25th Feb., 1970. A provision was made for Rs. 1 lakh in view of the impending liability on account of the change in service conditions of the assessee s workmen in the accounts for the year under consideration. Negotiations between the asssessee and the trade union resulted in settlement dt. 2nd May and 6th Oct., 1972. Pursuant thereto the assessee paid a sum of Rs. 28,600 to the workmen in the month of May and June, 1972 on account of salary, etc. Later another ad hoc payment of Rs. 48,000 was made to the workers pursuant to the said settlement. The assessee claimed deduction of the aggregate sum of Rs. 76,680 in the asst. yr. 1972-73. It was held that though the provision of Rs. 100 lakhs itself was an allowable deduction, but since the same was denied, the assessee was entitled for the quantified liability of Rs. 76,680. The learned Departmental Representative submitted that eithe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntative thus submitted that the liability can be said to have accrued only when the final settlement was reached. The learned Departmental Representative submitted that strike notice was given after the end of accounting year and, therefore, it could not be said that liability had accrued in any case during the previous year 2001-02. 5. We have considered the rival submissions and have perused the records of the case. From the various judicial pronouncements noted earlier, it is clear that if liability had accrued during the relevant previous year and quite reasonably could be estimated on the basis of material available with the assessee, then merely because quantification of the same is done in a subsequent year, it cannot be said that the provision made for the said liability on a reasonable estimate basis was not allowable deduction. In the present case we find that the Workers Progressive Union submitted its list of demands for the ensuing wage revision period starting from 1st Jan., 1997 on 25th June, 1997 itself, Therefore, it was an impending liability. Vide letter dt. 14th Jan., 1999 it was pointed out by the Government of India, Department of Public Enterprises that wag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nufacturing urea in its Fertilizer Division. Urea being an essential commodity, sale price of urea was subject to administrative price control. In the note on the urea, subsidy, filed in the paper book, it has been pointed out by the assessee that with a view to ensure that fertilizer companies do not incur losses, the Government fixed what is known as retention price based on various facts like expenses, depreciation, fuel charges, electricity charges, return on investment etc., of the fertilizer company. The difference between the retention price and the sale price of urea is given by the Government as a grant or subsidy. It has been further pointed out that there is a provision for reworking of the retention price on the basis of variation in the cost of various inputs going into the computation for the retention price. The assessee had to claim escalation on quarterly basis specifying the variation in input cost and also giving the working for the claim. For claiming this enhancement in subsidy, the fertilizer companies were required to make an application to the Government along with the relevant particulars and documents. The Government had to approve the application and then ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the assessee referred to p. 59 of the paper book wherein a letter of Ministry of Commerce and Fertilizer, Department of Fertilizer dt. 11th Jan., 2002 is contained intimating the assessee regarding revision in retention price on account of escalation/de-escalation w.e.f. 1st April, 1997 to 1st April, 2001. The learned counsel also referred to pp. 61 and 62 of the paper book to demonstrate as to how the assessee was making quarterly escalation claim on account of increase/decrease in the cost of various inputs. He further referred to p. 73 of the paper book, para 24(iii), which reads as under: "Differential retention price of urea and closing stock of urea accounted on ad hoc price or estimated realizable price whichever is less and supplementary/escalation claim accounted in the year of acceptance/realization as against the earlier policy of accounting the claim of estimated realizable price". The learned counsel referred to the decision of the Hon ble Madras High Court in the case of CIT vs. Elgi Equipments Ltd. (2002) 176 CTR (Mad) 305. In this case, the assessee had changed its method of accounting only in respect of export cash assistance from accrual to cash basis as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is not disputed that the formula for computing subsidy is known to both the parties and there is no instance where the Government of India has gone back by disputing the formula. The main thrust for this conclusion is that mere delay in receipt of portion of subsidy cannot be a reason for undervaluing the closing stock. In this regard it is noteworthy that urea retention price w.e.f. 1st Jan., 2000 was fixed at Rs. 1,12,214 metric tonne but it was revised to Rs. 9,475 per metric tonne vide letter dt. 11th Jan., 2002. It is also pointed out in the note as already noted earlier, that the claim made to the Government of India in regard to power cost from 1996-97 aggregating to Rs. 6.97 crores were neither settled by the Government nor was there any acceptance of the claim as on 31st March, 2001. Therefore, it cannot be said that whatever retention price was approved by the Government of India was also received by the assessee. As per AS-9, where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, such escalation of price, export incentives, interest etc., revenue recognition should be postponed to the extent of uncert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same cannot be allowed/she submitted that the fact that mining is not listed as an infrastructure development activity and, therefore, this straightaway throws it outside the purview of s. 80-IA. We find that s. 80-IA and s. 80-IB were substituted for s. 80-IA by the Finance Act, 1999 w.e.f. 1st April, 2000. Prior to its substitution deduction was available under s. 80-IA in respect of profits and gains from industrial undertaking in certain cases. Under these circumstances merely because assessee made a claim under s. 80-IA, the same cannot be denied for technical reasons if he is entitled for the same under s. 80-IB. Whether profits and gains derived from the activity of mining are eligible for deduction under s. 80-IB also will depend upon whether the activity of mining of lignite constitutes production or manufacture of an article or thing or not because as per the provisions of s. 80-IB(2)(iii), the industrial undertaking should have, inter alia, fulfilled the condition of manufacture or production of any article of thing. We, therefore, proceed to decide the issue whether mining of lignite would amount to manufacture or production of article or thing. The assessee has given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... occurrence a central hole up to the hard band bottom is drilled to have exclusive charge exactly at that strata. Normally, dry drilling is carried out using high pressure air compressors to flush out cutting materials. If there is moisture in the strata, the cutting materials will not come out. In such places water is being used to drill the holes. Blasting Operation: The drilled holes may contain some water which may either react with the explosives to be charged or will not allow the explosive to reach the required location. These water are to be bailed out and reamers are to be used to smoothen the inner edge of the hole and also to clean the sledges at the bottom of the hole. Ground Water Control: The lignite deposit is in a basin with confined aquiferic condition. The upward pressure of the aquifer poses water problem while excavation of lignite unless otherwise the pressure is controlled and kept below the bottom of the lignite seam. To tackle this problem number of pump tests were conducted to steady the aquiferic parameters like permeability, storability, transmissibility, etc., that aided to design the pump well and the method of pumping. Geo-hydrologial studies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... small sized rubble. Cutting, crushing and transportation of lignite: Lignite deposits is in huge continuous block. There are two methods of excavating the lignite. Scoop blocks of lignite and then use crusher to reduce it into rubble. Alternatively at the time of digging itself the machines are so designated that the lignite block is broken into small sized lumps and transported. Huge bucket wheel excavators are employed for cutting into lignite formations. They are huge machines with rotating buckets with teeth. The buckets perform a three dimensional motion and the size of the teeth and the gaps between the teeth are so designed that lignite is broken/crushed into small lumps of about 500 mm size even at time of digging. Thereafter the lumps are loaded into the conveyor system. The conveyors carry the lumps at a predetermined speed. At regular intervals, there is a break in the conveyors. The lumps are thrown out and hit iron buffer doors at an angle and speed. Then the lumps fall down into another conveyor system. These are so designed that the impact and fall further break any larger lumps of lignite loaded by BWE into smaller size. This is achieved through angle of thr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are maintained qualitywise, which are again mixed by deploying two reclaimers in both the stacks simultaneously. In the stackyard also the blending is fine-tuned with the help of claimers. The lignite reaches its exact required quality when it is further blended in the thermal stackyard with the help of reclaimers. Moreover, to avoid contamination in the bench area, the floor is finely dozed off to have a cleaner lignite top. The tackling of inter burden also needs special skill as this may contaminate the lignite excavated. The lignite produced in this manner is fed to thermal power station for power generation. A full-fledged laboratory is functioning to carrying out the lignite sampling in order to maintain quality. The learned counsel pointed out that more than Rs. 5000 crores of investment has been made for this purpose. The learned counsel has also relied on the decision of the Hon ble Supreme Court in Chrestian Mica Industries Ltd. vs. State of Bihar 12 STC 150 (SC). From the foregoing discussions, it is clear that the process of production of lignite is quite cumbersome. In short, the first stage is the removal of overburden consisting of different soil characteristics t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here again the activity of excavation of lignite is treated as production of article or thing. Sec. 80-IB(9) entitles an undertaking engaged in commercial production or refining of mineral oil for purposes of deduction under s. 80-IB. It is noticeable that in the Fifth Schedule noted earlier at Sl. No. 3 along with coal, lignite etc., mineral oil has also been mentioned. Thus, by applying the principle of ejusdem generis it can be reasonably concluded that excavation of lignite would also come within the term production of any article or thing. Now we will consider the various case laws relied upon by both the parties. The learned Departmental Representative has referred to following case laws: Minerals Metal Trading Corporation of India vs. Union of India 1983 (30) ELT 1541 (SC). The learned Departmental Representative has pointed out that in this case, it was held by the Supreme Court that separating walfrom ore from rock does not amount to production or manufacture. She also referred to the decision in Hyderabad Industries Ltd. vs. Union of India 78 ELT 641 (SC) wherein it has been held that separating asbestos fibre from rock in which it is embedded does not amount to pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on by the learned Departmental Representative are with reference to s. 80HH where under sub-s. (10), a clear-cut statutory prohibition was there to deny deduction in respect of undertakings engaged in mining. However, no such prohibition is there under s. 80-IB. On the contrary, as noted earlier, the deduction is available specifically in respect of mining activity. In this regard he referred to s. 35E and pointed out that where the assessee is engaged in any operation relating to prosecuting or extraction of or production of any mineral, then it would be entitled for deduction under s. 35E. Thus, he pointed out that taking out mineral is production. The learned counsel further referred to various case laws which are discussed hereunder. Chrestian Mica Industries Ltd. vs. State of Bihar, wherein it was held by the Hon ble Supreme Court that mica mining operations by which crude mica is taken out of the mine and processed into split mica amount to production. CIT vs. Singareni Collieries Co. Ltd. (1996) 221 ITR 48 (AP), wherein it was held that extraction of minerals amounts to production. The learned counsel further pointed out that the Hon ble Madras High Court in CIT vs. Goma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh Court observed as under: "Ore has to be extracted or raised from the earth in which it is embedded and has to be brought to the surface. What is brought to the surface is something new which comes into existence, as an article or thing. If that be the case, winning or extracting of ore would fall within the expression production ". From the case laws noted as above, it is clear that because of specific prohibition under s. 80HH(10) regarding mining activity, the decisions rendered with reference to the said section are of little help to the Department. In the present case, we find that lignite is found embedded beneath the earth in huge blocks. However, it can be put to use only after it is crushed to a uniform 50 to 150 mm size and after all the impurities are removed and the excavated lignite is blended. Therefore, it cannot be held that the lignite which is put to use is in the same form in which it is found embedded in earth. The test laid down in various judicial precedents is consistent and it is whether the article produced is regarded in the trade by those who trade in it as distinct in identity from the commodity involved in its manufacture. We are of the opinion t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich was on actual basis. The assessee s explanation was that the ratio of the quantitative extraction of lignite was taken because most of the input costs were related to the quantity of lignite extracted. The learned CIT noted that though the extraction of lignite was more by about 29 per cent in Stage-II, vis-a-vis Stage-I, the net income of Stage-II is about 224 per cent more even after allocating higher interest and depreciation amounts. It was explained to the CIT that as per the price fixation formula, the assessee charges lesser rate on in-house transfer of lignite of Stage-I to the power generation unit whereas the same lignite of Stage-II is charged at a much higher rate when it is transferred for in-house power generation purpose. It was also pointed out that this methodology of price fixation was adopted because of the cost plus formula adopted in the price formulation wherein certain percentage of return was fixed on the investment made on these projects. Consequently, newer and costlier the project, higher will be the price vis-a-vis older and cheaper units. The learned CIT did not agree with the apportionment of indirect costs to two stages and adopted the following f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Notification dt. 30th March, 1992 issued by the Ministry of Power in exercise of the powers conferred on the Central Government under sub-s. (2) of s. 43A of the Electricity Supply Act, 1948. It was pointed out that it was not reimbursement of the company s tax liability. The learned counsel for the assessee submitted that for deciding the purchase price, deemed tax on return of investment was notionally taken and it was not the actual tax. The learned counsel referred to pp. 9 to 47 of the paper book and referred to p. 21 of the paper book wherein the agreement entered into between the company and various electricity boards is contained, where under cl. 6 in regard to income-tax liability, if any, on the various income streams of the company were to be borne by the recipients. He specifically referred to cl. 6.2, which reads as under: "6.2 The total tax liability of the recipients shall however be: (a) the tax payable on the return on equity and internal resources relating to Mine-II and Power Station-II adopted in the tariff calculations and grossed-up tax thereon or (b) the actual tax, assessed for the above streams, whichever is less." The learned counsel also refer ..... X X X X Extracts X X X X X X X X Extracts X X X X
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