TMI Blog2014 (3) TMI 682X X X X Extracts X X X X X X X X Extracts X X X X ..... mity in the order passed by the CIT(A) Decided against Assessee. Disallowance of transitional liability Held that:- The decision in CIT Vs. Insilco Ltd. [2009 (2) TMI 31 - DELHI HIGH COURT] followed if a liability arises within the accounting period, the deduction should be allowed though it may be quantified & discharged at a future date - the provision was estimated based on actuarial calculations, deduction claimed is to be allowed - the provision for a liability is amenable to a deduction, if there is an element of certainty that it shall be incurred and it is possible to estimate liability with reasonable certainty even though actual quantification may not be possible, such a liability is not of a contingent nature thus, the liability relating to the AY is to be quantified by the AO and the same is to be allowed - Decided in favour of Assessee. Disallowing of depreciation on intangible assets Held that:- The decision in East India Minerals Ltd. Vs. JCIT [2014 (3) TMI 249 - ITAT CUTTACK] followed - the denial of claim of depreciation has been made on misinterpretation of law and the applicability - Explanation to Section 32(1)(ii) leans in favour of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... putation of income the assessee claimed this expenditure as revenue without providing any details or reasons - the assessee has not placed any evidence to establish the expenditure incurred as revenue expenditure thus, there was no infirmity in the order of the CIT(A) Decided against Assessee. Disallowance of PF contribution Held that:- In case of payment of contribution to PF is made before the due date prescribed in PF Act and the Scheme the deduction can be claimed and the right of deduction would be lost u/s 43B read with Explanation if the same is paid after the due date, i.e., after the due date of filing of return u/s 139(1) of the Act, as per the amended provisions of section 43B - only provision has been made which is not allowable in terms of section 43B Decided against Assessee. Valuation of closing and opening stock Held that:- CIT(A) held that With respect to closing stock, there is no ambiguity about the fact that the appellant is to recognize the same on cost or the market value, whichever is less - the Assessing Officer has not reduced the valuation of lump but has increased the valuation of fine iron are from zero to 20 Crores - This is incorrect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inction of the liability is a contingent liability. It is only the actual liability which is existing in the relevant asst. year which is allowable to be considered as an expenditure. If the liability is contingent, then it would amount to allowing the apprehended losses/ expenditure in future from the profits which is not accepted on any principle of law or accountancy. The question of estimation in a contingent liability does not arise in order to allow the deduction u/s 37 of the I.T. Act. In the case of Indian Molasses Co. Pvt. Limited Vs CIT [37 ITR 66 (SC)], it was held that the expenditure which is deductible for income tax purposes, is one which is towards a liability actually existing at the time, but the putting aside of money which may become expenditure on the happening of an event is not an expenditure. The expenditure is allowable only at the time when the expenditure is actually incurred or ascertained. 2.5. Mere setting apart funds without divesting proprietary rights over the funds does not make it an expenditure. It has been held, where such reserves are placed completely beyond the control of the assessee from their creation right upto the point of their utili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same. Closure down and restoration costs are a normal consequence of mining and the majority of close down and restoration expenditure is incurred at the end of the life of the mine. Although the ultimate cost to be incurred is uncertain it is necessary to estimate and to provide for the same during periods when the related environmental disturbance occurs. 2. The liability towards mine closure is accrued as soon as the mining operations commence and in compliance with the matching concept': such liability may be charged over the periods when the related environmental disturbance occurs i. e. the period of operation of the mine. International Mining companies of repute ha ve defined policy for recognition of obligations towards mine closure. In our country also the subject is getting focused and the environmental protection, rehabilitation and reclamation measures required under Statutes have become more stringent. 3. In India, mines are required to be closed/abandoned as per the provisions contained in the Mines Minerals (Development and Regulation) Act, 1957 (MMDR 1957) Act, 1957 (MMDR 1957) and the rules made under i.e. Mineral Conservation and Development Rules ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rves is arrived. The detailed working of cost per tonne of minerable reserves is given at Annexure-2. Based on this the total mine closure liability for the minerable ore reserves as at 3pt March, 2004 and the proportionate change for the current financial year 2004-05 is worked out and placed at Annexure-3. 7. The final mine closure as per MMDR Act entails commitment of large sums at the time of mine closure and unless a suitable reserve is built up in a phased manner to meet the commitment, it may adversely affect the bottom line of the company at that time. Charging the expenditure of mine closure over the periods when the related environmental disturbances occurs i.e during the period of operation of the mine will be in compliance with the matching concept of accounting and accordingly the estimated liability is proposed to charge to revenue over the balance life of mines. It is but mete that cost of sales are matched with revenue by recognizing such obligation on account of mine closure. The estimated current liability of mine closure of the operating mines to the company was worked out to Rs.19.63 crores and charged to the Profit Loss Account. 5.1 It was further s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied, the liability is not a contingent one. The liability is in prasenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain. 5.5 In view of the above observations and referring to the case of Metal Box Co. of India Ltd. V. Their Workmen [1969] 73 ITR 53 (SC) and the case of Calcutta Co. Ltd. Vs. CIT [1959] 37 ITR 1, the CIT(A) held as follows: 4.2.6 From the above facts and case laws, it is clear that in the case of the appellant, the mine closure liability is an ascertained liability, It gets ascertained the day the mine is opened. This expense even though not incurred, accrues when the mining is done. As per the matching principle as well as the mercantile system of accounting the liability is allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 A reading of the above chart shows that for S.No.2, Deposit No. 11B the production yet to be commissioned. Therefore, this obligation of Rs. 4,98,058/- is not allowable. Similarly, for S.No.6, Kumaraswamy and S.No.8, Lalapur, there is no production. Therefore, obligation is not allowable. For the other mines, the appellant has not given any year- wise breakup. Accordingly, the Assessing Officer is directed to ascertain the amount of year-wise mining which has been done from the remaining mines and allow a mine closure obligation to the extent of mining done corresponding to the current year. In case the appellant cannot provide such data, then pro-rata has to be applied. For example, S.No.4, Deposit NO.IO IIA, the mine started in February 2002. The total obligation claimed is Rs. 2,38,12,707/-. If the appellant gives data on mining from the date of start of mining then the obligation allowable will correspond to the current year mining as compared to the total mining. i.e. current year mining X Rs.2,38,12,707 total mining from Feb'02 to Mar'08 If no data is provided then the amount allowable would be Rs. 2,38, 12,707/- (i.e. FY 2002-03 to FY 2007 -08). This issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsidered as erroneous and hence the CIT cannot exercise revisional power u/s 263. As pointed out above, the provisions for an accrued existing liability, even though, the actual expenditure may take place at a later date, is an allowable deduction and the CIT erred in treating it as an unascertained liability. Therefore, we set aside the order of the CIT passed u/s 263 and the order of the AO is restored. 9.1 The above decision relied upon by the AR of the assessee, though, it was delivered in assessee's own case for AY 2006-07 cannot be applied to the facts of the case as that order was delivered by the Tribunal in connection with the order passed u/s 263. The order passed u/s 263 read with section 143(3) and the order passed u/s 143(3) read with section 251 are standing on different footing. The scope of section 263 is not par with the provisions of section 251 of the Act. Being so, we cannot borrow support from the order of the Tribunal passed in ITA No. 991/Hyd/2011 for AY 2006-07, on which reliance placed by the assessee's counsel. In the present case, there is a categorical finding given by the CIT(A) that there are certain mines not yet commenced. On that mine cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction on account of ordinary annual contribution should not exceed 8.33% of the employee's salary for that year. 4.3. It is mentioned by the assessee itself that any change in the accounting policy which has a material effect in the previous year subsequent to the previous years shall be disclosed. Therefore, the creation of a liability for the company in respect of the employees for their past service is nothing but an expenditure relatable to the past years and not related to the current year. 11.1 In view of the above reasons, the AO held that since the transitional liability does not relate to the current previous year, it is not an allowable expenditure under the provisions of Income Tax Act for the A.Y. 2008-09 and since this expenditure does not relate to the current previous year, the provision should have been created from the accumulated reserves of the company and not from the current year's profits. Hence, the same is to be added back. 12. On appeal before the CIT(A), the assessee stated that there is no doubt about the fact that date of birth and past service had been taken into account while calculating the gratuity liability. But it was incorrect t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 07-08/AY 2008-09. He referred to the Actuarial report under AS-15, which is enclosed at page 105 of the paper book. He has placed reliance on the following case laws: 1. Bokaro Power Supply Co. (P) Ltd. Vs. ACIT, ITA No. 4921/Del/2010, AY 2007-08, ITA No. 149/Del/2012, Ay 2008-09. 2. CIT Vs. Insilco Ltd., (Delhi-HC) 179 Taxman 55-2009. 15. On the other hand, the DR relied on the order of the CIT(A). 16. We have heard the arguments of both the parties, perused the record and have gone through the orders of the authorities below as well as the decisions cited. The Hon'ble Delhi High Court in the case of CIT Vs. Insilco Ltd., 179 Taxman 55, on which reliance placed by the assessee, held as follows: The assessee company had evolved a scheme whereby, employees who rendered long period of service to the assessee, were made entitled to monetary awards at various stages of their employment equivalent to a defined period of time. On the basis of actuarial calculation the assessee made provision for 'long service award' payable to its employees under the scheme and claimed deduction of the same. The Assessing Officer disallowed the claim on the ground that the gra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee company but are obtained on lease from' State Government for a certain period. The period for which the land is to be held has not been explained. Further, the AO noted that the purpose for which the land acquired is also not explained. The AO observed that even if it is considered that the land is taken on lease for the purposes of exploitation of mining, it cannot be treated as plant machinery for which depreciation is available under the Income Tax provisions. The provisions of Sec.32(1) are not applicable to assets which are in the form of land since the assts for which depreciation is admissible under the Income Tax Act is specified under Rule-5 of the Income Tax Rules. Land does not form part of Appendix-l read with Rule-5 of Income Tax Rules. Further the intangible assets are defined as 'know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature. The AO, therefore, held that since land does not form an intangible asset, the depreciation claimed by the assessee for such an asset is not admissible and, hence, the same is added back by the AO. 19. On appeal, before the CIT(A) the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... off which pertains to land being a intangible asset. It is nobody's case that the land either belonged to the lessee or to the Government. This simply indicates that a depletion of the land against the payment of premium it was leased has to be claimed after capitalization thereof by the assessee which is for the purpose of its main business. All expenses are incurred for the purpose of business and are incidental to the holding of rights were claimed u/s.32(1)(ii) being the license to carry out the mining therefore could not be denied insofar as the Government and the lessee are in control of the asset. The definition of depreciation therefore has been misconstrued for the purpose of allowing deduction by the Assessing Officer and the learned CIT(A) in holding a view on the promulgation of Section 32(1)(ii) with effect from the year 1998-99 which has been further amended w.e.f. Assessment Year 2003-04. In this view of the mater, we are inclined to hold that the assessee is entitled to depreciation as charged to the P L account in accordance with its business exigencies. We direct accordingly. On the claim of deduction/s.80G, the A.O., is directed to verify the receipts and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e period of the lease was for 20 years and there was option for renewal the expenditure was the only expenditure required for drawing up of effective deed of lease namely, the expenditure in respect of stamp duty, registration charges and professional fees paid to the solicitors, who prepared and got registered the deed of lease. Further there was no element of premium in the amount claimed as expenditure and the expenditure would have been the same even if the lease had been of a shorter duration provided the period of lease was more than one year. Hence, the period of the lease could not be regarded as decisive of the circumstances as to whether the asset or advantage secured is of an enduring nature. Hence the expenditure on registration fee, solicitors fee and stamp duty incurred for registering lease deed was a revenue expenditure allowable under s. 37(1). 28.1 The Hon'ble Court concluded that expenditure on registration fee, solicitor's fee and stamp duty incurred in connection with registration of lease deed is revenue expenditure irrespective of period of lease. 28.2 The coordinate bench of ITAT, Cuttack in case of Shri Jitendra Nath Patnaik Vs. DCIT in ITA No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the major expenses incurred by the company: 30.1 The AO noted that from the nature of the above expenditure incurred, it can be observed that they are not related to business of the assessee and they are in the nature of donations which is not an allowable expenditure under the provisions of the IT Act. Hence, he disallowed the above amount of Rs. 12,18,99,548/-. 31. On appeal, after considering the submissions of the assessee, the CIT(A) observed that firstly, the issue at hand is not whether corporate responsibility should be there or not. Rather, every expense has to be seen through the prism of the Income Tax Act. An expense can be allowed only if it is incurred wholly and fully for business purpose under the mercantile system of accounting and pertains to the current year. In case of donations or corporate social responsibility, the Income Tax Act provides for the methodology and the sections under which donations are made deductible. Specific funds and organizations to whom the donations made are deductible are ;duly notified. 31.1 The CIT(A) further observed that by applying the above simple and clear principles, it is seen that the payments in question had no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of Tribunal in assessee's own case to submit that the issue is squarely covered by these decisions: 1. 2005-06 ITA No. 1791/Hyd/2008, dated30/09/2009. 2. 2006-07 ITA No. 1085/Hyd/2010, dated 05/08/2011. 3. 2007-08 ITA No. 130/Hyd/2011, dtd. 13/04/2011. 33.1 He also relied on the following cases: 1. Orissa Power Generation Co. Ltd., ITA No. 271/CTK/2010. ITAT, Cuttack Bench. 2. Rio Tino India (P) Ltd., ITA No. 363/Del/2012, dt. 22/06/12. 3. CIT Vs. Madras Refineries Ltd., [2004] 266 ITR 170 (Mad.) 4. Mahindra Mahindra Ltd. Vs. CIT [2003] 261 ITR 501 (Bom.) 5. CIT Vs. Rupsa Rice Mills [1976] 104 ITR 249 (Orissa) 33.2 He also relied on the NMDC CSR Policy and statement of expenditure made for past 7 years. 34. On the other hand, the learned DR has relied on the orders of the revenue authorities. 35. We have considered rival submissions and perused the record. We find that the issue in dispute is squarely covered by the decision of coordinate bench in assessee's own case for AY 2005- 06 in ITA No. 1791/Hyd/2008 dated 30/09/2009 wherein it has been held as follows: 14. We have considered the rival submissions on either side and also p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss. Therefore, we do not find any justification in disallowing the sum. Accordingly, we set aside the orders of the lower authorities and delete the entire addition. 36. Since the issue under consideration is identical to that of AY 2005-06, we delete the additions made under the heads from (i) to vii). 36.1 However, we make it clear that the expenditure incurred at Rs. 3,48,04,548/- shown as miscellaneous expenses cannot be allowed as the assessee has not furnished the details of expenditure, therefore, in the absence of requisite information the said expenditure cannot be allowed. Accordingly, this ground is partly allowed. 37. Ground No. 7 relates to disallowance of claim of preoperative expenses of Rs. 5,43,27,455/-. 38. Briefly the facts are that the assessee company had claimed deduction on account of 'pre-operative expenses' of Rs.5,43,27,455/- in the computation of income. Originally, this amount of expenditure was reduced from the gross expenditure of RS.1471.03 crores and the balance was claimed as expenditure. Thus, in the books of account, the assessee itself added back the pre-operative expenditure as not eligible for deduction from profits of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 26.09.08. (c) ClT vs. Usha Iron and Ferro Metal Corporation Ltd. [(2007) 201 Taxation 434(Del.)] wherein it is decided that expenditure incurred towards expansion of existing business. although treatment given in the books as capital expenditure. is allowable as revenue expenditure. Under para no. 10.30 of page no. 13 of the assessment order. the A.O. disallowed the expenses and added back in the taxable income on the basis that In the absence of information as to the context in which the expenditure has been incurred, it cannot be considered as allowable expenditure since the company itself has chosen to treat it as capital expenditure in its books . Write-up on pre-operative expenses has been submitted on 16.12.2010. The A.O. has not sought any further information. Even though it was booked in capital expenditure, the company has claimed this based on above decided cases in favour of the assessee. The A.O. has not considered the fact that the assessee is a premier mining company and its future survival lies on exploration and investigation of various deposits of iron ore and other minerals. The expenditure incurred under this head is purely revenue in nature, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etails or reasons. Even before us also, the assessee has not placed any evidence to establish the expenditure incurred as revenue expenditure. Therefore, we do not find any infirmity in the order of the CIT(A) in confirming the addition of Rs. 5,43,27,455/- on account of preoperative expenses and the order of the CIT(A) is hereby confirmed. This ground is dismissed. 45. The next issue relates to the addition of Rs.4,04,77,426/- on account of disallowance of PF contributions on wage revision.: 46. The assessee had made the following ad-hoc provisions: Adhoc provisions - PF- workmen 2,35,30,446 -do- - PF-JO 16,99,401 -do- - PF-Officers 1,22,15,497 -do- - PF-Workmen 26,35,527 -do- - PF-JO 2,66,208 -do- - PF Officers 4,30,347 Total 4,04,77,426 46.1 The assessee was asked to furnish reasons for the above adhoc provisions and explain why they should not be disallowed since they are not actually incurred. It was explained that the ad- hoc provision of PF in the accounts was based o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wage revision provision is allowed by the AO as deduction, therefore, the PF calculation goes with wage. Hence, it is to be allowed as it is ascertained liability with wage. He relied on the following decisions: 1. CIT Vs. Insil Co. Ltd., [2009] 179 Taxman 55 (Delhi) 2. CIT Vs. Bharat Heavy Electricals Ltd., ITA Nos. 278, 807, 1578 312/2010, Delhi High Court. 50. We have heard the arguments of both the parties and perused the record. In case of payment of contribution to PF is made before the due date prescribed in PF Act and the Scheme thereof, deduction can be claimed and the right of deduction would be lost u/s 43B read with Explanation if the same is paid after the due date, i.e., after the due date of filing of return u/s 139(1) of the Act, as per the amended provisions of section 43B. In the present case, only provision has been made which is not allowable in terms of section 43B. Accordingly, this ground is rejected. 51. In the assessee appeal in ITA No. 714/H/12 is partly allowed. ITA No. 885/H/12 - Revenue appeal 52. Ground No. 1 is general in nature. 53. Ground No. 2 is as follows: The CIT(A) erred in granting relief to the assessee in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus, the expenditure relating to the production of fines has been accounted for in the regular accounts of the assessee. The fine ores have been recognized as part of stocks though its value has been adopted as zero. This method of accounting is not proper since the assessee has already availed of the expenditure in production of such fine ores in the earlier years. Thus, the value to be adopted for the fine ores cannot be zero. The value of iron ore is shown at RS.93.13 crs for a quantity of 3918700 WMTs which works out to RS.237.65 per W MT. The value of 8.78 lakh WMTs of fine ore as on 31.03.2007 works out to RS.20,86,61,392/-. This is treated as income relatable to the fine ores which were recognized as saleable products in the current financial year. The same is added to income. 57. During appeal proceedings, the appellant explained that lump and fine iron ore are produced simultaneously in the same process. It was explained that in the earlier years, the fine iron are was not marketable and hence the entire cost of production was imputed to lump. During the current year, fine iron are became marketable and hence developed a value in the market. The fine iron are has ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned A.O. stated that This method of accounting is not proper since the assessee has already availed of the expenditure in production of such fine ores in the earlier years. Thus, the value to be adopted for the fine are cannot be zero . The contention of the A.O. is not correct. He cannot make any comment on the certified accounts made by CAG. When the cost of fine ore(not marketable) lying in dumps upto 31.03.2007 was absorbed by the saleable product and tax has been paid based on sales and/or value of closing stock of the saleable product, considering the product again in some value is double taxation. The following cases are also presented for kind information of the H'onbleClT(A). a) Assessee has the choice on method, but such method should be shown as regularly followed - The choice of the method of accounting lies with the assessee; but the assessee must show that he has followed the method regularly for his own purposes - C/T v. McMillan Co.[19581 33 ITR 182 b) A taxpayer is free to employ, for the purpose of his trade, his own method of keeping accounts, and for that purpose to value his stock-in-trade either at cost or market price. A method of accou ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
