TMI Blog2005 (11) TMI 483X X X X Extracts X X X X X X X X Extracts X X X X ..... h the stores and spares relate to past years, the appellant had made the revaluation during the current year and subsequent years on the basis of audit objections by the C AG when they pointed out that the profit has been overstated. Accordingly, the bona fides of such change also should not be doubted. The change effected by the assessee is bona fide and aimed at obtaining correct business profit as such obsolete stocks/non-moving spare parts went on losing their values thereby distorting the true profits of the appellant. Relying on the case of Chainrup Sampatram vs. CIT [ 1953 (10) TMI 2 - SUPREME COURT] , we set aside the order of the CIT(A) on this ground and direct the AO to allow the claim of loss on account of value of non-moving stores and spares. We direct accordingly. The ground of appeal No. 1 by the appellant is accordingly, allowed. Prior Period Adjustments - We find that the learned CIT(A) had confirmed an amount under other manufacturing expenses and under 'administrative, selling and distribution expenses'. As regards other manufacturing expenses, we find that the appellant had issued 18.675 kgs. of nitric acid for consumption during the financial year 1992 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atmosphere in which the business can succeed in a greater measure with the aid of such goodwill. In the result, the appeal filed by the appellant is partly allowed. Water charges' payable to Government of Orissa and interest on 'Water charges' payable to Government of Orissa) as 'fees' - We find that the appellant has made provisions towards water charges as per the notification of the Government of Orissa, Ministry of Water Resources. We further find that there is no dispute that the water charges are in the nature of statutory liability. We further find that the learned CIT(A) while deciding the appeal against the assessee relied upon the decision of the Hon'ble Calcutta High Court in the case of Orient Paper Industries Ltd.[ 1994 (1) TMI 14 - CALCUTTA HIGH COURT] . Thus, we are of the considered opinion that the remaining amount has to be allowed as business expenditure u/s 37 of the IT Act. We direct accordingly. The ground of appeal No. 3 by the appellant is accordingly, allowed. Provision of unpaid interest on water charges amount , we are of the considered opinion that the same is compensatory in nature and does not fall within the purview of s. 43B a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (J.M.) and R. K. PANDA (A.M.) Ved Jain, A. K. Sabat, B. K. Mahapatra, for the Appellant V. Kumar, S. K. Das, for the Respondent ORDER These six appeals filed by the assessee are directed against the orders of the learned CIT(A)-II, Bhubaneswar, relating to asst. yrs. 1994-95 to 1998-99 and 2000-01. Since common issues are involved all the six appeals are disposed of in this consolidated order for the sake of convenience. ITA No. 66/Ctk/2003, asst. yr. 1994-95 : 2. Ground of appeal No. 1 is as under : 1(a). That the learned CIT(A) has erred, both on fact and law, in holding that the loss of ₹ 4,86,70,639 on account of valuation of non-moving stores and spares, is not allowable as revenue expenditure. (b) That the learned CIT(A) ought to have allowed the claim of ₹ 4,86,70,639 on account of valuation of non-moving stores and spares. 3. The facts in brief are that the AO disallowed an amount of ₹ 4,86,70,639 on account of valuation of non-moving stores and spares holding that these items are neither trading items nor moving stores and spares. According to the AO, the loss can be considered as capital loss. In appeal, the learned CIT(A) upheld the disallowance holding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e value of a stock-in-trade is always a revenue loss. He further submitted that the provision in reality is not a provision for liability, but is valuation loss of current assets. 6. The learned counsel also relied on a number of case decisions. 7. The learned Departmental Representative submitted that there is no debit in the P L a/c about the claim of such expenditure. The assessee has not identified those as obsolete or non-moving. He submitted that the reduction of 20 per cent of the value is on ad hoc basis. It is not correct to say that the loss has arisen during this year. The learned Departmental Representative further submitted that the assessee is entitled to change the method of accounting provided the same is bona fide and is followed consistently. However, in the present case the assessee has not consistently followed the above method in the subsequent years. The assessee has also not established the basis of reduction in stock by 20 per cent during this year. The learned Departmental Representative accordingly, relied on the orders of the AO and the learned CIT(A). 8. We have considered the rival submissions made by both the sides and perused the orders of the authori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of their cost. We further find from the notes on accounts of M/s Hindustan Zinc Ltd. for the accounting year 1998-99 a copy of which is placed at paper book p. 2 where the closing stock of stores and spares are valued at weighted average cost except stores and spares unmoved for more than 2 years which are valued at 25 per cent of weighted average cost. We further find from the published accounts of M/s Steel Authority of India for the accounting year 1996-97 a copy of which is placed at paper book p. 3 where stores and spares are valued at cost. However, in the case of stores and spares declared obsolete/surplus and stores and spares not moved for five years or more, provision is made at 75 per cent and 10 per cent, respectively, of the book value and charged to revenue. 12. From reading of the notes on accounts of the above 3 public sector undertakings we are of the opinion that the diminution of value because of obsolescence at 20 per cent of historical cost cannot be said to be without any basis. Neither this can be said to be improper. We are further of the opinion that although the stores and spares relate to past years, the appellant had made the revaluation during the cu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... off was really the accumulated loss of several previous years : Held, that the assessee was entitled to change his method of valuation of stock in this manner even though the Revenue may be affected adversely by such change. It is a concession given to the assessee based on the well recognized wage of the trade and the principle underlying that concession is in no way violated when the assessee changes his method of valuation from cost to market value, when the latter is less than the cost price, provided the change is bona fide and the new system is continued in subsequent years. The assessee's claim for deduction of ₹ 1,41,035 was allowable in law . 15. We find that the Hon'ble Madras High Court in the case of India Motor Parts Accessories (P) Ltd. vs. CIT (1966) 60 ITR 531(Mad) has held as under (short notes) : The assessee-company, which dealt in spare parts of cars the import of which was banned, treated part of its stock as obsolete and part as slow-moving, and valued them notionally at 100 per cent and 50 per cent less than the cost price, respectively. The articles were valued at higher prices for purposes of obtaining overdrafts from banks. Some of the articl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of appeal. 17. We find that the Hon'ble Delhi High Court in the case of CIT vs. Bharat Commerce Industries Ltd. (1999) 157 CTR (Del) 53: (1999) 240 ITR 256(Del) has held as under (short notes) : An assessee is free to adopt a particular method of valuation of its closing stock which it has to follow regularly from year to year. At the same time it is well-settled that irrespective of the basis adopted for valuation for earlier years, the assessee has an option to change the method of valuation of closing stock, provided the change is bona fide and followed regularly thereafter. The Tribunal being the final fact-finding authority under the Act, the High Court in the exercise of its advisory jurisdiction can neither go behind the facts stated by the Tribunal nor can disturb the same unless a challenge is provided specifically by a question framed in a reference against the validity of the impugned findings of fact on the ground that there is no evidence to support them or they are the result of a misdirection in law. Held, that, in view of the findings of the Tribunal, the assessee had resorted to revaluation of the raw materials on the basis of specific instances of fall in valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... On a reference under s. 66(2) of the question, 'whether in the circumstances of the case and on a true construction of s. 4(1)(b) and s. 14(2)(c) of the Indian IT Act the sum of ₹ 2,20,887 was in law assessable to tax', the High Court answered the question in the affirmative. On appeal by special leave granted by the Supreme Court : Held, that on the finding of the IT authorities that the silver bars lying at Bikaner had not been really sold but remained part of the unsold stock of the assessee's business at the end of the accounting year, the whole of the profits of that year must be taken to have accrued or arisen at Calcutta where the business was carried on, no part of that business having admittedly been transacted at Bikaner. Consequently, the sum of ₹ 2,20,887 was in law assessable to tax. 19. Considering the totality of the facts of the case and relying on the above case decisions we set aside the order of the CIT(A) on this ground and direct the AO to allow the claim of loss on account of value of non-moving stores and spares at ₹ 4,86,70,639. We direct accordingly. The ground of appeal No. 1 by the appellant is accordingly, allowed. 20. Groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny satisfactory explanation by the assessee, the AO added the remaining items to the total income. In appeal, the learned CIT(A) discussed and decided each and every item included in the prior period adjustments. He deleted the addition on account of employees remuneration and benefits and interest and finance charges amounting to ₹ 66.77 lakhs. However, he upheld the addition amounting to ₹ 2.51 lakhs on account of other manufacturing expenses and addition amounting to ₹ 227.58 lakhs on account of administrative selling and distribution of expenses. Being aggrieved, the assessee is in appeal before us. 22. The learned Authorised Representative referring to pp. 116 and 216 to 268 of Vol. II of the paper book submitted that the details of the prior period expenses are given. He submitted that in the asst. yr. 1989-90 the prior period expenses were allowed. The Revenue has not gone in appeal to the Tribunal which otherwise means that they have accepted the principle. 23. The learned Authorised Representative further submitted that detailed head-wise break-up of expenses were given. Though the expenses are for a particular period, claims/bills settlement, etc. are ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... approval. Accordingly, they are dismissed. 28. Ground of appeal No. 5, being general in nature is dismissed. 29. In the result, the appeal file by the assessee for the asst. yr. 1994-95 is partly allowed. ITA No. 67/Ctk/2003 (asst. yr. 1995-96) 30. Ground of appeal No. 1 is as under : 1(a). That the learned CIT(A) has erred, both on facts and in law, in holding that the loss of ₹ 40,47,757 on account of valuation of non-moving stores and spares, is not allowable as revenue expenditure. (b) That the learned CIT(A) ought to have allowed the claim of ₹ 40,47,757 on account of valuation of non-moving stores and spares. 31. After hearing both the sides, we find that the above ground is identical to that of ground No. 1 in ITA No. 66/Ctk/2003 for the asst. yr. 1994-95. We have already decided the ground in favour of the assessee. Following the same principle, the ground of appeal No. 1 is allowed in favour of the assessee. 32. Ground of appeal No. 2 is as under : 2. (a) That the learned CIT(A) has erred, both on facts and in law, in holding that 'Interest on electricity duty' falls under s. 43B of the Act. (b) That the learned CIT(A) ought to have allowed the sum of & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Duty Act. He submitted that interest on electricity duty is not a penalty in nature but is compensatory in nature and has to be allowed as a general business expenditure. He submitted that cl. (a) of s. 43B does not include the word interest and as such the provision of s. 43B is not applicable to interest on delayed payment of electricity duty. He also relied on the decisions of the Hon'ble Calcutta High Court in the cases of CIT vs. Orient Beverages Ltd. (2000) 164 CTR (Cal) 529: (2001) 247 ITR 230(Cal) and CIT vs. E.L. Properties Ltd. (2001) 166 CTR (Cal) 485: (2001) 248 ITR 14(Cal) and submitted that the analysis by the learned CIT(A) is erroneous. 36. The learned Authorised Representative further submitted that interest is different to tax, duty, cess or fee which are distinguishable as per the Act. They are separate from each other. He further submitted that the analysis by the learned CIT(A) is erroneous. He further submitted that cl. (a) of s. 43B does not include the word interest. 37. The learned Departmental Representative, on the other hand, relied on the orders of the AO and learned CIT(A). 38. We have considered the rival submissions made by both the sides and pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Agarwal, learned advocate appearing for the Department, that in this particular case s. 43B(a) would be applicable. The s. 43B(a), as noted earlier, provides, notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of (a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force. In our view, this question has been set at rest by the decision of the Supreme Court as well as by another decision of this Court. 7. In Mahalakshmi Sugar Mills Co. vs. CIT (supra), as noted herein earlier, the Supreme Court, while considering a case under s. 3(3) of the U.P. Sugarcane Cess Act, 1956, on arrears of cess payable held that the interest payable did not fall within the scope of s. 10(2)(xv) of the Indian IT Act, 1922, because it was paid by way of penalty or infringement of the Cess Act. In that actual situation the Supreme Court held that the interest payable under s. 3(3) of the Cess Act was not a penalty paid for an infringement of law and was an allowable deduction under s. 10(2)(xv) of the Act. At p. 434 of the said decision, the Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kherjee, J. (as His Lordship then was) in the aforesaid Division Bench decision considered the Cess Act as well as the Calcutta Municipal Act, with which we are not therefore (sic), it cannot be disputed that the decision of Hindustan Motors Ltd. (supra), as rendered by Sabyasachi Mukherjee, J. (as His Lordship then was) was so rendered applying the principles laid down in the aforesaid decision of the Supreme Court and the submission of Mr. Agarwal that the decision of the Supreme Court was not applicable in this case, cannot be alleged. That apart, we are also fortified by a recent decision of this Court in the case of Hindustan Motors Ltd. vs. CIT (1996) 132 CTR (Cal) 472: (1996) 218 ITR 450(Cal). It appears that there was a difference of opinion on the question mentioned above between the Hon'ble Chief Justice Mr. K.C. Agarwal (as His Lordship then was) and the Hon'ble Justice Mrs. Ruma Pal (while she was in this Court). The matter was referred to a Third Judge, the Hon'ble Justice Prabir Kumar Majumdar (as His Lordship then was). His Lordship by his order dt. 20th Feb., 1995, agreed with the views expressed by Ruma Pal, J. and held that he was not inclined to agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 218 ITR 450(Cal) : TC S19.2130 followed. Interest payable on unpaid municipal rates is not in the nature of penalty and therefore, it is clearly deductible under s. 37; s. 43B is also not attracted as it is applicable to municipal rates and not to interest thereon. 44. Considering the totality of the facts of the case and relying on the above decisions, we are of the considered opinion that the interest on electricity duty is compensatory in nature and has to be allowed as a general business expenditure. The provision of s. 43B is not applicable for such interest. The AO is directed to allow the same as business expenditure. Accordingly, the ground by the appellant is allowed. 45. Ground of appeal No. 3 is as under : 3(a) That the learned CIT(A) has erred, both on facts and in law, in enhancing the disallowance under 'Peripheral Development Expenses' to ₹ 38.26 lakhs. (b) That the finding of the learned CIT(A) in holding that the sum of ₹ 38.26 lakhs under 'Peripheral Development Expenses' does not have any nexus with the business of the assessee is contrary to facts, based on irrelevant considerations, presumptions, conjectures and surmises and being ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enses except drinking water and roads, etc. to have any nexus with the company's business needs. He also referred to the gazette notification, minutes of peripheral development committee, various newspaper clippings and statistics of land displaced persons employed in Nalco and residing in the peripheral area, copies of which are placed in the paper book. Referring to paper book pp. 198 to 222, the learned Authorised Representative referred to the directions of the pollution control board. He also relied on a number of case decisions. 48. The learned Departmental Representative, on the other hand, submitted that the assessee had not fulfilled the conditions laid down in s. 37(1) that the expenditure is wholly and exclusively laid down for business purposes. He accordingly, relied on the orders of the authorities below. 49. We have considered the rival submissions made by both the sides and perused the orders of the authorities below and the paper book filed on behalf of the appellant. From the details as furnished by the appellant in p. 117 of the paper book we find that the appellant had incurred expenditure to the tune of ₹ 60,53,890 out of which an amount of ₹ 38 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 19 of the paper book which is as under : Government of Orissa Industries Department Resolution Bhubaneswar, the 7th April, 1982. Sub'Constitution of a standing committee for monitoring programme of rehabilitation of the affected tribal committee due to establishment of Aluminium Complex in the State of Orissa : Establishment of large industries in backward areas predominantly inhabited by the scheduled tribes causes serious imbalance in the traditional economy and create misery for many indigenous people. This includes rehabilitation problems. An Alumina/Aluminium complex has been set up in the State by the National Aluminium Company Ltd. It has been desired by the Prime Minister that in such circumstances where establishment of a public sector unit affects the tribals in the area, adequate precautionary measures should be taken to ensure that tribes living in the areas derive benefit rather than suffer disadvantage from development of the complex. Accordingly, the State Governments have been pleased to set up a standing committee with the following members with the object of effecting a total and comprehensive programme rehabilitation of the affected tribal communities and als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss is located in particular. Being known as a good corporate citizen brings goodwill of the local community, as also with the regulatory agencies and the society at large thereby creating an atmosphere in which the business can succeed in a greater measure with the aid of such goodwill. For the asst. yr. 1992-93, the assessee, a public limited company, as a good corporate citizen as a measure of gaining goodwill of the people living in and around its industry which was to some extent a polluting industry, provided funds for establishing drinking water facilities to the residents in the vicinity of the refinery and also provided aid to the school run for the benefit of the children of those local residents. It incurred an expenditure of ₹ 15,32,000 for that purpose. The AO declined to allow that expenditure on the ground that it was not an item of expenditure incurred by the assessee for earning the income in that year. The Tribunal allowed it. On appeal to the High Court : Held, that the amount spent for bringing drinking water as also for establishing or improving the school meant for the residents of the locality in which the business was situated could not be regarded as b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... odwill with the regulatory agencies and society at large, thereby creating an atmosphere in which the business can succeed in a greater measure with the aid of such goodwill'. Even if an expense is incurred voluntarily, it may still be construed as 'wholly and exclusively'. Just because the expenses are voluntary in nature and are not forced on the assessee by a statutory obligation, these expenses cannot cease to be a business expenditure. Keeping all these facts in mind, as also entirety of the case, the disallowance of expenditure incurred on implementation of 20 point programmes is not sustainable. 55. The Hon'ble Orissa High Court in the case of CIT vs. Rupsa Rice Mills (1976) 104 ITR 249(Ori) has held as under (short notes) : In the great diversity of human affairs and the complicated nature of business operations it is difficult to lay down any single test which would apply to all situations to determine whether an expenditure is of the nature of capital or of revenue. However, the Courts have deduced three broad criteria which could be applied for deciding this question. They are : 1. An outlay is deemed to be capital when it is made for the initiation of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrow angle and the immediate benefits arising out of spending a particular amount of money should not be the lookout of a businessman. The overall needs of the business running over a long span of time is envisaged in business expediency. Furthermore, under the modern day concepts, even social and similar other obligations are also required to be considered as part of the business obligations of a businessman. From that angle also, the expenditure incurred by the assessee towards plantation cannot be considered to be unrelated to its business. Furthermore, it was not a case of fulfilling the whims and fancies of the owner of the assessee-corporation. On the other hand, the afforestation programme was closely connected with the actual business operations of the assessee although the assessee might not be expected to derive any direct benefit out of the spending in that regard in the immediate future. When a Government undertaking is under the obligation to carry out some loss thereby, the loss cannot be ignored in computing the total income of the undertaking. There was no reason to consider the expenses incurred by the assessee being not connected with its business operations. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee. Following the same ratio, the above ground by the appellant is allowed. 64. Ground of appeal No. 3 is as under : 3. (a) That the learned CIT(A) has erred, both on facts and in law, in treating ₹ 1,51,18,676 (Rs. 1,30,21,508 'Water charges' payable to Government of Orissa and ₹ 20,97,168 for interest on 'Water charges' payable to Government of Orissa) as 'fees' and confirming both under purview of s. 43B of the Act. (b) That the learned CIT(A) has erred, both on facts and in law, in holding that ₹ 20,97,168 for interest on 'Water charges' payable to Government of Orissa falls under purview of s. 43B of the Act. (c) That the learned CIT(A) ought to have allowed the sum of ₹ 1,30,21,508 and ₹ 20,97,168 for 'Water charges' payable to Government of Orissa and for interest on 'Water charges' payable to Government of Orissa, respectively, as the same are trading liabilities of the year under consideration. 65. The facts in brief are that during the course of assessment proceedings the AO found from Annex. VI to the tax audit report that the auditors have mentioned about non-payment of the provision t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 63 CTR (Kar) 410: (2000) 246 ITR 750(Kar) (b) CIT vs. Shree Warna Sahakari Shakar Karkhana (2002) 173 CTR (Bom) 188: (2002) 253 ITR 226(Bom) (c) CIT vs. Varas International (P) Ltd. (1997) 142 CTR (Cal) 369: (1997) 225 ITR 831(Cal) (d) Hindustan Motors Ltd. vs. CIT (supra) (e) CIT vs. Padmawati Raja Cotton Mills Ltd. (supra). 67. The learned Departmental Representative, on the other hand, relied on the orders of the authorities below. 68. We have considered the rival submissions made by both the sides and perused the orders of the authorities below and the paper book filed on behalf of the appellant. We find that the appellant has made provisions towards water charges as per the notification of the Government of Orissa, Ministry of Water Resources. We further find that there is no dispute that the water charges are in the nature of statutory liability. We further find that the learned CIT(A) while deciding the appeal against the assessee relied upon the decision of the Hon'ble Calcutta High Court in the case of Orient Paper Industries Ltd. (supra). We further find that the Hon'ble High Court in the case of Orient Papers Industries Ltd. (supra) has held as under (short notes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut reference to any special benefit conferred on the payer of the tax, fee is payable when some special service is intended or envisaged as a quid pro quo. Similarly, cess is relatable to special benefit or service received. In CIT vs. Orient Paper Industries Ltd. (1995) 128 CTR (Cal) 438: (1995) 214 ITR 473(Cal), the Calcutta High Court has held that the cess payable under the Water (Prevention and Control of Pollution) Act for water consumed in factories came within the ambit of s. 43B. The above decision has a direct bearing on water charges discussed here. Therefore, the fact that water charges are payable for services rendered do not keep it outside the purview of s. 43B and the absence of the term 'cess' or 'fee' will not make any difference. There is also another aspect to the above claim. Even though the relevant details have not been filed the appellant is stated to be still in dispute about the payment of water charges and major amount has not been paid. Therefore, the liability is far from determinate. In any case allowability of the above claim will be subject to the provisions of s. 43B as held by the AO. By the same logic, the interest on water charges ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee is contrary to facts, based on irrelevant considerations, presumptions, conjectures and surmises and being arbitrary, unjustified and accordingly, the disallowance of the same is erroneous and legally untenable. 75. The facts in brief are that the assessee has debited an amount of ₹ 6.20 crores towards contribution to Mineral Exploration Fund for the first time. The explanation of the assessee that it is required to contribute to MEF, Government of India, as per letter dt. 29th Jan., 1996, of the Ministry of Mines and the contribution is payable on the basis of proven reserve of bauxite @ 20 paise per MT of bauxite reserve was not accepted by the AO. The AO was of the opinion that the said contribution is in the nature of application of income and hence it could not be considered as expenditure incurred by the assessee. Accordingly, he made an addition of ₹ 6.20 crores. In appeal, the learned CIT(A) confirmed the actions of the AO holding that the above expenditure has got no nexus to the business needs of the assessee. Being aggrieved with the order of the learned CIT(A), the assessee is in appeal before us. 76. The learned Authorised Representative referring t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9th Jan., 1996, had decided to set up the Mineral Exploration Fund under the administrative control of the Ministry of Mines for promoting sustainable exploration and development activities in the field of minerals. We further find from p. 274 of the paper book that a letter has been received by the appellant from the Jt. Secretary to the Government of India, Ministry of Steel and Mines, Department of Mines, which reads as under : Government of India Ministry of Steel and Mines Department of Mines New Delhi, the 19th Jan., 1996 No. 38/13/95-M.T. To The Chairman-cum-Managing Director Nalco, TDCO Tower, Janpath Bhubaneswar. Sub : Creation of Mineral Exploration Fund for promoting sustainable activities for exploration development of minerals' Sir, I am directed to say that this Department has established Mineral Exploration Fund (MEF) for promoting sustainable activities for exploration and development of minerals vide office order of even number dt. 29th Jan., 1996 (copy enclosed). It was decided by Government that the PSUs under control of Department of Mines shall make one-time contribution to the tune of ₹ 16.41 crores on the basis of reserves of minerals established by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e year of accruing of the liability. Considering the totality of facts of the case, we are of the considered opinion that the above expenditure has to be allowed as a business expenditure under s. 37(1) of the IT Act. We direct accordingly. The grounds of appeal filed by the appellant is accordingly, allowed. 80. The other grounds are not pressed for hearing. Accordingly, these grounds are dismissed. 81. In the result, the appeal filed by the assessee is partly allowed. ITA No. 459/Ctk/2003 (asst. yr. 1997-98 ) : 82. Grounds of appeal No. 1, 4, 6, 10, 11, 13 and 14 are not pressed for hearing at the time of hearing of the appeal. Accordingly, the above grounds are dismissed. 83. Grounds of appeal Nos. 2(a) and (b) are as under : 2. (a) Payments made under Benevolent Scheme : (a) That the learned CIT(A) has grossly erred, both on facts and in law, in upholding the disallowance of ₹ 11.19 lakhs under 'Benevolent Scheme'. (b) That the learned CIT(A) has confused himself that payments under 'Benevolent Scheme' by the employer in the event of death of employee is a contribution to fund falling under s. 40A(9) whereas the fact remains that amount involved is not a & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mastiputia M R 8. G. Sahu M R 9. Barna Gabda M R 10. S. Bagh M R 11. P.K. Singh Smelter 12. B. Desnaik M R 13. P. Gopalkrisna Chennai 14. P.P. Paramanik Smelter 15. L. Behera CPP 16. K.C. Dash Mines 17. C. Jena Smelter 18. K. Ojha Smelter (18 deaths @ ₹ 10 per death from 6,232 employees) ₹ 11.19 lakhs. 86. The learned Authorised Representative also relied on the case decisions in the case of Ajay Singh Deol vs. Jt. CIT (2004) 87 TTJ (Mumbai) 771: (2004) 91 ITD 196(Mumbai). 87. The learned Departmental Representative relied on the orders of the AO and the learned CIT(A). 88. We have considered the rival submissions made by both the sides and perused the orders of the authorities below and the paper book filed on behalf of the appellant. From the list submitted before us we find that the appellant has paid an amount of ₹ 11.19 lakhs to the members of 18 families due to their deaths @ ₹ 10 per death for 6,232 employees as a matching contribution. We further find that the objective of the scheme reads as under : to provide financial assistance to families of the members of the persons who die while in employment in the company and to provide any other benefit a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court in the case of CIT vs. National Engineering Industries Ltd. (1994) 208 ITR 1002(Cal) has held as under (short notes) : That the contribution made to the National Engineering Industries Centre and National Engineering Officers and Executive Welfare Scheme had to be made as the assessee's conduct of business had a nexus to the object of the employees' welfare scheme. The expenditure was justified having regard to the business expediency. The refusal to pay such expenditure would have spread disaffection amongst the workers and employees and would have adversely affected the assessee's business. The expenditure incurred merely for the purpose of keeping the workers happy and maintaining the industrial peace and cordial relations with the employees is by now an accepted expenditure for the carrying on of a business. Without such good relations it is not possible to run any business. Therefore, the expenditure was deductible as revenue expenditure. Considering the totality of the facts of the case and relying on the above decisions, we direct the AO to allow the expenditure as a deductible expenditure. 92. Ground of appeal No. 3 is as under : 3. Peripheral Develop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and vouchers and the transactions are fully verifiable. The amount of disallowance has been made on estimate basis and no ad hoc disallowance can be made. 97. The learned Departmental Representative, on the other hand, relied on the orders of the authorities below. 98. We have considered the rival submissions made by both the sides and perused the orders of the authorities below and the paper book filed on behalf of the appellant. There is no dispute that the appellant is a Government of India undertaking and the accounts are audited. We further find that the expenses are supported by proper vouchers and the transactions are fully verifiable. From the details as furnished by the assessee for the month of July, 1996, as discussed by the learned CIT(A), it could not be said that they are donations. Accordingly, the addition is directed to be deleted. The ground of appeal is allowed. 99. Ground of appeal No. 7 is as under : 7. Loss on account of unserviceable materials'That the learned CIT(A) has erred in upholding the disallowance of ₹ 10.04 lakhs under 'loss on account of unserviceable materials' on account of contaminated CT Pitch, a raw material, and further tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he period upto 31st March, 1996 (amounting to ₹ 354.46 lakhs), determined on the basis of 'actuarial valuation' and Accordingly, charged to P L a/c on the ground that the same relates to 'prior period' is on misappreciation of facts and law, arbitrary, unwarranted, unjustified, wrong and legally not tenable. (b) That the learned CIT(A) has misappreciated that the aforesaid liability for 'leave encashment' for the period upto 31st March, 1996 (amounting to ₹ 354.56 lakhs), charged to P L a/c is on account of bona fide change in the method of accounting from 'cash basis' to 'accrual basis' based on the said 'actuarial valuation' and as per accounting standards and as approved by the judicial pronouncements of the Hon'ble Supreme Court and other Courts, is allowable under the Act in the year under consideration and hence this direction of disallowance of liability towards 'leave encashment' for the period upto 31st March, 1996, is arbitrary, unwarranted, unjustified, wrong and legally not tenable. 102. The facts in brief are that the AO found from the P L a/c that the assessee has claimed deduction for ₹ 4,4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... easoning adopted in Bharat Earth Movers Ltd. vs. CIT (2000) 162 CTR (SC) 325: (2000) 245 ITR 428(SC) that the liability is in respect of services already rendered by the employees and as such are not contingent. The learned Authorised Representative submitted that the above issue is covered in favour of the assessee by the decision of the Hon'ble Supreme Court in the case of Bharat Earth Movers Ltd. vs. CIT (supra). The liability has been provided on actuarial valuation as per requirements of AS-15 issued by the ICAI. The learned Authorised Representative further relied on the decision of the Hon'ble Supreme Court in the case of Shree Sajjan Mills Ltd. vs. CIT (supra) and in the case of Metal Box Company of India Ltd. vs. Their Workmen (1969) 73 ITR 53(SC). 104. The learned Departmental Representative, on the other hand, relied on the orders of the authorities below. 105. We have considered the rival submissions made by both the sides and perused the orders of the authorities below and the paper book filed on behalf of the appellant. After hearing both the sides, we find that the learned CIT(A) as well as the learned counsel for the appellant rely on the decision of the Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not right in taking the view to the contrary.' The above decision of the Supreme Court is applicable to the provision made by the company towards the leave encashment benefits on the basis of actuarial valuation. It is significant to mention here that w.e.f. 1st April, 2002, the provisions of s. 43B will be applicable to any sum payable by an assessee, as an employer, in lieu of any leave at the credit of his employee'. However, the amended provisions are not applicable to the asst. yr. 1997-98 and, therefore, the ratio of the decision in Bharat Earth Movers Ltd. (supra) will be applicable to the claim of the appellant in this regard. However, it is seen that the appellant has also included a claim in regard to post-retirement medical benefits. It has not been clarified how the future liability in this regard accrues in the current year in the manner of leave encashment. In regard to leave encashment, the right to encash a part of leave due to the employee during the year arises in that year. Since the encashment can be done in any subsequent year, the liability for such expenses is to be recognized actuarially. But, no such liability arises regarding post-retirement m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial pronouncements and confirming AO's own method of computing the profit from power generation at ₹ 12,74,16,684, is incorrect, thereby the disallowance of ₹ 32,74,56,495 under s. 115JA(2)(iv) is on irrelevant considerations, presumptions, conjectures and surmises, arbitrary, excessive, unwarranted, unjustified, wrong and legally not tenable. (b) That the assessee adopted realizable price from GRIDCO to whom it sold power which is supported by judicial pronouncements and the issue in dispute being computation of profit derived from power generation, the AO's conclusion that in respect of electricity internally consumed by assessee smelter unit is not eligible to be considered for computation of profit from power generation, since the company cannot sell to itself and thereby the 'notional profit' is to be ignored and thereby both the AO and the CIT(A) has misappreciated and confused themselves inasmuch as there is no question of assessee selling power to itself at profit, but that the question really is of ascertaining what are the true and correct profits or gains earned by the power plant, which is to be deducted as required under s. 115JA(1)(iv) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n for computing profit of eligible business for deduction under the section. There is absolutely no ambiguity on this issue. The learned counsel submitted that the decision of the Hon'ble Gujarat High Court in the case of Anil Starch Product Ltd. vs. CIT (supra) is squarely applicable to the facts of the case. He further submitted that from the asst. yr. 1988-89, the company is supplying power of its power unit to its smelter units as well as to OSEB/GRIDCO. There is no dispute as regard to eligibility. The AO himself has allowed the deduction but the market value of power supplied to smelter unit has been worked out on cost basis as against market value ignoring express provisions of s. 80-I. The learned CIT(A) also commits an error by observing that it will be difficult to hold that the appellant has derived profit from internal consumption of power which is contrary to s. 80-I. In each of its units ' mines, refinery, smelter and power plant, separate books of account are maintained and profitability of each of the units can be separately worked out from the books of account maintained therein. Since the company's power plant is an industrial undertaking and the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port so as to include any income which can in some manner be attributed to the business. The profits derived by the eligible business have to mean profits and gains includible in the computation of total income chargeable to tax. In this case, it will be difficult to hold that the appellant has derived profit from internal consumption of power. As AO has rightly observed one cannot sell to himself and derive profit. Therefore, what the appellant-company is advocating for exclusion is the fictional profit. Such fictional profit has to be determined by drawing up another set of accounts by presuming non-existent sale at an assumed rate. Sec. 115JA does not visualize the exclusion of profit determined notionally on the basis of certain assumptions. What it seeks to exclude is the profit derived from the eligible business and included in the book profit as such. Reliance in this regard is placed on the ratio of the decision of Allahabad High Court in CIT vs. Hind Lamps Ltd. (1991) 92 CTR (All) 204: (1991) 190 ITR 553(All) rendered in the context of s. 80J(1). The decision in the case of Anil Starch Products Ltd. (1966) 59 ITR 514(Guj), relied upon by the appellant is not a judgment dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wards leave encashment and post-retirement medical benefits for the purpose of computation of book profit under s. 115JA. The AO invoked the provision of Expln. (c) to second proviso to s. 115JA of the IT Act holding that the above provision to be in the nature of contingent liabilities as admitted in the tax audit report in Form No. 3CD. In appeal, the learned CIT(A) confirmed the actions of the AO. The assessee is in appeal before us. 116. The learned Authorised Representative submitted that the liability is an ascertained liability as the same has been provided on actuarial value. He submitted that the issue is covered in favour of the assessee by the decision of the Hon'ble Supreme Court in the case of Bharat Earth Movers Ltd. vs. CIT (supra) where it has been held liabilities on these accounts are not contingent liabilities. As per judgment of Apollo Tyres Ltd. vs. CIT (2002) 174 CTR (SC) 521: (2002) 255 ITR 273(SC), the AO cannot take adjustment to the book profits computed on the basis of audited P L a/c under the Companies Act. 117. The learned Departmental Representative, on the other hand, relied on the orders of the AO and the learned CIT(A). 118. We have considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and thereby sustaining the disallowance of ₹ 25,21,62,651 (i.e., ₹ 255,63,20,13 ₹ 236,41,51,602 is arbitrary and legally untenable. 121. The facts in brief are that during the course of the assessment proceedings the appellant-company revised its claim for deduction under s. 80HHC. In the revised calculation the appellant-company excluded excise duty from 'total turnover' relying upon the decision of Mumbai High Court in the case of CIT vs. Sudarshan Chemicals Industries Ltd. (2000) 163 CTR (Bom) 596and other Tribunal decisions. The AO did not accept the above contention. According to AO, cl. (ba) to Explanation below proviso to sub-s. (4A) of s. 80HHC of the Act provide that 'total turnover shall not include freight or insurance'. Therefore, as per the above definition, total turnover will include all receipts including statutory dues and duties. The AO has also referred to the decision of the Supreme Court in the case of Chowringhee Sales Bureau (P) Ltd. vs. CIT 1973 CTR (SC) 44: (1973) 87 ITR 542(SC) where it has been held that the statutory taxes and duties received by an assessee from sale of goods would form part of its trading receipts. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court following the decisions in the cases of CIT vs. Sudarshan Chemicals Industries Ltd. (supra), CIT vs. Chloride India Ltd. (2002) 178 CTR (Cal) 432: (2002) 256 ITR 625(Cal) and CIT vs. K. Rajendranathan Nair (2004) 187 CTR (Ker) 201: (2004) 265 ITR 35(Ker) had held that sales-tax and excise duty are not to be included in the total turnover for the purpose of computation of special deduction under s. 80HHC of the IT Act. The learned Departmental Representative could not cite any contrary decision of the jurisdictional High Court or of the Hon'ble Supreme Court to counter the above submissions by the learned counsel. 126. The Hon'ble Madras High Court in the case of CIT vs. Wheels India Ltd. (supra) CIT vs. India Pistons Ltd. (supra) has held as under (short notes) : Under s. 80HHC(1) of the IT Act, 1961, in the case of an assessee being an Indian company or a person resident in India, who is engaged in the business of export out of India of any goods or merchandise to which this section applies a deduction of the profits derived by the assessee from the export of such goods or merchandise will be allowed subject to the provisions of s. 80HHC. Sub-s. (3) provides that f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceeds. Sec. 80HHC is a code by itself and in order to remove difficulties the legislature thought it fit to explain and give meaning to various expressions employed in that section for the purpose of its working. The object of s. 80HHC is required to be kept in mind while considering that section. The general definition of the word 'turnover' or the definition under the sales-tax laws of the case law dealing with the definition of turnover under the State levy cannot be imported into s. 80HHC of the Act, particularly, when such expressions are incorporated and explained in the provision itself. Sales-tax and excise duty are not to be included in the total turnover while computing the deduction under s. 80HHC. 127. Further the Hon'ble Madras High Court has again held that for the purpose of computation of special deduction under s. 80HHC excise duty is not a part of the total turnover. The Hon'ble High Court in the case of CIT vs. Sundaram Fasteners Ltd. (2005) 194 CTR (Mad) 339: (2005) 272 ITR 652(Mad) has held as under (short notes) : Excise duty does not form part of the total turnover for the purpose of calculation of deduction under s. 80HHC of the IT Act, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent Expenses' does not have any nexus with the business of the assessee is contrary to facts, based on irrelevant considerations, presumptions, conjectures and surmises, arbitrary, unjustified and the disallowance of the same is erroneous and legally not tenable. 132. After hearing both the sides we find that the above ground is identical to that of ground No. 3 in ITA No. 67/Ctk/2003 for the asst. yr. 1995-96. We have already decided in favour of the appellant. Following the same ratio the above ground is allowed in favour of the appellant. 133. Ground of appeal No. 5 is as under : 5. Advertisement and Publicity Expenses : That the learned CIT(A) has erred in upholding the disallowance of ₹ 23,13,729 under 'Advertisement and Publicity Expenses' made by the AO and further the said disallowance is on irrelevant considerations, presumptions, conjectures and surmises, arbitrary, excessive, unwarranted, unjustified, wrong and legally not tenable . 134. The AO during the course of assessment proceedings found that the assessee debited an amount of ₹ 86,69,537 towards advertisement and publicity. From the details furnished by the assessee the AO disallowed an amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and hockey tournaments was an allowable deduction under s. 10(2)(xv). We take the same view. The question is, therefore, answered in favour of the assessee. 138. Relying on the above decision and the decision of the Hon'ble Delhi High Court in the case of Addl. CIT vs. Delhi Cloth General Mills Co. Ltd. (1983) 144 ITR 280(Del), we direct the AO to delete the addition of ₹ 4,22,020. However as regards the remaining amount of ₹ 18,91,709 incurred on account of other publicity in TV, newspapers including banner display, etc., no details were filed either before the AO or CIT(A). 139. Considering the totality of the facts of the case and in the interest of justice we restore the matter back to the file of the AO directing him to give one more opportunity to the assessee to furnish the details for ₹ 18,91,709 regarding the remaining expenditure incurred. We direct accordingly. The ground is partly allowed for statistical purposes. 140. Ground of appeal No. 8 is as under : 8. Loss on account of unserviceable raw materials : That the learned CIT(A) has erred in upholding the disallowance of ₹ 57.50 lakhs under loss on account of unserviceable materials on accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant. 146. Grounds of appeal Nos. 4, 6, 7, 9 and 11 are not pressed by the learned counsel. Accordingly, the above grounds are dismissed. ITA No. 512/Ctk/2003 (asst. yr. 2000-01) : 147. Ground of appeal No. 1 is as under : 1. Deduction under s. 80HHC of the Act : (a) That on the facts and in the circumstances of the case the CIT(A) has grossly erred in not allowing the full deduction of ₹ 1,400.46 lakhs under s. 80HHC claimed by the assessee on the basis of excluding 'excise duty' from 'total turnover' in the formula given below : Total turnover x profits of the business For the purpose of computing deduction under s. 80HHC of the Act and that in sustaining the disallowance of ₹ 1,400.46 lakhs. (b) That for the purpose of computing deduction under s. 80HHC of the Act, the issue of 'Excise duty' to be excluded from 'total turnover' in the above formula having already been decided as per judicial pronouncements by the Hon'ble Calcutta High Court, Mumbai High Court and various Benches of Tribunal, being superior in judicial hierarchy to the CIT(A), the learned CIT(A) has grossly erred in not following the judicial pronouncements and his u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dy decided the above ground in favour of the assessee. Following the same ratio the above ground is accordingly, allowed. 153. Ground of appeal No. 4 is as under : 4. (a) Advertisement and Publicity Expenses : That the learned CIT(A) has erred in upholding 50 per cent of the disallowance of ₹ 1,46,455 (i.e., ₹ 73,222) under 'Advertisement and Publicity Expenses' on estimate and further the said disallowance is on irrelevant considerations, presumptions, conjecture and surmises, arbitrary, excessive, unwarranted, unjustified, wrong and legally not tenable. (b) That the learned CIT(A) has erred in both facts and in law holding that the gifts made to various Government officials are 'personal expenses' and hence do not come within the ambit of s. 37(1) of the Act. 154. The facts in brief are that during the course of assessment proceedings the assessee has paid presentation of articles amounting to ₹ 1,46,445. In absence of any satisfactory explanation the nature and purpose of presentation of such articles along with identification of the persons and for want of proof regarding the business nexus vis-a-vis nature and purposes of presentation, the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be as per the purpose of business. These are gifts for the 8th Alumini Paceni-Club meeting for ₹ 22,250, gifts during the visit abroad by the CMD for ₹ 9,874 and gifts to foreign customers for ₹ 4,972. However, other gifts to the Government officers, some of which cover personal occasions like marriage, etc. will not come under the ambit of s. 37(1). The appellant has only filed a sample of expenses. It is to be expected that this will also be the profile of the remaining expenses. Therefore, the AO is directed to disallow only fifty per cent of the expenses, in question, for ₹ 1,46,145 as not for the purpose of the business. 159. Considering the totality of the facts of the case and the findings of the learned CIT(A), we do not find any reason to interfere in the findings of the learned CIT(A) and accordingly, uphold the same. The ground by the appellant is accordingly, dismissed. 160. Ground of appeal No. 5 is as under : 5(a) That the learned CIT(A) has erred, both on facts and in law, in sustaining the disallowance under 'Peripheral Development Expenses' to ₹ 137.99 lakhs. (b) That the finding of the learned CIT(A) in holding that the su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1956. 165. The AO while completing the assessment added an amount of ₹ 15,94,666 and interest under s. 115P of the Act for delay in payment of dividend tax as per provision of s. 115-O(iii) of the IT Act, 1961 r/w 115P and Explanation of Chapter XII-D. In appeal, the learned CIT(A) confirmed the actions of the AO. The assessee is in appeal before us. 166. The learned Authorised Representative submitted that both AO and the learned CIT(A) ignored the express provisions of s. 8 of the Act and failed to make distinction in dividend and interim dividend. The assessee has passed resolution dt. 27th March, 2000, for declaring interim dividend which was subject to the approval of Central Government. The Board resolution is only an intention to pay the dividend and as such cannot be termed as declaration of dividend. Under the Companies Act, the power to declare the dividend is with the shareholders only. The board of directors only recommended the dividend which shareholders may approve and declare and may also refuse. In line with the Companies Act, IT Act has distinct provisions in s. 8. As per provisions of s. 8(b) interim dividend (a) and (b) is considered to be income onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st under s. 115P. In this case the appellant declared dividend on 27th March, 2000, and paid the tax on the same on 18th May, 2000, for which the AO has charged interest under s. 115P for ₹ 15,94,666. The contention of the appellant is that the resolution dt. 27th March, 2000, containing the declaration of interim dividend for the financial year 1999-2000, was subject to the approval of Central Government under s. 205(1)(c) of the Companies Act, 1956. Therefore, it cannot be taken as the date of declaration of dividend. In this regard the appellant has also filed a copy of the letter dt. 5th April, 2000, addressed to Ministry of Law, Justice and Company Affairs seeking approval of the Central Government under s. 205(1)(c) of the Companies Act. The appellant has not pointed out the date of receipt of the approval from the Ministry of Company Affairs apparently opined that this being a declaration of interim dividend, no such approval is necessary. Sec. 205(1)(c) of the Companies Act, 1956, provides that 'the Central Government, may if it thinks necessary so to do in the public interest, allow any company to declare or pay dividend for any financial year out of the profits ..... X X X X Extracts X X X X X X X X Extracts X X X X
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