TMI Blog2017 (7) TMI 1191X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of sub-section (1) of section 145 - Held that:- CIT(A) was justified in deleting the additions because the same console with the provision of sub-section 1 of section 145 of the I. T. Act. in view of the facts that the Assessee is regularly following the system of accounting for computation of its income. Disallowance of expenses under various heads from 15% to 8% - Held that:- Again it is not in controversy that the assessee is working in the remote area of Jammu Kashmir where every time external vouchers to obtain receipt of such payment is not practically possible and in exigencies the business, sometime the Assessee constrained to resort to such practice. According to our considered view although it was observed by the Ld. CIT(A) that the fact remains that expenditure are not fully verifiable but he finally concluded that the addition of disallowances at the rate of 15% is higher and finding proper and reasonable, the Ld. CIT(A) restricted it to 8%, we are in consonance with the observations of the Ld. CIT(A) and do not find any ground or material to interfere with it. Disallowance of expenditure on account of development of raid and quarry - revenue or capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... antile system of accounting. 2. Whether the Ld. Commissioner of Income Tax (A) was justified in deleting the addition made which does not console with the provisions of sub-section (1) of section 145 of the Income tax Act, 1961 as the income is to be computed in accordance with the system of accounting regularly employed by the assesse. 3. Whether the Ld. Commissioner of Income Tax (A) was justified in restricting the disallowance of expenses under various heads from 15% to 8% when the Assessing Officer had failed to rebut the finding of the Assessing Officer during the appellate proceedings also. 4. Whether the Ld. Commissioner of Income Tax (A) was justified in holding that the expenditure on the Development of Road and Quarry is Revenue expenditure and not Capital expenditure as held by the Assessing Officer. 3. The brief facts of the case as noted in the assessment order are as under that the assesse is running a cement manufacturing plant and during the relevant previous year 2010-11, the assesse has declared total sale to the tune of ₹ 140,10,91,197/-. After debiting various expenses the assesse declared net taxable income of Rs. (-) 1,43,92,746/-. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total ₹ 1,18,83,220 Further since the assessee failed to produce the complete bills and vouchers in respect of these expenses during the assessment proceedings and could not substantiate completely the above expenditure. In absence of proper bills and vouchers and unverifiable bills of these expenditures, disallowance of 15% of above expenses is made to the income of the assessee on account of unverifiable nature of expenses claimed by the assessee. C. The Assessing Officer further in respect of expenditure on account of Development of Road/Quarry determined the addition by holding as under: The argument of the assessee that the extraction and transportation of limestone is germane to the carrying on the business of the company, which cannot produce without limestone and the expense incurred is simply for smooth functioning of the factory of the company, hence the same is to be considered as revenue expenditure cannot be accepted. Merely because the expenditure was incurred in connection with the business of the assessee or for the purpose of business of the assessee or was incidental to the business of the assessee, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure and not revenue expenditure. Thus, being capital expenditure this expenditure claimed by the assessee in its PL Account is disallowed and added to the total income of the assessee. Finally the Ld. Assessing Officer made an addition of ₹ 23,16,737/- in the income of the assessee. 4 . Feeling aggrieved by the assessment order, the assessee preferred the first appeal before the Ld. CIT(A), who by its order deleted the disallowances which is under consideration in the instant appeal by holding as under: A. The Appellant submits that the assessing Officer made disallowance on account of Leave encashment a) ₹ 1849982/- Short Provided during the Year 2008-09 for leave salary b) ₹ 262744/- Short Provided during 2009-10 for Leave Salary a) ₹ 18,49,982/- representing leave encashment for the year 2008-09 is because of the fact that no provision was made for leave encashment during that year in view of constant strikes and hartals which resulted in loss of production to the company and management decided not to pay leave encashment and treated leaves taken during hartals and strikes as leaves officially availed by the employees. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gures on account of error in approximation cannot he held to be prior period expense and held to be disallowable. Approximations are bound to differ from actual figures. It is humbly stated that the assessee has been regularly following the same method of accounting and whenever any excess provision is made the same is reversed in next year. These minor adjustments due to error in estimates due to approximation cannot be equated with other prior period expenses. AS-5 issued by Institute of Chartered Accountants of India states that income or expense recognized on the outcome of a contingency which previously could not be estimated reliably does not constitute prior period item. I am convinced with the arguments of the Appellant and relief of ₹ 262744/- is allowed. B. With regard to the unverifiable expenses, the Ld. CIT(A) considered the submissions of the assessee and finally in para no. 4.4 of the order reduced the disallowances to the tune of 8% instead of 15%, which is reproduced herein, for the sake of brevity and convenience: 4.4. Ground of appeal no. 5 relates to addition of ₹ 17,82,483/- on account Disallowance out of Travelling Conveyance, Staff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed out in hilly terrains, which do not have any pathways for the movement of men and goods. This is not in the nature of road of enduring benefits because it breaks down because of running of heavy duty trucks and vehicles carrying lime stone and also these roads do not last long and have to be maintained and repairs to be carried out every year as these roads get wiped out in rainyseasons. I have perused the nature of expense and the explanations submitted by the appellant. I am convinced with the submissions made by the appellant as material purchased by the appellant does not contain any such material which would have resulted in creating any asset of enduring benefit. The mines allotted to the appellant are in the hills which do not have pathways and the appellant company has to make temporary pathways to facilitate movement of men for extraction of limestone from the mines and then to carry extracted limestone to the factory site which is in the foothills of the mines. The extraction of limestone is germane to the business of the appellant company. And roads developed by the company are not of any use other than that for extracting and carrying limestone for its consumpti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the said expenses for the construction of the road which has been debited under the head (short development or road/ quarry (11) is a capital expenditure and not a revenue expenditure because according to the Karnataka High Court Judgment in I.T. referred no. 75/1974 titled as D. P. Chirania Company Vs. CIT Massore, emphasized that expenditure incurred on the construction of access road is of enduring nature because the expenditure was made for acquiring of bringing into existence of common asset or advantage for the enduring benefit of the business, it is in the nature of capital expenditure, on the other hand, if it is not made for the purpose of bringing into existence any such asset or advantage, but for running the business or working it to produce profits, it is a revenue expenditure, in the instant case, the construction of roads brings into existence of an advantage because it was made during the performance of the contract of transportation. 6. On the other hand, the Ld. AR submitted that the assessee is working in the remotes area of Srinagar where many times and on various occasions hartals, strikes and bands etc. or a common and enduring assessment year 2008 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lected while preparing the balance sheet for the assessee because the assessee is following the mercantile system of accounting, in the instant case which is a fact that generally hartals, strikes and bands are being organized and admittedly the condition of the area of Jammu Kashmir where the assessee operating is remote area and the assessee company is working in abnormal circumstances and even otherwise there is no contrary material against the hartals/ strikes by the employees in relevant period and the assessee acceded to the demands of the employees in the year under appeal and therefore the leave encashment was duly paid to the employees for the year 2008-09 and even otherwise the liability was crystallized only after deliberations and settlements made in the relevant year only and it could not have been anticipated, because the some arose out in the sudden settlement and all these facts have been duly explained in the reply filed before the Assessing Officer. According to our mind no provision was made for leave encashment during that year in view of the constant strike and hartals which resulted in loss of production to the company and even if leave encashment would have b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ca road as no such material has been purchased as would entail an enduring benefit and the said roads are used only for the purpose of carrying extracted limestone from mines to the factory site and other than this, this the same are of no use and the nature of business is such that access to quarry or mining place is of prime importance without which no excavation can be done and further because the appellant is working in the hills which do not have any pathways and in the compelling circumstances has to make temporary pathways to facilitate movement of men for extraction limestone to the factory site which is in the foothills of the mines and the extraction of limestone is germane to the business of the appellant company and even otherwise the road gets wiped out in rainy season and do no last long and every year replaced to be carried out. Even otherwise Hon'ble Apex Court in Laxmiji Sugar Mills Pvt. Ltd. Vs. CIT, held that apart from element of compulsion, road which were constructed and developed were not the property of the assessee, and in CIT Vs. Madras Auto Service Pvt. Ltd., the Apex Court held that building constructed on the leased land is revenue expenditure as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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