Income Tax Appellate Tribunal - Hyderabad
M/S. National Mineral Development ... vs Department Of Income Tax on 23 January, 2014
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH 'B', HYDERABAD
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER
ITA No. 714/Hyd/2012
Assessment Year: 2008-09
NMDC Ltd., Hyderabad. vs. Joint Commissioner of Income-
PAN - AAACN7325A tax, Range - 16, Hyderabad
Appellant Respondent
ITA No. 885/Hyd/2012
Assessment Year: 2008-09
Asst. Commissioner of vs. NMDC Ltd., Hyderabad.
Income-tax, Circle - PAN - AAACN7325A
16(1), Hyderabad
Appellant Respondent
Assessee by: Sri Laxmi Niwas Sharma
Revenue by: Sri D. Sudhakar Rao
Date of hearing: 23/01/2014
Date of pronouncement: 28/02/2014
O RDE R
PER CHANDRA POOJARI, AM:
These are the cross appeals directed against the order of the CIT(A)-V, Hyderabad dated 08/03/2012 for the assessment year 2008-2009.
ITA NO. 714/Hyd/2012 - appeal by assessee
2. Ground Nos. 1 & 9 are general in nature.
3. Ground No. 2 is as follows:
"The learned CIT(A) has erred in disallowing the mine closure obligation of Rs. 79,03,417/- to the extent relating to the project under construction or not having any production 2 I.T.A. No. 714 & 885/H/12 M/s NMDC Ltd.
during the year. The expense is accrued based on the quantity extracted during the year."
4. The facts are that the appellant is a public sector undertaking engaged in mineral exploration. In the Profit and Loss Account, the appellant debited Rs.19,62,86,171/- towards mine closure obligation. This was a provision made towards expected future liability to closure of mines which are exploited by the organization. The appellant explained that this is a statutory liability for which a separate fund had been created by the company with Lie. The Assessing Officer did not agree with the contentions of the appellant and by giving the following reasons, disallowed the mine closure obligation which has been debited to P & L Account:
"2.4. The above contentions of the assessee are considered. Any liability which is not accurately estimated could be a contingent liability and is not an ascertained liability. A liability which is dependent on fulfillment of a \' condition which may result in reduction or in extinction 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 utilization, then the sums set apart as reserve would be deductible as outgoings - Cochin State Power and Light Corporation Ltd Vs CIT (1974) 93 ITR 582 (Ker); Amalgamated Electricity Co. Ltd Vs CIT (1974) 97 ITR 334 (Bom); DarbhangaLaheriasari Electric Supply Corporation Ltd Vs CIT (21974) 117 ITR 516 (Pat). Cf Vellore Electric 3 I.T.A. No. 714 & 885/H/12 M/s NMDC Ltd.
Corporation Ltd Vs CIT (1977) 109 ITR 454 (Mad) affirmed in (1997) 227 ITR 557 (SC) and approved in Associated Power Co Ltd Vs ClT (1996) 218 ITR 195 (SC). The inference would depend upon the nature of reserves.
2.6. The assessee itself has stated that the ultimate cost to be incurred is uncertain and it is necessary to estimate and to provide for the same during periods when the related environmental disturbances occur. Thus, the expenditure is contingent in nature and by no stretch of imagination can be termed as ascertained. Any liability which is contingent in nature cannot be allowed u/s. 37(1) of the I.T. Act.
2.7. It has been explained that the mines are required to be closed/abandoned as per the provisions of Mines and Minerals (Development and Regulation) Act, 1957 and the rules made under Mineral Conservation and Development Rules 1988. The provisions of Income-tax Act are applicable in deciding whether an expenditure is allowable or not. The provisions of other Acts do not have an overriding effect. In the case of T.N. Power Finance and Infrastructure Corporation Vs. JClT (2006) 280 ITR 491 (Mad.) it was held that the Reserve Bank of India guidelines cannot override the mandatory provisions of the Income-tax, Act.
2.8. It is explained that the final mfne closure as per MMDR Act entails commitment of large sums at the time of mine closure and unless the suitable reserve is built-up in a phased manner to meet the commitment it may adversely affect the bottom line of the company. However, the contingent fund which the assessee has created should be from the accumulated reserves of the company and not from the current revenue. The fund created is for meeting a liability which is contingent upon certain future events like disasters and floods and is therefore not an allowable revenue expense.
5. On appeal, before the CIT(A), the assessee stated as follows:
"Any mining activity results in environmental degradation and ecological imbalance on the mining and surrounding area and conscious support, is required to rectify 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.4 I.T.A. No. 714 & 885/H/12
M/s NMDC Ltd.
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, 1988 (MCDR 1988). administered by Mis Indian Bureau of Mines.
3.1. Rule 23A of MCDR 1988 provided for two types of mine closure plans viz., Progressive Mine Closure Plan (PMCP) and Final Closure Plan (FCP) and the details are as under:
3.1.1. The progressive mine closure plans envisage the protective, rehabilitation and reclamation works to be carried during the operation of the mine., MCDR 1988 has been amended vide notification no GSR 330(£) dated 10.04.2003 and according to the notification all existing mines should be submitted within a period of 180 days of notification of progressive mine closure plan. The lessee should submit financial assurance along with the progressive mine closure plan. The progressive mine closure plan should be reviewed and submitted every five years. Final mine closure plan should be submitted for approval one year prior to the proposed closure of the mine.
3.1.2. The lease holder shall not abandon a mine or a part thereof unless a final mine closure plan duly approved by the Regional Controller of Mines or the officer authorized by the State Government in this behalf as the case may be is implemented. For this purpose, the lessee shall be required to obtain a certificate from the Regional controller of mines or the officer authorized by the State Government on this behalf to the effect that protective, reclamation and rehabilitation work in accordance with the final mine closure plan or with such modifications as approved by the competent authority, have been carried out before abandonment of mine.
4. NMDC being a mining company, to comply with the statutes and evolve a comprehensive plans of mine closure, proposed 5 I.T.A. No. 714 & 885/H/12 M/s NMDC Ltd.
to define a policy on "Mine Closure Obligation" and to recognize for the liabIlity as per the technical assessment.
5. The company is operating mines with varying 'Ore Reserves' having different balance life period and the details of balance minerable ore reserves and their balance life as at pt April, 2004 are given at Annexure-l.
6. The expenditure on mine closure is estimated based on parameters identified as per IBM circular No. 1412003. Bailadila Deposit-lIB is considered as a typical mine and costs assigned for each parameter and final mine closure of cost of Deposit-11B estimated on the basis of existing rates. Based on these parameters, cost of final mine closure per to/me of reserves 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 stated that the Indian Bureau of Mines administers the Mines and Mineral (Development & Regulation) Act known as MMDR, 1957. Coupled with this, the Mineral Conservation & Development Rules, 1988 (MCDR, 1988) provide for closure of mines so as to protect and rehabilitate them once the mining is over. It was further stated that the estimate for mine closure is based on specific parameters given by the Indian Bureau of Mines. The rates and amounts are quantified and notified.
6 I.T.A. No. 714 & 885/H/12M/s NMDC Ltd.
5.2 After considering the submissions of the assessee, the CIT(A) observed that in the case of Udaipur Mineral Development Syndicate (P) Limited [2003] 261 ITR 706 (RAJ), an identical issue was considered by the Hon'ble High Court of Rajasthan. The assessee had taken mines on lease from the State Government for excavating soapstone crude. Under the terms of agreement, the assessee was required to restore surface land so used by it to its original condition. The assessee was following mercantile system of accounting. It was held that the very moment assessee dug pits, liability did arise and it was entitled for deduction of expense which it was supposed to incur for filing those pits.
5.3 The CIT(A) further observed that in order for an expense to be allowable section 37 of the Act it must satisfy the following conditions:
1. It should be a specific and ascertained liability i.e. the expense should have accrued.
2. The expenditure should not be covered under section 30 to 36 of the Act.
3. It should not be capital in nature.
4. It should be laid out wholly and exclusively for the purpose of the business.
5.4 Further, the CIT(A) observed that the expenditure in nature is not a contingent liability. Referring to the Rule 23A, 23B & 23C of the MCDR, the CIT(A) observed that once an assessee takes on lease a mine, its closure is inevitable because a mine cannot be exploited infinitely and indefinitely. Secondly, once the mine has been exploited, it has to be closed and rehabilitated. Further, even the amounts to be spent on rehabilitation are more or less determined as per the scheduled of the Indian Bureau of Mines.
Therefore, he disagreed with the view of the Assessing Officer that 7 I.T.A. No. 714 & 885/H/12 M/s NMDC Ltd.
it is a contingent liability. In case of Bharat Earth Movers Limited Vs. Commissioner of Income Tax [2000] 112 Taxman 61, the Hon'ble Supreme Court held that if a business liability has 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 allowable in principle u/s 37 of the Act.
4.2.7 However, what is to be seen is the year of allowability i.e. it is not up to the assessee to claim the liability as expense in any financial year. Rather the matching principle has to be applied correctly to determine the year in which such a liability can be allowed. On this issue, the judgement of the Hon'ble Rajasthan High Court in the case of Udaipur Mineral Development Syndicate (P) Limited discussed supra is directly applicable. The Hon'ble High Court has held that the moment the assessee digs the pits for mining he is legally bound to fill those pits and the liability accrues on the very date when the pits are due. In the case of Calcutta Company Ltd [1959] 37 ITR I, the assessee had purchased land and sold them in plots fit for building purposes undertaking to develop them. When the plots were sold, the assessee undertook to carry out the development within a stated period. In its accounts, it debited an estimated sum as 8 I.T.A. No. 714 & 885/H/12 M/s NMDC Ltd.
expenditure for the development that it had undertaken to carry out. This expenditure was disallowed. It was held by the Hon'ble Supreme Court that the undertaking to carry out development on the land imported a liability which accrued on the dates of the deeds of sale, though it was to be discharged at a future date. It was an accrued liability and estimated expenditure which would be incurred on discharging the same could be deducted from the profits and gains of the business. The difficulty in the estimation thereof did not convert the accrued liability into a conditional one. Profits or gains had to be understood in a commercial sense.
4.3 From the above facts and circumstances and taking account the various judicial pronouncements on the issue, I hold that mine closure obligation is in principle an allowable. However, it is not open to the appellant to claim any liability in any year. The matching principle has to be followed. This is illustrated with an example. If a mine "X" is excavated for two years amounting to 4000 cubic feet in year 1 and 5000 cubic feet in year 2, then in year 1 mine closure obligation corresponding to the filling 4000 cubic feet will accrue. In the second year and the accrual will correspond to filling of 500 cubic feet. These will be the allowable accrued expenses. In the current case, the appellant has claimed the obligation as below:
4.4 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 is accordingly partly allowed."
9 I.T.A. No. 714 & 885/H/12M/s NMDC Ltd.
6. Aggrieved, the assessee is in appeal before us.
7. Before us, the learned AR of the assessee has canvassed that the issue is squarely covered in favour of the assessee by the decision of the Tribunal in assessee's own case for AY 2006-07 in ITA No. 991/Hyd/2011 vide its order dated 18/05/2012. The AR pointed out that in AY 2007-08 the AO allowed mine closure obligation consistently the expenses were allowable since MMDR Act was amended w.e.f. 10/04/2003. The AR has also relied upon the following case laws in support of assessee's case:
1. Jitendranath Patnaik in ITA No. 09/CTK/2012.
2. Enviro Technology Ltd. Vs. DCIT, ITA No. 1921/Ahm/2009 and 2836/Ahm/2010.
3. Udaipur Mineral Development Syndicate (P) Ltd. [2003] 261 ITR 706(Raj.)
4. Patnaik Minerals Pvt. Ltd. Vs. CIT, ITA No. 008/CTK/2012.
5. Metal Box Co. of India Vs. Their Worken, [1969] 73 ITR 53 (SC)
6. Bharat Earth Movers Vs. CIT [2000] 112 Taxman 61 (SC)
7. Calcutta Co. Ltd. Vs. CIT [1959] 37 ITR 1
8. The learned DR on the other hand relied upon the order of the CIT(A).
9. 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. In AY 2006-07, the coordinate bench in assessee's own case (supra), held as follows:
"11. We have heard both the parties, perused the record and gone through the orders of the authorities below. It is observed that the basis of calculation for the relevant AY 2006-07 for Rs. 71.18 crores was submitted during the original assessment and accepted by the AO. The detailed calculation of Rs. 21.31 crores charged to P&L A/c (on the basis of Rs. 71.18 crores) was also enclosed and produced before the CIT. Hence, the CIT is wrong in his observation that the estimate of Rs. 21.31 crore is excessively on a higher side and absolutely no realistic or rational basis for such calculation.10 I.T.A. No. 714 & 885/H/12
M/s NMDC Ltd.
12. The CIT is not correct in invoking the provisions of section 263 as we find that the issue is debatable and when two views are possible the AO has taken one view. The Apex Court in the case of Malabar Industrial Co. Ltd. Vs. CIT reported in 243 ITR 83 as well as CIT Vs. Max India Ltd. reported in 295 ITR 282 has held that when there are two views possible and the AO has taken one view, the order of the AO cannot be considered 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 closure obligation works out to Rs. 4,98,058/- cannot be allowed. Further, mines at Kumaraswamy and Lalpur where there is no production, being so, no obligation is allowable. Further, assessee has not given year-wise break-up. Being so, the CIT(A) directed the AO to ascertain the account of year-wise mining, which has been done from the remaining mines and allow mine closure obligation to the extent mining done corresponding to the current year. He further gave a direction to the AO if the assessee fails to provide such data, then, prorata has to be applied. Thus, the CIT(A) has given a categorical finding in paras 4.3 & 4.4 of his order. Therefore, we do not find any infirmity 11 I.T.A. No. 714 & 885/H/12 M/s NMDC Ltd.
on that part of the order and accordingly, we confirm the same. This ground raised by the assessee is dismissed.
10. Ground No. 3 is as follows:
"The learned CIT(A) is not justified in disallowing the 'Transitional Liability as per AS-15 of Rs. 27.11 crores provided towards ascertained liability done by an outside actuary under the mandatory Accounting Standard 15 (revised) on employee benefits issued by the ICAI."
11. The Assessing Officer noticed that the appellant had debited an amount of Rs. 27,11,00,000/- towards transitional liability. The appellant stated that it had made its calculations of employee benefits like gratuity, LTC, etc. on actuarial basis as against the earlier method of accounting on cash basis. The Assessing Officer agreed that the expenditure on actuarial basis is allowable. However, it was stated that creation of liability for the company in respect of employees for past service is not allowable as it does not pertain to the current year. The following reasons were given for the addition:
"4.2. It is clear from the explanation furnished above, that the liability on account of Gratuity & LTC etc have all been valued on actuarial basis in order to comply with the Accounting Standards-15. This liability even if allowable should relate to the current year. It is to be appreciated in the present instance that the assessee has created a liability in respect of gratuity etc on the basis of the number of years of service of each employee taking their Basic, DA etc. Employers contribution towards an approved gratuity fund created exclusively for the benefit of the employees under an irrevocable trust can be allowed as deduction, provided the amount of deduction 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."12 I.T.A. No. 714 & 885/H/12
M/s NMDC Ltd.
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 to say that the liability related to the earlier years because the liability related to current year. The Assessee stated further as follows:
"Accounting Standard-I5 - Employee Benefits - has been revised w.e.f. 07-12-06. As per the revised Standard, Employees' Benefits like Gratuity, LTC, etc. are required to be valued on actuarial basis as compared to the earlier practice of accounting expenditure on cash basis - as and when incurred (except gratuity). As required by the revised AS-I5, transitional liability of RS.27.11 crores arising on the first application of the AS-I5 has been charged to P&L account. It may be pointed out here that actuarial valuation takes into account Basic Pay, DA, Date of Birth, Date of entry into service, length of service and date of retirement of all employees and discounts the calculation at an appropriate rate to arrive at the liability as on the Balance Sheet date. This represents amount due to employees as on that date and is therefore very much an expenditure and is not contingent in nature. Thus this is an allowable expenditure only.
Provision for actuarial valued liabilities is an allowable expenditure. If an amount is set apart for discharge of a liability on actuarial valuation that is to be allowed as deduction - (IT v. Electric Lamp Mfrs. (India) (P.)Ltd. [1987] 165 ITR 115 ((al.)."
12.1 After considering the submissions of the assessee, the CIT(A) observed that there is no doubt that the gratuity is actually 13 I.T.A. No. 714 & 885/H/12 M/s NMDC Ltd.
calculated by using one of parameters as length of service, etc. and it is a liability which is incidental to the business of the appellant. However, He agreed with the Assessing Officer that the entire liability does not pertain to the current year and, therefore, the earlier year liability has to be charged from the reserves. Accordingly, the CIT(A) directed the Assessing Officer to look at the calculation and allow the gratuity to the extent it pertain to the current year after taking into account the changes made in AS - 15.
13. Aggrieved, the assessee is in appeal before us.
14. Before us, the AR of the assessee contended that the CIT(A) is not correct to hold the view that entire liability does not pertain to current year and it was stated that accounting standard AS-15 made it mandatory to account it on accrual basis with effect from accounting period commencing from 01/04/2007 i.e. FY 2007-08/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 14 I.T.A. No. 714 & 885/H/12 M/s NMDC Ltd.
under the scheme and claimed deduction of the same. The Assessing Officer disallowed the claim on the ground that the grant of award was at the discretion of the management and therefore, it could not be said to be a provision towards ascertained liability. The Tribunal allowed the assessee's claim.
On appeal by Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under :
"i) There was no merit in the submission of the revenue that the liability of the assessee under the long service award scheme was contingent as the payment under the said scheme was dependent on the discretion of the management. It is well-settled that if the liability arises within the accounting period, the deduction should be allowed though it may be quantified and discharged at a future date. Therefore, 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.
ii) In the instant case, since the provision for 'long service award' was estimated based on actuarial calculations, the deduction claimed by the assessee had to be allowed."
16.1 We are in complete agreement with the above judgment of the Hon'ble Delhi High Court. However, we make it clear that the liability relating to the AY under consideration is to be quantified and the same is to be allowed in terms of the judgment cited supra. Future liability, if any, cannot be charged to the present AY. Accordingly, the AO is directed to pass consequential order.
17. Ground No. 4 is as follows:
"The learned CIT(A) is not justified in disallowing the 'depreciation on intangible assets' of Rs. 6.48 crores provided towards depreciation on leasehold land. Intangible assets are mainly lease hold land acquired from various State Governments which can be used for a limited period."
18. The assessee had claimed a sum of Rs. 6,48,42,067/- during the year towards depreciation of intangible assets. The assessee was asked to explain the nature of the assets acquired and the allowability of such depreciation. It was replied in the letter dated 15 I.T.A. No. 714 & 885/H/12 M/s NMDC Ltd.
16.12.2010 that the intangible assets are mainly lease hold land acquired from various state governments which can be used over a certain period. The AO noted that from the above explanation, it is clear that the lands are not owned 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 assessee explained that intangible assets pertain to leasehold lands which are taken from various statement governments and, therefore, the leasehold land is to be taken as intangible asset on which depreciation is allowable. The CIT(A) after considering the submissions of the assessee observed that an intangible asset is one which cannot be touched, felt or seen. This is fundamental difference between what is tangible and what is intangible. Land, whether leasehold or freehold and taken for whichever purpose, is by no stretch of imagination intangible. It has all the properties of tangibility. Further, land is not a depreciable asset as per the Income Tax Act.
16 I.T.A. No. 714 & 885/H/12M/s NMDC Ltd.
In view of the above observations, the CIT(A), therefore, confirmed the addition made by the AO on this account.
20. Before us, the learned AR of the assessee submitted that the accounting policy/method is consistently followed by number of years and, therefore, the same may be allowed as deduction. He relied on the following case laws:
1. East India Minerals Ltd. Vs. JCIT, ITA No. 224/CTK/2012.
2. Mysore Minerals Ltd. Vs. ACIT, ITAT, Bangalore 100% allowed as revenue expenditure.
3. Jitendra Pathiak Vs. DCIT, ITA No. 185/CTK/2010
21. The learned DR has relied on the order of the CIT(A).
22. We have heard the arguments of both the parties and perused the record as well as gone through the orders of the authorities below. Similar came up for consideration before the coordinate bench of ITAT, Cuttack in case East India Minerals Ltd. Vs. JCIT in ITA No. 224/CTK/2012, vide its order dated 25/06/2012, on which reliance placed by the assessee, wherein it has been held as follows:
"7. We have heard the rival contentions of the parties and perused the material available on record. Considering the facts and circumstances of the case, we uphold the contention of the learned Counsel for the assessee for the simple reason that the denial of claim of depreciation has been made on misinterpretation of law and the applicability thereof. Explanation to Section 32(1)(ii) leans in favour of the assessee to the extent that it is the actual action of put to use which entitles the assessee to claim depreciation. A straight line method of claiming the writing off of lease hold rights for the period of lease cannot be denied to the assessee for the simple reason it being intangible asset has been written 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 17 I.T.A. No. 714 & 885/H/12 M/s NMDC Ltd.
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 allow the deduction in accordance with the provisions of Income-tax Act,1961."
22.1 Since the issue under consideration is materially identical to that of the case decide by the Tribunal in the case of East India Minerals Ltd., respectfully following the same, we set aside the order of the CIT(A) and direct the AO to delete the addition made in this regard.
23. Ground No. 5 is as follows:
"The CIT(A) is not justified for disallowance of the expenditure amounting to Rs. 1.37 crore incurred/paid towards payment of stamp duty & registration charges to the Govt. authority on the leasehold land acquired wholly and exclusively for business purpose and claimed u/s 37(1) of the IT Act."
24. The assessee had claimed the expenditure of Rs. 1,36,93,552/- towards stamp duty and registration charges on leasehold land to state government in respect of projects/units BLD-14 and BLD-5. The AO disallowed the said expenditure on the ground that the same are obtained in the process of acquisition of land which itself has been treated as an intangible asset by the assessee and the expenses related to such acquisition has also to be treated as capital in nature and therefore is not an allowable expenditure.
25. Before the CIT(A), the assessee argued that such charges are allowable as the expenditure is towards business purposes. The 18 I.T.A. No. 714 & 885/H/12 M/s NMDC Ltd.
CIT(A) confirmed the action of the AO observing that it is a settled law that these charges are capital in nature.
26. Before us, the learned AR of the assessee submitted that this expenditure is incurred every year and the same is allowed as revenue expenditure consistently. He relied on the following case laws:
1. Jitendra Pathiak Vs. DCIT, ITA No. 185/CTK/2010.
2. CIT Vs. Cinceita (P) Ltd. [1982] 137 ITR 652 (Bom.)
3. CIT Vs. Bank of India [1987] 168 ITR 731 (Bom.)
4. Shree Krishna Tiles & Polteries (P) Ltd. Vs. CIT [1988] 173 ITR 311 (Mad.)
5. Plantation Corporation, 205 ITR 364 (Kerala)
27. Learned DR, on the other hand, relied on the orders of the revenue authorities.
28. We have heard the arguments of both the parties, perused the record and have gone through the orders of the revenue authorities as well as the decisions cited. This issue is squarely covered by the Hon'ble Bombay High Court in the case of CIT Vs. Cinceita (P) Ltd. (supra), wherein the Hon'ble Court held as follows:
"Although the 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).19 I.T.A. No. 714 & 885/H/12
M/s NMDC Ltd.
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. 185/CTK/2010 for AY 2007-08 vide its order dated 17/06/2011, on similar issue, held as follows:
"7. On careful analysis of the impugned orders of the authorities below and the order passed by the CIT(A), Bhubaneswar dt. 21/07/2010 in the case of Orissa Mining Corporation Ltd., copy of which is made available by the assessee before us, we are of the considered view that the assessee is not acquiring any asset nor enduring benefit but is having only a right to work of mining in the land given to him for a specific period on lease. Therefore, this amount is practically a revenue expenditure incurred by the assessee while doing his trade of mining operation. Hence, we are of the considered view that the claim of the assessee to allow the same as revenue expenditure is very much within the provisions of the income-tax Act, 1961 applicable thereto. Hence, having find merits in the appeal of the assessee, we set aside the impugned order of the learned CIT(A) on this issue and direct the AO to allow the expenditure in question as revenue expenditure."
28.3 Further, the same view has been followed by the Hon'ble Jurisdictional High Court in the case of CIT Vs. Panyam Cements and Minerals Industries Ltd. , 228 ITR 212 (AP) wherein it has been held that stamp duty paid for renewal of mining lease is a revenue expenditure. However, we make it clear that if the expenditure incurred by the assessee for first time with respect to the assets claimed as capital asset, in earlier paras of this order on which we have granted depreciation, then, this expenditure to be considered as capital expenditure. Thus, this ground is partly allowed.
20 I.T.A. No. 714 & 885/H/12M/s NMDC Ltd.
29. Ground No. 6 is as follows:
"The learned CIT(A) is not justified by disallowing the 'expenses on corporate social responsibility' of Rs. 12.19 crores incurred for and benefit of the company under social obligation for the very existence of the business."
30. The AO noted that the assessee had submitted the details of expenses on corporate social responsibility vide its letter dated 18.10.2010. It is stated that in the present scenario, expenses on Corporate Social Responsibility(CSR) are a statutory obligation to conduct a profitable business in the long run. The assessee company has incurred a sum of Rs.21,74,75,417/- in the name of Corporate Social Responsibility. It is observed that the following are some of the major expenses incurred by the company:
(Amounts in Rs.)
i) Payment made towards flood relief works with Steels Authority of India. 4,00,00,000
ii) Paid to ISM, Dhanbad for endowment 65,00,000 fund
iii) Paid to Collector, Jagadalpur under Nirmal Gram Panchayat Program 2,00,000
iv) Paid to Collector, Jagadalpur under Nirmal Gram Panchayat Program 1,75,00,000
v) Paid to Collector, Jagadalpur for construction of musical fountain 5,00,000
vi) Paid to celebration of Hampi Utsav 10,00,000
vii) Purchase of vehicles for flood relief 15,95,000 works
viii) Payments less than Rs. 5 lacs for which no details are available 3,48,04,548 12,18,99,548 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/-.21 I.T.A. No. 714 & 885/H/12
M/s NMDC Ltd.
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 not been made to any organization which is granted the status under section BOG of the Act. Therefore, none of the payments can be considered as allowable donations under that section. Now, the payments will have to be examined with regard to their allowability under section 37 of the Act.
31.2 With regard to the first payment of Rs. 4 crores to Steel Authority of India, the CIT(A) observed that the same had been made to that company for no apparent business purpose and the fact that there was a review meeting in the Ministry of Steel and they decided on the payment does not in any way make the purpose of the payment either business or an allowable deduction under the Income Tax Act. If the appellant company wanted to contribute to some flood or calamity relief and claim deduction under the Income Tax Act, it could have very well done so by making the payment to Prime Minister's Relief Fund or any other notified fund. Therefore, the aforementioned payment of Rs. 4 Crores is neither an allowable donation nor an allowable deduction under section 37 of the Act.
22 I.T.A. No. 714 & 885/H/12M/s NMDC Ltd.
31.3 As regards the second payment of Rs. 0.65 crores paid to the Indian School Mines, the CIT(A) noted that the the appellant has stated that this payment was essential because the appellant gets to recruit engineers from Indian School of Mines. In this regard, no details whatsoever have been provided by the appellant. It is not clear as to how this payment will attract the top engineers to NMDC.
31.4 As regards the payments made to Collector, Jagdalpur, purchase of vehicles, for celebration of HampiUtsav, etc. the CIT(A) observed that they also fall in the same category and they are not channeled as allowable donations under the Income Tax Act, while, at the same time not being wholly and exclusively for business purpose.
31.5 In view of the above observations, the CIT(A) confirmed the addition of Rs. 12,18,99,548/- made by the AO on these counts.
32. Aggrieved, the assessee is in appeal before us.
33. Before us, the learned AR of the assessee submitted that all expenses are in the perferi & district of assessee's plant or operational allowed in all earlier years consistently. He further submitted that Govt. made it mandatory to spend 2% which works out to about Rs. 100 crores and, therefore, the assessee company had spent only 0.24% of profit. He relied on the following decisions 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. 22/06/12.23 I.T.A. No. 714 & 885/H/12
M/s NMDC Ltd.
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 perused the material available on record. No doubt the assessee incurred an expenditure of Rs. 5,00,00,000/- as contribution for establishing a medical college. The fact that the assessee is having a mining unit and a steel plant in Chattisgaarh is not dispute. The objection of the Department appears to be that the medical college was located at a distance of 16 kms. And the assessee, instead of providing relief to the affected people, directly incurred the expenditure for establishing the medical college. The fact remains that one of the conditions for contributing the money was to give free medical treatment to the Adivasis who were affected by the assessee's project in the locality. Moreover, the employees of the assessee and their dependents were to be treated free of cost. Five seas were reserved in the medical college for the children of the employees of the assessee. In fact admission was also given to the children of the employees of the assessee as per the condition stipulated while contributing the money. The assessee also had a representation in the Board. In view of the above, in our opinion, the contribution of Rs. 5 crores is only a welfare measure for the upliftment of the Adivasis in the locality where the mining unit was situated and also for the welfare of the employees of the assessee. This contribution would definitely go a long way in conducting the assessee's mining business in a 24 I.T.A. No. 714 & 885/H/12 M/s NMDC Ltd.
profitable manner. When the assessee is having a mining unit in a remote corner of the country, the cooperation of the villagers is very much required for conducting the business. More particularly, the cooperation of the people who are affected by the mining operation of the assessee is required. Merely because the hospital and medical college are situated 16 kms away from the unit, that will not deter the medical institution in giving treatment to the affected people. Moreover, admission was given to the children of the assessee's employees in the medical college. Therefore, indirectly the contribution made by the assessee takes care of the education of the employees' children. This would certainly be a welfare measure on the part of the assessee for carrying out the business in an effective and efficient manner. Therefore, in our opinion, the contribution of Rs. 5,00,00,000 has to be treated as revenue expenditure for the purpose of the business. 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 25 I.T.A. No. 714 & 885/H/12 M/s NMDC Ltd.
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 year treating them as capital expenditure under schedule 21 of the P &I L Account. The assessee was asked to explain the reasons.
38.1 It was explained that the "Pre-operative revenue expenses' are nothing but consumption of stores & spares, payments & benefits to employees, repair & maintenance, other expenses and consultancy charges. AR relied on the following decisions:-
(a) CIT vs. Usha Iron & Ferro Metal Corp. Ltd.
(b) CIT vsRelaxoFootwears Ltd."
38.2. The AO observed that both the cases are not applicable since the assessee has not explained the context in which the expenditure has been incurred. The facts determine the nature of expenditure whether it is capital in revenue. From the reply furnished in its letter dt. 16-12-2010, it can be observed that the expenses are all revenue in nature being towards consumption towards stores & spares, payments to employees, repairs & maintenance, consultancy charges, etc., which cannot be treated as capital expenses. If the expenses are incurred in setting up a new business, it would be an expenditure incurred on capital account, but where it does not amount to the starting of a new business, the expenses in connection therewith would be revenue expenses. In the absence of information as to the context in which the expenditure has been incurred, it cannot be considered as allowable since the company itself has chosen to treat it as capital expenditure in, it books. Hence, the AO disallowed the claim of preoperative expenses of Rs. 5,43,27,455/-.
26 I.T.A. No. 714 & 885/H/12M/s NMDC Ltd.
39. During appeal proceedings, the appellant did not provide any details of preoperative expenses, but, it was replied as under:
"Pre-operative revenue expenses are nothing but consumption of stores & spares. payments & benefits to employees. repair & maintenance. other expenses and consultancy charges. The revenue expenses are claimed based on the following decided cases:-
(a) CIT vs. RelaxoFootwears Ltd. [ (2007) 200 Taxation 433 (Del.)] :Wherein it was decided by the Delhi High Court that preoperative expenses can be claimed as revenue expenditure in one go, when there is common funds and unity of control.
(b) DClT vs. ACC Rio Tinto Exploration Ltd. ITA Nos.
4908/Del/2005 The company's contention is also supported by the recent decision of the ITAT in DCIT vs. ACC Rio Tinto Exploration Ltd. ITA Nos. 4908/Del/2005 AY: 2001-02 decided on 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.
27 I.T.A. No. 714 & 885/H/12M/s NMDC Ltd.
The expenditure incurred under this head is purely revenue in nature, which would otherwise have been charged to revenue. and has been written off' as per the accounting policy adopted by the Company during the year to be in line with Accounting Standard applicable for the company to comply with as per Companies Act. 1956.
In all respects, the expenditure incurred during pre-operation period complies with conditions as laid down under section 37 of the Income Tax Act. and qualifies for revenue expenditure.
CIT(A) is requested to delete the addition made by A.a. based on the above submissions & decided cases."
40. After considering the submissions of the assessee, the CIT(A) confirmed the addition by holding as under:
" 12.2 I have considered carefully the facts and evidence. It is very clear that the expenses in question are preoperative in nature. These expenses are definitely capital and have been right categorized so by the appellant and also certified as capital expenditure by the auditors. It is only at the time of computation of income the appellant claimed this expenditure as revenue without providing any details or reasons. I have also taken a look at the case law referred to by the appellant and I find that there is absolutely no reason by which the claim of the appellant can be allowed. The facts in the case law are very different than the facts of appellant's case. Accordingly, I uphold the action of the Assessing Officer to treat the same as capital expenditure".
41. Aggrieved, the assessee is in appeal before us.
42. Before us, the learned AR submitted that expenses are in the nature of consuming stores/spare, payment to employee, repairs and maintenance. He contended that since the expenses were crystallized in the year under consideration, the same are allowable. He relied on the following case:
1. ACIT Vs. Parabolic Drugs Ltd., ITA No. 2111/Del/2010, ` dated 17/06/2011, 141 TTJ (Del.) 662/62 DTR 3.
43. The learned DR relied on the orders of the revenue authorities.
28 I.T.A. No. 714 & 885/H/12M/s NMDC Ltd.
44. We have heard the arguments of both the parties and perused the record. While confirming the addition, the CIT(A) gave a categorical finding that "these expenses are definitely capital and have been rightly categorized so by the appellant and also certified as capital expenditure by the auditors. It is only at the time of computation of income the assessee claimed this expenditure as revenue without providing any details 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 on the provision of wage revision which was due from 01101-2007. However, no further information regarding the effective date of revision and the calculations behind the working of the ad-hoc deduction have not been furnished, in the absence of which they cannot be treated as allowable expenditure under the provisions of 1.T. Act, 1961, by the AO.
29 I.T.A. No. 714 & 885/H/12M/s NMDC Ltd.
47. During appeal proceedings, the appellant stated as follows:
"Under para 11.2 of page no, 14 of the assessment order, the A.O. has not allowed the expenses based on the contention that "No further information regarding the effective date of revision and the calculations behind the working of the ad hoc deduction have not been furnished".
Based on our reply, the A.O, has mentioned that "the adhoc provision of PF in the accounts was based on the provision of wage revision which was due from 01.01.2007" .
The contention of A.O. in the above two paras is contradicting each other.
We have not submitted any additional information as no further information has been asked for. Without asking any further information or giving opportunity to the assessee, the A.O. has added back the amount.
When the wage revision was allowed by the A.O, the PF contribution on revision cannot be disallowed on the contention of the following:
No further information regarding the effective date of revision and the calculations behind the working of the adhoc deduction have not been furnished.
CIT(A) is requested to delete the addition made by A.O. based on the above submissions."
48. After considering the submissions of the assessee, the CIT(A) confirmed the addition made by the AO by observing as under:
"From the above facts, I find absolutely no rationale for the adhoc provision made by the appellant and for same to be allowed as deduction under the Income Tax Act. The Assessing Officer is right in saying that no details regarding the calculations and no relevant information was provided by the appellant. During appeal proceedings, instead of providing information and evidence regarding its claim, the appellant merely stated that the Assessing Officer did not ask for more information. I too find that in the absence of any details of calculations and the basis, the adhoc provision cannot be allowed as deduction. Addition on this account is ordered to be confirmed."30 I.T.A. No. 714 & 885/H/12
M/s NMDC Ltd.
49. According to the AR of the assessee the 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 of Mine Closure obligation in view of the fact it is not an ascertained liability and if at all any expenditure is to be allowed, it should be spread over evenly for all the years since the date of commencement of mining operations till the date of closure of mining activities."
54. This ground has been decided in favour of the assessee vide paras 3 to 9.1 in assessee's appeal, therefore, this ground of revenue is dismissed.
31 I.T.A. No. 714 & 885/H/12M/s NMDC Ltd.
55. Ground Nos. 3 & 4 are as follows:
"3. The CIT(A) erred in granting relief to the assessee in respect of closing stock valuation of lumps & Fine Iron Ore, though it is clearly mentioned in the Notes Forming Part to the Accounts that the Fine Ore lying in dump at the end of current year's production is recognized as production and stock and that the value of inventories - finished goods- iron ore has increased by Rs. 16.38 crores with the corresponding increase in net profit.
4. The CIT(A) erred in granting relief to the assessee thereby directing to adopt the value of diamonds as opening stock and closing stock at Rs. 1 lakh each thereby the net effect would be zero. The CIT(A) ought to have considered the fact that the Diamonds since recovered during the previous year under consideration are to be taken as stock received and since the same are in the possession of the assessee, as at the end of the year the same are required to be reflected as closing stock which the AO has rightly considered.
56. Briefly the facts relating to this ground are that the AO found from the notes forming part of the accounts, it was written as under:
"fine ore lying in dump at the year end out of current year's production is recognized as 'production and stock', as against the earlier practice of not considering the same. As a result, value of "inventories - finished goods - iron ore" has increased by Rs.16.38 crs with corresponding increase in net profit."
56.1 The Assessing Officer asked the appellant as to why the value of lumps and fine iron ore should not be recognized as the income. of the year on account of valuation of closing stock. By giving the following reasons, the Assessing Officer made the addition in question:
"3.4. The above contentions of the assessee are considered. The assessee has stated that the cost of production of the dumped fine ore was absorbed by the saleable product, namely, lumps. 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 32 I.T.A. No. 714 & 885/H/12 M/s NMDC Ltd.
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 therefore been valued at its cost i.e. zero. The following are the written submissions of the appellant:
"Lump and fine ore are produced simultaneously during the same process. In earlier years as there was no market for fine are, hence the produced quantity was dumped in different stock yards. The cost of production of this dumped fine ore quantity was being absorbed by the saleable product - lump. Hence fine are stock carried Zero value. W ith improvement in steel making technology, fine are became a saleable product. Hence the company started retrieving the fine are from the dump and selling it to various customers. The quantity so sold was included in sales turnover and accounted for. Sometimes due to break down of the equipment, conveyor belt and saturation of fine are stock pile at the loading plant, fine ore is dumped at these stock yards, retrieved and sold as per requirement.
During 2007-08 Accounting Policy was revised to recognize the total fine ore produced in that year - whether sent to regular loading plant or sent to dump yards. Thus quantity remaining in stock out of current year (2007-08) production whether at loading plant or dump site was recognized as stock and valued. The same has been indicated in Sch.24.
Thus during 2007-08 the quantity lying in dump pertaining to the period upto 31-03-07 was surveyed and physically measured. This quantity has been indicated in Sch.23 as 8.78 LT. As the cost of production of this quantity was already absorbed by the saleable product of earlier years, this stock has Zero value.33 I.T.A. No. 714 & 885/H/12
M/s NMDC Ltd.
In view of the changed Accounting Policy, fine are lying in dump generated during the financial year 2007-08 was valued and indicated at RS.16.38 crores (instead of Zero value); in other words cost of production of fine ore from 2007-08 onwards was not absorbed by other saleable are. Thus lump and fine are stocks were valued separately. The value of 8.78 LT of fine ore lying in dump pertaining to earlier years is RS.Zero as the cost of production has been absorbed by the lump ore and saleable fine are. This point has been adequately indicated in Note NO.2.2 of Sch.24 at page-1l3 of Annual Report 2007-08. As per AS-2, stock is to be valued at cost or net realizable value whichever is lower. Accordingly, the stock of 8.78 LT has been valued at cost, which is zero.
Under para 3.4 of page no. 7 of the assessment order the 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 accounting adopted by the trader consistently and regularly cannot be discarded by the departmental authorities on the view that he should have adopted a different method of keeping account or of valuation. The method of accounting regularly employed may be discarded only if, in the opinion of the taxing authorities income of the trade cannot be properly 34 I.T.A. No. 714 & 885/H/12 M/s NMDC Ltd.
deduced there from - Investment Ltd. v. C/T[1970] 77 ITR 533 (SC)."
58. After considering the submissions of the assessee, the CIT(A) directed the AO to delete the addition made on this count by observing as under:
"I have seen carefully the arguments, the facts and the case laws. 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. It is a fact which is not disputed by the Assessing Officer that both iron lump and fine iron are are produced in the same process. Therefore, the cost of production of both has been calculated through a common process. The appellant has been allocating the entire cost of production to iron lumps which have been valued at that cost. Now, if some cost is to be attributable to fine iron are then that corresponding cost will have to be reduced from the cost of lumps. As an example, if the total cost of fine iron are and lumps is hypothetically taken as 100, the appellant had allocated the cost as zero for fine iron are and 100 for lumps. If the Assessing Officer wants to revalue the closing stock i.e. reallocate the cost, he will have to increase the cost affine iron are from zero to let us say 30 while reducing the cost of lumps from 100 to 70, thereby maintaining the overall cost at 100. In the present case, 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 as it increases the overall valuation. The fact that the market price of fine iron are has increased does not have anything to do with the closing stock valuation. Therefore, any reallocation of closing stock cost between fine iron are and lump will necessarily have to be tax neutral. There is therefore, no circumstances which compels the Assessing Officer torevalue to closing stock of fine ore. In any case, as the fine iron ore is sold, the revenue so generated will be accounted for in the receipts.
Given the above facts and circumstances, the addition made on this account is ordered to be deleted."
59. We have heard the arguments of both the parties and perused the record. We do not find any infirmity in the findings of the CIT(A) with respect to closing stock valuation of lumps and fine iron ore and, therefore, the order of the CIT(A) is hereby confirmed in 35 I.T.A. No. 714 & 885/H/12 M/s NMDC Ltd.
deleting the addition made by the AO on this issue. Accordingly, this ground of appeal of revenue is dismissed.
60. In the result, appeal of the revenue in ITA No. 885/H/12 is dismissed.
61. To sum up, appeal of assessee in ITA No. 714/H/12 is partly allowed and appeal of revenue in ITA No. 885/H/12 is dismissed.
Pronounced in the open court on 28/02/2014.
Sd/- Sd/-
(ASHA VIJAYARAGHAVAN) (CHANDRA POOJARI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, dated 28/02/2014.
kv
Copy forwarded to:
1. ACIT, Circle - 16(1), Room No. 612, 6 th Floor, , Aayakar Bhavan, Basheerbagh, Hyderabad - 500 004.
2. M/s National Mineral Development Corporation Ltd., Khanji Bhavan, Masab Tank, Hyderabad - 001.
3. CIT(A)-V, Hyderabad
4. CIT-IV, Hyderabad.
5. The DR, ITAT, Hyderabad