Income Tax Appellate Tribunal - Chennai
Neyveli Lignite Corporation Ltd. vs Assistant Commissioner Of Income Tax on 18 August, 2004
Equivalent citations: (2005)93TTJ(CHENNAI)685
ORDER
S.V. Mehrotra, A.M. This appeal is against the order under Section 263 of the IT Act, 1961 passed by the CIT, dt. 25th Nov., 2003. At the time of hearing, the learned counsel for the assessee pointed out that the Committee on Disputes has not accorded its approval for raising the issue regarding jurisdiction of the CIT invoking the provisions under Section 263 of the IT Act. Accordingly, this ground of appeal challenging the assumption of jurisdiction by CIT was not pressed before us. Accordingly, the said ground is dismissed as not pressed,
2. The second effective ground of appeal is that the learned CIT erred in directing the AO to disallow the business deduction of Rs. 180.92 crores, being arrears of salary. Brief facts apropos this ground are that the assessee had made a claim of Rs. 180.92 crores on account of pay revision. The assessee in its reply pointed out that liability had been created in the accounts for the pay revision as per Accounting Standard-4, which deals with the events occurring after the date of balance sheet but before the date of approval of accounts by the board of directors. The assessee also referred to the decision in the case of Bharat Earth Movers Ltd. v. CIT (2000) 245 ITR 428 (SC) and pointed out that it has been decided in that case that all known liabilities though not fully quantified had to be provided for. Since this was an existing liability, the same was provided.
3. The course of events giving rise to the pay revision was like this. The wage structure of workmen of Neyveli Lignite Corporation was determined through a memorandum of understanding dt. 8th July, 1995 between the management and workmen of the Neyveli Lignite Corporation represented by the joint council of unions. Settlement under Section 12(3), of the Industrial Disputes Act, 1947, was subsequently signed on 26th Aug., 1995 which was valid till 31st Dec., 1996. On account of expiry of the existing settlement, a bipartite committee was constituted on 29th Sept., 1999 and modified on 17th April, 2001, subsequent to identification of NLC Workers Progressive Union as the majority union through secret ballot election as per the directions of the Hon'ble High Court of Madras. The Neyveli Lignite Corporation Workers Progressive Union vide their strike notice dt. 18th April, 2001 raised an industrial dispute against the management of Neyveli Lignite Corporation (NLC) over the issue of finalizing the new wage revision from 1st Jan., 1997. There was a work to rule agitation from 17th May, 2001, a sit on strike on 21st May 2001 and general strike from 22nd May, 2001 to 26th May, 2001. Negotiations on the revised charter of demands of the recognized union commenced on 23rd April, 2001 and the Committee had meetings on various dates and finally on 26th May, 2001 and after protracted discussions on the union's charter of demands, a memorandum of understanding was reached between the representatives of management and recognized union on 27th May, 2001. Consequent to the arriving at a memorandum of understanding between the management of NLC and NLC workers progressive union, the strike was withdrawn. The dispute was ceased in consultations and conciliation provided on various dates as on 2nd May, 2001, 23rd May, 2001, 24th May, 2001, 25th May, 2001, 26th May, 2001 and finally on 29th June, 2001.
4. After protracted and prolonged discussions finally on 29th June, 2001, both the parties agreed to arrive at a settlement under Section 12(3) of the Industrial Disputes Act. The learned CIT taking note of the fact that the wage agreement was entered into on 29th June, 2001 and treating this as a fresh event which had taken place in the subsequent year, for which there was no whisper in the previous year, held that this liability germinated in the subsequent year and could not be related back to the earlier year. He further observed that the principle of prudence, as referred in Accounting Standard-4, is applicable to known liabilities and not to the liabilities of the subsequent years.
The learned counsel for the assessee submitted that pay revision was effective from 1st Jan., 1997, the process for which was started in 1999. However, list of demands was submitted by workers union on 1997 itself. In this regard, he referred to the letter of workers union dt. 26th June., 1997 contained at p. 19 of the paper book, which reads as under :
'We, the Workers Progressive Union, submitted list of demands for the ensuing wage revision period starting from 1st Jan., 1997 and decided to furnish the memorandum to the management with request all this demands'.
He also referred to p. 14 of the paper book, wherein letter dt. 22nd Feb., 1999 from the Director of Ministry of Coal, Government of India, addressed to the Chairman, Coal India Ltd., and CMD., Neyveli Lignite Corporation Ltd., is contained wherein it is pointed out as under :
"I am directed to forward herewith the office memorandum issued in the Department of Public Enterprises vide No. 2(11)96-UPE(LC) dt. the 14th Jan., 1999, which contains the decisions of the Government, regarding the policy for the Sixth Enterprises. It may kindly be ensured that the wage settlements are negotiated strictly in accordance with the parameters laid down in the aforesaid O.M. of the Department of public enterprises".
The learned counsel further referred to p. 15 of the paper book containing the office memorandum dt. 14th Jan., 1999 referred to in the letter of the director and pointed out that this office memorandum followed for the sixth round of wage negotiations in public sector undertakings and copy of this was endorsed to the assessee-company also and received in the office of the chairman on 22nd Feb., 1999. The learned counsel submitted that services had been rendered before 31st March, 2001 and this liability did not accrue after 31st March, 2001 but actually accrued prior to March, 2001 and a reasonable estimate in respect of the said liability was possible. In support of his argument regarding reaching at reasonable estimate, the learned counsel referred to p. 35 of the paper book wherein are contained the instructions dt. 25th March, 2001 for revision of pay scales, fitment, DA, fringe benefit, etc., in respect of the executives for implementation with the approval of the Government of India. Thus, the learned counsel submitted that framework for arriving at the revised pay structure had already been framed and, therefore, the assessee had to follow the same parameters for arriving at reasonable estimate of its accrued liability in respect of workers. The learned counsel pointed out that there could not be any conflict between wage revision of employees and executives and since instructions had been received regarding wage revision of executives, on the same lines provision for liability accruing on account of wage revision of employees could reasonably be made as the services had already been rendered by the workers. The learned counsel further referred to p. 15 of the additional paper book wherein a letter dt. 2nd March, 2001 of Personnel Department of National Thermal Power Corporation Ltd., is contained. He pointed out that NTPC had given the revised pay scales on 2nd March, 2001 and uniformity had to be had with other public sector undertakings. He also referred to p. 47 of the paper book wherein the circular of Corporate Personnel Department of Bharat Heavy Electricals Ltd., dt. 15th Nov., 2000 is contained which also deals with revision of pay and allowances of employees. The learned counsel submitted that all these facts were available to the assessee prior to 31st March, 2001 and, accordingly, the assessee had made provision for this liability. The learned counsel submitted that once a liability is known, the provision is an allowable deduction. In this regard he relied on following decisions :
Metal Box Co. of India Ltd. v. Their Workmen (1969) 73 ITR 53 (SC).--In this case the Hon'ble Supreme Court, inter alia, observed as under :
"Contingent liabilities discounted and valued as necessary, can be taken into account as trading expenses if they are sufficiently certain to be capable of valuation and if profits cannot be properly estimated without taking them into consideration. An estimated liability under a scheme of gratuity, if properly ascertainable and the present value is discounted, is deductible from the gross receipts while preparing the P&L a/c".
CIT v. Coimbatore Cotton Mills Ltd. (1983) 140 ITR 562 (Mad)--In this case it was held that provision for gratuity made on actuarial valuation was the proper deduction from the profits.
Hukumchand Jute & Industries Ltd. v. CIT (2000) 241 ITR 517 (Cal)--In this case, the assessee was a public limited company. During the year relevant to the asst. yr. 1981-82, the assessee-company consumed electricity and received a notice of demand for additional fuel surcharge in September, 1983 relevant to the asst. yr. 1984-85. In the original return for the asst. yr. 1981-82, the assessee did not claim deduction in respect of the amount of Rs. 25,48,047 on account of additional fuel surcharge for power consumption. But the assessee claimed it before the IAC in the proceedings under Section 144B of the Act. The claim of the assessee was not allowed by the IAC for the asst. yr. 1981-82 on the ground that the amount of liability was not ascertained and quantified, an ad hoc provision of Rs. 3,71,980 had been made by the asst. yr. 1981-82 for additional fuel surcharge. The Hon'ble Calcutta High Court, after taking note of Clauses 19, 20 and 25(9) of the agreement entered into between the Board and the assessee, wherein it was agreed that fuel charges would form part of the bill issued monthly and would depend upon the units consumed by the assessee during the month, held that the liability accrued under the agreement when the electricity was consumed by the assessee in the previous year relevant to the asst. yr. 1981-82 though quantification was made later. Accordingly, it was held that the assessee was entitled for deduction of additional fuel charge liability in the asst. yr. 1981-82.
Bharat Earth Movers Ltd. v. CIT (supra).--The Hon'ble Supreme Court observed :
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 on. The liability is in praesenti 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".
CIT v. Mahindra Ugine & Steel Co. Ltd. (2001) 250 ITR 84 (Bom)--In this case it was held that where, after perusing the terms and conditions of the wage settlement entered into by the assessee-company, the Tribunal found that under the conciliation proceedings a lumpsum payment was to be paid to the workers and hence, a debit was made in the P&L a/c to discharge the increased liability, and that the provision was made on a reasonable basis for anticipated expenditure, it was an allowable deduction.
CIT v. United Motors (India) Ltd. (1990) 181 ITR 347 (Bom)--In this case, the assessee was an agent for sale of motor vehicles. It also carried out repairing motor vehicles. The terms and conditions of service of workmen employed by the assessee were governed by wards. In October, 1970 the trade union representing the workmen of the assessee gave notice to the assessee terminating the award with effect from four months thereafter. The assessee's board of directors noted this at a meeting held on 25th Feb., 1970. A provision was made for Rs. 1 lakh in view of the impending liability on account of the change in service conditions of the assessee's workmen in the accounts for the year under consideration. Negotiations between the assessee and the trade union resulted in settlement dt. 2nd May and 6th Oct., 1972. Pursuant thereto the assessee paid a sum of Rs. 28,600 to the workmen in the month of May and June, 1972 on account of salary, etc. Later another ad hoc payment of Rs. 48,000 was made to the workers pursuant to the said settlement. The assessee claimed deduction of the aggregate sum of Rs. 76,680 in the asst. yr. 1972-73. It was held that though the provision of Rs. 100 lakhs itself was an allowable deduction, but since the same was denied, the assessee was entitled for the quantified liability of Rs. 76,680.
The learned Departmental Representative submitted that either the amount should have been apportioned over the years to which it related or it should have been debited in the P&L a/c in the year in which settlement reached. The learned Departmental Representative referred to p. 53 of the paper book wherein the memorandum of settlement under Section 12(3) of the Industrial Disputes Act, 1947, between the company and NLC Workers Progressive Union is contained. She pointed out that the said settlement was entered into on 29th June, 2001. The learned Departmental Representative submitted that nothing happened in asst. yr. 2001-02 and, therefore, it could not be allowed. She referred to the decision of the Tribunal in the case of South Eastern Coalfields Ltd- v. Jt. CIT (2002) 72 TTJ (Nag) 401 : (2003) 260 ITR 1 (Nag)(AT). In this case, the assessee-company had made a provision for interim relief payable to its employees covered by the National Coal Wage Agreement for the period 1st July, 1991 to 31st March, 1994 to the extent of Rs. 3,266 lakhs and amount payable to the employees covered by executives rules for the period 1st Jan., 1992 to 31st March, 1994 to the extent of Rs. 62.49 lakhs. The Tribunal held that as far as provision of Rs. 3,266 lakhs made by the assessee-company in respect of interim relief payable to the employees governed by the National Coal Wage Agreement was concerned, a letter was issued by the holding company, i.e. Coal India Ltd., on 11th Feb., 1994, which was carrying on the negotiations with the representing trade unions, intimating the assessee that amicable settlement between the parties had been arrived at, according to which Rs. 100 per month of interim relief to the employees covered by the National Coal Wage Agreement was payable w.e.f. 1st July, 1991. The Tribunal allowed this provision. However, in regard to the provision of Rs. 62.49 lakhs in respect of employees covered by executives rules for the period from 1st Jan., 1992 to 31st March, 1994, it noted that the negotiations with the concerned union reached the stage of settlement only after the end of the relevant accounting year vide letter intimating such settlement forwarded by Coal India Ltd., on 3rd May, 1994. Accordingly, it was held that it was not possible for the assessee-company to anticipate the liability to pay interim relief to this class of employees and that the provision was not warranted. The learned Departmental Representative thus submitted that the liability can be said to have accrued only when the final settlement was reached. The learned Departmental Representative submitted that strike notice was given after the end of accounting year and, therefore, it could not be said that liability had accrued in any case during the previous year 2001-02.
5. We have considered the rival submissions and have perused the records of the case. From the various judicial pronouncements noted earlier, it is clear that if liability had accrued during the relevant previous year and quite reasonably could be estimated on the basis of material available with the assessee, then merely because quantification of the same is done in a subsequent year, it cannot be said that the provision made for the said liability on a reasonable estimate basis was not allowable deduction. In the present case we find that the Workers Progressive Union submitted its list of demands for the ensuing wage revision period starting from 1st Jan., 1997 on 25th June, 1997 itself, Therefore, it was an impending liability. Vide letter dt. 14th Jan., 1999 it was pointed out by the Government of India, Department of Public Enterprises that wage settlement should be negotiated by public sector enterprises for which broad guidelines were made. Thus, the process started in January, 1999 itself and the assessee was also informed of this decision of Government of India on 22nd Feb., 1999. In pursuance of this, P&A Department of company issued instructions on 26th March, 2001 in regard to revision of pay scales for executive w.e.f. 1st Jan., 1997, Thus, as far as provision in respect of wage revision relating to executives is concerned, there cannot be any dispute that the same has to be allowed. Negotiations with workers trade union were also going on simultaneously and, therefore, that liability also was very much existing because under no circumstances wage revision to employees could be denied. Now we have to see whether the assessee could reasonably make estimate of liability on account of wage revision relating to workers. In this regard the assessee was having instructions of P&A Department of company dt. 25th March, 2001 in regard to wage revision of executives and two settlements of public sector undertakings, viz., NTPC and BHEL prior to 31st March, 2001, where also wage revision was to be effected on the same lines as in the case of the assessee. Therefore, the assessee could reasonably estimate its accrued liability as the services had already been rendered by 31st March, 2001. It was, therefore, fully justified in making this provision. It was not a new event occurring in the case of this company. The learned Departmental Representative has pointed out that the assessee should have made this provision in the respective years. However, for arriving at the provision there should be some basis available to the assessee and that was in the form of settlements reached for pay revision of its executives and also by NTPC and BHEL which were also made available to the assessee before 31st March, 2001. In view of the aforesaid facts, we set aside the order of the learned CIT in respect of this issue. This ground is allowed.
6. The second issue involved in the present appeal is regarding rejection of change in basis of valuation of closing stock of urea. The learned CIT in para 8 of his order has held that due to change in method of accounting of valuation of closing stock of urea, the closing stock was undervalued by Rs. 18.6 crores. The brief facts apropos this issue are that the assessee was manufacturing urea in its Fertilizer Division. Urea being an essential commodity, sale price of urea was subject to administrative price control. In the note on the urea, subsidy, filed in the paper book, it has been pointed out by the assessee that with a view to ensure that fertilizer companies do not incur losses, the Government fixed what is known as retention price based on various facts like expenses, depreciation, fuel charges, electricity charges, return on investment etc., of the fertilizer company. The difference between the retention price and the sale price of urea is given by the Government as a grant or subsidy. It has been further pointed out that there is a provision for reworking of the retention price on the basis of variation in the cost of various inputs going into the computation for the retention price. The assessee had to claim escalation on quarterly basis specifying the variation in input cost and also giving the working for the claim. For claiming this enhancement in subsidy, the fertilizer companies were required to make an application to the Government along with the relevant particulars and documents, The Government had to approve the application and then only payment could be made. One of the elements of input is the power cost which is determined by the agreement with the Electricity Board. Power cost on different occasions had been varied with retrospective effect, for example there was variation in power cost in 1997, 1998 and 1999. On the basis of these variations the assessee had claimed escalation of retention money from 1996-97 onwards aggregating to Rs. 6.97 crores. It is pointed out in the note that this amount was not settled by the Government nor was there any acceptance of claim as on 31st March, 2001. In regard to other items also it is pointed out in the note that it has been the experience of the assessee that even in respect of other claims for escalation, the Government had not accepted the full claim nor did they give reason for reduction or rejection of the claim of the assessee. In regard to change in method of accounting, it is pointed out that earlier the assessee had been accounting its claim for the escalation amount at the time of raising the claim. However, keeping in view the uncertainty of the acceptance of the claim for escalation, profits of the year were not truly reflected by accounting the claim of escalation in the year of making the claim itself. Accordingly, the assessee decided to account for this claim for escalation in respect of cost on various inputs in the year in which the Government accepted the claim. Thus, in sum and substance, the assessee changed its method for accounting in respect of escalation in the cost of inputs on cash basis instead on mercantile basis earlier followed by it. In regard to the deduction in value of closing stock by Rs. 18.69 crores, it is pointed out in the Note that during the asst. yr. 2001-02, there was an agreement with the Electricity Board regarding power tariff by which the power tariff was changed w.e.f. 1997-98. As a result, the assessee had raised the claim for escalation of retention price on account of this change in power tariff amounting to Rs. 18.69 crores for the period 1997-98 to 2000-01. Here again on account of uncertainty about the acceptance of the claim by the Government, the assessee had decided to account for the same on cash basis. It is pointed out that this change in method was mentioned in the balance sheet and the same has also been accepted by the Comptroller and Auditor General of India. The learned counsel for the assessee referred to p. 59 of the paper book wherein a letter of Ministry of Commerce and Fertilizer, Department of Fertilizer dt. 11th Jan., 2002 is contained intimating the assessee regarding revision in retention price on account of escalation/de-escalation w.e.f. 1st April, 1997 to 1st April, 2001. The learned counsel also referred to pp. 61 and 62 of the paper book to demonstrate as to how the assessee was making quarterly escalation claim on account of increase/decrease in the cost of various inputs. He further referred to p. 73 of the paper book, para 24(iii), which reads as under :
Differential retention price of urea and closing stock of urea accounted on ad hoc price or estimated realizable price whichever is less and supplementary/ escalation claim accounted in the year of acceptance/realization as against the earlier policy of accounting the claim of estimated realizable price".
The learned counsel referred to the decision of the Hon'ble Madras High Court in the case of CIT v. Elgi Equipments Ltd. In this case, the assessee had changed its method of accounting only in respect of export cash assistance from accrual to cash basis as the amount was not being regularly received. In this case, it was held that change in the method of accounting from mercantile to cash system of accounting only in respect of export incentive on bona fide reasons and with a view to avoid genuine problems was permissible. The learned counsel therefore submitted that the change in the method of accounting of subsidy on receipt basis was a bona fide change and, therefore, no interference was called for, with such change in method of accounting. The learned Departmental Representative submitted that the decision of Hon'ble Madras High Court in CIT v. Elgi Equipments Ltd. (supra) was rendered with respect to asst. yr. 1981-82. However, thereafter Section 145 has been amended by Finance Act, 1995 w.e.f. 1st April, 1997 and there after the assessee is entitled to either follow the cash or mercantile system of accounting regularly. The learned Departmental Representative submitted that the closing stock has to be valued on the basis of cost or market price, whichever is less. Therefore, the change was not permissible. The learned Departmental Representative submitted that before we consider the bona fides of the change in method of accounting, it should be kept in mind that the assessee had closed its fertilizer unit. The learned counsel in rejoinder submitted that if the learned Departmental Representative's plea is accepted regarding adopting the market price being lower of the cost or market price, then the value of closing stock will be much less. It was submitted that if there is uncertainty of receipt, then it is not necessary to account for the same. The learned counsel submitted that continuance of business is not relevant. He pointed out that once bona fide change was accepted by CAG subsequently mala fide cannot be attributed.
7. We have considered the rival submissions and have perused the records of the case. There is no dispute of the fact that retention price fixed by the Government of India was subject to revision from time to time with retrospective effect depending upon cost of inputs in production of fertilizer and it is evident from the letter dt. 11th Jan., 2002 of Section Officer of the Ministry of Commerce and Fertilizer, Department of Fertilizer that escalation with effect from 1st April, 1997 was recognized by the Government of India in January, 2002. The learned CIT in his order has pointed out that it is not disputed that the formula for computing subsidy is known to both the parties and there is no instance where the Government of India has gone back by disputing the formula. The main thrust for this conclusion is that mere delay in receipt of portion of subsidy cannot be a reason for undervaluing the closing stock. In this regard it is noteworthy that urea retention price w.e.f. 1st Jan., 2000 was fixed at Rs. 1,12,214 metric tonne but it was revised to Rs. 9,475 per metric tonne vide letter dt. 11th Jan., 2002. It is also pointed out in the note as already noted earlier, that the claim made to the Government of India in regard to power cost from 1996-97 aggregating to Rs. 6.97 crores were neither settled by the Government nor was there any acceptance of the claim as on 31st March, 2001. Therefore, it cannot be said that whatever retention price was approved by the Government of India was also received by the assessee. As per AS-9, where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, such escalation of price, export incentives, interest etc., revenue recognition should be postponed to the extent of uncertainty involved. In such cases it would be more appropriate to recognise revenue only when it is reasonably certain that ultimate collection will be made. Therefore, it is not a case of mere delay in receiving the claim but also associated with uncertainty in receiving the claim. Under these circumstances, the change in method of valuation of closing stock could not be said to be mala fide. There are plethora of judicial pronouncements on the issue that mere lodging of claim does not result in accrual of income. The learned Departmental Representative's objection is that after the amendment in Section 145, the assessee could not adopt the hybrid system of accounting. In our considered opinion, this cannot be said to be deviation from the mercantile system of accounting regularly employed by the assessee. It is only the change in method of valuing of closing stock necessitated on account of uncertainty associated in receiving the claim made by the assessee. In this view of the matter, we set aside the order of the learned CIT.
8. Ground No. 3 is regarding allowability of deduction under Section 80-IA in respect of lignite production. The assessee had claimed deduction under Section 80-IA on the profits arising from its activity relating to mining lignite and generation of power using the mined lignite. The learned CIT examined in detail whether the assessee was the manufacturer or producer of an article or a thing and after elaborate discussion held that the mining activities of the assessee did not involve manufacture or production of any article or thing and, therefore, the assessee was not entitled to the benefit of Section 80-IA.
9. We have considered the elaborate submissions of both the parties carefully. Before considering the issue whether the activity of mining constitutes manufacture or production of any article or a thing, we may observe that for claiming deduction, if any, in respect of income accruing on account of activity of mining, it was Section 80-IB in the relevant assessment year and not Section 80-IA. The learned counsel for the assessee submitted that merely because a claim has been made under a wrong section, the same cannot be denied to the assessee and it should be considered under the appropriate section viz. Section 80-IB. However, the learned Departmental Representative vehemently objected and submitted that since assessee had claimed deduction under Section 80-IA, the same cannot be allowed/she submitted that the fact that mining is not listed as an infrastructure development activity and, therefore, this straightaway throws it outside the purview of Section 80-IA. We find that Section 80-IA and Section 80-IB were substituted for Section 80-IA by the Finance Act, 1999 w.e.f. 1st April, 2000. Prior to its substitution deduction was available under Section 80-IA in respect of profits and gains from industrial undertaking in certain cases. Under these circumstances merely because assessee made a claim under Section 80-IA, the same cannot be denied for technical reasons if he is entitled for the same under Section 80-IB. Whether profits and gains derived from the activity of mining are eligible for deduction under Section 80-IB also will depend upon whether the activity of mining of lignite constitutes production or manufacture of an article or thing or not because as per the provisions of Section 80-IB(2)(iii), the industrial undertaking should have, inter alia, fulfilled the condition of manufacture or production of any article of thing. We, therefore, proceed to decide the issue whether mining of lignite would amount to manufacture or production of article or thing. The assessee has given in detail the process of production of lignite which is reproduced here under :
The first step is removal of overburden. The overburden consisting of different soil characteristics has to be removed to expose the lignite below. The overburden is excavated in four benches. In the high capacity mines of 10-5 MTPA, the top three benches are operated with maximum bench height of 24m each with high capacity system, consisting of 1400 L. BWE, a number of 2400/2000 mm wide steel cord belt conveyors, 20,000/11,000 t per hr. tripper and spreader. The fourth bench is operated with two 700 L. BWE loading into 2000 mm. vide steel cord belt conveyor and matching spreader of 11,000 t/hr, whereas the 3 MTPA mine has got 700 L BWEs and the connected system in each bench. All the overburden excavation and dumping systems are interlinked so as to operate the excavation side without interruption if any of the connecting dumping system goes under breakdown or planned stoppage.
Drilling and Blasting :
The overburden of Neyveli mines consists of soft and sticky alluvium and hard Cuddalore sandstone. The deployment of BWE for excavation of sandstone without blasting experience heavy shock load on the machines causing structural damages and cutting teeth worn out in a very short duration. The cutting resistant and the compressive strength of the Cuddalore sandstone are 22 to 250 Kg per cm. and 200 Kg per sq.cm, respectively. The binding media of the sandstone are generally clay and in some places the silicon itself form a binding medium. The mafic minerals like Fe, Mg, Mn, also act as binding media resulting in a very hard strata. These hard strata pose manifold effects on the working of the mine.
The hardness in the strata is neither uniformly distributed along the length of the mine nor it follows any pattern in the vertical plane. The degree of hardness also varies.
To aim at proper parameters for drilling and blasting, experiments were conducted in collaboration with different explosive manufacturers adopting different bore hole spacing and pattern, different charge ratio and different firing orders. .
Drilling of short hole :
The blast holes are being drilled using a straight rotary drill. A drag bit is used for driving the hole to diameter of 200mm. In a quarry the depth of the hole is normally the bench height, which is to be 24 to 26mm. In places of high hard band occurrence a central hole up to the hard band bottom is drilled to have exclusive charge exactly at that strata. Normally, dry drilling is carried out using high pressure air compressors to flush out cutting materials. If there is moisture in the strata, the cutting materials will not come out. In such places water is being used to drill the holes.
Blasting Operation :
The drilled holes may contain some water which may either react with the explosives to be charged or will not allow the explosive to reach the required location. These water are to be bailed out and reamers are to be used to smoothen the inner edge of the hole and also to clean the sledges at the bottom of the hole.
Ground Water Control :
The lignite deposit is in a basin with confined aquiferic condition. The upward pressure of the aquifer poses water problem while excavation of lignite unless otherwise the pressure is controlled and kept below the bottom of the lignite seam. To tackle this problem number of pump tests were conducted to steady the aquiferic parameters like permeability, storability, transmissibility, etc., that aided to design the pump well and the method of pumping.
Geo-hydrologial studies, large scale pumping tests and hydrological computations suggested that establishment of pump wells having 1000 GPM capacity is ideal for GWC operations. The pump well was designed step by step equipped with the specified parameters. The main procedure of designing the pump well is as follows :
(a) Screen diameters
(b) Bore hole diameters
(c) Gravel packing
(d) Screen opening The GWC wells are drilled by Jet Hole Master with rock roller bits to a diameter of 1000mm and depth varies from 80mm to 160mm. The hole is cased with 500 mm casings and 5 to 8 stages of submersible pumps (squirrel cage induction motors of 175 to 250 HP) ore lowered for pumping 1000 GPM continuously.
Storm Water Control :
The vast open cast mine is in the monotonic belt and experienced 1500 mm/annum of rain on an overage. This rainwater, unconfirmed water and extraneous water are together designated as 'storm water' which poses problem in the mining operation. The storm water is collected in the sumps located suitably at the pit bottom and pumped out by means of float pumps mounted in pontoons, 2000/4000 GPM centrifugal pumps with 170/250 HP motors are mounted on a float, to pump to a head of 42/85 m. The high head pumps are having 350 kw/650 kw motors with the pumping capacity of 2000/4000 GPM to a head of 140 m. Intermediate booster stations are established to pump out the storm water to surface level.
Dust Suppression :
The dust emanated from the mining activity is well controlled by spraying of water through water lorries, water dumpers in the moving benches and haul' roads. Flexible water hoses for spraying along the conveyors tap water supply pipelines laid along the permanent conveyors, Similar arrangements are made in lignite bench and lignite bunker areas.
U. Production of lignite :
The production of lignite is a complex, complicated operation involving use of advance technologies and sophisticated machinery. Production of lignite cannot be compared with excavation of minerals like limestone and granite, which are available on the surface and are not mixed with any great amount of other material. Removal of limestone and granite are easy and does not involve any complicated operations and processes.
Lignite occurs naturally as a huge continuous blocks extending over a large area. As the lignite is to be used in boilers, lignite is required to be reduced to small sized rubble.
Cutting, crushing and transportation of lignite :
Lignite deposits is in huge continuous block. There are two methods of excavating the lignite. Scoop blocks of lignite and then use crusher to reduce it into rubble. Alternatively at the time of digging itself the machines are so designated that the lignite block is broken into small sized lumps and transported.
Huge bucket wheel excavators are employed for cutting into lignite formations. They are huge machines with rotating buckets with teeth. The buckets perform a three dimensional motion and the size of the teeth and the gaps between the teeth are so designed that lignite is broken/crushed into small lumps of about 500 mm size even at time of digging.
Thereafter the lumps are loaded into the conveyor system. The conveyors carry the lumps at a predetermined speed. At regular intervals, there is a break in the conveyors. The lumps are thrown out and hit iron buffer doors at an angle and speed. Then the lumps fall down into another conveyor system. These are so designed that the impact and fall further break any larger lumps of lignite - loaded by BWE into smaller size. This is achieved through angle of throw fall of height at discharge points and speed impact and friction during transportation.
At the stack yard, blending process is carried out by deploying 2 BW reclaimers. This process achieves uniform calorific value of lignite. This process also breaks any remaining large lumps of lignite.
Due to the above, the huge streams of lignite is reduced to lump of the size of 500mm at the BWE stage gets crushed to a uniform 50-150mm size at the stacker.
Quality control of lignite :
This involves Removal Marcasite and impurities; and blending at the production yard to assure acceptable and appropriate quality.
Removal of marcasite and impurities :
Lignite that is produced from the mines and crushed to appropriate sizes still have impurities embedded in them through layers of marcasite and interburdened waste. Marcasites are dimorphate of pyrite and the physical properties of marcasites are as follows :
Chemical composition : FeS2 (Ferric Sulphide)
Colour : Pale bronze yellow
Appearance : Metal like
Shape : Boulder, Lenticular Lems,
Platty and Massive
Hardness : 6 to 6.5
Specific gravity : 4.89
Compressive strength : 150 to 800 Kg/CM2
Nature : Non Magnetic
As could be seen from the above, these are non-magnetic and that compressive strength upto 800 Kg./CM2. The impure lignite with marcasite cannot be fed into the boiler and it would hurt the boiler because of the nature described above. There are also layers of clay and sand which are not combustible also to be removed to make the lignite of acceptable quality. After the impurities are removed the lignite is blended with specific quality of lignite to ensure that the batch of production is of acceptable quality and fit enough to be fed for consumption by the Thermal Unit.
Blending of lignite :
The quality of lignite extracted from the mine varies as this is a natural occurrence. In order to give the required quality of lignite to the down stream thermal power station, suitable test semples are taken from the lignite bench and analysed. Depending upon the grade and quality, the ''excavation of lignite is blended in the bench itself by deploying two bucket wheel excavators at different ureas/horrisons and sent to stack yard. In the stack yard two lignite stacks are maintained qualitywise, which are again mixed by deploying two reclaimers in both the stacks simultaneously. In the stackyard also the blending is fine-tuned with the help of claimers. The lignite reaches its exact required quality when it is further blended in the thermal stackyard with the help of reclaimers. Moreover, to avoid contamination in the bench area, the floor is finely dozed off to have a cleaner lignite top. The tackling of inter burden also needs special skill as this may contaminate the lignite excavated. The lignite produced in this manner is fed to thermal power station for power generation. A full-fledged laboratory is functioning to carrying out the lignite sampling in order to maintain quality. The learned counsel pointed out that more than Rs. 5000 crores of investment has been made for this purpose. The learned counsel has also relied on the decision of the Hon'ble Supreme Court in Chrestian Mica Industries Ltd. v. State of Bihar 12 STC 150 (SC).
From the foregoing discussions, it is clear that the process of production of lignite is quite cumbersome. In short, the first stage is the removal of overburden consisting of different soil characteristics to expose the lignite below. This requires drilling and blasting which is also very technically complicated procedure requiring lot of accuracies. In the process, there is one more very important procedure employed for controlling the upward pressure of the water so as to keep that below the bottom of the lignite scene. Lignite is found in huge blocks extending over a large area and, therefore, in order to use it in boilers it is required to be reduced to small size rubbles. This process is also highly technically advanced procedure and after employing the same, huge stream of lignite is reduced to a uniform 50mm to 150mm size. Thereafter comes the procedure of removal of marcasite and impurities and blending at the production yard to assure acceptable and appropriate quality. It is pointed in the procedure noted above that impure lignite with marcasite cannot be fed into the boiler as it would hurt the boiler. Therefore, it is an essential procedure before excavated lignite can be put to use. The blending of lignite is also an essential part of making the lignite useful for thermal power stations. Thus, from the aforementioned discussion, it is evident that though lignite is found embedded in the earth in big blocks, but it is useful only after it has undergone various processes.
Before we consider the various precedents cited by both parties, we may point out that we have before us in the form of statutory evidence the Explanation to Section 33B, which was earlier referred to in Section 80-IA for defining the term industrial undertaking. As per the Explanation to Section 33B industrial undertaking means any undertaking which, inter aha, was engaged in the business of mining. Thus, prior to the amendment of Section 80-IA, by the Finance Act, 1999 w.e.f. 1st April, 2000, because of the statutory provision itself being there, the deduction under Section 80-IA could not be denied to the assessee, since mining activity came within the eligibility of deduction under Section 80-IA. Then again we have before us Section 33(1)(b)(i) in the form of statutory evidence, according to which where machinery or plant is installed for the purpose of business or construction, manufacture or production of any one or more of the articles or things specified in the list in the Fifth Schedule, it would be entitled for development rebate. Items mentioned at Sl. No. 3 of the Fifth Schedule include lignite. Thus, here again the activity of excavation of lignite is treated as production of article or thing. Section 80-B(9) entitles an undertaking engaged in commercial production or refining of mineral oil for purposes of deduction under Section 80-IB. It is noticeable that in the Fifth Schedule noted earlier at Sl. No. 3 along with coal, lignite etc., mineral oil has also been mentioned. Thus, by applying the principle of ejusdem generis it can be reasonably concluded that excavation of lignite would also come within the term production of any article or thing.
Now we will consider the various case laws relied upon by both the parties. The learned Departmental Representative has referred to following case laws:
Minerals & Metal Trading Corporation of India v. Union of India 1983 (30) ELT 1541 (SC). The learned Departmental Representative has pointed out that in this case, it was held by the Supreme Court that separating walfrom ore from rock does not amount to production or manufacture. She also referred to the decision in Hyderabad Industries Ltd. v. Union of India 78 ELT 641 (SC) wherein it has been held that separating asbestos fibre from rock in which it is embedded does not amount to production or manufacture. She referred to the decision of the Hon'ble Madras High Court in CIT v. Pooshya Exports (P) Ltd. (2003) 262 ITR 417 (Mad) and submitted that the Hon'ble Madras High Court has held that quarrying and mining granite blocks does not amount to manufacture. In this case, the Hon'ble Madras High Court decided the issue in favour of Revenue following the decision of Hon'ble Madras High Court in CIT v. Gomatesh Granites (2000) 246 ITR 737 (Mad) and CIT v. Bishal Enterprises (2001) 247 ITR 484 (Mad). In the case of Gomatesh Granites (supra) the Hon'ble Madras High Court held that activity of extracting granite from hill does not amount to manufacturing activity. In this case, the assessee was an exporter of unpolished granite blocks which were excavated from hills and after employing a simple procedure of thoroughly washing with water to see whether there were any cracks in them or not, they were lifted by cranes and exported. In the case of Bishal Enterprises (supra) the Hon'ble Madras High Court followed the decision in the case of Gomatesh Granites (supra). The learned Departmental Representative further referred to the decision of the Hon'ble Supreme Court in CIT v. Gem India Manufacturing Co. (2001) 249 ITR 307 (SC), wherein it was held that cutting and polishing uncut raw diamonds did not amount to manufacture or production of article or thing. The learned Departmental Representative further referred to the decision in Lucky Minmat (P) Ltd. v. CIT (2000) 245 ITR 830 (SC) wherein it was held that mining of lime stone and marble blocks and cutting and sizing them does not amount to manufacture or production of article. Referring to all these decisions, the learned Departmental Representative submitted that the activity carried out by the assessee was primarily activity of mining and, therefore, the assessee was not entitled for deduction under Section 80-IB of the Act also.
The learned counsel for the assessee, however, submitted the activity of excavation of lime stone cannot be compared with the activity carried on by the assessee which was very cumbersome as noted earlier and more then Rs. 5,000 crores of investment was made in order to carry out the activity of excavation of lignite. The learned counsel further submitted that all the case laws relied upon by the learned Departmental Representative are with reference to Section 80HH where under Sub-section (10), a clear-cut statutory prohibition was there to deny deduction in respect of undertakings engaged in mining. However, no such prohibition is there under Section 80-IB. On the contrary, as noted earlier, the deduction is available specifically in respect of mining activity. In this regard he referred to Section 35E and pointed out that where the assessee is engaged in any operation relating to prosecuting or extraction of or production of any mineral, then it would be entitled for deduction under Section 35E. Thus, he pointed out that taking out mineral is production. The learned counsel further referred to various case laws which are discussed hereunder.
Chrestian Mica Industries Ltd. v. State of Bihar (supra), wherein it was held by the Hon'ble Supreme Court that mica mining operations by which crude mica is taken out of the mine and processed into split mica amount to production.
CIT v. Singareni Collieries Co. Ltd. (1996) 221 ITR 48 (AP), wherein it was held that extraction of minerals amounts to production. The learned counsel further pointed out that the Hon'ble Madras High Court in CIT v. Gomatesh Granites (supra) held as under:
"This is not to say that the activity of cutting the extracted block to smaller sizes, polishing the same, and thereafter exporting the polished slabs, would not amount to production. It is not necessary for us to express any opinion finally on that question as that question does not arise for our consideration in these cases".
The learned counsel pointed out that impliedly the Hon'ble Madras High Court has approved the decision of the Andhra Pradesh High Court in CIT v. Singareni Collieries Co. Ltd. (supra) which is evident from its observations contained at p. 744:
"Though the word 'production' is wider then the word 'manufacture', and manufacturing activity is not always essential before a process is described as production, nevertheless must involve process which involves labour and skill, and the process involved should also be processes which involve some degree -of complexity. Before holding that mica mining and processing amounted to production, the process involved was carefully analysed by the apex Court and it was in the light of the process so set out, which indicated several stages through which the mineral is passed from the time of extraction of crude mica to the stage of split mica which is commercially valuable that it was held that it is on account of the nature of process involved thereon that the term 'production' could be aptly applied to the production of split mica."
The learned counsel further pointed out that the decision of the Hon'ble Supreme Court in (2001) 249 ITR 207 (SC) (supra) is not applicable to the facts of the case. The Hon'ble Supreme Court was considering the deduction under Section 80H of the Act. He pointed out that the Hon'ble Supreme Court has observed that conversion into lime and lime dust or concrete by stone crusher could legitimately be considered to be manufacturing process. The learned counsel for the assessee after distinguishing these cases referred to the decision of the Bombay High Court in CIT v. Sesa Goa Ltd. (2004) 266 ITR 126 (Bom) and submitted that this decision is squarely applicable to the facts of the case, wherein it was held that extraction and processing of iron ore amounts to production of article. He pointed out that the Hon'ble Bombay High Court elaborately considered all the case laws on this issue. The Hon'ble Bombay High Court observed as under:
"Ore has to be extracted or raised from the earth in which it is embedded and has to be brought to the surface. What is brought to the surface is something new which comes into existence, as an article or thing. If that be the case, winning or extracting of ore would fall within the expression 'production'".
From the case laws noted as above, it is clear that because of specific prohibition under Section 80HH(10) regarding mining activity, the decisions rendered with reference to the said section are of little help to the Department. In the present case, we find that lignite is found embedded beneath the earth in huge blocks. However, it can be put to use only after it is crushed to a uniform 50 to 150 mm size and after all the impurities are removed and the excavated lignite is blended. Therefore, it cannot be held that the lignite which is put to use is in the same form in which it is found embedded in earth. The test laid down in various judicial precedents is consistent and it is whether the article produced is regarded in the trade by those who trade in it as distinct in identity from the commodity involved in its manufacture. We are of the opinion that keeping in view the statutory evidence in the form of various sections noted earlier, the various stages involved in the process and the decisions of the Hon'ble Madras High Court in the case of Gomatesh Granites (supra), Hon'ble Bombay High Court in the case of Sesa Goa Ltd. (supra) and the Hon'ble Supreme Court in Chrestian Mica Industries Ltd. (supra) the irresistible conclusion is that the assessee was engaged in the production of lignite. As noted earlier, the Hon'ble Madras High Court in Gomatesh Granites (supra) has clearly held that the term production is of much wider import and, therefore, applying the same principles, we set aside the order of the learned CIT on this point and restore this issue back to the file of the AO to examine the fulfillment of other conditions under Section 80-IB in accordance with law. In the result, this ground is allowed for statistical purposes.
10. The next issue raised in this appeal is regarding the allocation of indirect cost of production of lignite to Stage-II.
11. The learned CIT has noted that the assessee was extracting lignite from the mines located in two sectors, viz. Stage-I and Stage-II. There is no dispute that the income generated from the extraction of lignite from Stage-I is not eligible for deduction under Section 80-IA and the assessee was claiming deduction under Section 80-IA on the income generated from the lignite extracted from Stage-II. The learned CIT has summarized the working of both the stages and the total profits from mining activity as submitted by the assessee during the course of hearing which is reproduced below :
Mine II - Workings for IT Claim under S. 80-IA Stage-I State-II Percentage of difference Physical Production 27,623,343.05 35,692,006.83 29.2 (Tonnes) Expenditure : various cost 210,503,517.20 271,990,720.31 29.2 fixed cost 1777,560,169.09 2567,928,962.22 44.46 Total Expenditure 2003,685,050,38 2868,170,275.51 2497,106,570.68 4458,249,389.72 78.5
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Total Income 488,421,520.31 1590,179,114.22 220.5
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The learned CIT noted that both variable and fixed costs were proportionately divided on the basis of the ratio of tonnage of the extraction of lignite from Stage-I and Stage-II except interest cost and depreciation, which was on actual basis. The assessee's explanation was that the ratio of the quantitative extraction of lignite was taken because most of the input costs were related to the quantity of lignite extracted. The learned CIT noted that though the extraction of lignite was more by about 29 per cent in Stage-II, vis-a-vis Stage-I, the net income of Stage-II is about 224 per cent more even after allocating higher interest and depreciation amounts. It was explained to the CIT that as per the price fixation formula, the assessee charges lesser rate on in-house transfer of lignite of Stage-I to the power generation unit whereas the same lignite of Stage-II is charged at a much higher rate when it is transferred for in-house power generation purpose. It was also pointed out that this methodology of price fixation was adopted because of the cost plus formula adopted in the price formulation wherein certain percentage of return was fixed on the investment made on these projects. Consequently, newer and costlier the project, higher will be the price vis-a-vis older and cheaper units. The learned CIT did not agree with the apportionment of indirect costs to two stages and adopted the following formula for arriving at the power expenditure towards lignite and power as under :
Total tonnes of lignite/power consumed x The rate at which they were
transferred to Stage-I.
Total income of lignite/power consumed x The rate at which they were
transferred to Stage -II.
The learned counsel submitted that the transfer price is fixed not on the basis of market value but on the basis of actual expenditure incurred and, therefore, apportionment of indirect cost on the basis of actual tonnage produced is the correct method in assessee's case. The learned Departmental Representative submitted that the actual rate of power should be taken since the same was used for Stage-II only. We have considered the submissions of both the parties. The assessee had adopted an in-house mechanism for price fixation due to which profits of Stage-n considerably swelled. Therefore, apportionment of cost on the basis of ratio of tonnage of the extraction of lignite was not correct. It should have been done on the basis of actuals. The important aspect is in regard to allocation of power cost. The learned counsel has also submitted that transfer price is fixed on the basis of actual cost involved in the production. Therefore, the assessee should furnish the actual cost of power consumed for Stage-II for computing correct profit of Stage-n. This ground is accordingly allowed for statistical purposes. However, we may clarify that this issue will be relevant only when assessee satisfies the AO regarding fulfillment of conditions under Section 80-IB.
12. The next issue is regarding allowance of deduction under Section 80-IA in respect of grossed-up taxes. Brief facts apropos this issue are that on detailed examination of the working of the claim of the assessee under, Section 80-IA, the learned CIT noted that the assessee had included in its eligible income for deduction under Section 80-IA a sum of Rs. 34,94,69,000 in the mining income segment and Rs. 45,55,92,000 in the power generation segment as an additional income under the head income-tax reimbursement. The assessee's submissions have been reproduced in para 11.3 in which, inter alia, it was submitted that any payment under the bulk power purchase agreement was a payment for purchase of power and the recovery of income-tax is only a component of two part tariff for sale of power and this was done as per Notification dt. 30th March, 1992 issued by the Ministry of Power in exercise of the powers conferred on the Central Government under Sub-section (2) of Section 43A of the Electricity Supply Act, 1948. It was pointed out that it was not reimbursement of the company's tax liability. The learned counsel for the assessee submitted that for deciding the purchase price, deemed tax on return of investment was notionally taken and it was not the actual tax. The learned counsel referred to pp. 9 to 47 of the paper book and referred to p. 21 of the paper book wherein the agreement entered into between the company and various electricity boards is contained, where under Clause 6 in regard to income-tax liability, if any, on the various income streams of the company were to be borne by the recipients. He specifically referred to Clause 6.2, which reads as under :
"6.2 The total tax liability of the recipients shall however be :
(a) the tax payable on the return on equity and internal resources relating to Mine-n and Power Station-II adopted in the tariff calculations and grossed-up tax thereon or
(b) the actual tax, assessed for the above streams, whichever is less."
The learned counsel also referred to Section 195A to submit that where under an agreement, tax chargeable on any income is to be borne by the person by whom income is payable, then, for the purpose of deduction of tax, such income is to be increased by the tax component. The learned counsel also referred to pp. 122 and 128 of the paper book wherein the working regarding tax collection is contained. The learned counsel pointed out that tax at 39.55 per cent was allocated to various units on the basis of return on split basis. He pointed out that though the actual tax liability was Rs. 28,31,407 lakhs the total grossed-up tax was Rs. 12,505 out of which Rs. 455.82 lakhs pertains to Stage-11 which was recovered from electricity boards in the form of purchase price. In sum and substance, the learned counsel submitted that the agreement was for purchase of power and it was not the actual tax which was recovered but only a component of price. The learned Departmental Representative submitted that the income-tax reimbursement does not form port of tariff. Since this was not income derived from generation of electricity, no deduction was allowed.
13. We have considered the rival submissions and perused the record of the case. Admittedly, agreement was entered into with various electricity boards for supply of power and was titled as bulk power supply agreement. Clause 4 of the said agreement is with regard to the computation of generation tariffs. Annexure-A to the said agreement referred to in Clause 4.1 lays down the principles and parameters for fixation of generation tariffs. One of the items mentioned in the said Annexure is for including the rate of return on equity and internal resources at 12 per cent for both power station and mine. Clause 6 of the agreement deals with the liability in respect of income-tax, if any, on the income stream of NLC. It also lays down the overall limit of income-tax reimbursement by recipient. It is noticeable in this connection that Clause 4 dealing with tariff does not refer to tax liability on income. Clause 4 and Clause 6 are independent clauses. Therefore, it is wrong to conclude that income-tax reimbursement to the limited extent as contained in Clause 6 was part of tariff. The combined reading of all these clauses clearly indicate that it is primarily the income-tax liability of the recipient on its income relating to a particular stream which has to be reimbursed to the assesses. This cannot be held to be income derived from industrial undertaking and, therefore, was rightly held by the learned CIT as not being part of sale-price of power. This ground is accordingly dismissed.
14. In the result, the appeal is treated as partly allowed for statistical purposes.