Income Tax Appellate Tribunal - Hyderabad
Bharathi Cement Corporation Private ... vs Asst. Commissioner Of Income Tax, ... on 27 June, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES "A", HYDERABAD
BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER
AND
SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER
ITA No. Asst. Year Appellant Respondent
Dy. Commissioner
1010/Hyd/17 2011-12 of Income Tax,
Circle-2(3),
Bharathi Cement HYDERABAD
Corporation Private
Limited,
1011/Hyd/17 2012-13 HYDERABAD Asst.
[PAN: AADCR3079G] Commissioner of
Income Tax,
1012/Hyd/17 2013-14 Circle-2(2),
HYDERABAD
For Assessee : Shri S. Kalyanasundaram, AR
For Revenue : Shri M. Sitharam, DR
Date of Hearing : 21-05-2018
Date of Pronouncement : 27-06-2018
ORDER
PER B. RAMAKOTAIAH, A.M. :
These three appeals are by assessee against the common order of the Ld. Commissioner of Income Tax (Appeals)-2, Hyderabad, dated 28-02-2017. Assessing Officer (AO) passed the orders of the assessment on 31-03-2014, 25-03-2015 & 23-03-2016 inter-alia disallowing the provisions for Mining Restoration Expenses, ROC Expenditure and Corporate Social Responsibility Expenditure in the impugned years. Since common issues are involved, the CIT(A) has decided the issue :- 2 -:
ITA Nos. 1010, 1011 & 1012/Hyd/2017 by the common order and all these appeals are heard together and disposed-of by this order.
2. Assessee is a company manufacturing cement. In the assessment for AY 2011-12 under normal computation of income, AO disallowed two items - (i) Provisions for Mining Restoration Expenses Rs. 2,53,00,000/- & (ii) Fees paid to ROC for increase of authorised capital Rs. 14,95,000/-. In AY. 2012-13, AO disallowed Mining Restoration Expenses to an extent of Rs. 40 Lakhs, whereas in AY. 2013-14, an amount of Rs. 1,94,00,000/- towards provision for Mining Restoration Expenses and an amount of Rs. 62,11,173/- claimed as Corporate Social Responsibility.
Issue of provision for Mines Restoration Expenses:
3. Assessee has made the provision in all the impugned three assessment years and the same was debited to P&L A/c. Since it was the provision, AO has asked why the same should be allowed. It was submitted that the same was mandatory for all lease-holders to back fill the excavated void after exhaust of mineral to the extent the waste material is available. It was further submitted that one need to develop the mineral bearing land by removing top soil which was stocked outside the lease area temporarily, till the mine is matured for backfilling. Normally, it will take long time for maturing the area may be 5 to 10 years and later it is a continuous process. It was submitted that the provision is :- 3 -:
ITA Nos. 1010, 1011 & 1012/Hyd/2017 being made from the beginning for site restoration as it will have a huge impact on the financial position of the companies if not provided. Further, Government has made it mandatory under the Mineral Conservation and Development Rules to restore the mine area for which provision is made depending on the estimated cost. It was further submitted that it was an ascertained liability the determination of which can be done even at a later point of time, but the same cannot be disallowed as it was not a contingent liability and has been provided as per Rules 23A, 23B and 23C of MCDR, 1988. It was submitted that the liability has accrued when the mining has been done and an allowable expenditure u/s. 37(1). AO, however, did not agree and disallowed the amount in all the three years with the following reasons. For the sake of record, the decision in AY. 2011-12 in para 3.1 is extracted as under:
"3.1 The contention of the assessee is verified and found to be not acceptable. The assessee company has not incurred any expenses and therefore the assessee company's claim for deduction of provision for mines restoration expenses, while computing the income from the profits and gains of the assessee company, is not an allowable expenditure u/s. 37(1) of the I.T. Act. In this connection, reliance is placed on the hon'ble Supreme Court decision in the case of New India Mining Corporation - 243 ITR 632 (SC) given in the context of allowing claim for deduction of estimated liability of restoration charges, wherein it was held that where assessee holding mining leases from State Government had not incurred any expenditure towards restoration of lands to their original condition, estimated ability for restoration charges could not be allowed as deduction'. Accordingly, the provision for mining restoration expenses of Rs.2,53,00,000/- is brought to tax and added to the total income".
4. Assessee has contested the issue before the Ld.CIT(A) and submitted as under:
:- 4 -:
ITA Nos. 1010, 1011 & 1012/Hyd/2017 a. The appellant is a Company engaged in the business of manufacture of Cement. Lime stone is the major raw material used in the process of manufacture of Cement. The company owns 632.278 hectares of land at Nallalingayapalle village in Kadapa District, purchased from private parties and also from the Government.
b. To do mining activities in the said land the company had applied to various government authorities for various approvals.
c. In India, mines are required to be closed / abandoned as per the provisions of Mines and Minerals (Development and Regulation) Act, -1957 (MMDR) and the Rules made under Mineral Conservation and Development Rules, 1988 (MCDR). These are administered by M/s Indian Bureau of Mines. As per Rule 23Aof MCDR 1988 there are two types of mine closure plans viz. Progressive Mine Closure Plan (PMCP) and Final Closure Plan (FCP). Accordingly the company has submitted Scheme of Mining including Progressive Mine Closure Plan to India Bureau of Mines.
d. As per Rule 23F of MCDR every leaseholder has to furnish financial assurance for closure of Mines.
e. Further Ministry of Environment & Forests, Government of India while issuing the environmental clearance has stipulated a condition that the Top Soil, if any, shall be stacked with :- 5 -:
ITA Nos. 1010, 1011 & 1012/Hyd/2017 proper slope at earmarked site(s) only with adequate measures and should be used for reclamation and rehabilitation of mined out areas.
f. The Appellant being a Company has to maintain the books of accounts on accrual basis of accounting and has to follow the various Accounting Standards as prescribed.
5. In the above background, it was submitted that company has debited to P&L A/c various accounts towards Mining Restoration Expenses in the impugned years and this is the provision made towards expected future liability on the closure of mines which is being exploited by assessee-company at present. Since this is a statutory liability for which a separate fund is to be created, the liability towards mine closure accrues as soon as the mining operations commence and it is to be charged over the period of operation of mine. It was further submitted that as per the provisions of MMDR Act, 1957, coupled with MCDR 1988, it is mandatory for assessee- company to provide for closure of mind so as to protect and rehabilitate once the mining is over. It was further submitted that as per rules, bank guarantee for Rs. 30,26,250/- has been furnished to Indian Bureau of Mines. It was the contention that the provision is not a contingent liability, but ascertained liability. On principles of law, assessee contended that the decision in the case of New India Mining Corporation (P) Ltd., Vs. CIT [243 ITR 640] (SC) does not apply to the facts of the case as the decision relied on by AO was on the :- 6 -:
ITA Nos. 1010, 1011 & 1012/Hyd/2017 interpretation of Mining rules of Bombay Government and clauses on lease agreement entered into by the said company. Since the Mining Rules at present make it mandatory, the decision of the Hon'ble Supreme Court does not hold good in assessee's case. Before the Ld.CIT(A), assessee also relied on the various principles established by the following cases:
a. NMDC Ltd., Hyderabad Vs. JCIT Range 16, Hyderabad (ITAT 'B' Bench, Hyderabad in ITA Nos. 714 & 885 of 2012 dated 28.02.2014);
b. Bharat Earth Movers Vs. CIT [245 ITR 428] (SC); c. Rotork Controls India (P) Ltd., Vs. CIT [314 ITR 62] (SC); d. Udaipur Mineral Development Syndicate (P) Ltd., Vs. DCIT & Anr. [261 ITR 706] (Raj);
6. However, Ld.CIT(A) did not agree and dismissed the ground, stating as under:
"7.2. I have gone through the AO's observations and AR's contentions. It is seen from the asst. order that the AO has disallowed the amounts of i) Rs.2,53,00,000, ii) Rs.40,00,000/- and iii) Rs.l,94,00,000/- for the A.Ys.2011-12, 2012-13 and 2013-14 respectively claimed by the assessee towards Imine restoration expenses' citing the following reasons.
i) "It is evident that the liability towards Mines restoration does not arise at all till the mine is matured for back filing. This being the case, the question of creating a provision towards mines restoration expenditure and claiming it as expenditure does not arise.
ii) Further, i) Rs.2,53,00,000, ii) Rs.40,00,000/- and iii) Rs.l,94,00,000/- for the A.Ys.2011-12, 2012-13 and 2013-14 respectively, that has been debited by the assessee to the profit and loss account is merely a provision created and the assessee has not incurred any expenditure during the year under consideration. The :- 7 -:
ITA Nos. 1010, 1011 & 1012/Hyd/2017 provisions so created, does not represent the true value of expenditure and it cannot be estimated accurately. The expenditure which has not been incurred by the assessee during the year under consideration, cannot be allowed as deduction on a rough estimate basis.
iii) The case laws relied upon by the assessee were considered and found to be not applicable for the facts of the assessee's case. The above mentioned case laws have not dealt with the question of mines restoration fund. For instance, the question dealt in the case of Bharat Earth Movers Ltd (2005) 245 ITR 428 SC is about the provisions for leave encashment. Similarly, the question involved in the case of Rotrok Controls India Pvt. Ltd v. CIT (2009) 314 ITR 62 is about the provision for warranty claims. Though the 3rd case law (Udaipur Mineral Development Syndicate (P) Ltd. v. Dy. CIT & Anr.
261 ITR 706) as relied upon by the assessee dealt with the question of ''year of allowability-liability stipulated in lease agreement to restore land in original form" and the decision is in favour of the assessee, it is pertinent to place reliance on the decision of Honhle Supreme Court in the case of New India Mining Corporation (P) Ltd. v. CIT 243 ITR 640 (SC) which is in favour of the Revenue. In this case, the Hon'ble Supreme Court dealt with the very question that is involved in the instant case and held as follows, ".......Once it is held that no expense was incurred by the appellant, the question of any allowable expense being deducted in computing the: appellant does not arise ......
.... As in the present case, admittedly, no expense has been incurred by the appellant. The question of law, therefore, do not arise in the present case. Any question of any allowable deduction can arise only if any expense is so incurred by the assessee.
From the above, it is clear that the mines restoration expenses which was not incurred by the assessee during the year under consideration is not allowable as deduction.
iv) In view of the above discussion, i) Rs. 2,53,00,000, ii) Rs.40,00,000/- and iii) Rs.l,94,00,000/- for the A. Ys.2011-12, 2012- 13 and 2013-14 being the provision for mine restoration expenses debited by the assesse to the profit and loss account are not allowable".
7.3. On the other hand, the AR relied on the case laws mentioned as under, in support of his view :
:- 8 -:
ITA Nos. 1010, 1011 & 1012/Hyd/2017 a. NMDC Ltd, Hyderabad vs. JCIT Range 16, Hyderabad (ITAT 'B' Bench, Hyderabad in ITA Nos. 714 & 885 of 2012 dated 28.02.2014) b. Bharat Earth Movers V5. CIT (2000) 245 ITR 428 (SC) c. Rotork Controls India (P) Ltd V5. CIT (2009) 314 ITR 62 (SC) d. Udaipur Mineral Development Syndicate (P) Ltd vs. DCIT & Anr (2003) 261 ITR 706 (Raj) 7.4. On careful consideration of the facts of case, I am in full agreement with the reasons cited by the AO in disallowing mine restoration expenses. In view of the above reasons and also placing reliance on the decision of Hon'ble Apex Court in the case of New India Mining Corporation - 243 ITR 632 (SC) which is squarely applicable to the assessee's case, the above action of the AO is hereby confirmed.
The case laws relied upon by the AR are not applicable to the facts of the assessee's case. Therefore, I am of the considered view that the AO's action in disallowing mine restoration expenses of i) Rs.2,53,00,000, ii) Rs.40,00,000/- and iii) Rs.1,94,00,000/- for the A.Ys.2011-12, 2012-13 and 2013-14 respectively is justified. As a result, the grounds raised are dismissed".
7. In the course of present proceedings, assessee filed an additional evidence in the form of a Paper Book containing pages 1 to 236 mainly with reference to the provision of Mines Restoration Expenses with the following prayer:
1. .........
2. .........
3. .........
4. The assessee had sought to explain the concept behind the expenditure that was disallowed before the Ld.CIT(A) but did not succeed in the appeal and has, consequently, preferred these appeals before the Hon'ble ITAT, Hyderabad Benches.
5. In order to substantiate the Grounds of Appeal taken before the Hon'ble ITAT, Hyderabad Benches, the assessee would like to file additional evidence that go to :- 9 -:
ITA Nos. 1010, 1011 & 1012/Hyd/2017 the root of the matters on which disallowance has been made/upheld.
6. The additional evidence was not focused on at the time of proceedings before both the Ld.AO as well as Ld.CIT(A)-2 and before the lower authorities focus was instead made on explaining the accounting basis of the claims for expenditure.
7. The additional evidence sought to be furnished includes statutory returns furnished by the assessee under the provisions of the Mineral Conservation and Development Rules, 1988 (as amended) and details regarding to the expenditure that has been classified as 'CSR Expenditure' and
8. In view of the specific circumstances of the case, the assessee prays for allowing assessee to furnish additional evidence enclosed herewith in the form of Paper Book.
Assessee also placed on record Mine Reclamation Write up.
8. It was the contention of Ld. Counsel that the issue of ascertained liability or contingent liability was decided by the Hon'ble Supreme Court in the case of Bharat Earth Movers Vs. CIT (supra) and on similar facts Hon'ble Rajasthan High Court in the case of Udaipur Mineral Development Syndicate (P) Ltd., Vs. DCIT & Anr (supra) has held that expenditure is ascertained liability and is an allowable deduction. The mine closure rules were introduced w.e.f. 2003 and decision in the case of New India Mining Corporation (P) Ltd., Vs. CIT (supra) has come much before that when there is no statutory liability/guidelines and that lease agreement does not provide for such expenditure. Relying on the order of ITAT in that case, it was submitted that ITAT has allowed the expenditure :- 10 -:
ITA Nos. 1010, 1011 & 1012/Hyd/2017 as ascertained liability, whereas the Hon'ble Bombay High Court held that expenditure is to be provided as per the lease agreement between the parties. Since the MCDR Rules are not in operation at that point of time, the Hon'ble Supreme Court has said that no expenditure was incurred during the year, therefore, the same is not allowable. However, subsequently the Hon'ble Supreme Court judgment (three Judges) in the case of Bharat Earth Movers, analysed the liability and held that although the liability may have to be quantified and discharged at a future date, the liability is in praesenti and that same is allowable". Ld. Counsel also placed on record the order of NMDC by the Co-ordinate Bench at Hyderabad, wherein such mining closure expenditure was allowed.
9. Coming to estimation of expenditure under the Mining Rules, Ld. Counsel fairly admitted that the Unitary Cost Method adopted by assessee (placed in the additional evidence at pgs. 148 -149) has to be examined and as such the quantum of allowance can be worked out by the AO, but the provision has to be allowed as it is not a contingent liability.
10. Ld.DR, however, relied on the orders of the CIT(A) and submitted that the mining work is still in progress and so the mine closure expenditure does not arise in the impugned years. In case of examination, he has submitted that the issue can be restored to the file of AO for fresh examination as assessee has filed additional evidence in the form of orders of :- 11 -:
ITA Nos. 1010, 1011 & 1012/Hyd/2017 Government and project report and estimations submitted to the Indian Bureau of Mines.
11. We have considered the rival contentions and perused the Paper Book and the additional evidence. As per the Conservation and Development Rules, it is statutory / mandatory that any person who is holding the license has to submit a project report and bank guarantee for mine closure operations in order to conserve the environment. Therefore, there is merit in the assessee's contentions that this liability is a statutory liability. Moreover, the decision relied upon by the AO and Ld.CIT(A) in the case of New India Mining Corporation (P) Ltd., Vs. CIT (supra) was given in the context of an agreement between two parties, wherein this sort of statutory rules were not available and on the interpretation of the lease agreement, the Hon'ble Supreme Court has decided that no actual expenditure was incurred, hence the question of law need not be answered. However, in the later case of Bharat Earth Movers Vs. CIT [245 ITR 428] (SC), the Hon'ble Apex Court held -
"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 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".
:- 12 -:
ITA Nos. 1010, 1011 & 1012/Hyd/2017 11.1. The above ratio is squarely applicable to the facts of the assessee. This ratio has been further followed by the Hon'ble Apex Court in a recent judgment in the case of Rotork Controls India Pvt. Ltd., Vs. CIT (2009) [314 ITR 62]. It has been held that a provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when:
a) an enterprise has a present obligation as a result of a past event;
b) it is probable that an outflow of resources will be required to settle the obligation, and
(c) a reliable estimate can be made of the amount of the obligation.
11.2. In the case of NMDC Ltd., Hyderabad Vs. JCIT Range 16, Hyderabad (ITAT 'B' Bench, Hyderabad in ITA Nos. 714 & 885 of 2012 dated 28.02.2014), the ITAT has upheld the order of CIT(A), wherein the Ld.CIT(A) has held as under:
"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.
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 have defined policy for recognition of obligations :- 13 -:
ITA Nos. 1010, 1011 & 1012/Hyd/2017 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 M/s 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 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 :- 14 -:
ITA Nos. 1010, 1011 & 1012/Hyd/2017 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.
5.2 After considering the submissions of the assessee, the CIT(A) observed that in the case of Udaipur Mineral Development Syndicate (P.) Ltd. v. Dy. CIT [2003] 261 ITR 706/129 Taxman 728 (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.
:- 15 -:
ITA Nos. 1010, 1011 & 1012/Hyd/2017 5.4 Further, the CIT(A) observed that the expenditure in nature is not a contingent liability. Referring to the Rules 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 it is a contingent liability. In case of Bharat Earth Movers Ltd. v. CIT [2000] 245 ITR 428/112 Taxman 61 (SC), 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. v. CIT [1959] 37 ITR 1 (SC), 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 judgment of the Hon'ble Rajasthan High Court in the case of Udaipur Mineral Development Syndicate (P.) Ltd. 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 Co. Ltd. v. CIT [1959] 37 ITR 1 (SC), 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 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 :- 16 -:
ITA Nos. 1010, 1011 & 1012/Hyd/2017 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 × 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."
11.3. This order of Ld.CIT(A) was upheld by the ITAT in the case of NMDC Ltd., Hyderabad Vs. JCIT Range 16, Hyderabad (supra) in the AY 2008-09 and subsequently in other years in that case. The Hon'ble Rajasthan High Court in the case of Udaipur Mineral Development Syndicate (P) Ltd., Vs. DCIT & Anr. [261 ITR 706] (Raj) has held as under:
:- 17 -:
ITA Nos. 1010, 1011 & 1012/Hyd/2017 "Considering the clause in the agreement, ie, as far as possible the lessee shall restore the surface land so used to its original condition, the moment the assessee digs pits, he is bound under the agreement to fill those pits and the liability does accrue on the date when the pits are dug Therefore, in our view, the Tribunal has committed an error in disallowing the claim of the assessee in the year in hand, ie, 1991-92 We agree with the view taken by the CIT (Appeals) that the moment the assessee digs the pits, the liability does arise and it is entitled for deduction of the expenses which it is supposed to incur for filling those pits, as the assessee is following the mercantile system of accounting It can claim the expenses incur as soon as it digs the pits In the result, we restore the view taken by the CIT (Appeals) The appeal stands allowed".
11.4. Respectfully following the above judgments and principles, we are of the opinion that assessee statutorily has to restore the mine to the original shape and therefore, the Mining Restoration Expenses are ascertained liability.
However, the quantification of which is to be examined and Ld. Counsel fairly admitted that the provision was not made according to the requirement under the Act. AO is therefore directed to examine the quantification, in the light of the additional information filed before us and particularly the workings provided in 148, 149 and 150 of the paper book. While holding that the liability is an ascertained liability and not a contingent liability, the quantification of provision to be allowed is restored to the file of AO. AO should give an opportunity to assessee to explain the quantification of provision and the quantum so decided should be allowed, subject to not exceeding the actual provision made in the books of account by the time of assessment. With these :- 18 -:
ITA Nos. 1010, 1011 & 1012/Hyd/2017 directions, the grounds in all the years are partly allowed for statistical purposes.
Issue of ROC Expenditure:
12. AO noticed that assessee has debited an amount of Rs. 15,10,000/- towards preliminary expenses written-off out of which an amount of Rs. 14,95,000/- was paid towards ROC fees to increase its authorised capital. AO disallowed the same as capital expenditure, following the principles on the issue. It was contended before the Ld.CIT(A) that this amount was paid for increasing the authorised share capital and this amount is eligible for deduction u/s. 35D of the Act. Therefore, it has claimed an amount of Rs. 2,99,000/- being 1/5th of Rs. 14,95,000/- be allowed as revenue expenditure. The main contention as well as the alternate contention were rejected by the Ld.CIT(A).
12.1. After considering the contentions of assessee and perusing the case law on the issue, we are of the opinion that this issue requires examination by the AO. It is true that the amount is paid for increasing the authorised capital which comes under the character of a capital expenditure. However, it was submitted that this amount was paid towards conversion of preference shares and not for issuance of new shares. In that sense, following the principles laid down by the Co-ordinate Bench in the case of DCIT(LTU) Vs. M/s. Hero Motors Ltd., in ITA Nos. 2919 and 2920/Del/2012, wherein :- 19 -:
ITA Nos. 1010, 1011 & 1012/Hyd/2017 the Co-ordinate Bench has followed the judgment of the Hon'ble Supreme Court in the case of CIT Vs. General Insurance Corporation [286 ITR 232] (SC), the amount is allowable as revenue expenditure, as there is no fresh infusion of share capital due to conversion of already existing preference shares. However, this aspect has not been examined by the AO or CIT(A). Since the facts are to be examined afresh, we are of the opinion that the claim of amount is to be examined afresh in the light of the judgemnet of the Hon'ble Supreme Court in the case of CIT Vs. General Insurance Corporation (supra) and also the decision of the Hon'ble Supreme Court in the case of Punjab State Industrial Development Corporation Ltd., Vs. CIT [225 ITR 792] (SC) and Brooke Bond India Ltd., Vs. CIT [225 ITR 798] (SC). It is also to be noted that the contention that no fresh capital was brought in was not raised before the authorities and as seen from the submissions before the Ld.CIT(A), assessee itself has restricted the claim to 1/5th of the amount u/s. 35D of the Act. Since the claim was made before us, we deem it proper to restore the issue for examination of facts and for allowing the amount as per the provisions of law and case law cited above. Assessee is directed to submit the necessary details before the AO. Ground is considered allowed for statistical purposes.
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ITA Nos. 1010, 1011 & 1012/Hyd/2017 Issue of CSR Expenditure:
13. AO has disallowed an amount of Rs. 62,11,173/- incurred towards Corporate Social Responsibility (CSR) in AY. 2013-14. AO was of the view that the same was not incurred wholly and exclusively for the purpose of business of assessee. It was the submission of assessee before the Ld.CIT(A) that assessee has to undertake few activities under CSR to develop the surrounding villages as they are effected by the movement of heavy trucks on the village roads and as a part of social responsibility the amounts are spent which are to be allowed as business expenditure. Assessee also contended that the amendment brought to Section 37(1) and Explanation-2 was effective from AY. 2015-16 and so the expenditure incurred during the year is allowable as a business expenditure. Ld.CIT(A) without analysis of the expenditure or the nature of the claims agreed with the AO in his order.
13.1. Before us it was submitted that out of the entire amount of Rs. 62,11,173/-, an amount of Rs. 28,74,363/- was wrongly classified as 'CSR expenditure', whereas this expenditure pertains to consultancy charges and advertisement charges which are not part of CSR expenditure.
13.2. With reference to an amount of Rs. 23,46,000/-, assessee has explained the reasons why the expenditure has to be spent in the mining area. It was fairly admitted that an :- 21 -:
ITA Nos. 1010, 1011 & 1012/Hyd/2017 amount of Rs. 9,90,810/- was not supported by bills or not directly related to business.
14. After considering the rival contentions and case law on the issue, we are of the opinion that an amount of Rs. 9,90,810/- out of the amount disallowed cannot be allowed as assessee has fairly admitted that they have no vouchers or not directly related to the business. The disallowance to that extent is confirmed.
14.1. On the amount of Rs. 23,46,000/-, it is explained as under:
CSR Expenditure in local/surrounding area of factory to facilitate smooth operations, goods movement and local support Rs.
Scholarship/support to junior tennis play, 1,80,000 Raymond Jude, from Cuddapah district Gravel Road from Jambuapuram to Kothapalli (near 3,60,000 area under Mining lease) Construction of public toilet at Agasthalaingayapalli 5,40,000 (behind factory) Temple at ST Colony, Thippaluru (village in the 6,00,000 surrounding of the Mine under lease) Burial Ground Compound wall at Pandirlapalli (village en route - 1.50 km - to factory, that has to 6,66,000 be crossed during goods movement) Sub-total (B) 23,46,000 Considering the above reasons given, we are of the opinion that the expenditure is allowable as a business expenditure, as the amendment to Section 37(1) is not :- 22 -:
ITA Nos. 1010, 1011 & 1012/Hyd/2017 applicable for the impugned assessment year and assessee has to spend this amount in order to keep its business in good condition without any problem from the neighboring villages or villagers. Since the expenditure is part of Corporate Social Responsibility (CSR), we allow this amount to assessee.
14.2. The balance amount of Rs. 28,74,363/- is explained as under:
Expenditure wrongly classified as CSR Rs.
Topographic survey for laying water pipe from Penna river to Factory-paid to Design Group 28,39,363 against WO No. 5100000679 Advertisement in Revenue Diary 2013 - IOM and the Appeal from A.P. Revenue Services Association attached. Bharathi logo published in the diary and the publication is widely circulated in AP. The 20,000 advertisement leads to publicity for the company Advertisement in Ankusam magazine having circulation in AP. The magazine was celebrating 15 15,000 years of their magazine.
Sub-total(A) 28,74,363 It was the contention that this amount is not related to CSR but pertains to consultancy charges and advertisement expenses wrongly classified under this head. Since this issue was not examined by the AO, we are of the opinion that AO can examine the nature of expenditure and allow the same, if they are eligible for deduction u/s. 37(1). To the extent of an amount of Rs. 28,74,363/- the claim is restored to the file of AO for fresh examination, after giving due opportunity to assessee. Ground is partly allowed for statistical purposes.
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ITA Nos. 1010, 1011 & 1012/Hyd/2017
15. In the result, appeal in AY. 2011-12 is considered allowed for statistical purposes. Appeal in AY. 2012-13 is allowed for statistical purposes and appeal in AY. 2013-14 is partly allowed for statistical purposes.
Order pronounced in the open court on 27th June, 2018 Sd/- Sd/-
(P. MADHAVI DEVI) (B. RAMAKOTAIAH)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated 27th June, 2018
TNMM
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ITA Nos. 1010, 1011 & 1012/Hyd/2017
Copy to :
1. Bharathi Cement Corporation Private Limited, 8-2-696, Reliance Majestic, Road No. 10, Banjara Hills, Hyderabad.
2. The Dy. Commissioner of Income Tax, Circle-2(3), Hyderabad.
3. The Asst. Commissioner of Income Tax, Circle-2(2), Hyderabad.
4. CIT(Appeals)-2, Hyderabad.
5. Pr.CIT-2, Hyderabad.
6. D.R. ITAT, Hyderabad.
7. Guard File.