2002 (8) TMI 26 - HC - Income Tax

Accrued liability for filling mining pits and restoring leased land: deductible in year pits are dug under mercantile accounting.

Whether an accrued liability to restore leased land by filling mining pits is deductible in the assessment year in which pits are dug was the dominant ... Disallowance of expenses - liability stipulated in the lease agreement to restore the land has not accrued in the assessment year in hand and it does arise when he has filled the pits - Whether the Tribunal was justified in restoring the view taken by the Income-tax Officer regarding disallowance of the expenses accrued on account of agreement with the State Government regarding restoration of the land in its original shape ? - HELD THAT:- Considering the clause in the agreement, i.e., 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, i.e., 1991-92. We agree with the view taken by the Commissioner of Income-tax (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. – Question answered in negative - we restore the view taken by the Commissioner of Income-tax (Appeals). The appeal stands allowed. Issues:1. Disallowance of expenses accrued on account of agreement with the State Government regarding restoration of land.Analysis:The High Court of Rajasthan heard an appeal against the Tribunal's order regarding the disallowance of expenses accrued on restoring land as per an agreement with the State Government. The main issue was whether the Tribunal was justified in restoring the view taken by the Income-tax Officer. The agreement between the assessee and the State outlined the obligation to restore the land to its original condition, specifically filling pits dug during mining activities. The Income-tax Officer initially denied the claim, stating that the liability to restore the land had not accrued in the assessment year. However, the Commissioner of Income-tax (Appeals) allowed the claim after considering the agreement's provision. The Tribunal then reversed this decision, siding with the Assessing Officer.The assessee's counsel argued that the company, engaged in open-cast mining, had a lease agreement with the government that mandated restoring the land. The company dug pits during the year under consideration, incurring costs to refill them as per the lease agreement. The company followed the mercantile system of accounting, recognizing the liability to refill pits as soon as they were dug. The Tribunal's disallowance of the claim was deemed erroneous by the High Court, which agreed with the Commissioner of Income-tax (Appeals) that the liability arose when the pits were dug. Therefore, the High Court restored the view taken by the Commissioner of Income-tax (Appeals) and allowed the appeal, permitting the deduction of expenses incurred for land restoration.