2014 (8) TMI 105 - AT - Income Tax

Tribunal upholds CIT(A)'s decision on under-pricing, afforestation & bridge expenses

ASSTT COMMISSIONER OF INCOME TAX Versus M/s VELINGKAR BROTHERS

The tribunal upheld the CIT(A)'s decision to delete the addition of Rs. 4.95 crores on account of under-pricing of sales to a sister concern, emphasizing ... Claim of exemption u/s 10B - Under-pricing of sales to sister concern – Held that:- In the case of sister concern M/s. Ramacanta Velingkar Minerals and on facts, it has been held that no under invoicing or underpricing has been done by the assessee of its sales made to sister concern – AO applied the rates of processed fine ore with ROM and wrongly concluded the rates were not properly charged - The price of Rom varies between ₹ 360 to ₹ 575 for per tonne whereas the assessee has charged ₹ 450 tonne which shows that assessee has sold the ore at the market rate - CIT(A) is justified in his action – Relying upon CIT(A) Vs. Calcutta Discount [1973 (4) TMI 6 - SUPREME Court] - when one trader transfers his goods to another trader at a price less than the market price, the taxing authority cannot take into consideration the market price of these goods, ignoring the real price fetch. Also in Marghbhai K. Patel & Co. Vs. CIT [1976 (2) TMI 15 - GUJARAT High Court] it has been held that the taxing authorities has no right to substitute the market price or average price in place of agreed price - unless it has been shown that the transaction in question was a sham one or unless the value shown was not the value in the books of account or unless it was not the value in the books of account or unless it was not bona fide transaction, it is not open to the taxing authorities to disregard the figures of the transactions shown in the books of account and disallow a part of price paid to partners in respect of purchases made by them – thus, the order of the CIT(A) is upheld – Decided against Revenue. Afforestation Expenses – Capital in nature or not – Held that:- The assessee has paid the 'compensation' for use of forest area for mining - Forest area/land used by assessee is a capital asset and anything paid for acquiring a capital asset is capital expenditure and not a revenue expenditure - the assessee has not acquired any capital asset but assessee has paid the amount of compensation for carrying out mining activities and the assessee has paid compensation as charges for degrading the forest land and the expenditure is incurred wholly and exclusively for the purpose of mining business and same has been treated as revenue expenditure by CIT(A) – relying upon Deputy Commissioner of Income Tax vs. Timblo Pvt. Ltd. in Tax [2014 (7) TMI 1086 - BOMBAY HIGH COURT] – CIT is justified in holding the payment on net present value as afforestation charges in respect of the mining lessees already obtained has been decided and is treated as revenue expenditure – Decided against Revenue. Contribution towards construction of bridge – Held that:- The assessee has paid by way of contribution for construction and development of roads between sugarcane producing centre and sugar factory of the assessee - the close proximity existed between construction of the road and running of factory - assessee has made contribution to the Govt. for construction of the bridge - The bridge was owned by the State Government and it is used by general public as well as mining companies and truck owners - The construction of the bridge is not a statutory obligation but it is a duty of the State Government – the AO himself has treated this expenditure as capital expenditure – the expenditure is in revenue nature and is allowed – Decided in favour of Assessee. Issues Involved:1. Deletion of addition on account of under-pricing of sales to a sister concern entitled to 10B exemption.2. Deletion of afforestation expenses treated as capital in nature.3. Contribution towards the construction of a bridge treated as capital expenditure.Detailed Analysis:Issue 1: Deletion of Addition on Account of Under-Pricing of Sales to Sister ConcernThe department contended that the assessee sold iron ore to its sister concern, M/s. Ramacanta Velingkar Minerals (100% EOU), at prices significantly below market rates, which led to a reduction in taxable income. The Assessing Officer (AO) observed discrepancies in the invoices and concluded that the sales were under-priced to shift profits to the tax-exempt sister concern, invoking Section 10B(7) of the IT Act. The AO recomputed the sales value and added Rs. 4.95 crores to the total income.The CIT(A) deleted the addition, noting that:- The AO replaced the price of Run of Mine (ROM) ore with processed ore, which was incorrect.- There was no proof that the assessee received any money back or that the book results were unreliable.- The AO's assumptions were based on market price estimates, not actual prices.- Judicial precedents (CIT v. A. Raman and Co., CIT v. Calcutta Discount) support that market prices cannot replace actual transaction prices unless the transactions are proven to be sham.The tribunal upheld the CIT(A)'s decision, emphasizing that the AO wrongly compared ROM prices with processed ore prices and that the assessee sold the ore at market rates. The tribunal also cited judicial precedents supporting that taxing authorities cannot substitute market prices for actual transaction prices without evidence of sham transactions.Issue 2: Deletion of Afforestation Expenses Treated as Capital in NatureThe assessee claimed expenses of Rs. 1,07,73,000/- for land compensation and Rs. 1,93,899/- for afforestation charges as revenue expenditure. The AO treated these expenses as capital in nature, arguing that they were for acquiring a capital asset.The CIT(A) allowed the claim, stating:- The payments were made to the Government Forest Department as a necessity for continuing mining operations.- The payments did not result in acquiring any tangible capital asset.- The jurisdictional ITAT, Panaji, in Dr. Prafulla R. Hede v. CIT, held similar payments as revenue expenditure.The tribunal agreed with the CIT(A), noting that the payments were for compensating ecological degradation due to mining, not for acquiring a capital asset. The tribunal also referenced the Bombay High Court's decision in Deputy Commissioner of Income Tax v. Timblo Pvt. Ltd., which held that such payments are for commercial expediency and should be treated as revenue expenditure.Issue 3: Contribution Towards Construction of Bridge Treated as Capital ExpenditureThe assessee contributed Rs. 15 lakhs towards the construction of a bridge, which the AO treated as capital expenditure, arguing it was not directly related to the assessee's business.The tribunal found that:- The bridge was used for transporting ore and by the public.- The assessee did not own the bridge, and the contribution was a necessity for business operations.- The expenditure was in the nature of revenue, not capital.The tribunal allowed the assessee's claim, treating the contribution as revenue expenditure necessary for business operations.Conclusion:The tribunal dismissed the revenue's appeal and upheld the CIT(A)'s decisions on all grounds, confirming that the transactions and expenses in question were correctly treated by the assessee as per the applicable legal provisions and judicial precedents. The tribunal's comprehensive analysis reinforced that the AO's assumptions and market price estimates could not replace actual transaction prices without concrete evidence of sham transactions.