2025 (7) TMI 369 - AT - Income Tax

Educational society payments allowed as statutory obligations under NCWA, not employee welfare expenses under section 40A(9)

Singareni Collieries Company Limited Versus ACIT, Circle – 1 Khammam and Kothagudem ACIT, Circle 13 (1), Hyderabad and Dy. CIT, Circle 13 (1), Hyderabad Versus Singareni Collieries Company Limited, Kothagudem

The ITAT Hyderabad allowed the assessee's appeal on multiple grounds. The tribunal deleted the disallowance of payments to an educational society under ... Disallowance of payment/grant made to Singareni Educational Society u/s 40A(9) - Assessee submitted that the said educational society is a body constituted for running educational institutions established by the assessee for the benefit of its employees - AO disallowed the claim of the assessee by holding that the payment in question made by the assessee to the educational society would not be an allowable expenses u/s 40A(9) as this payment is not made for the expenses provided u/s 36(1)(iv) &(iv) - HELD THAT:- We note that this issue has been now considered and decided by the Hon'ble jurisdictional High Court in assessee’s own case for the A.Ys 2006-07 to 2008-09 [2024 (2) TMI 1498 - TELANGANA HIGH COURT] held that the benefit extended by the assessee as per the NCWA was an obligation under the statutory document as held in case of Mohan Mahto v. Central Coal Field Ltd [2007 (9) TMI 727 - SUPREME COURT] and therefore, the same is not considered as an expenditure incurred towards employees welfare but for discharging the statutory obligation. Following the judgement of the Hon'ble jurisdictional High Court where the assessee has incurred the expenditure towards electricity expenditure of the employees/ workers as per the terms of the said NCWA, the education provided by the assessee to the employees in terms of the NCWA cannot be given a different treatment and therefore, the issue is now covered by the judgment of the Hon'ble jurisdictional High Court in favour of the assessee. Accordingly, the addition made by the AO and sustained by the learned CIT (A) is deleted. Investment Allowance u/s 32AC disallowed - DR submitted AO has not only disallowed the claim of the assessee by treating the same as not falling in the ambit of manufacturing/production of goods or article but also on the factual aspect that the assessee has failed to prove that the alleged plant & machinery was set up/installed during the period relevant to the A.Y 2015-16 and 2016-17 - HELD THAT:- Despite the amendment in section 32(1)(iia) of the Act, no corresponding amendment is made in section 32AC of the Act and therefore, the intention of the Legislature is clear that the benefit of section 32AC(1) is not available to a company engaged in the business of generation of power. To maintain the rule of consistency, we follow the earlier decision in the case of ACIT vs. Hinduja National Power Corporation Ltd [2025 (4) TMI 81 - ITAT HYDERABAD] and consequently, this issue is decided against the assessee and the impugned order of the learned CIT (A) for the A.Ys 2015-16 and 2016-17 are upheld. Disallowance u/s 40(a)(ia) - TDS u/s 194A - TDS on interest on land compensation deposited in court as per court order - HELD THAT:- we note that this issue is covered by the decision of this Tribunal in assessee’s own case for the A.Y 2009-10 to 2011- 12 [2021 (5) TMI 735 - ITAT HYDERABAD] and further for the A.Ys 2012-13 [2021 (10) TMI 1468 - ITAT HYDERABAD], AY 2013-14 & AY 2014-15 [2021 (5) TMI 914 - ITAT HYDERABAD] held that Interest received by an assessee on compensation or on enhanced compensation, as the case may be, shall be deemed to be in the income of the year in which it is received. Now coming to the case on hand, it is clear that the assessee has deposited the amount with the Court, but, it has not actually paid to the actual recipients directly i.e., pattadars. On analysis of the above cited section and Circulars, it is clear that the assessee is not responsible for deducting tax deduction at source and assessee is also not sure that when the amount shall be paid to the actual recipients/pattadars. In our considered opinion, the addition made in this regard is not sustainable in the eyes of law and, therefore, the addition is deleted. Accordingly, grounds raised on this issue are allowed in favour of the assessee. Disallowance of expenditure incurred for the development of the coal mines which was abandoned - nature of expenses - HELD THAT:- As decided in own case for the A.Y 2015-16 assessee has debited to the capital expenditure in the P&L account in respect of those mines which are not in operation or the mines were unsuccessful for coal mines. It is also clear that the breakups were filed before the CIT(A) which has been incorporated by him in his order. We find that in most of the cases mines were closed and no operations could be carried out, the capital work in progress relating to that mine development expenditure could not be capitalized. Therefore, the capital work in progress relating to the mine development expenditure incurred was written off since no asset could be created. Any expenditure which does not bring any additional advantage to the business of the assessee is revenue expenditure. The expenditure was basically of revenue nature and incurred wholly and exclusively for the purpose of business. As decided in the case of Hindustan Aluminum Corporation Ltd. [1986 (1) TMI 88 - CALCUTTA HIGH COURT] was applicable and following that decision held that the expenditure was allowable as incurred wholly and exclusively for the purpose of the assessee's business. Claim of depreciation @ 15% was restricted by AO to 10% but allowed by the CIT (A) - assessee is engaged in the business of coal mines and he is extracting coal from open cast mines as well as underground mines - HELD THAT:- Issue covered by the decision of this Tribunal in assessee’s own case for the A.Y 2011-12 [2021 (5) TMI 735 - ITAT HYDERABAD] A.Ys 2012-13 [2021 (10) TMI 1468 - ITAT HYDERABAD], AY 2013-14 & AY 2014-15 [2021 (5) TMI 914 - ITAT HYDERABAD] as per the schedule of depreciation, the roads are falling in the asset as building and not as plant and machinery. However, in the case of the assessee, the work carried out by the assessee is within the Mines and very much part and parcel of the coal mines of the assessee. Undisputedly, the coal mines are considered as plant and machinery for the purpose of depreciation and therefore, any work carried out in the Mines which is essential for the operations of extraction of the coal from the Mines will partake the character of plant and machinery. Accordingly, we do not find any merits in the contention of the learned DR on this issue. The core legal issues considered by the Tribunal in these cross appeals for assessment years 2015-16, 2016-17, and 2020-21 can be broadly categorized as follows:1. Whether the payments/grants made by the assessee to Singareni Educational Society for running educational institutions for employees qualify as allowable business expenditure or are disallowable under section 40A(9) of the Income Tax Act, 1961.2. Whether the assessee is entitled to claim investment allowance under section 32AC of the Income Tax Act in respect of plant and machinery acquired and installed during the specified period, particularly in the context of electricity generation being treated as production of an article or thing.3. Whether the disallowance under section 40(a)(ia) for non-deduction of TDS on interest payments was justified.4. Whether expenditure incurred for development of coal mines that were subsequently abandoned should be treated as capital or revenue expenditure.5. Whether certain civil works carried out by the assessee within coal mines qualify as plant and machinery eligible for depreciation at 15% or should be treated as buildings attracting depreciation at 10%.Issue 1: Applicability of Section 40A(9) to Payments Made to Singareni Educational SocietyLegal Framework and Precedents: Section 40A(9) disallows expenditure if payments or contributions are made to funds, trusts, societies, or associations except those covered under specified sections (36(1)(iv) and (v)). The National Coal Wage Agreement (NCWA) is recognized as a statutory settlement under section 18(3) of the Industrial Disputes Act, 1947, as upheld by the Supreme Court in Mohan Mahto v. Central Coal Field Ltd., conferring binding force on the parties.Court's Interpretation and Reasoning: The Tribunal examined whether the payments to the educational society were voluntary contributions or statutory obligations under the NCWA. The assessee contended that these payments were reimbursements of deficits incurred by the society in running educational institutions mandated under the NCWA for the welfare of employees and their families, thus incurred wholly and exclusively for business purposes and allowable under section 37.The Tribunal noted that the educational society was formed to efficiently run schools and colleges for employees, funded partly by government grants and fees, with the assessee bridging the deficit as per statutory obligations. The Tribunal relied on the jurisdictional High Court's recent ruling for AYs 2006-07 to 2008-09, which held that the NCWA is statutory and binding, and expenditures incurred under it are not voluntary welfare contributions but statutory obligations.Key Evidence and Findings: The accounts of the society showed that funds were used to mitigate deficits in running educational institutions. The NCWA's binding nature and the statutory obligation on the assessee to provide such facilities were established. The Tribunal also considered analogous judicial pronouncements from Jharkhand High Court and Bombay High Court affirming the statutory nature of NCWA obligations.Application of Law to Facts: Since the payments were statutory obligations and not voluntary contributions, section 40A(9) disallowance did not apply. The payments were held to be incurred wholly and exclusively for business and allowable under section 37.Treatment of Competing Arguments: The Revenue argued that the society was an independent entity providing education to others beyond employees, thus the expenditure was not wholly for business. The Tribunal rejected this, emphasizing the statutory obligation and binding nature of NCWA and prior judicial precedents.Conclusion: The Tribunal deleted the disallowance under section 40A(9) for payments to Singareni Educational Society for all three assessment years.Issue 2: Claim of Investment Allowance under Section 32AC for Plant and Machinery in Power GenerationLegal Framework and Precedents: Section 32AC allows investment allowance to companies engaged in manufacture or production of any article or thing acquiring and installing new plant or machinery during specified periods. Section 32(1)(iia) provides additional depreciation for machinery used in manufacturing or power generation businesses. However, the proviso to section 32(1)(iia) grants enhanced depreciation only to manufacturing undertakings in notified backward areas, excluding power generation businesses.Several judicial decisions have held electricity generation as production of an article or thing for sales tax and other purposes (e.g., Supreme Court in Commissioner of Sales Tax, Madhya Pradesh vs. Madhya Pradesh Electricity Board), but these do not directly govern the scope of investment allowance under section 32AC.Court's Interpretation and Reasoning: The Tribunal carefully analyzed the statutory language and legislative intent. It noted that while section 32(1)(iia) includes power generation businesses for additional depreciation, the proviso restricting enhanced depreciation to manufacturing undertakings excludes power generation. Similarly, sections 32AC and 32AD, introduced later, provide investment allowance only to manufacturing or production businesses, explicitly excluding power generation enterprises.The Tribunal emphasized the principle that a proviso qualifies the main enactment and cannot be read expansively to include excluded classes. It rejected the assessee's reliance on judgments recognizing electricity as an article or thing for other tax purposes, as these did not address the specific statutory provisions for investment allowance.Key Evidence and Findings: The Assessing Officer found that the plant and machinery were not installed within the prescribed period and that the power generation business was excluded from section 32AC benefits. The assessee submitted certificates and invoices, but failed to conclusively establish acquisition and installation dates within the specified period.Application of Law to Facts: The Tribunal held that the benefit of section 32AC was not available to power generation companies, consistent with legislative intent and statutory language. It also upheld factual findings that the assessee failed to prove timely installation of assets.Treatment of Competing Arguments: The assessee argued that power generation is manufacturing and cited various judicial pronouncements. The Tribunal distinguished these cases as unrelated to section 32AC and emphasized strict compliance with statutory conditions for claiming deductions. The Revenue's position, supported by statutory interpretation and prior Tribunal decisions, was accepted.Conclusion: The Tribunal upheld the disallowance of investment allowance under section 32AC for the assessment years 2015-16 and 2016-17.Issue 3: Disallowance under Section 40(a)(ia) for Non-Deduction of TDS on Interest PaymentsLegal Framework and Precedents: Section 40(a)(ia) disallows expenditure where tax is required to be deducted at source but is not deducted or not deposited with the government. Section 194A requires TDS on interest payments. CBDT Circulars and judicial decisions clarify responsibility for TDS deduction in cases of court-directed deposits.Court's Interpretation and Reasoning: The Tribunal observed that the assessee deposited interest amounts with the court as per court orders but did not directly pay the recipients (pattadars). The Board's circulars and judicial decisions clarify that the responsibility for TDS deduction lies with the authority making the payment to the final beneficiary, not with the depositor of the amounts in court.Key Evidence and Findings: The assessee's submissions and prior Tribunal rulings in its own case for earlier years were considered. The Tribunal also referred to High Court judgments and CBDT Circulars (including Circular No. 23/2015) which held that TDS is not required to be deducted until the ownership of funds is decided by the court.Application of Law to Facts: Since the assessee was not the person responsible for making the final payment to the beneficiaries, the non-deduction of TDS was not attributable to it, and disallowance under section 40(a)(ia) was not justified.Treatment of Competing Arguments: The Revenue contended that the assessee was aware of the payees and should have deducted TDS. The Tribunal rejected this, relying on binding precedents and circulars clarifying the position.Conclusion: The Tribunal upheld the deletion of disallowance under section 40(a)(ia) for non-deduction of TDS on interest payments.Issue 4: Treatment of Expenditure on Abandoned Mine DevelopmentLegal Framework and Precedents: Expenditure incurred on capital work in progress that does not result in creation of an asset of enduring nature is generally treated as revenue expenditure. Decisions of the Supreme Court and High Courts (e.g., CIT vs. Binani Cements Ltd., CIT vs. Indian Oxygen Ltd.) support this principle.Court's Interpretation and Reasoning: The Tribunal noted that the assessee wrote off capital work in progress relating to development of mines that were abandoned or unsuccessful. Since no capital asset came into existence, the expenditure did not qualify as capital expenditure and was allowable as revenue expenditure under section 37.Key Evidence and Findings: Details of abandoned mines and related capital work in progress were filed. The Tribunal relied on prior decisions of the Tribunal in the assessee's own case and binding judicial precedents.Application of Law to Facts: The expenditure was held to be revenue in nature and allowable as deduction.Treatment of Competing Arguments: The Revenue argued for capital treatment. The Tribunal distinguished the facts based on the absence of asset creation.Conclusion: The Tribunal allowed the claim of expenditure on abandoned mine development as revenue expenditure.Issue 5: Classification of Civil Works as Plant & Machinery or Building for DepreciationLegal Framework and Precedents: Depreciation rates differ for plant and machinery (15%) and buildings (10%). The classification depends on the nature and use of the asset. Judicial decisions have defined plant and machinery in context.Court's Interpretation and Reasoning: The Tribunal observed that the civil works such as retaining walls, bridges, land leveling, sand stowing, tunnels, bunkers, and dams were integral to the coal mining operations and necessary for coal extraction. Such works are functionally part of the plant and machinery of the coal mines.Key Evidence and Findings: The assessee submitted detailed descriptions and prior Tribunal rulings recognizing similar expenditures as plant and machinery. The Tribunal rejected the Revenue's reliance on a Madras High Court decision relating to road construction under BOT, which was factually distinguishable.Application of Law to Facts: The civil works were held to be plant and machinery eligible for depreciation at 15%.Treatment of Competing Arguments: Revenue argued classification as buildings. The Tribunal found the nature and purpose of the works aligned with plant and machinery.Conclusion: The Tribunal upheld depreciation at 15% for the civil works within the mines.Significant Holdings:'The payments made by the assessee to Singareni Educational Society towards running educational institutions are statutory obligations under the National Coal Wage Agreement, which is a settlement binding under section 18(3) of the Industrial Disputes Act, and therefore, such payments are incurred wholly and exclusively for the purpose of business and not disallowable under section 40A(9) of the Income Tax Act.''The benefit of investment allowance under section 32AC is not available to companies engaged in the business of generation, transmission, and distribution of power, as the legislature has deliberately excluded such businesses from the ambit of sections 32AC and 32AD, notwithstanding the inclusion of power generation under section 32(1)(iia) for additional depreciation.''Where the assessee deposits interest amounts with the court pursuant to court orders and does not directly pay the recipients, the responsibility for deduction of tax at source under section 194A does not lie with the assessee, and disallowance under section 40(a)(ia) is not justified.''Expenditure incurred on abandoned mine development that does not result in creation of an asset of enduring nature is revenue expenditure and allowable under section 37 of the Income Tax Act.''Civil works essential for coal extraction carried out within mines, such as retaining walls, bunkers, tunnels, and dams, are integral to plant and machinery and eligible for depreciation at 15%, not to be classified as buildings attracting depreciation at 10%.'In conclusion, the Tribunal allowed the assessee's appeals on the issues relating to payments to the educational society under section 40A(9), disallowance under section 40(a)(ia), treatment of abandoned mine development expenditure, and classification of civil works for depreciation. However, it upheld the Revenue's appeals disallowing investment allowance under section 32AC for power generation assets for the relevant years.