TaxTMI 
TaxTMI 
2021 (5) TMI 735
X X X X Extracts X X X X
X X X X Extracts X X X X
....on: 1. Disallowance of capital work-in-progress for the all the years 2. Interest accrued on loans to M/s APHMEL for AYs 2005-06 & 2006-07 3. Disallowance of deduction claimed u/s 43B 4. Disallowance of net prior period expenditure for AYs 2005-06 to 2010-11. 5. Prospecting expenditure - section 35E for AY 2007-08 to 2010-11. 6. TDS on interest on land compensation deposited in court as per court order for AY 2009-110 to 2011-12. 7. Loss due exchange fluctuation on interest on capital borrowed in forex for acquisition of machinery after such assets is put to use for AY 2009-10. 8. Restriction of depreciation on mine development to 10% as against 15% claim for AY 2011-12. 9. prior period expenditure - enhancement by CIT(A) for AY 2007-08 and 2009-10. 3. When the assessee preferred appeals before the CIT(A) the CIT(A) confirmed the some of the additions/ disallowances and deleted some of the additions/ disallowance made by the AO, against which the assessee and the revenue are in appeals before the ITAT. 4. First we take up the appeals of the assessee. 5. As Regards ground Nos. 1 to 4 regarding ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... This is done on an ongoing basis and this expenditure is parked separately and shown as Capital work in progress while expansion work is in progress and is not subjected to depreciation. This expenditure is capitalized or written off as revenue depending on whether the expansion yields more coal deposits for extraction or not. This expenditure is incurred for the purpose of making the coal deposits accessible and the mines economically viable. In most of the cases mine were closed and no operations could be carried out, the capital work in progress relating to that mine development expenditure could not be capitalized. Consequently, the capital work in progress relating to the mine development expenditure incurred was written off since no asset could be created. The expenditure was basically of revenue nature and incurred wholly and exclusively for the purpose of business. This is a continuous and ongoing process necessary to expand the area of operation in the mine. A mine is divided into districts for operational purposes, at each district expansion are envisaged periodically and development expenses stated above are incurred, for the purpose of coal mining. In....
X X X X Extracts X X X X
X X X X Extracts X X X X
....iled 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. The assessee had also filed detailed written submissions before the CIT(A) and had relied on number of judgments. Before us, the ld. AR also relied on the judgments as quoted supra. In support of our decision, we rely on the following judgements: 5.4.1 In case of CIT Vs. Binani Cements Ltd., vs CIT - 380 ITR 116 (Calcutta HC). In ITA No. 265 OF 2009, judgment dated 23/03/2015, similar issue was decided by the Hon'ble High Court of Calcutta wherein it has held as under: "3. Mr. Bajoria, learned senior advocate, appearing for the appellant su....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tton & Flour Mills (P.) Ltd. [1964] 53 ITR 134 (SC). In A. Gajapathy Naidu (supra ) on the question of power of the ITO to relate back an income the apex Court was of the following view: "When an ITO proceeds to include a particular income in the assessment, he should ask himself, inter alia, two questions, namely : (i) what is the system of accountancy adopted by the assessee, and (ii) if it is the mercantile system, subject to the deeming provisions, when has the right to receive accrued? If he comes to the conclusion that such a right accrued or arose to the assessee in a particular accounting year, he should include the said income in the assessment of the succeeding assessment year. No power is conferred on the ITO under the Act to relate back an income that accrued or arose in a subsequent year to another earlier year, on the ground that that income arose out of an earlier transaction. Nor is the question of reopening of accounts relevant in the matter of ascertaining when a particular income accrued or arose." 5. In Swadeshi Cotton & Flour Mills (P.) Ltd. (supra ) on a similar question the said Court held : "The system of reopening of accounts does....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ming the deduction. The decision was taken in the relevant year. It can therefore be safely concluded that the expenditure arose in the relevant year. 12. Reference in this regard may be made to the decision in the case of CIT v. Indian Mica Supply Co. (P.) Ltd. [1970] 77 ITR 20 (SC) wherein the Supreme Court in considering a claim for deduction on arrear lease rents, ascertained subsequently consequent to a compromise arrived in the suit and paid in the relevant assessment year held, inter alia, as under : "The Tribunal, in the present case, had clearly found that it was only as a result of the compromise that the respondent became entitled to remain in possession of the demised land. Its liability also became ascertained only at that point of time. It cannot be disputed that the respondent incurring the expenditure had acted in the interest of and for the purpose of its business. The expenditure was not laid out for any purpose other than that of carrying on the business. The deduction was properly admissible under s. 10(2)(xv) of the Act and the matter being self-evident the High Court was fully justified in declining to accede to the prayer made under s. 66(2)....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ain why the accrued interest on such advances to M/s APHMEL should not be added to the total income of the assessee, in response to the same, it was stated that the assessee company is following the cash basis of accounting in respect of interest on loans and advances to its subsidiary company M/s APHMEL. It was stated that this method of accounting is being consistently followed and the interest receivable from the subsidiary company is being accounted on a cash basis since the receipt of the interest is uncertain consequent to declaration of the subsidiary company as a sick unit by the BIFR. Further, it was stated that it could change its accounting policy from mercantile system to cash system for recognizing the interest receivable from M/s APHMEL due to the loans and advances to it becoming sticky. In this regard, the assessee relied on few case law, which were mentioned by the AO at page 7 of his order. 6.1 After considering the submissions of the assessee, the AO disallowed the assessee's claim of accrued interest by observing, inter-alia, as under: "4.10 In the light of drastic improvement in the financial performance and health of the Mis APHMEL and the assessee....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f the BIFR before the AAIFR and vide order dated 05/09105 the matter was remanded back to BIFR by AAIFR. It is submitted that SCCL had modified its accounting policy to recognize interest from sticky loans and advances on actual realization basis instead of accrual basis. The CIT (A) as well as the Assessing Officer have ignored the fact that the APHMEL was still a BIFR case and not out of BIFR, the recovery of interest beings still doubtful, ought to have allowed the method of accounting followed in this respect, consistently in the past years on cash basis and therefore the addition of the accrued interest is not warranted. It is submitted all the liabilities of a sick industrial company remain frozen, while it continues to be under scheme of rehabilitation. It is also submitted since SCCL had accounted for the interest income from APHMEL in subsequent years on receipt basis; the addition in this year would result in double taxation, which is not permitted." We draw your kind attention to the decision in the case of CIT V s Dalmia Industries Ltd. 180 ITR 167 (Del HC) Paper book pages 56 to 58." 6.4 The Ld. DR, on the other hand, relied on the orders ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 7.1 The ld. AR of the assessee filed written submissions on this issue which are reproduced as under: "The Assessing officer disallowed the expenditure referred to as prior period expenditure, relating to power and fuel, welfare expenses, Interest and other miscellaneous expenditure when the same have been crystallized and determined after the cut off date for close of the financial accounts for the previous year. In the earlier years the CIT (A) as well as IT AT has allowed the prior period expenditure as deductible expenses in the subsequent year based on the method of accounting and the volume of transactions and also the fact that these expenditure have been crystallized and determined only after cut off date for the close of the financial year. In the case of your Appellant the Account are subjected to audit by Statutory Auditors as well as C&AG, who, based on the method of Accounting, Accounting Standards and Accounting Policies consistently followed, have considered certain expenditures as prior period expenses for the purpose of presentation of accounts under the Companies Act, 1956, whereas for the purpose of income tax the same are allowable expenses....
X X X X Extracts X X X X
X X X X Extracts X X X X
....laimed a sum of Rs. 10,27,35,885/- towards "Exploration (Prospecting) Expenditure" as revenue expenditure and a further sum of Rs. 1,24,46,020/- as capital expenditure during the year under consideration. The assessee was asked to furnish mine-wise details of prospecting expenses and why the said expenses should not be dealt in accordance with the provisions of sec. 35E of IT Act, 1961. Under the provisions of sec. 35E. the amount of expenditure spent on prospecting etc. for development of certain minerals can be amortized and deduction can be claimed over a period of 10 years beginning with the year of commercial production. Further, the amount which is eligible for deduction must have been incurred during the year of commercial production and 4 years immediately preceding the year. The expenditure on prospecting, etc. includes aborted and suspended mines also. But, it was noticed that instead of claiming deduction u/s 35E, the assessee had claimed such expenditure on prospecting, etc. as revenue expenditure. 8.1 After examining the details filed by the assessee as well as referring to the provisions of section 35E, the AO computed the disallowance u/s 35E to the tune of Rs. 3,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ive new mines. Further, it was mentioned that as per the accounting policy of the assessee, any expenditure incurred towards exploration unless allocable to a project under construction is revenue expenditure is not in accordance with the' provisions of Section 35E of the Income Tax Act, '1961. This is a self- serving statement. Since the company has incurred expenditure for the purpose of exploring, locating or proving deposits on new sites and such expenditure is to be dealt in accordance with the provisions of Section 35E of the Income Tax Act, 1961. Hence, the contention of the assessee to treat the expenditure incurred relating to exploring, locating or proving on infructuous or abortive operations should be treated as revenue is not acceptable. As discussed above, under the provisions of sec. 35E, the amount of expenditure spent on prospecting etc. for development of certain minerals can be amortized and deduction can be claimed over a period of 10 years in equal instalments. 5.4 After careful examination of details submitted by the assessee, the prospecting expenses relating to two new mines viz., Gundala Block -III and KTK LW, BHPL sites, the prosp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of section 35E, there should be direct nexus between prospecting and commercial production during year under consideration. General prospecting is undertaken by the exploration department from time to time for exploration of availability of coal seams in mining areas. The general prospecting is also in relation to production support in the coal producing mines. General prospecting is undertaken to identify the coal reserves in the vicinity of existing mines. It is an undisputed fact that the Company is engaged in the business of coal mining and prospecting is an ongoing activity. At this juncture we would like to explain what exactly is prospecting - it is process of drilling holes in order to study the various levels of seams there would be mud, sand, water, rock, gases and minerals. It so happens in a open cast mine after certain level of extraction of coal, we face hard soil or rock then the prospecting department explores to arrive at the conclusion whether there are still any more mineral reserves available or not or to what extent over burden has to be removed in order to extract the coal. Even in underground mines we face similar situation wherein the prosp....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Further, the amount was deposited with courts directly drawing Cheques/DDs in the name of the courts/designation of principal officer of the court in compliance with various court orders. Therefore, the amount to the tune of Rs. 4.75 crores was dealt by the courts. As per the directives in the case, the courts/principal officers of the courts have directly disbursed the payments to the beneficiaries out of the deposits held by them, as per the provisions laid down in Civil Rules in practice. In view of the above, the amounts deposited by SCCL with the courts directly fall under para-4(a) of the Circular No: 08/2011 ( F. No: 275/30/2011-IT(B), dated 14/10/2011 and do not attract TDS provisions." 9.1 After considering the submissions of the assessee, the AO held that the contention of the assessee that the responsibility of making TDS vests with the authority distributing the compensation to the end beneficiary is not acceptable and, therefore, the interest debited to the P&L Account is disallowed by invoking provisions of section 40(a)(ia) wherein it was stated that any amount of interest exceeding prescribed limit paid or credited without deducting tax at source or ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....for paying to a resident any income by way of interest other than income by way of "Interest on securities" shall at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force. The provisions contained therein are however subject to the exceptions provided in the said section. According to the provisions of section 200 of the Income-tax Act, any person deducting any sum in accordance with the provisions of section194A shall pay, within the prescribed time, the sum so deducted to the credit of Central Government. If he fails to deduct tax at source or after deducting fails to pay the tax to the credit of Central Government, he shall be liable to action in accordance with the provisions of section 201. In this connection attention is also invited to the provisions of section 276B of the Income-tax Act, as substituted by the Direct Tax Laws (Amend‐ ment) Act, 1987 according to which if a person fails to pay to the credit of the Central Government the tax deducted at source by him, he shall be punishable with rigor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ove decision of the Supreme Court in Rama Bai's case ( supra) has set at rest the conflict of decisions among some High Courts on the above issue. The effect of the decision of the Supreme Court referred to above is that on the enhanced compensation, for land compulsorily acquired under the Land Acquisition Act, awarded by the Court on a reference under section 18 of the Land Acquisition Act, interest is payable to the claimants. If so, section 194A of the Act empowers the person who is responsible for making the payment to deduct income-tax. But the direction given in the D.O. letter dated 1-3-1987, of the Commissioner of Income-tax stating that while paying interest, income-tax was deductible at the rates in force during that financial year (Emphasis supplied) with effect from 1-4-1975, if the amount exceeded.Rs. 1,000 was not and could not be valid. Such a direction did not get support from section 194A under which Department sought deduction of income-tax at source. The proviso to section 194A of the Act empowers the assessee to receive the income by filing an affidavit or statement in writing declaring that his estimated total income assessable to tax for the assessme....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., while paying the compensation, deduct tax at source from the amount of interest forming part of the compensation ,and deposit the remaining amount with the Court of Law, for disbursement to the successful litigants. The same authority shall also issue the TDS certificates to the concerned parties in the prescribed Form 16A. Order : F.No. 275/109/92-IT(B), dated 21-9-1994. ANNEX - MINISTRY OF LAW, JUSTICE & C.A. (DEPARTMENT OF LEGAL AFFAIRS) ADVICE (B) SECTION The question for consideration is as to who is the person responsible for deduction of tax at source for the purpose of section 204 of the Income-tax Act, 1961 in the case of payment of compensation under the Land Acquisition Act. A prima facie view was expressed by us in the matter on the assumption that Collector, Land Acquisition is the person making payment and as such he is responsible for making deduction at source in terms of section 204( iii) of the Income-tax Act. However, we had requested the Department to confirm the factual position from the Ministry of Rural Development. The Department of Rural Development have stated that the person responsible for payment of compensation und....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n enhanced compensation, as the case may be, shall be deemed to be in the income of the year in which it is received." 9.8 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. 10. As regards the ground relating to loss due to exchange fluctuation on interest on capital borrowed in forex for acquisition of machinery, after such asset is put to use in AY 2009-10, raised in AY 2009-10 as ground No. 11, the AO observed that the assessee provided interest on the invoice price of the machinery purchased as at 31/03/2009, though the payments were made during the FY 2009-10. The AO stated that the paym....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... This ground is treated as allowed for statistical purposes. 11. As regards the ground relating to restriction of depreciation on mine development to 10% as against 15% claimed, as raised in AY 2011-12 as ground Nos. 9 & 10, the assessee has claimed depreciation @ 15% to the extent of Rs. 40,46,18,947/-, which was restricted by the AO to 10%, which comes to Rs. 13,48,72,982/-. The CIT(A) confirmed the same. 11.1 The ld. AR of the assessee filed written submissions on this issue, which are as under: "During the year your appellant had claimed depreciation on mine development expenditure in coal mines, @15% applicable to plant and machinery. It was in respect of expenditure incurred in the mines during the course of regular mining activity, to ensure continuity of mining operations. It included the expenditure incurred by the assessee company on construction of retaining wall for sand stowing, Dumper Working Platform, Construction of RCC Bridges, Land levelling, Sand Stowing, Bunker Stowing, construction of Inter Seam Tunnels, Construction of Steel Bunkers, Construction of Water Dams, construction of water tankers for sand stowing, building retention wall ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... refers to the decision jurisdictional High Court in their own case and the decision of Hon'ble Supreme Court in the case of Karnataka Power Corpoation, is to first establish that mines and shafts were in nature plant in coal mining industry, as held by jurisdictional High Court and then establish that any expenditure incurred in the mines, though a civil structure, if it functionally assists or forms part of the mining process, then it would also assume the nature of plant and be eligible for same benefits as those available to plant and machinery. Your appellant submits that Mine Development expenditure incurred by them on construction of retaining wall for sand stowing, Dumper Working Platform, Preparation of Financial Appraisal Report, Construction of RCC Bridge, Land levelling, Sand Stowing, Bunker Stowing, construction of Inter Seam Tunnels, Construction of Steel Bunkers, Construction of Water Dams, Development Expenditure and construction of Water tankers for sand stowing expenditure is incurred in connection with functional development of mining properties that is sinking of shafts and inclines and we also further affirm that the above expenditure under Mines a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... I - Part - A on tangible assets. Looking at the nature of business of the assessee the mine development expenditures spent by the assessee are to be treated as plant & machineries. There can be different type of expenditures for the different nature of business. In the Income Tax Act, the word "plant & machinery" has not been defined, but, the various courts have defiled the plant and machinery as per the conditions existed in given cases. Further on perusal of the submission of the AR of the assessee it has been observed that in assessee's own case while granting investment allowance U/s 32A of the IT Act, similar expenditures incurred by the assessee under the head "plant and machinery" were decided in favour of the assessee and held that it was plant and machinery by the Hon'ble jurisdictional AP High Court as relied upon by the assessee. Further the assessee has relied on the decision of the Hon'ble SC in case of Karnataka Power Ltd. as quoted supra is squarely applicable to the facts of the present case. The Ld. CIT (A) has not accepted this judgement of Hon'ble SC holding that it relates to Investment Allowance U/s 32A of the Income Tax Act, 1961. Once similar expenditures h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hat the assessee has rightly claimed prior period expenditure and then allow the claim of the assessee following the decision taken by us in for AYs 2005-06 to 2010-11 (supra). Accordingly, the AO is directed to decide the issue in accordance with law. Thus, this ground is allowed for statistical purposes. 12.2 In the result all the appeals of the assessee are disposed of in above terms. REVENUE APPEALS: 13. As regards the appeal of revenue in ITA No. 519/Hyd/2016 for AY 2004-05, the revenue has raised a substantive ground relating to the action of the CIT(A) in deleting the addition of Rs. 1.19 crore made by the AO towards expenditure on plantations. 14. On perusal of record, we find that the tax effect involved in this appeal is less than 50 lakhs as CBDT Circulars No.03/2018 dated 11.07.2018 and Circular No.17 of 2019 dated 9th August, 2019, the tax limit for filing of appeal by the Revenue before the Tribunal has been fixed at Rs. 50.00 lakhs. Since the tax effect in this appeal is less than Rs. 50.00 lakhs, we are dismissing the same on account of low tax effect with the liberty to the Revenue to seek recall of the order, if any of these cases falls within the exce....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s deducted TDS on the above payments at lower rate as prescribed in the Act. The section 40(a)(ia) is applicable only in those cases where tax has not been deducted at all. But in the given case, the assessee has deducted tax at lower rate. The assessing Officer is not justified to make disallowance U/s 40(a)(ia) on the payments made and debited into the Profit & Loss Account on the ground that assessee has not deducted TDS at full rate as was in force. In support of our decision, we rely on the decision of co-ordinate bench of the Tribunal ITAT KOLKATA bench in ITA No. 665/Kol/2018 wherein similar issue has been decided in favour of the assessee which reads as under : "Since all the grounds relate to the issue of disallowance under 40(a)(ia) made by the AO of an amount of Rs. 1,94,47,590, the same are dealt together. During the course of assessment proceedings the AO noticed that the appellant was required to deduct TDS in respect of various expenditures under different heads but failed to comply with the provisions of the IT act in respect of TDS deduction. The AO observes that the appellant was liable to deduct TDS of Rs. 4,08,954 under section 194C of the Income Tax Ac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e fails to dispute that going by the Assessing Officer's detailed discussion in pages 2 to 3 in his assessment order dated 07.01.2016, the assessee had indeed deducted TDS u/s.194C albeit at a lesser rate followed by three other head(s) of 194-H, 194-I and 194-J involving nil deduction. And also that the Assessing Officer had disallowed the impugned sum under the first head only. We observe in this factual backdrop that hon'ble jurisdictional high court's decision in Commissioner of Income Tax vs. S.K. Tekriwal 361 ITR (Cal) holds that the impugned disallowance u/s 40(a)(ia) does not apply in a case involving short deduction of TDS. We therefore go by the very reasoning and direct the Assessing Officer to delete the impugned disallowance. 4. This assessee's appeal is allowed." 20.1 Respectfully following the above judgement, we uphold the decision of the CIT (A) as he has rightly allowed the appeal of the assessee on the same issue. In the result the appeal of the revenue is dismissed. 21. As regards the appeals of the revenue in ITA No. 802 & 803/Hyd/2014 for AYs 2009-10 & 2010-11, the revenue has raised an identical ground in both these appeals that the CIT(A) erre....