PR COMMISSIONER OF INCOME TAX KOTA vs. M/S MANGLAM CEMENT LTD

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 357/2017 Pr. Commissioner Of Income Tax, Kota Rajasthan. ----Appellant Versus M/s Manglam Cement Ltd., Aditya Nagar-326520, Morak, Tehsil Ramganjmandi, Distt Kota Rajasthan. ----Respondent For Appellant(s) : Ms. Parinitoo Jain For Respondent(s) : Mr. Sanjay Jhanwar with Ms. Archana HON'BLE MR. JUSTICE K.S.JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYAS Judgment 03/04/2018 1. By way of this appeal, the department has assailed the judgment and order of the tribunal whereby tribunal has allowed the appeal of the assessee and dismissed the appeal of the department. 2. Counsel for the appellant has framed following substantial questions of law:- Appeal No.357/2017 1. Whether the Tribunal was legally justified in reversing the order of the CIT(A) and holding that expenditure of Rs.15 lacs incurred on account of contribution for hospital at Ramganj Mandi was allowable as business expenditure u/s 37(1), specifically

(2 of 10) [ITA-357/2017] when there was neither any commercial expediency nor the expenditure was relatable wholly and exclusively for business purposes? 2. Whether the Tribunal was legally justified in deleting the addition of Rs.1,05,15,243/- made on account of disallowance of various expenses (staff welfare, general charges, gifts, sales promotion and social welfare) not incurred wholly and exclusively for the purposes of business and also the same were neither explained satisfactorily nor supporting evidences were provided by the assessee specifically when Rs.29,80,302/- was confirmed by the CIT(A)? 3. Whether the Tribunal was legally justified in

deleting

the

disallowance

of Rs.53,44,198/- made on account of payment of compensation to farmers for acquisition of their land by holding it to be a revenue expenditure specifically when as per the registered deeds the seller did not have any right of ownership after the transfer of land to the assessee company so it was a capital expenditure? 4. Whether the Tribunal was legally justified in

deleting

the

disallowance

of Rs.5,82,90,611/- made on account of payment of demurrage specifically when the assessee company was not under an obligation to incur the expenditure in terms of agreement with another party? 5. Whether the Tribunal was legally justified in

deleting

the

disallowance

of Rs.39,35,948/- made on account of expenses incurred for railway siding as revenue expenditure specifically when the assessee itself has shown it as part of fixed asset in its balance sheet?” 3. The facts of the case are that the return of income was filed by the assessee which was processed u/s.143(1) and the case was selected for scrutiny. A notice u/s.143(2) was issued. The assessee company is a private company engaged in the business of manufacturing of cement and generation of power through capital power plants and wind mills. The Assessing Officer, during

(3 of 10) [ITA-357/2017] the course of assessment proceedings made various additions. The Assessing Officer disallowed the claim of expenditure of Rs.15 lacs incurred by way of contribution made by the assessee to District Administration towards construction of hospital at Ramganj Mandi by holding that the same is a capital expenditure and not revenue expenditure and hence disallowed u/s.37(1) of the I.T. Act, 1961. The Assessing Officer disallowed the social welfare expenses u/s.371(1) of Rs.12,00,436/- by relying on the decision of Hon'ble Supreme Court in the case of Arvind Mills Limited vs. CIT (197 ITR 422) which was spent by the assessee as contribution made to gram panchayat towards its welfare fund, repair o police station at Morak/Dara, supply of sweets for Budhkhan Gram Panchayat and the assessee had claimed it as business expenditure. The Assessing Officer made additions by disallowing the expenses incurred by the assessee which has claimed to be incurred for the purpose of business under the heads staff welfare expenses (Rs.55,82,016/-), general expenses (Rs.5,33,409/-) gift expenses (Rs.14,30,302/-), Sales promotion expenses (Rs.17,69,080/-) and taxi hiring expenses etc. as the assessee has not produced proper supporting evidence/details of the expenditure during the course of assessment proceedings which could prove its claim. The Assessing Officer disallowed the expenditure incurred amounting to Rs.53,44,198/- as the assessee had claimed the same to be compensation of land to farmers for mining use. The expenditure was claimed as revenue expenditure which was disallowed u/s.37(1) and treated as capital expenditure by the Assessing Officer. During the year under consideration the assessee had claimed demurrage under the

(4 of 10) [ITA-357/2017] main head "Freight Expenses" on account of claims lodged by the different clearing agents. The Assessing Officer disallowed the expenditure claimed by the assessee of Rs.5,82,90,611/- by stating that in the agreement between the assessee and the clearing agents it has been mentioned that responsibility of any loss due to shortage and/or damages at railway station as well as transit wagon position would be the responsibility of the clearing agent. There is no clause that reimbursement of demurrage paid by the clearing agents would be made by the assessee company. Moreover, demurrage has been levied in the form of fine for not adhering to the rules byelaws established by the railways. Hence, the expenditure being fine in nature was disallowed by the Assessing Officer During the year under consideration the assessee has debited an amount of Rs.39,35,948/- under the Head "Railway Siding Expenses" claiming it to be of revenue expenditure in nature. The Assessing Officer disallowed the claim of the assessee and treated the expenditure as capital in nature by stating that as the work for maintenance of the railway siding was entrusted to M/s. Khandelwal Construction, Kota vide work order dated 01.04.2009 and the expenditure on the work of railway siding resulted in enduring benefit to the assessee company, these expenses were considered as capital in nature. Further, the assessee had shown railway siding under the head Fixed assets in the balance sheet. The Assessing officer allowed depreciation @ 10% on total payment and disallowed the remaining expenditure.

(5 of 10) [ITA-357/2017] 4. Issue no.1 is covered by the decision in ITA No.358/2017 where while considering issue no.2, this court has held as under:- Regarding second issue of expenditure of Rs.45 lacs incurred on account of contribution for hospital, the same was raised in earlier appeal No.138/2014 however, the same was not admitted. In that view of the matter, we are of the opinion that the said question in appeal no.138/2014 was not admitted, thus same is not required to be considered in this appeal and the issue is covered by the decision of Supreme Court in Sri Venkata Satyanarayana Rice Mill Contractors Co. vs. Commissioner of Income Tax reported in (1997) 223 ITR 101 (SC) wherein it has been held as under:- The Principles for determining whether the payment of the kind made by assessee could be regarded as a business expense are well- settled. What is to be seen is not whether it was compulsory for the assessee to make the payment or not but the correct test is that of commercial expediency. As long as the payment which is made is for the purposes of the business, and the payment made is not by way of penalty for infraction of any law, the same would be allowable as a deduction. The contribution which was made by the assessee could under no circumstances be regarded as illegal payments of payments which were opposed to public policy. This was not a case where the assessee was paying any bribe to any person nor is this a case where money was being contributed to any private fund or for the benefit of any individual which could be regarded as a form of illegal gratification. By a voluntary scheme, with which the District Collector was associated, the District Welfare Fund had been established for the benefit of the general public. The payment to such a fund which was openly made by the Millers and which fund being used for public benefit could not be regarded as being opposed to public policy. Requiring payment to be made for the just cause which would entitle of businessman to obtain a licence or permitted cannot be regarded against the public policy. Any contribution made by an assessee to a public welfare fund which is directly, connected or related with the carrying on of the assessee business which result in the benefit to the assessee business has to be regarded an as

(6 of 10) [ITA-357/2017] allowable deduction under section 37 (1). Such a donation , whether voluntary or at the instance of the authorities concerned, when made to Chief Minister's Drought relief fund of a District Welfare Fund established by the District Collector or any other Fund for the benefit of the public and with the view to secure benefit to the assessee’s business, cannot be regarded as payment opposed to public policy. It is not as if the payment in the present case had been made as an illegal gratification. There is no law which prohibits the making of such a donation. The mere fact that making of a donation for charitable or public cause or in public interest results in the Government giving patronage or benefit can be no ground to deny the assessee a deduction of that amount under Section 37(1) when such payment had been made for the purpose of assessee’s business. 5. Issue no.2 is covered by the decision in ITA No.358/2017 where while considering issue no.3, this court has held as under:- Counsel for the respondent has relied on the decision of Gujarat High Court in CIT-I vs. Indian Petrochemical Corporation Ltd. (2016) 74 Taxmann.com 163 (Gujarat), it has been held as under:- 8. We have heard both the learned counsel and perused the record. We have also gone through the decisions cited before us. The Tribunal has followed its own decision in the case of Gujarat Narmada Valley Fertilizers Co. Ltd. and held in favour of the assessee. This Court in the case of Gujarat State Export Corporation Ltd. (supra) has held that payment of surtax was not an allowable deduction and that by paying the entrance fee to the sports club the assessee had no intention to acquire any capital asset or take advantage for the enduring benefit of the business and that by common sense standards, it could be stated that it was for running the business or for bettering the conduct of its business and therefore the amount paid as entrance fee was deductible. In view of the said decision, we find that the question raised is required to be answered in favour of the assessee.

(7 of 10) [ITA-357/2017] 11. Taking into account the same, the tribunal has confirmed the finding arrived at by the CIT(A) observing as under:- 10.3 We have heard the rival contentions, perused the material available on record. The Ld. CIT(A) has given a finding on fact by observing as under:- “In my opinion, the main purpose of acquiring the land was to extract lime stones which is the raw material for assessee. After the extraction the land becomes unusable for any other purpose. The assessee cannot use this land perpetually as in the case of a normal agricultural or residential land, this land can be used till its deposit (i.e. lime stone) lasts. Therefore, I agree with the finding of the AO in AY 2008-09 wherein he allowed such expenditure in 20equal installments. Considering the above, the AO is directed to allow this expenditure equally in 20 years including the current year. Therefore, addition of Rs. 46,56,887/- is confirmed. The AO is directed to allow expenditure of Rs. 2,45,099/-.” There is no dispute with regard to the fact that the AO himself had allowed expenditure in 20 equal installments in AY 2008-09. In the year under appeal, the Revenue has not demonstrated the change into the facts and the reason for changing the stand. Therefore, we do not see any reason to interfere into the order of the Ld. CIT(A), same is hereby affirmed. This ground is dismissed. 12. We are of the opinion that expenses which are done for the business purpose was rightly allowed by the CIT(A), therefore, this issue will not arise. 6. Issue no.3 is covered by the decision in ITA No.358/2017 where while considering issue no.5, this court has held as under:- The counsel for the respondent has relied upon the decision of Gujarat High Court in Indian Petrochemical (supra). 17. The tribunal has upheld the finding of CIT(A). We are in complete agreement with the view taken by the tribunal. Therefore, this question will not arise.

(8 of 10) [ITA-357/2017] 7. Issue no.4 is covered by the decision in ITA No.358/2017 where while considering issue no.6, this court has held as under:- The counsel for the respondent has relied upon on the following decisions:- 19.1 In Mahalakshmi Sugar Mills Company Ltd. vs. CIT (1984) 19 Taxmann 447 (Delhi), it has been held as under:- Payment of demurrage is not in the nature of damage or penalty and it is merely a charge made by the railway administration to compensate itself for keeping the goods of the assessee in its custody beyond a particular time. Payment of demurrage is incidental to business and its impact is to increase the cost to the assessee, of the goods

transported.

Therefore,

the expenditure on this account can be said to be laid out wholly any exclusively for the assessee's business. 19.2 In Nanhoomal Jyoti Prasad vs. CIT, (1980) 123 ITR 269 (Allahabad), it has been held as under:- 1. Demurrage charged by part authorities is in the nature of compensation for delay in clearing the goods from the godowns of the port authorities. It includes amount chargeable for storage and safe custody of the goods by the port authorities beyond the free period allowed under port rules. In the instant case, the demurrage paid by the assessee was not a fine paid for any criminal act but compensation for use of the port facilities beyond the permissible free period. 2. once the unauthorized import of goods had been regularized on payment of fine, commercial expediency dictated the assess to take delivery of the goods after paying the demurrage failing which its stock-in- trade would have been auctioned by the port authorities to realize their dues. The payment was, thus, made by the assessee to preserve its stock-in-trade and to utilize it for its manufacturing business. 3. The impugned expenditure was, therefore, held to be a permissible revenue

(9 of 10) [ITA-357/2017] deduction under Section70(2) both the parties had drawn the High Court's attention to cases of various types dealing with litigation costs, penalty paid for breach of contract, expenses incurred for carrying on illegal business, money 'lost through theft, amount paid as fine for infraction of law, etc., where questions regarding the admissibility of expenses arose. The High Court, however, observed that no useful purpose could be served by referring to decisions in those cases as none of them dealt with a case of the present type. 20. In our considered opinion, the demurrage which has been considered was not expenses under Section 37 of the Income Tax Act and the CIT(A) as well as Tribunal while considering the same has rightly observed as under:- 15.3 We have heard the rival contentions, perused the material available on record. We find that the Ld. CIT(A) has given a finding on fact that there is no clause by which the demurrages was required to be paid by the C & F Agent not by the assessee. It is also not brought on record by the revenue that the assessee had claimed such expenditure from C & F agent. Under these facts, we are of the view that the Ld. CIT(A) has rightly followed the decision of the Hon’ble Delhi High court in the case of Mahalaxmi Sugar Mills Co. Ltd. Vs. CIT and Hon’ble Allahabad High Court in the case of Nanhoomal Jyoti Prasad Vs. CIT (supra). We do not see any merit into the ground of revenue’s appeal, same is hereby affirmed. This ground is dismissed. 8. Issue no.5 is covered by the decision in ITA No.358/2017 where while considering issue no.7, this court has held as under:- 16.3 We have heard the rival contentions, perused the material available on record. The issue which required to be adjudicated is whether the AO was justified in disallowaning the claim of the expenditure incurred on maintenance of railway track at the railway siding. The AO while disallowing the expenditure as relied upon

(10 of 10) [ITA-357/2017] the judgment of the Hon’ble Madras High Court in the case of CIT vs. Madura Coats 205 Taxman 357. The contention of the assessee is that the judgment of the Hon’ble Madras High Court is not applicable as the fact is that the cases were with regard to replacement of old machinery and renovation of the buildings. We find that in the case of CIT vs. Madura Coats (supra) the AO disallowed the claim in respect of replacement of Auto Corner etc by holding that replacement of old machinery cannot be treated as the revenue expenditure. This view of the AO was upheld by the Hon’ble High Court. In the present case, it is not the case of replacement of old machinery by new machinery and repair of rented buildings. In the present case the expenditure is incurred on the day to day maintenance of the railway tracks at the railway siding. Therefore, we do not see any reason to interfere into the order of the Ld. CIT(A), same is hereby affirmed. This ground of Revenue’s appeal is dismissed. 23. In our considered opinion, it was not for laying new railway line and the tribunal has rightly recorded the finding as reproduced above. 9. In view of the above, no substantial question of law arises. 10. The appeal stands dismissed. (VIJAY KUMAR VYAS),J (K.S.JHAVERI),J Brijesh 21.