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

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 358/2017 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. We have heard counsel for the appellant extensively as if the appeal is listed for final hearing. 2.1 Counsel for the appellant has framed following substantial questions of law:- “1. Whether the Tribunal was legally justified in holding that expenses of Rs.16,56,509/- incurred towards Fly Ash Handling System were revenue in nature, specifically when the property could not be transferred before five years as per the lease agreement and the assessee earned long term benefit from it and Rs.14,72,452/- was confirmed by the CIT(A)?

(2 of 40) [ITA-358/2017] 2. Whether the Tribunal was legally justified in reversing the order of the CIT(A) and holding that expenditure of Rs.45 lacs incurred on account of contribution for hospital at Ramganj Mandi was allowable as business expenditure u/s 37(1), specifically when there was neither any commercial expediency nor the expenditure was relatable wholly and exclusively for business purposes? 3. Whether the Tribunal was legally justified in deleting the addition of Rs.1,02,03,799/- 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.35,62,380/- was confirmed by the CIT(A)? 4. Whether the Tribunal was legally justified in

deleting

the

disallowance

of Rs.1,00,00,000/- made on account of construction of road by holding it to be revenue expenditure u/s 37(1) specifically when the same was in the nature of capital expenditure? 5. Whether the Tribunal was legally justified in

deleting

the

disallowance

of Rs.49,01,986/- 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? 6. Whether the Tribunal was legally justified in

deleting

the

disallowance

of Rs.3,71,46,968/- 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? 7. Whether the Tribunal was legally justified in

deleting

the

disallowance

of Rs.27,51,314/- made on account of expenses incurred for railway siding as revenue expenditure specifically when the assessee

(3 of 40) [ITA-358/2017] 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 the course of assessment proceedings made various additions. The assessing Officer disallowed the claim of expenditure of Rs.45 lacs incurred by way of contribution made by the assessee to District Administrative towards contribution of hospital at Ramganj Mandi by holding taht 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.9,10,425/- 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 of police station at Morak/Dara, supply of sweets for Budhkhan Gram Panchayat and the assessee had claimed it as business expenditure. During the hereunder consideration the assessee incurred total expenditure or Rs.18,40,565/- on flyash handling system comprising of expenditure of Rs.12,89,767/- on roads and boundary wall and it was claimed as revenue expenditure u/s.37(1) of the Act. The Assessing Officer considered the entire expenditure of Rs.18,40,565/- as capital in nature and allowed

(4 of 40) [ITA-358/2017] depreciation @10% and balance amount Rs.16,56,509/- was added to the total income. 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.46,20,468/-), general expenses (Rs 4,57,819/-), gift expenses (Rs.11,77,771/-), sales promotion expenses (Rs.30,37,316/-) 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.49,01,986/- 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 has debited a sum of Rs. 1,00,00,000/- under the head social welfare expenses on account of contribution towards approach road and ROB in Morak which was claimed by the assessee as revenue expenditure. The Assessing Officer disallowed the claim u/s.37(1) and treated it as capital expenditure by relying on the judgment of Supreme Court in the case of Arvind Mills Ltd. vs. CIT (197 ITR 422) in which it was stated that the question of voluntary and or involuntary payment is not material for deciding capital/revenue nature of expenditure. During the year under consideration the assessee had claimed demurrage of Rs.3,71,46,968/- under the main head "Freight Expenses" on account of claims lodged by the different clearing agents. The Assessing Officer disallowed the expenditure claimed

(5 of 40) [ITA-358/2017] by the assessee for Rs. 3,71,46,968/- 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.33,57,015/- under the Head "Railway Siding Expenses claiming it to be of revenue expenditure in nature. 3.1 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 amounting to Rs.30,57,015/-. The Assessing Officer allowed depreciation @ 10% on total payment and disallowed the remaining expenditure amounting to Rs.27,51,314/- (30,57,015 - 3,05,701).

(6 of 40) [ITA-358/2017] 4. Regarding issue no.1, the counsel for the appellant has relied on the following findings of the authorities:- Assessing Officer 2.4 Fly Ash Handling system:- (i) The assessee company has claimed in its original return of income an amount of Rs. 12,89,767/- towards expenses for Dry Fly Ash Handling System at Kota Super Thermal Power Station (KSTPS) and another expenditure of Rs.11,14,805/-(revised to Rs.5,50,798/- in the revised return of income filed on 01.07.2011) for common property work at KSTPS. In the notes below the computation of income, the assessee has stated that Fly Ash from this system is used in manufacturing of cement and as such the same has been claimed to be business expenditure u/s 31(1). It is pertinent to mention here that i the schedule-5(fixed assets), as contained in the annual report of the assessee company for the financial year 2009-10, the assessee has included the amount of Rs.12.90 lakhs in the additions to the buildings, which clearly shows that this expenditure is capital in nature. (ii) The assessee was asked vide letter dated 03.12.2012 as to why the above noted expenses, may not be treated as capital expenditure, in view of the past history. It is worthwhile to mention here that similar expenses claimed by the assessee for the A.Y. 2009-10 were capitalized by the Assessing Officer and disallowance was upheld by the ld. CIT(A) vide his order dated 28.02.2012 in Appeal No. 422/2010-11. Written submissions made by the assessee vide its reply dated 14.12.2012, are reproduced as under:- "Fly Ash is a raw material for production of cement. The Rajasthan Rajya Vidyut Utpadan Nigam Limited (RRVUNL or RRL) operates a Theraml Power Station (TPS), located at Kota at a distance of approx, 60 KM from the company's cement plant. The TPS generates 'Fly Ash' as a residual of power generation, Considering the requirement of 'fly Ash', the company has entered into an agreement dated 14.10.2004 with RRVUNL for supply of fly ash to the company. Under the aforesaid agreement, the company was required to set

(7 of 40) [ITA-358/2017] up a 'Fly Ash Handling System' primarily involving transportation machinery and a silo/warehouse on the land owned by RRVUNL. The handling system enabled collection of dry fly ash from one of the units within the TPS (belonging to RRVUNL) and thereafter the fly ash is transported to the Silo located at outside the boundary of TPS. From the silo, the fly ash is transported to the Company's cement plant for use in its manufacturing process." (iii) The assessee has reiterated its submissions made in the preceding assessment year. It is submitted that since these expenses resulted in obtaining Fly Ash free of cost, there are allowable as revenue expenses. Assessee also referred to different judgments. However, claim of assessee is not acceptable. Assessee claimed that property is not related to company, however, it is held in various judicial decisions that vesting of full title is not necessary. The expression property owned by the assessee company in section 32 has not been used in the sense that the property's complete title vests with the assesseee. The assessee will be considered to be an owner of the building. If it is in a position to exercise the rights of the owner not on behalf of the person with whom the title vests but in his own right. (iv) Further the requirement of ownership by the assessee will be deemed to be fulfilled, if the assessee has the dominion and control over the property in his own right and not in the right of others. Also building owned by the assessee means the person who having acquired possession over the building in his own right uses the same for the purposes of his business or profession though a legal title has not been conveyed to him as per the requirements of laws such as the Transfer of Property Act and the Registration Act. (v) In view of the above discussions, it is clear that expenditure incurred on Fly Ash Handling System is capital expenditure. Therefore, claim of the assessee is not disallowed u/s 37(1). Hence, expnenditure of Rs.18,40,565/- is disallowed u/s37(1), being off capital nature. The assessee has itself shown the addition in the Fly Ash Handling System under the head 'building's, reflected in the schedule-5, forming part of the balance sheet, as stated above. To be reasonable and judicious, depreciation @ 10% is allowed on the above amount of Rs.

(8 of 40) [ITA-358/2017] 18,40,565/- representing addition to the Fly Ash Handling System. Hence, the balance expenditure of Rs.16,56,509/-(18,40,565- 1,84,056) is disallowed u/s 37(1), being of capital nature. (vi) I am satisfied that the assessee company has furnished inaccurate particular of income of Rs. 16,56,509/-. Penalty proceedings u/s 271(1)(c)

for

furnishing

inaccurate particulars of income of Rs.16,56,509/- are initiated separately. CIT(A) Discussion and the Appellate Decisions on Ground No.5,5.1 & 5.2 On similar facts, the undersigned while deciding appeal for A.Y. 2009-10 has decided as under:- “The assessee constructed fly ash handling system and spet a sum of Rs.5,52,41,773/- on the same. This amount was claimed as revenue expenditure, however, the AO allowed only 20% of the above as the benefit was stated to be spread over five years. In my view, we should approach this issue by commonsense approach to arrive at realistic profits of the enterprise. In this case, the facility created was to be transferred to the Thermal Power Station not before five years and in lieu of this the assessee was entitled to lift fly ash free of cost for five years or more. If the entire amount is allowed as expenditure in the first year, the profits of first year will be abnormally reduced because entire cost of fly ash collection system will be attributed to the cost of fly ash in the first year itself, whereas the profits of next four years will be abnormally high as in these years assessee will get fly ash free of cost. Accordingly, as the assessee get benefit of this facility for five years and the ownership of this property can get transferred to Thermal Station not before five years, therefore, it would be fair and reasonable if the cost is spread over five years to arrive at true profits of the enterprise. The action of A.O. is fair and reasonable and this approach gives realistic profits of the

(9 of 40) [ITA-358/2017] enterprise. The Action of A.O. is therefore upheld. The facts of the case are identical, following the above, the AO is therefore directed to allow 1/5th of the expenditure in the current year.” Tribunal 6.4 The facts are identical as were in the year 2009-10. The revenue has not brought any other contrary binding precedents by the Hon’ble High Court of Rajasthan against this finding of the Tribunal. Therefore, taking a consistent view, we hereby direct the AO to delete the disallowance. 12.1 The ground no. 3, we have decided in favour of the assessee by following the earlier decision of this Tribunal of assessee’s own case. For the same reasoning, this ground of Revenue’s appeal is dismissed. 5. The issue no.1 is squarely covered by the decision of this court in ITA No.138/2014 (CIT, Kota vs. M/s. Manglam Cement Ltd.) decided on 19.9.2017 where while considering question no.2, the court has decided the same in favour of the assessee. Therefore this question will not arise. 6. Regarding issue no.2, the counsel for the appellant has relied on the following findings of the authorities:- Assessing Officer 2.2 Contribution of Rs.45 lakhs to Hospital Building:- (i) During the year under consideration, the assessee company incurred expenditure of Rs.45 lakhs as contricution for hospital at Ramganjmandi and claimed the same as revenue expenditure. In this regard, the assessee was asked vide letter dated 03.12.2012 to justify claim with evidence. The company filed the written submissions on 14.12.2012, as under:-

(10 of 40) [ITA-358/2017] "In pursuance of the order of the District Colleector dated 30 July, 2007, a Hospital Building at Ramganjmandi was planned to be constructed at a project cost of Rs.200 lacs in which the assessee company was to contribute Rs.100 lacs. During the year under consideration the assessee company has contributed a sum of Rs.45 lacs to "The Secretary, Medicare Relief Society, Community Health Centre, Ramganjmandi" toward the construction of the Hospital at Ramganjmandi Situated at about 10 kms fromthe plant site. The name of the hospital is Government Mangalam Cement Hospital. The contribution was debited under the head Social Welfare Expenses. The assessee company has received the following advantage/benefits as a result of the said contribution: -Name of the Hospital is linked with name of the company which shall advertise the company's name among the people living around the industry. -The Hospital is a at a distance of 10 Kms. From the plant site whereas presently where referral is to be made in case of serious injury/disease, the Hospitals are situated at Jhalawar (40 Kms. Away) or at Kota (65 Kms away) which are far away fromthe plant site. -Few beds shall be reserved for the company's employees and also priority shall be given in treatment to the employees of the company. Since, the contribution for construction of hospital is made in view of the commercial expediency of the Assessee company's business, it humbly submits that the said expenditure is incurred wholly and exclusively for the purpose of business and therefore the same is allowable as revenue expenditure under section 37(1) of the Act." (ii) The assessee has also relied upon the following judicial decisions:- -CIT vs Rupsa Rice Mill (1976) 104 ITR 249 (ORI) -CIT vs Mysore Cements Ltd (1990) 183 ITR 367 (KAR) -CIT vs. Travancore Cochin Chemicals Ltd., (2000) 243 ITR 284 (Ker) - CIT vs. Rajasthan Spinning and Weaving Mills Ltd., (2006) 281 ITR 408 (Raj.) - CIT vs. Madras Refineries Ltd (2004) 266 ITR 170 (Mad) - Addl. CIT vs Rajasthan Spinning & Weaving Mills Ltd. (2005) 274 ITR (463) (Raj.)

(11 of 40) [ITA-358/2017] - Hindustan Petroleum Corporation Ltd vs DCIT (2005) 96 ITD 186 (Mum-ITAT) -CIT vs Premier Cotton Spinning Mills Ltd., (1997) 223 ITR 440 (Ker) -CIT vs. India Radiators Ltd (1999) 236 ITR 719 (Mad) -CIT vs. Madras Cements Ltd., (2005) 254 ITR 423 (Mad) -CIT vs. Rajasthan Spg & Wvg. Mills Ltd., (2005) 272 ITR 487 (Raj.) -CIT & Anr. Vs Karnataka Financial Corporation (2010) 326 ITR 355 (iii) The assessee company's submissions have duly been considered and found to be unacceptable. The facts stated in the above noted case laws are different from the facts of the case of the assessee company. Most of the case laws, as stated above have already been considered by the ld. CIT(A), Kota in his appellate order dated 28.02.2012 in appeal No. 422/10-11 for the A.Y.2009-10 in the assessee's own case. The Ld. CIT(A) has held the contribution of Rs.40 Lakhs made by the assessee company during the assessment year 2009-10 towards construction of hospital at Ramganjmandi as capital expenditure. Hence, expenditure of Rs.45 Lakhs incurred by the assessee company during the year under consideration towards construction of hospital at Ramganjmandi and claimed as revenue expenditure is treated to be capital expenditure and thus, is disallowable u/s 37(1). Reliance is also placed on the Hon'ble Calcutta High Court's decision in the case of CIT vs India Tobacco Co. Ltd. (114 ITR 182), wherein contributionof Rs.50,000/- to the hospital was held to be capital expenditure. Further, the Hon'ble Kerla High Court in the case of Season Rubber Ltd vs CIT (311 ITR 15), have held that "contribution made by the assessee to a school and to a hospital development committee was not allowable as assessee's prospects were not advanced by making these contributions, een though the assessee's employees were getting treatment from the hospital and the employee's children were students in the school which benefit, if at all, was quite remote". Hence, expenditure of Rs.45 lakhs claimed as revenue expenditure is disallowed u/s 37(1), being of capital nature. (iv) I am satisfied that the assessee company has furnished inaccurate particulars of income of Rs.45,00,000/-. Penalty proceedings u/s 271(1)(c) for furnishing inaccurate particulars

(12 of 40) [ITA-358/2017] of income of Rs.45,00,000/- are initiated separately. CIT(A) 4.22 Discussion and the Appellate Decisions The payment for construction of hospital is in the nature of charity/donation and the same can be claimed under relevant provisions e.g. section 80G etc. The same cannot be allowed as business expenditure. As the assessee has claimed the same as business expenditure, the same was rightly allowed by A.O. The addition of Rs.45,00,000/-is therefore confirmed. This ground of appeal is therefore dismissed. Tribunal 4.3 We have heard the rival contentions, perused the material available on record. It is stated by the assessee that where the contribution is made by the assessee, the hospitals keeps certain beds reserved for the employees of the assessee and the treatment is also given on priority basis. Under these facts, we do not see any reason to take a different view as taken by the Co-ordinate Bench in ITA No. 319/JP/2012, assessee’s own case pertaining to the AY 2009-10. Therefore, we direct the AO to delete the disallowance. 7. 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

(13 of 40) [ITA-358/2017] 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 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

(14 of 40) [ITA-358/2017] 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. 8. Therefore, this question does not arise. 9. Regarding issue no.3, the counsel for the appellant has relied on the following findings of the authorities:- Assessing Officer 2.5 Staff welfare expenses:- (i) The assessee has claimed Rs.92,40,937/- on account of workmen and staff welfare expenses. The assessee was asked to justify this expenditure alongwith documentary evidence. On examination of the details filed during the course of assessment proceedings, it is noticed that majority of the expenditure cannot be treated wholly and exclusively for business proposes. Out of above expenditure claimed by the company major expenses have been booked under the following heads:- 1. Guest house/canteen Rs.21,33,831/- 2. Staff Entertainment Rs.8,72,112/- 3. Oil and Gur Rs.1,60,185/- 4. Marriage gifts to employees Rs.2,31,999/- 5. Pooja expenses Rs.4,36,514/- 6. Petty expenses Rs.1,73,418/- 7. National festival Rs.95,814/- 8. Motivation award Rs.71,820/- 9. Worker tour Rs.1,06,733/- 10. Uniform/Shoes Rs.34,24,514/- 11. Refreshment Rs.18,863/- 12. Dispensary Rs.2,23,754/- If the claim is treated to be made under the provisions of section 40(a)(v), then also it cannot be allowed. This specific provision has been inserted by the Finance Act, 2002 w.e.f. 01.04.2003 which reads as under:- "Any tax actually paid by employer referred to in clause (10CC) of section 10". The provisions of section 10(10CC) have also been

(15 of 40) [ITA-358/2017] made effective from 01.04.2003 which read as under:- "In the case of an employee, being an individual deriving income inthe nature of perquisite, not provided for by way of monetary payment, within the meaning of cause(2) of section 17, the tax on such income actually paid by his employer at the option of the employer, on behalf of such employee, notwithstanding anything container in section 200 of the Companies Act, 1956 (1 of 1956)" (ii) Thus, it is clear that the claim of assessee is not admissible legally as the amendments brought in w.e.f. 01.04.2003 are also not of any assistance to the assessee company. By insertion of clause (10CC), the employees have been given a benefit but simultaneously the revenue burden on such benefit in the form of tax actually paid by the employer has also been disallowed by inserting clause (v) in section 40(a). (iii) Considering the above said facts and following the previous history, 50% of staff welfare expenses claimed at Rs. 92,40,937/- i.e. a sum of Rs. 46,20,468/- is disallowed u/s37(1) and added back to the assessee company's total income. 2.6 Charges General expenses- (i) The assessee has claimed Rs.22,89,094/- on account of charges general expenses. During verificationof details furnished, it is noticed that the assessee has claimed Rs.5,41,282/-+Rs.64,820/- for guest house expenses, Rs.4,30,992/- for entertainment expenses, Rs.2,30,641/- towards canteen expenses, Rs.2,95,974/- for school expenses, Rs.4,10,574/- for stores and Rs.1,66,796/- towards other expenses. Considering the nature of the said expenses and in the absence of sufficient supporting evidence in this regard, these expenses cannot be treated as wholly and exclusively for the purposes of business of the company. Nexus of incurring of the said expenses for the business purposes of the assessee company is not fully proved. Therefore, considering the above said facts and following the previous history; 20% of the above expenditure claimed at Rs.22,89,094/- i.e. a sum of Rs.4,57,819/- is disallowed u/s37(1) and added to the total income of the assessee. 2.7 Social welfare expenses- (i)

The

assessee

has

claimed Rs.1,54,38,057/- on account of social welfare

(16 of 40) [ITA-358/2017] expenses. On query, the A/R of the assessee stated that this payment relates to welfare expenditure for Gram Panchayats, Hospital (Ramganjmandi), construction of approach road etc. As per details filed, it is seen that this expenditure includes amounts of Rs.45 lakhs as contribution towards the hospital building at Ramganjmandi and Rs.1 Crore towards construction of approach road and ROB, which have already been dealt with in the paras 2.2 & 2.3 above. The remaining expenditure includes the following amounts:- 1 Gram panchayat, Morak Rs.6,38,401/- 2 Morak Station (i) Cost of supply Cement and Bajari CC Road M. Station Rs.1,69,960/ - (ii) Labour supply for CC Road station Rs.29,950/- (iii) Jugal Mewara for Shiv Mandir Sewa Samiti Daseraha and Navratra Rs.10,000/- Rs.209910/- 3 Budhkhan (i) Sweets for 15 Aug Distribution Budhkhan Gram Panchayat Rs.9,555/- (ii) Jai Mata De Sweet Centre supply of sweet for Budhkhan School Rs.11,700/- Rs.21255/- 4 Morak Mukti Dham Shade Graoting work Rs.3768/- 5 Making of shed at Morak Village Mukti Dham Rs.10408/- 6 Expenses of police station Building work Rs.8383/- 7 Manish Goswami, Bill No.72 dated 06.10.2009 Rs.240/- 8 Chandra Prakash, Labour work at Medical Paramarsh Kendra Rs.350/- 9 Jain Medical Store, Morak Bill No.797 to 800 dated 05.10.2009 Rs.3710/- 10 Lal Chand, white washing at police station at Dara, M. Station Rs.14,000/- (ii) Since the above noted expenditure aggregating Rs.9,10,425/- has not been incurred wholly & exclusively for the business purposes, this entire claim of Rs.9,10,425/- is hereby disallowed u/s37(1) and added to the assessee's total income, by placing reliance on the Hon'ble Supreme Court's decision in the case of Arvind Mills Limited vs CIT(197 ITR 422), referred to in para 2.3 above.

(17 of 40) [ITA-358/2017] (iii) I am satisfied that the assessee company has furnished inaccurate particulars of income of Rs.9,10,425/-. Penalty proceedings u/s 271(1)(c) for furnishing inaccurate particulars of income of Rs.9,10,425/- are initiated separately. 2.8 Gift expenses- (i) In the profit and loss account, the assessee company has claimed gift expenses of Rs.23,55,543/- under the head 'Presentation expenses'. The assessee was asked to give the details alongwith documentary evidence. Some expenses included in presentation expenses are as under:- 1 Kailash Chand manoj Kumar Saraf Rs.10725/- 2 Kalu Lal Meena Rs.11,000/- 3 Jaina Bags Suppliers Rs.7500/- 4 Virendra Singh Khinchi Rs.5100/- 5 R.C. Gupta, Dry Fruits for gift Rs.9250/- 6 Faridabad Depot Rs.3200/- 7 HDFC Bank towards coins for Gift Rs.81,328/- 8 Various bills for gifts Rs.64,115/- 9 RK & Sons, Agra Rs.22,000/- 10 Krishan Cement Corporation Rs.1,08,167/- 11 Various Parties towards gifts Rs.28,235/- 12 Hira Lal Sons Rs.7900/- 13 Various gifts for VVIP visits Rs.17,800/- (2) In addition to above major expenses, te assessee has spent on various other gift items. The assessee has not filed justification with regard to allowance of the said expenditure being attributable to business purposes. Therefore, this claim is not verifiablee completely. Moreover, nexus of incurring of the said expenses for the business purposes of the assessee company is not fully proved. Considering the above said facts and nature of the expenses as well as following the previous history, 50% of above expenses i.e. Rs.11,77,771/- is disallowed u/s 37(1) and added to the total income of the assessee, in view of the past history of the case.(Disallowance of Rs.11,77,771/-)

(18 of 40) [ITA-358/2017] CIT(A) 4.62

Discussion and the Appellate Decision Ground No.6(i)-Staff Welfare Expenses (Rs.46,20,468/-) The Ao made a disallowance observing as under:- (i) The assessee has claimed Rs.92,40,937/- on account of workmen and staff welfare expenses. The assessee was asked to justify this expenditure alongwith documentary evidence. On examination of the details filed during the course of assessment proceedings, it is noticed that majority of the expenditure cannot be treated wholly and exclusively for business proposes. Out of above expenditure claimed by the company, major expenses have been booked under the following heads:- 1. Gust house/canteen Rs.21,33,831/- 2. Staff Entertainment Rs.8,72,112/- 3. Oil and Gur Rs. 1,60,185/- 4. Marriage gifts to employees Rs.2,31,999/- 5. Pooja expenses Rs.4,36,514/- 6. Petty expenses Rs.1,73,418/- 7. National festival Rs.95,814/- 8. Motivation award Rs.71,820/- 9. Worker tour Rs.1,06,733/- 10. Uniform/shoes Rs.34,24,514/- 11. Refreshment Rs.18,863/- 12. Dispensary Rs.2,23,754/- If the claim is treated to be made under the provisions of section 40(a)(v), then also it cannot be allowed. This specific provision has been inserted by the Finance Act, 2002 w.e.f. 01.04.2003 which reads as under:- “Any tax actually paid by employer referred to it in clause (10CC) of section 10.” The provisions of section10(10CC) have also been made effective from 04.01.2003 which reads as under:-

(19 of 40) [ITA-358/2017] “In the case of an employee, being an individual deriving income in the nature of perquisite, not provided for by way of monetary payment, within the meaning of clause (2) of section 17, the tax on such income actually paid by his employer at the option of the employer, on behalf of such employee,

notwithstanding

anything contained in section 200 of the Companies Act, 1956 (1 of 1956).” (ii) Thus, it is clear that the claim of assessee is not admissible legally as the amendments brought in w.e.f. 01.04.2003 are also not of any assistance to the assessee company. By insertion of clause (10CC), the employees have been given a benefit but simultaneously the revenue burden on such benefit in the form of tax actually paid by the employer has also been disallowed by inserting clause (v) in section 40(a). (iii) Considering the above said facts and following the previous history, 50% of staff welfare expenses claimed at Rs.92,40,937/- i.e. a sum of Rs.46,20,468/- is disallowed u/s 37(1) and added back back to the assessee company’s total income. I have gone through AO’s findings and assesse’s submission. Considering the non-verifiable nature of expenditure and element of non-business use, some disallowance was justified. Considering the facts of the case, a disallowance of Rs.4,62,047/-(5)% of the expenses is considered reasonable and confirmed. The AO is directed to delete balance addition of Rs.41,58,421/-. This ground of appeal is therefore party allowed. Ground

No.6(ii)-Charges

General Expenses (Rs.4,57,819/-) The AO made a disallowance observing as under:- (i) The assessee has claimed Rs.22,89,094/- on account of charges general expenses. During verification of details furnished, it is noticed that the assessee has claimed Rs.5,41,282/-+Rs.64,820/- for guest house expenses, Rs.4,30,992/- for entertainment expenses, Rs.2,30,641/- towards canteen expenses, Rs.2,95,974/- for school expenses,

(20 of 40) [ITA-358/2017] Rs.4,10,574/- for stores and Rs.1,66,796/- towards other expenses. Considering the nature of the said expenses and in the absence of sufficient supporting evidence in this regard, these expenses cannot be treated as wholly and exclusively for the purposes of business of the company. Nexus of incurring of the said expenses for the business purposes of the assessee company is not fully proved. Therefore, considering the above said facts and following the previous history; 20% of the above expenditure claimed at Rs.22,89,094/- i.e. a sum of Rs.4,57,819/- is disallowed u/s 37(1) and added to the total income of the assessee.” I have gone through AO’s findings and assessee’s submission. Considering the non-verifiable nature of expenditure and element of non-business use, some disallowance was justified. Considering the facts of the case, a disallowance of Rs.2,28,909/- (10%) of the expenses is considered reasonable and confirmed. The AO is directed to delete balance addition of Rs.2,28,910/-. This ground of appeal is therefore party allowed. Ground

No.6(iii)-Gift

Expenses (Rs.11,77,771/-) I have gone through AO’s findings and assessee’s submission.\ Considering the non-verifiable nature of expenditure and element of non-business use, some disallowance was justified. Considering the facts of the case, a disallowance of Rs.11,77,771/- (50%) of the expenses is considered reasonable and confirmed. This ground of appeal is therefore dismissed. Ground No.6 (iv)-Sales Promotion Expenses (Rs.30,37,316/-) The AO made a disallowance observing as under- “(i) The assessee has debited a sum of Rs.1,51,86,533/- under the head sales promotion expenses, which include the expenses under the following minor heads:- 1. Refreshment/Lunch Rs.7,59,884/-

(21 of 40) [ITA-358/2017] expenses for dealers 2. Sales conference & Mason meeting exp. At various places Rs.17,40,297/- 3. Dealers Tour (Nepal & Malysai) Rs.1,26,86,402/- Total Rs.1,51,86,583/- (ii) The details furnished in this regard are mostly on internal vouchers without any supporting documents or bills. Since self made vouchers without any supporting documents or bills. Since self made vouchers only have been produced, the whole expenditure claimed under this head cannot be treated as incurred wholly and exclusively for the business purposes. Considering this fact and following the previous history of the case, 20% of above expenditure i.e. Rs.30,37,316/- is disallowed and added to the total income of the assessee.” I have gone through AO’s findings and assessee’s submisson. Considering the non-verifiable nature of expenditure and element of non-business use, some disallowance was justified. Considering the facts of the case, a disallowance of Rs.15,18,653/- (10%) of the expenses is considered reasonable and confirmed. The AO is directed to delete balance addition of Rs.15,18,653/-. This ground of appeal is therefore partly allowed. Tribunal 7.4 The Revenue has not brought any contrary, material on records suggesting that the facts are different. Therefore, taking a consistent view, this ground of the assessee’s appeal is partly allowed. The AO is directed to delete the disallowance of expenses i.e. Staff Welfare Expenses, Charges General Expenses, Gift Expenses, and Promotion Expenses. Now, coming to the Taxi Hiring Expenses, we find that the assessee had claimed that the expenditure was made for business purposes from the details furnished before the Assessing Officer. It is noticed that

(22 of 40) [ITA-358/2017] the expenditure related to taxi hiring for DRM Railway and other railway employee is also booked, it is not clear whether such railway employee were on official duty and such taxi was hired in inspecting the railway siding in the absence of the material. We are of the considered view that Ld. CIT(A) has rightly confirmed the disallowance of 10% of the expenditure. This ground of assessee appeal is partly allowed. 10. 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. 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:-

(23 of 40) [ITA-358/2017] “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. 13. Regarding issue no.4, the counsel for the appellant has relied on the following findings of the authorities:- Assessing Officer 2.3 Construction of Roads:- (i) During the year under consideration, the assessee company has debited a sum of Rs.1,00,00,000/- under the head 'Social Welfare Expenses' on account of contribution towards approach road and ROB in Morak. When asked to justify the claim with the support of documentary evidence, the assessee filed written reply vide its letter dated 14.12.2012, response to this office

(24 of 40) [ITA-358/2017] letter dated 03.12.2012, which is reproduced as under:- "During the year under consideration, the Assessee company has contributed Rs.1.00 crore by issuing cheque in favour of Executive

Engineers,

Public

Works Department, District Division, Kota for construction of new ROB with approaches and bye pass on 3.20 Km Road. The contribution was debited under the head social welfare expenses. By constructing of bye pass road and railway over bridge, the distance from company to Dabadeh will be reduced & also company will get better transportation facility due to smooth & wide road. Hence, due to short distance, better road conditions and railway over bridge, the company

will

enjoy

the

following advantage/benefits as a result of the said contribution: -Facility of receiving input material i.e. raw material, stores & spare items, Capita goods etc. Easily. -Facility of selling and transferring of finished goods i.e. cement. -Saving of transportation cost due to reduction in dieset cost & maintenance cost -Ease of passage for loading/heavy vehicles as there will be not Railway Crossing and there will be low traffic jams. Since, the contribution is made to facilitate the business operations of the company and in view of commercial expediency of the Assessee company's business, the Assessee company humbly submit that the said expenditure is incurred wholly and exclusively for purpose of business and therefore the same is disallowable u/s 37(1) of the Act. (ii) The assessee has also cited certain case laws of different high courts in support of its submissions. Reliance has also been placed by the assessee company on the following case laws:- -Lakshmiji Sugar Mills Co. P Ltd vs CIT (1971) 82 ITR 376 (SC) -L.H. Sugar Factory & Oil Mills (P) Ltd vs CIT, (1980) 125 ITR 293 (SC) (iii) Submissions made by the assessee company have duly been considered and are not acceptable. The Hon'ble Supreme Court in the case of Arvind Mills Ltd vs CIT (197 ITR 422) have elaborately discussed similar facts and held such expenditure as capital

(25 of 40) [ITA-358/2017] expenditure. The Hon'ble Supreme Court have also discussed the case law of L.H. Sugar Factory & Oil Mills (P) Ltd vs CIT, (1980) 125 ITR 293 (SC) in its decision in the case of Arvind Mills Ltd vs CIT (197 ITR 422). The Hon'ble Supreme court have clearly established that the question of voluntary and/or involuntary payment is not material for deciding capital/revenue nature of expenditure. In this case, the assessee claimed deduction of betterment charges, being contribution made towards cost of Town Planning Schem, which provided general improvement of area and resulted in providing facilities for carrying out business of the assessee. The Hon'ble Supreme Court have held the betterment charges paid are capital

exepnditure and

disallowable u/s37(1), though this expenditure was incurred in connection with the business activities which ultimately resulted in efficiently carrying on the assessee's business. Hence, considering the totality of the facts, contribution of Rs.1 crore towards approach road and ROB in Morak is treated as capital expenditure. Therefore, the amount of Rs.1.00 Crore is disallowed u/s.37(1) and added to the assessee's return income. (iv) I am satisfied that the assessee company has furnished inaccurate particulars of income of Rs.1,00,00,000/-. Penalty proceedings u/s271(1)(c) for furnishing inaccurate particulars of income of Rs.1,00,00,000/- are initiated separately. CIT(A) 4.32 Discussion and the Appellate Decisions The assessee contributed a sum of Rs.1,00,00,000/- for construction of ROB and approach road. This payment was made to Public Works Department. The AO held that the expenditure is capital in nature. In this case, the assessee did not acquire any asset as the road and ROB belong to the State Government.

(26 of 40) [ITA-358/2017] In the case of Empire Jute Company Ltd. (124 ITR 1), the Hon’ble Supreme Court has held as under:- “that there may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital filed that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee’s trading operations or enabling the management and conduct of the assessee’s business to the carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. In the current case, the construction of ROB and approach road resulted in enabling the assessee to carry out its business efficiently or profitably. It did not result in any advantage in the capital field. Therefore, it is held that the expenditure was revenue in nature. The AO is directed to delete addition of Rs.1.00 crore. This ground of appeal is therefore allowed.” Tribunal 11.3 We have heard the rival contentions, perused the material available on record. The facts remains that the assessee had contributed to the Rajasthan Government for construction of new railway over bridge. This facilitated the transportation of raw materials to the factory and flow of finished goods to the market. It is also stated that by this the distance is also reduced. The contribution is purely for business purposes. The Ld. CIT(A) has given a finding that the construction of ROB with approach road resulted in enabling the assessee to carry out its business efficiently and profitably. It did not result in any advantage in the

(27 of 40) [ITA-358/2017] capital field and therefore the expenditure is revenue in nature. As the assessee has not acquired any material asset. We do not see any fault in this finding of the Ld. CIT(A) as there is no dispute with regard to the fact that the assessee has not acquired any capital asset giving enduring benefit. It was a contribution towards construction of railway over bridge which facilitated the smooth flow of traffic including the transportation of goods by the assesssee. Therefore, this ground of the Revenue’s appeal is dismissed. 14. In our considered opinion, the expenses incurred are held to be revenue expenses which has been upheld by the tribunal. We are in complete agreement with the view taken by the CIT(A) and the tribunal on this issue. Therefore, this question does not arise. 15. Regarding issue no.5, the counsel for the appellant has relied on the following findings of the authorities:- Assessing Officer 2.1 Compensation of Rs.49,01,986/- to the framers (i) During the year under consideration, the assessee company made payment of Rs.49,01,986/- to the farmers, claiming the same to be compensation of land for mining use. The assessee was asked to justify this claim with evidence. In its written reply furnished on 14.12.2012, the assessee company submitted as under:- "During the impugned F.Y. 2009-10, the assessee company incurred expenditure of Rs.49.02 lacs on acquiring mining rights over an area of 25.15 bigha (4.65 hectre) of land from the scheduled caste/scheduled tribes. On payment of the said amount, the Assessee company has not acquired any ownership rights in the land. In other words, the ownership remains with the land owners. This could also be substantiated from the agreement between the landowner(s)

(being

scheduled

(28 of 40) [ITA-358/2017] caste/scheduled tribes) and the company (a copy of the agreement is attached). Since this expenditure was incurred for obtaining the limestone (raw material) to be used for the purpose of business, the expenditure incurred is allowable u/s37(1) of the Act." (ii) The submissions made by the assessee have duly been considered and are not acceptable. Copies of the registered deeds filed by the assessee and placed on the records explicitly state that the sellers do not have any right of ownership, after transfer of the land to the assessee company. The following clause incorporated in each and every registered deed, reads as under:- ÞmDr Hkwfe dk dCtk Hkh Hkyh izdkj ls ekSds ij Øsrk dEiuh dks lEgyk fn;k x;k gSA mDr Hkwfe esa gekjk dksbZ gd fdlh izdkj dk 'ks"k ugha jgk gSA leLr gd gdwd [kkrsnkjh dk'rdkjh tks vc rd eq>s gkafly Fks oks leLr Øsrk dEiuh ds i{k eqUrfny dj fn;s gSAß (iii) Hence, it is held that the expenditure incurred at Rs.49,01,986/-, whichis to protect a long term exploitation right over huge area of mining land is of capital nature and as such, cannot be allowed u/s37(1) of the Income Tax Act, 1961. The word 'Capital' connotes permanency and capital expenditure is closely akin to the concept of securing something, tangible or intangible property, corporeal or incorporeal rights, so that it could be a lasting or enduring benefit to the enterprise in issue. The Hon'ble Supreme Court in the case of Assam Bengal Cement Co. Limited vs CIT (27 ITR 34) have held that "Acquisition by a cement manufacturer of a lease of certain lime stone quarries for a period of 20 years on certain half yearly rent and royalties is capital expenditure" Further it has been held by the Hon'ble Mysore High Court in the casee of N.Pee Sahib Vs CIT (1964) (54 ITR 681) that the amount paid for the acquisition of the right to dig the surface land at the beginning of the mining operation is capital exependiture. Further, payment for purchase of the mining rights has been held to be capital in nature (Madhya Pradesh Industries Limited vs CIT) (37 ITR 342). It has further been held by the Hon'ble Supreme Court in the case of Enterprising Enterprises vs DCIT (293 ITR 437) that lease rent paid by the mining lessee for acquiring lease hold right for extracting minerals from mineral bearing land would be capital expenditure. Hence,

(29 of 40) [ITA-358/2017] the expenditure of Rs.49,01,986 claimed as revenue expenditure is disallowed u/s37(1) and added to the assessee's total income. However, no depreciation is allowable on the said amount of Rs.49,01,986/- paid to the farmers on account of purchase of land for mining. The asset acquired in question is land and as per section 32 of the Income Tax Act, 1961, no depreciation is admissible on land. (iv) I am satisfied that the assessee company

has

furnished

inaccurate particulars of income of Rs. 49,01,986/-. Hence, penalty proceedings u/s 27(1)(c) for furnishing inaccurate partiulars of income of Rs.49,01,986/- are initiated separately. CIT(A) 4.12 Discussion and the Appellate Decisions The AO made a disallowance of Rs.49,01,986/- observing as under:- (i) During the year under consideration, the assessee company made payment of Rs.49,01,986/- to the farmers, during the same to be compensation of land for mining use. The assessee was asked to justify this claim with evidence. In its written reply furnished on 14.12.2012, the assessee company submitted as under:- “During the impugned F.Y. 2009-10, the assessee company incurred expenditure of Rs.49.02 lacs on acquiring mining rights over an area of 25.12 Bigha (4.65 hectre) of land from the Scheduled Caste/Scheduled Tribes. On payment of the said amount, the Assessee company has not acquired any ownership rights in the land. In other words, the ownership remains with the land owners. This could also be substantiated from the agreement between the landowner(s)

(being

scheduled caste/scheduled tribes) and the company (a copy of the agreement is attached). Since, this expenditure was incurred for obtaining the limestone (raw material) to be used for the purpose of business, the expenditure incurred in allowable u/s 37(1) of the Act.

(30 of 40) [ITA-358/2017] (ii) The submissions made by the assessee have duly been considered and are not acceptable. Copies of the registered deeds filed by the assessee and placed on the records explicity state that the seller do not have any right of ownership, after transfer of the land to the assessee company. The following clause incorporated in each and every registered deed, reads as under:- ÞmDr Hkwfe dk dCtk Hkh Hkyh izdkj ls ekSds ij Øsrk dEiuh dks lEgyk fn;k x;k gSA mDr Hkwfe esa gekjk dksbZ gd fdlh izdkj dl Hkks’k ugha jgk gSA leLr gd gdwd [kkrsnkjh dk rdkjh tks vc rd eq>s gkfly Fks oks leLr Øsrk dEiuh ds i{k eqUrfny dj fn;s gSAß (iii) Hence, it is held that the expenditure incurred at Rs.49,01,986/-, which is to protect a long term exploitation right over huge area of mining land is of capital nature and as such, cannot be allowed u/s 37(1) of the Income Tax Act, 1961. The word ‘Capital’ cannotes permanency and capital expenditure is closely akin to the concept of securing something, tangible or intangible property, corporeal or incorporeal rights, so that it could be a lasting or enduring benefit to the enterprise in issue. The Hon’ble Supreme Court in the case of Assam Bengal Cement Co. Limited vs. CIT(27 ITR 34) have held that “Acquisition by a cement manufacturer of a lease of certain lime stone quarries for a period of 20 years on certain half yearly rent and royalties is capital expenditure”. Further it has been held by the Hon’ble Mysore High Court in the case of N.Pee Sahib vs. CIT (1964) (54 ITR 681) that the amount paid for the acquisition of the right to dig the surface land at the beginning of the mining operation is capital expenditure. Further, payment for purchase of the mining rights has been held to be capital in nature (Madhya Pradesh Industries Limited vs. CIT) (37 ITR 342). It has further been held by the Hon’ble Supreme Court in the case of Enterprising Enterprises vs. DCIT (293 ITR 437) that lease rent paid by mining lease for acquiring lease hold right for extracting minerals from mineral bearing land would be capital expenditure. Hence, the expenditure of Rs.49,01,1986 claimed as revenue expenditure is disallowed u/s 37(1) and added to the assessee’s total income. However, no depreciation is allowable on the said amount of Rs.49,01,986/- paid to the farmers on

(31 of 40) [ITA-358/2017] account of purchase of land for mining. The asset acquired in question is land and as per section 32 of the Income Tax Act, 1961, no depreciation is admissible on land. (iv) I am satisfied that the assessee company

has

furnished

inaccurate particulars of income of Rs.49,01,986/- are initiated separately. I have gone through AO’s finding and assessee’s submissions. I have also gone through the sample consent deed produced by the assessee. The A.O. observed that the possession of land was given to assessee and all rights of khatedari were transferred to the assessee. This fact was mentioned in the agreement between assessee and khatedari. Primarily assessee is having mining lease agreement with Government of Rajasthan and to conduct mining operation in the leased area, the assessee has to purchase the land or obtain permission from the respective owners of land. In the instant case, as the land belong to Scheduled Caste & Scheduled Tribes, the assessee obtained permission for carrying out mining operation by paying compensation to the respective land owners. Tribunal 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/-.”

(32 of 40) [ITA-358/2017] 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. 16. 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. 18. Regarding issue no.6, the counsel for the appellant has relied on the following findings of the authorities:- Assessing Officer 2.12 Payment of Demurrage:- (i) The assessee has claimed demurrage of Rs.3,71,46,968/- under the main head 'Freight Expenses', on account of claims lodged by the different clearing agents. Vide letter dated 03.12.2012, the assessee was asked to explain why the said amount, being penal in nature, may not be disallowed. The assessee vide written submissions filed on 14.12.2012, stated as under:- "We have claimed demurrage charges of Rs.3,71,46,968/- towards demurrage and wharfage charges. Demurrage charges are being levied for detention of wagons for loading or unloading goods. Demurrage as application to wagons is essential payment made in the nature of compensation paid for delay of wagons in loading or unloading of the goods beyond particular period. Wharfage charges are being charges for the space occupied at the unloading siding. Expenses on demurrage and wharfage is

(33 of 40) [ITA-358/2017] not fine paid to the railway authorities for any offence but compensation for use of railway facilities beyond free period allowed under the rules. Hence, it is an allowable business expenditure" (ii) Vide order sheet entry dated 18.12.2012, the assessee company was asked to produce copies of the terms and conditions with the clearing and forwarding/handling agents. The assessee filed copies of agreements for appointment of clearing agents at Moradabad, Aligarh and Ajmer depots alongwith its reply filed on 21.12.2012. On perusal of the copies of the said agreements, it is observed that there is no clause that demurrage would be paid by the C&F agents and they would et reimbursement of such demurrage payment from the assessee company. As regards loss due to shortage and/or demurrage at the railway station etc. The following clauses appear at S.Nos. 3 & 4 the said agreements:- 3. The clearing agent shall indentify the principal against any loss due to shortage and/or damages caused to principal stock while at Railway siding. Any loss due to shortage and/or damages at Railway station will be on clearing agent's account. 4. The clearing agent shall also be responsible for the following: (a) Material arrival report (b) RR Register and safe custody of Rrs (c) Submit the bills with all supporting bills (d) Transit wagon position. (iii) Therefore, the assessee's version that reimbursement was made by the company itself falsifies the facts contained in the agreements. It is clearly narrated in the agreements 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. Considering the contents of the agreements made with the clearing agents, payment of demurrage is the liability of the clearing agents, who are responsible for managing the stocks at the railway siding and they have also been responsible for transit wagon position. Moreover, demurrage has been levied in the form of fine for not adhering to the rules/byelaws established by

(34 of 40) [ITA-358/2017] the railways, specifying the time limits for loading/unloading of the railway wagons. Hence, the expenditure of Rs.3,71,46,968/-, being fine in nature and also in the absence of any reference to its reimbursement in the agreements, is disallowed u/s 37(1) and added to the assessee's income. Reliance is also placed on the Hon'ble Karnataka High Court's decision in the case of Millennia Developers Ltd v/s DCIT (322 ITR 401). (iv) I am satisfied that the assessee company

has

furnished

inaccurate particulars of income of Rs.3,71,46,968/-. Hence, Penalty proceedings u/s for furnishing inaccurate particulars of income of Rs.3,71,46,968/- are initiated separately. (Disallowance of Rs.3,71,46,968/-) CIT(A) I have gone through assessee’s submission and AO’s findings. Firstly, the payment is not covered by section 37(1) as the same was not paid for any purpose which was an offence or was prohibited by law. In fact demurrage is paid for delay in removing the goods in time and the same is contractual in nature. Secondly, there was no clause in the agreement that demurrage would be paid by the C&F agents. In view of the above, the AO was not justified in disallowing demurrage expenses of Rs.3,71,46,968/-. The AO is therefore to delete addition of Rs.3,71,46,968/-. This ground of appeal is therefore allowed. Tribunal 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

(35 of 40) [ITA-358/2017] 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. 19. 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

(36 of 40) [ITA-358/2017] 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 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.

(37 of 40) [ITA-358/2017] 21. In that view of the matter, this question also does not arise. 22. Regarding issue no.7, the counsel for the appellant has relied on the following findings of the authorities:- Assessing Officer 2.13 Railway siding expenses- (i) The assessee has debited an amount of Rs.33,57,015/- under the head 'Railway siding expenses'. On being asked to justify this claim as revenue expenditure, the assessee vide its reply dated 14.12.2012 submitted as under:- "Railway siding expenses includes maintenance of railway tracks at our siding, salary of western central Railway staff, Kota and Railway track land license fees. Such expenses are recurring expenses,

allowable

revenue expenditure". (ii) On perusal of the details filed by the assessee company, it is observed taht the work for maintenance of the railway siding was entrusted to M/s Khandelwal Construction, Kota vide work order dated 01.04.2009. Further, perusal of bill No.50 dated 31.03.2010 of M/s Khandelwal Construction, Kota reveals that contract was for replacement of all required fitting, replacement of CST sleper and wooden sleeper, replacement of raisl etc. These facts indicate that expenditure on this work of railway siding results in enduring benefit to the assessee company. Hence, these expenses are considered as capital in nature. Railway Siding has been shown in the balance sheet under the "Fixed Assets". Considering the nature of expenses of Rs. 30,57,015/-, which are of capital nature, the same are disallowed u/s 37(1) of the Income Tax Act, 1961 and added to the assessee's income. Reliance is placed on the Hon'ble Madras High Court's decision in the case of CIT, Madurai vs Madura Coats 205 TAXMAN 357 wherein expenditure incurred on such replacements was not allowable as revenue expenditure u/s 37(1). As the railway siding has been shown as the fixed asset in the balance sheet, to be judicious and reasonable, depreciation @ 10% is

(38 of 40) [ITA-358/2017] allowed on the total payment of Rs.30,57,015/-. Hence, the remaining expenditure of Rs.27,51,314/- (3057015- 305701) is disallowed, being of capital nature and added to the assessee's total income. (iii) I am satisfied that the assessee company has furnished inaccurate particulars of income of Rs.27,51,314/-. Hence, penalty proceedings u/s for furnishing inaccurate particulars of income of Rs.27,51,314/- are initiated separately. (Disallowance of Rs.27,51,314/-) CIT(A) 4.92 Discussion and the Appellate Decisions The AO made an addition of Rs.27,51,341/- observing as under:- “The assessee has debited an amount of Rs.33,57,015/- under the head ‘Railway siding expenses’. On being asked to justify this claim as revenue expenditure, the assessee vide its reply dat. 14.12.2012 submitted as under:- “Railway siding expenses includes maintenance of railway tracks at our siding, salary of western Central Railway staff, Kota and Railway track land license fees. Such expenses are recurring expenses,

allowable

revenue expenditure. (ii) On perusal of the details filed by the assessee company, it is observed that the work for maintenance of the railway siding was entrusted to M/s. Khandelwal Construction, Kota vide work order dt. 1.4.2009. Further, perusal of bill No.50 dt. 31.3.2010

M/s.

Khandelwal Construction, Kota reveals that contract was for replacement of all required fitting, replacement of CST sleeper and wooden of railway siding results in enduring benefit to the assessee company. Hence, these expenses are considered as capital in nature. Railway siding has been shown in the balance sheet under the “Fixed assets.” Considering the nature of expenses of Rs.30,57,015/-, which are of

(39 of 40) [ITA-358/2017] capital nature, the same are disallowed u/s 37(1) of the Income Tax Act, 1961 and added to the assessee’s income. Reliance is placed on the Hon’ble Madras High Court’s decision in the case of CIT, Madural vs. Madura Coats 205 Taxman 357 wherein expenditure incurred on such replacements was not allowable as revenue expenditure u/s 37(1). As the railway siding has been shown as the fixed asset in the balance sheet, to be judicious and reasonable, depreciation @ 10% is allowed on the total payment of Rs.30,57,015/-. Hence, the

remaining

expenditure

of Rs.27,51,314/- (3057015-305701) is disallowed, being of capital nature and added to the assessee’s total income. (iii) I am satisfied that the assessee company has furnished inaccurate particulars of income of Rs.27,51,314/-. Hence, penalty proceedings u/s for furnishing inaccurate particulars of income of

Rs.27,51,314/-

are

initiated separately). I have gone through AO’s findings and assessee’s submission. The expenditure was not for bringing a new asset in to being, the same was incurred for replacement of fitting and maintenance of existing railway siding. In my

opinion,

expenditure

for improvement/maintenance of existing asset has to be treated as revenue in nature. Tribunal 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 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

(40 of 40) [ITA-358/2017] 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. 24. In view of the above, no substantial question of law arises in this appeal. 25. The appeal stands dismissed. (VIJAY KUMAR VYAS),J (K.S.JHAVERI),J Brijesh 22.