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.359/2017 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.359/2017 “1. Whether the Tribunal was legally justified in deleting the addition of Rs.1,62,85,105/- 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.52,82,432/- was confirmed by the CIT(A)?

(2 of 9) [ITA-359/2017] 2.Whether the Tribunal was legally justified in

deleting

the

disallowance

of Rs.2,75,00,000/- made on account of construction of railway over bridge by holding it to be revenue expenditure u/s 37(1) specifically when the same was in the nature of capital expenditure? 3. Whether the Tribunal was legally justified in

deleting

the

disallowance

of Rs.1,36,29,693/- 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.3,02,13,331/- 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.28,29,670/- 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 the course of assessment proceedings made various additions. The assessing Officer disallowed the social welfare expenses u/s.371(1) of Rs.32,39,757/- by relying on the decision of Hon'ble Supreme Court in the case of Arvind Mills Limited vs. CIT (197 ITR

(3 of 9) [ITA-359/2017] 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. 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.58,08,465/-) general expenses (Rs.7,12,561/-) gift expenses (Rs.19,32,432/-) sales promotion expenses (Rs.45,91,890/-) 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.1,36,29,693/- 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.2,75,00,000/- 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.3,02,13,331/- under the

(4 of 9) [ITA-359/2017] main head "Freight Expenses" on account of claims lodged by the different clearing agents. The Assessing Officer disallowed the expenditure claimed by the assessee 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.28,29,670/- 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. The Assessing Officer allowed depreciation @ 10% on total payment and disallowed the remaining expenditure.

(5 of 9) [ITA-359/2017] 4. Issue no.1 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. 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

(6 of 9) [ITA-359/2017] 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. 5. Issue no.2 is covered by the decision in ITA No.358/2017 where while considering issue no.4, this court has held as under:- 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. 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:- 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. 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:- 19. The counsel for the respondent has relied upon on the following decisions:-

(7 of 9) [ITA-359/2017] 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 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

(8 of 9) [ITA-359/2017] 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 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.

(9 of 9) [ITA-359/2017] 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 23.