DCIT, BHUBANESWAR vs. M/S. ORISSA MINING CORPORATION LTD, BHUBANESWAR

Since the issue involved in both the appeals are connected and common, hence, both the appeals are heard together and disposed off by this consolidated order. We shall take up assessee’s appeal i.e. ITA No.177/CTK/2013 and the facts narrated therein and the assessee has raised the following grounds of appeal :-

3 I have carefully considered the matter. The above expenditure has been booked under the peripheral development expenses. In the instant case, as per the details filed by the assessee, an amount of Rs.10,46,800/- has been spent on construction of 3 nos. of special cabins at Capital Hospital. It is also seen that the same was done at the request of the Chief Medical Officer, Bhubaneswar wherein the employees of OMC shall be accommodated on out of turn basis. Similarly, an aynount of Rs.25 lakhs was given to Bhubaneswar Municipal Corporation at the. request of the Municipal Commissioner. The BMC, as is evidenced from the letter of the Municipal Commissioner agreed to provide a ornamental lights were installed. In other words, in these two cases not only the amount has been spent at the request of Government authorities, but also the OMC as a corporate entity has derived benefits by way of facilities for its employees and a visibility for the company’s brand name. In view of the same and applying the ratio of the decision of the Hon’ble Tribunal referred by the Ld.AR, it is held that the above two expenses are allowable business expenditure u/s.37(l). However, the other expenditure including contribution to Ram Krishna Mission are pure donations for which there is no evidence that ahy concrete business benefit accrues to the company. Such acts while being noble and clearly charitable do not qualify for deduction u/s.37(l). Since these expenditures are also not at the direction/request of the Government authorities, the ratio of the decision of the Hon’ble Tribunal referred by the assessee for assessment year 2008-09 shall not apply. In view of the same, out of peripheral expenditure of Rs.75,00,040/-, addition to the extent of above two amounts to Capital Hospital and BMC aggregating to Rs.35,46,800/- is deleted and the balance addition is sustained. The ground is, thus, partly allowed. On the second disputed issue of prior period expenses of Rs.20,52,394/- the CIT(A) has called for the comments of the AO and the submissions of the assessee and finally the CIT(A) is of the opinion that the claim of the assessee to the extent of Rs.2,35,878/- is allowable as it was crystallized in the financial year and in respect of balance amount of Rs.18,16,516/- the assessee has not furnished any evidence that the liability has been crystallised in this year and partly allowed the grounds of appeal of the assessee observing at para 7.3 page 73 of the order which is as under :-

3 I have carefully considered the matter. While the appellant has claimed prior period expenses of Rs.20,52,394/-, before the AO and before me it has submitted only a single piece of evidence relating to payment of tax for earlier years in respect of a old pay- loader in pursuance of the letter of RTO, Keonjhar No.613/BBL/2008 dated 25.11. 08. In view of the same, the addition of Rs.2,35,878/- relating to the old pay-loader being an allowable expenditure as the same crystallized during the year is not sustainable and hence deleted. In respect of the balance amount of Rs.18,16,516/-, the assessee has not furnished any paper or evidence in support of its ground taken in appeal that the liabilities crystalised during the year. In view of the same, I do not see any infirmity in the action of the AO in adding the same. Thus, the addition is sustained at Rs.18,16,516/-. The ground No.3 is allowed in part.”

Aggrieved by the order of CIT(A), assessee has filed an appeal before the Tribunal. Before us, ld. AR submitted that the CIT(A) has granted partial relief of peripheral development expenditure irrespective of the fact that development expenditure has to be incurred to maintain the relation with people around its mines and offices, assessee took various developments works for the growth of the periphery area and the amount has been spent as per the Government Notification. Whereas out of major expenses, ld. CIT(A) has allowed periphery development expenses to the extent of Rs.35,46,800/- and explained that Rs.10 lakhs was provided as financial assistance for construction of multipurpose complex at Shri Ram Krishna Mission, Bhawanipatna,. Kalahandi, and prayed for allowing the appeal.

Contra, ld. DR submitted that these expenses are not incidental to the business and submitted the order of AO.

We have heard the rival submissions and perused the material on record and judicial decision cited above. Prima facie, the peripheral expenses is incurred by the assessee as per the notification and the sanctions of the Government to maintain the relationship with people working at mines and adjoining areas. The peripheral expenses consists of various claims submitted by the ld. AR, which according to us are to be verified and test checked, further on perusal of the assessment order there is no proper findings on the disputed issue, the ld. AR filed written submissions and supported his arguments with the paper book containing details and annexures supporting the claims and judicial decisions. Accordingly, in the interest of substantial justice since the above information was filed and the same was not available with the AO. We direct the AO to examine and check the genuineness of claim and pass the order on merits after providing adequate opportunity of hearing to the assessee and remit the disputed issue to the file of AO and allow the grounds of appeal of the assessee for statistical purposes.

On the second disputed issue of prior period expenditure the ld. AR submitted that assessee has complete information on the claim and prayed for an opportunity to submit. On the query from the bench to the ld. AR to explain with reasons for non-filing details before the AO, the AR’s explanations are not convincing. We find the prior period expenditure claim was dealt by the coordinate bench of this Tribunal in assessee’s own case in ITA No.551/CTK/2012, order dated 18.12.2012 at para 9.1 page 9 where the Tribunal has dealt on the each issue of prior period expenses which reads as under :-

On the second issue being prior period expenses, we find the contention of the learned Counsel of the assessee justified that it is nobody's case that the accounting of prior period expenses have to be otherwise. A practical method of accounting is considered mercantile when the concept of deriving real income in the hands of the assessee in year to year basis is a mundane requirement insofar as income tax is levied for the impugned Assessment Year only. The very intention on the basis to claim it as prior period expenses indicates that these expenses were not known to them but pertain to that year and they could not have been accounted in the year when they may have accrued which deficiency was required to be fulfilled by the learned CIT(A) when the substantial amount was deleted by him as computed by the Assessing Officer as prior period expenses. The sustenance of part addition on account of prior period expenses have been dealt item- wise by him in his order, which we are inclined to reproduce as follows, has to be considered otherwise. (i) Pay & allowances - Rs.968,561/- : This was stated to be arrear salary paid to Shri Barinder Singh. It is seen that the order of reinstatement was passed on 16.11.2006 in case of this officer and his leave for the preceding period was sanctioned on 16.03.2007 along with sanction of increments for the preceding years on that day. On the basis of these orders passed by the OMC, the liability had crystallized in financial year 2006-07 and in 2007-08; (ii) Arrear salary - Rs.3,11,927/- :- Arrear salary of Rs.3,11,927/- consisted of leave salaries only. A copy of the order from AG, Odisha was filed in respect of Dr. Umakanta Mishra amounting to Rs.1,34,610/-. Since this order is dated 10.08.2007, the amount is allowable as the liability crystallized during financial year 2007-08. In respect of the balance amount no details or evidences were furnished; (hi) Miscellaneous expanses;- Miscellaneous expenses relate to supply of explosives during financial year 2004-05 and, hence, provision should have been made in that year. In any case, no evidence was furnished that the same accrued during the year; (iv) Repair to the building - Rs.4,35,364/-: This amount relates to purchase of GGI sheets on 30.12.2005 and repairs in pursuance to agreement entered in financial year 2004-05. Accordingly, the provision should have been made during that year. In any case, no evidence was furnished that the same accrued during the year; (v) Raising expenses- Rs.12,02,510/-: These expenses mostly consist of raising of mineral ore at Dubna mines for 1998-99, 1999- 2000, 200001 and 2001-02, also includes over burden cutting in 2001 and in respect of agreements/activities done in , 2001-02. Accordingly, provisions should have been made in 'Those years in respect of these expenses. In any case, no / evidence was furnished that the same accrued during the year. vi) Rent, rates 6c taxes — Rs.4,58,432/-: In fact, these are rent paid for private plots taken on lease by OMC. As per details filed, the rent was finalized by the Managing Director of the assessee on 16.12.2006. Thus, the provision should have been made in the financial year 2006-07. In any case, no evidence was furnished that the same accrued during the year. (vii) R&M to machinery — Rs.23,02,201/-: The work by M/s. Mcnall Bharat is in response to work order of the assessee dated 31.10.2002 and the bills were raised by this concern on the assessee on 09.12.2004, 24.10.2006, 05.09.2000 and 05.09.2003. Accordingly, provision should have been made in the relevant financial years. In any case, no evidence was furnished that the same accrued during the year." A mere glance of the above would suggest that the expenses are of a nature which may not have crystallized even after a gap of one year was explained by the assessee appellant before him. He required the evidence of their accrual in the impugned Assessment Year when it was the assessee's claim that they have crystallized in the impugned the year they pertain to. In other words, we find the contention of the learned Counsel of the assessee appropriate that there is no method to foresee as to what revenue expenditure would have to be provided for after end of the Assessment Year if the accounts are to be balanced for approval by the share holders within six months of the close of the financial year. Therefore, a concept of claiming them as prior period expenses on the basis they having been actually incurred in the impugned Assessment Year has been declared as prior period expenses in accordance with the concept of mercantile system of accounting. In this view of the matter, we are of the considered view that the prior period expenses are bound to be allowed in the impugned Assessment Year having crystallized in the impugned Assessment Year. Therefore, the part confirmation of the addition made by the learned Assessing Officer on this count is therefore directed to be deleted. Whereas the assessee in the assessment proceedings could not substantiate the claim with proper explanations and evidence, therefore, in the interest of substantial justice, we provide one more opportunity as prayed by the ld. AR to represent its case before the AO with the evidences/documents of prior period expenses and the AO shall examine the genuineness and crystallisation of the expenses in the financial year and assessee should be provided adequate opportunity of hearing and shall cooperate in submitting the information. Accordingly, we restore the disputed issue to the file of AO and allow the grounds of appeal of the assessee for statistical purposes.

Now, we take up the revenue’s appeal in ITA No.163/CTK/2013, wherein the revenue has raised the following grounds :- 1.On the facts and in the circumstances of the case, the Ld. CIT(A) is not justified in deleting the addition of Rs. 1150,35,26,077/- on the issue of valuation of closing stock. 2.On the facts and in the circumstances of the case, the Ld. CIT(A) is not justified in ignoring the fact that the sales are assured for which a market exists and there is negligible risk of failure to sale.

On the facts and in the circumstances of the case, the Ld. CIT(A) is not justified in ignoring the fact that as per the clarification issued by the ICAI in January 1994 all mandatory Accounting Standards apply i.r.o. financial statements audited u/s.44AB of the Act.

On the facts and in the circumstances of the case, the Ld. CIT(A) is not justified in ignoring the fact that Para 6.2 of AS- 9 on “Revenue Recognition” issued by the ICAI specifically, inter alia, applies to industries dealing with minerals to which special conditions apply and thus AS-9 is squarely applicable in assessee’s case and the application is mandatory in such cases.

On the facts and in the circumstances of the case, the Ld. CIT(A) is not justified in ignoring the fact that AS-2 (revised) which deals with valuation of inventories does not apply to mineral ores to the extent that they are measured at net realizable value in accordance with well established practices in these industries.

On the facts and in the circumstances of the case, the Ld. CIT(A) is not justified in deleting the addition when reliance placed by the Ld CIT(A) on the case laws were pronounced in different context and under different facts and circumstances.

Orp-tbe'facts and in the circumstances of the case, the Ld. CIT(A) is not justified in deleting the addition and accepting the view of the Ld CIT(A) that the method of valuation adopted by it is an acceptable method of accounting for the reason that it was consistently followed by it and by other similar entities.

On the facts and in the circumstances of the case, the Ld. CIT(A) is not justified in deleting the addition made by the AO towards peripheral development expenses in respect of cabins in Capital Hospital and amount paid to BMC, when the same was not incidental to the business of the assessee.

On the facts and in the circumstances of the case, the Ld. CIT(A) is not justified in ignoring the fact that these two items of expenses have been incurred at the request of Govt, authorities and not by its own motion which are purely Capital expenditure in nature and its benefit will be enjoyed by the Company in the long run.

On the facts and in the circumstances of the case, the ld. CIT(A) is not justified in deleting Rs.2,35,878/- out of addition made by the AO towards prior period expenses.

On the facts and in the circumstances of the case, the ld. CIT(A) is not justified in deleting the additions accepting the required under Rule 46A.

At the time of hearing ld. DR submitted that ground No.1 to 7 are in respect of recognition and differential valuation of closing stock, where the CIT(A) has erred in allowing in favour of the assessee relying on the coordinate bench Tribunal decision of the earlier year and prayed for allowing the appeal. Contra, ld. AR relied on the orders of CIT(A).

We have heard rival submission and perused material on record. Ld.DR’s contention that CIT(A) erred in deleting the addition we find the coordinate bench of the Tribunal in assessee’s own case in ITA No.551/CTK/2012 has decided the issue in favour of the assessee and we respectfully follow the judicial precedence and uphold the action of CIT(A) allowing the claim relying upon the decision of the Tribunal and dismiss the grounds of appeal of the revenue.

In grounds No.8 & 9 of the revenue’s appeal, disputed issue is with respect to expenditure incurred on peripheral development expenses. Ld.DR submitted that there is no nexus of claim with the assessee’s business and CIT(A) has erred in allowing the partial relief and ld. AR relied on the order of CIT(A).

We have heard rival submissions and perused the material on record. The ld. DR’s contention that CIT(A) has granted partial relief to the assessee and on certain documents we find CIT(A) applies the decision of Tribunal and granted part relief and further assessee is in appeal before us in respect of balance claim. Since the CIT(A) has relied on ITAT’s order and allowed the partial relief, therefore, we are not inclined to interfere with the order of CIT(A) in respect of this disputed issue and dismiss the grounds of appeal of the revenue.

Revenue’s ground No.10 related to claim of prior period expenses. Ld. DR’s contention that the CIT(A) has erred in deleting prior period expenditure irrespective of fact that they are not crystalised during the year and assessee could not substantiate with the evidence in the assessment proceedings. Whereas the ld. AR submitted that the assessee has also filed an appeal against the sustenance of disallowance by the CIT(A) and supported his arguments with the details of prior period expenses crystalised during the year. Accordingly, in the interest of substantial justice, we remit the disputed issue to the file of AO to verify and examine the crystallisation of expenses and accordingly the grounds of appeal of the revenue are allowed for statistical purposes.

In the result, appeal of the assessee in ITA No.163/CTK/2013 is allowed for statistical purposes and the revenue’s appeal in ITA No.177/CTK/2013 is partly allowed for statistical purposes. Order pronounced in the open court on this 20/09/2017. (N. S. SAINI) (PAVAN KUMAR GADALE) लेखा सदस्य / ACCOUNTANT MEMBER न्याधयक सदस्य / JUDICIAL MEMBER कटक Cuttack; ददनाांक Dated 20/09/2017 प्र.कु.धि/PKM, Senior Private Secretary आदेश की प्रधतधलधप अग्रेधषत/Copy of the Order forwarded to :