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Income Tax Appellate Tribunal, BENCH ‘A’ KOLKATA
Before: Hon’ble Shri N.V.Vasudevan, JM & Shri M.Balaganesh, AM ]
IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH ‘A’ KOLKATA [Before Hon’ble Shri N.V.Vasudevan, JM & Shri M.Balaganesh, AM ] ITA No.352/Kol/2011 Assessment Year : 2007-08
Essel Mining & Industries Ltd. -versus- Addl. C.I.T., Range-5, Kolkata Kolkata (PAN:AAACE6607L) (Appellant) (Respondent)
ITA No.589/Kol/2011 Assessment Year : 2007-08
D.C.I.T., Circle-5, -versus- Essel Mining & Industries Ltd. Kolkata Kolkata (PAN:AAACE6607L) (Appellant) (Respondent)
For the Assessee: Shri D.S.Damle, FCA For the Department : Shri Rajat Subhra Biswas, CIT(DR)
Date of Hearing : 17.05.2016. Date of Pronouncement :20.05.2016.
ORDER Per N.V.Vasudevan, JM
ITA No.352/Kol/2011 is an appeal by the Assessee while ITA No.589/Kol/2011 is an appeal by the Revenue. Both these appeals are directed against the order dated 10.01.2011 of CIT(A)-VI, Kolkata, relating to AY 2007-08. ITA No.352/Kol/2011 (Assessee’s appeal) 2. Ground No.1 was not pressed and the same is dismissed as not pressed. 3. Ground Nos. 2 and 3 raised by the assessee read as follows :- “2. That the Commissioner of Income-tax (Appeals) was wrong in dismissing the appellant's Ground of Appeal in relation to the appellant's claim for treatment of Foreign Exchange Fluctuation Gain to the extent of Rs.5,79,10,208/- as a Capital receipt in the hands of the appellant.
ITA No.352/Kol/2011 & ITA No.589/Kol/2011-Essel Mining & Inds.Ltd A.Y.2007-08
That without prejudice to the contention raised in Ground No.2 above, the Commissioner of Income-tax (Appeals) failed to appreciate that the Supreme Court decision in the case of Goetz (India) Ltd. was relevant only in relation to the Assessing Officer's power and not in respect of the power of an Appellate authority and thus he erred in applying the said decision in relation to the claim made by the appellant at the Appeal stage.” 4. The Assessee is a company. It is engaged in the business of raising of ore and manufacture of ferro alloys. The assessee is also engaged in trading of iron ore and mining ore. For A.Y.2006-07 the assessee filed return of income declaring total income of Rs.797,24,64,400/-. Assessment was completed by the AO determining the total income of Rs.821,98,42,178/- by order dated 30.12.2009 passed u/s 143(3) of the Income Tax Act, 1961 (Act). It is not in dispute that in arriving at the total income declared by the assessee in the return of income the assessee had included foreign exchange fluctuation gain of Rs.10,89,43,668/-. The assessee noticed that the aforesaid foreign exchange fluctuation gain included a sum of Rs.5,79,10,208/- which pertain to foreign currency loan availed by the assessee for purchase of indigenous machinery in the assessee’s wind power unit. It was the plea of the assessee before CIT(A) that similar gain or loss on foreign exchange fluctuation against foreign currency loan utilised for purchase of indigenous machinery had not been included in the total income and offered to tax when there was a gain on the ground that it was a capital receipt not chargeable to tax. Nor was it excluded from the total income when there was a loss on the ground that it was a capital loss which will not go to reduce the taxable total income. The details in this regard have been given by the assessee as follows :- TREATMENT OF EXCHANGE FLUCTUATION GAIN/LOSS- WIND POWER UNITS A.Y. Amount in Rs. Treatment Gain / (Loss) 2007-08 57,910,208 Claimed as capital receipt before the CIT(A). Claim not allowed. Appeal pending before ITA T 2008-09 19,65,08,245 Claimed as capital receipt in the Computation of Total Income. The claim allowed in the order u/s 143(3) as well as in the Order u/s 1471143(3) 2009-10 (41,33,87,127) Added back in the Computation of Total Income being capital loss. Assessed as such i.e. loss disallowed in the ITA No.352/Kol/2011 & ITA No.589/Kol/2011-Essel Mining & Inds.Ltd A.Y.2007-08
order u/s 143(3) 2010-11 13,84,44,458 Claimed as capital receipt in the Computation of Total Income. The claim allowed in the order u/s 143(3) 2011-12 (50,94,002) Added back in the Computation of Total Income being capital loss. Assessed as such i.e. loss disallowed in the order u/s 143(3) 2012-13 (2,14,23,575) Added back in the Computation of Total Income being capital loss. Assessed as such i.e. loss disallowed in the order u/s 143(3)
The assessee raised ground no.13 before CIT(A) seeking to exclude from the total income, the gain on foreign exchange fluctuation on loans availed for purchase of indigenous machineries, which read as follows :- “13. That the Assessing Officer should have treated a sum of rs.5,79,10,208/- out of Rs.10,89,43,668/- being the gain on Foreign Exchange Fluctuation, as Capital Receipt in the appellant’s hands and so the said sum of Rs.5,79,10,208/- should have been reduced from the appellant’s taxable income. “
The assessee submitted before CIT(A) that since the foreign currency loan in question had been availed and utilised for purchase of indigenous fixed assets, the gain there from should be considered as being on capital account and consequently the said sum was required to be reduced from the assessee’s total income. The assessee pointed out before CIT(A) that the AO ought to have excluded the same from the total income. The assessee relied on the decision of the Hon’ble Supreme Court in the case of Sutlej Cotton Mills Ltd. Vs. CIT 116 ITR 1 (SC) wherein the Hon’ble Supreme Court held that profit or loss that arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. But, if on the other hand, the foreign currency is held as capital asset or as fixed capital, such profit or loss would be of capital nature. 7. CIT(A) however did not agree with the aforesaid submissions of the assessee for the reasons that the assessee did not make any claim for exclusion of the aforesaid gain from the total income before the AO by filing a revised return of income. ITA No.352/Kol/2011 & ITA No.589/Kol/2011-Essel Mining & Inds.Ltd A.Y.2007-08
According to the CIT(A) the assessee for A.Y.2007-08 could have filed a revised return on 31.03.2009 and since the assessee had failed to do so, it cannot be permitted to rectify the above omission after 31.03.2009. In this regard the CIT(A) referred to the decision of the Hon’ble Supreme Court in the case of Goetze (India) Ltd. Vs CIT 284 ITR 323 (SC) wherein the Hon’ble Supreme Court held that after filing the return of income, an assessee can make further new claim only by filing a revised return of income in time. The CIT(A) therefore held that the claim made by the assessee in this regard cannot be entertained. 8. Aggrieved by the order of CIT(A) the assessee has raised ground Nos 2 and 3 before the Tribunal. 9. We have heard the submissions of the ld. Counsel for the assessee and the learned DR. The ld. Counsel for the assessee brought to our notice that the Hon’ble Supreme Court in the case of Goetze (India) Ltd vs CIT (supra) held that the AO cannot entertain any claim by an Assessee which is not made in a return of income, without filing a revised return of income. In the aforesaid decision, the Hon’ble Supreme Court also made reference to the decision of the Hon’ble Supreme Court in the case of NTPC Ltd. 229 ITR 383 (SC), wherein it was laid down that it was open to the assessee to raise any point of law even before the appellate tribunal. The ld counsel further brought to our notice that the Hon’ble Supreme Court in the case of Goetze India Ltd further observed that in para – 4 of its decision that its decision will not have any impact on the power of the Tribunal u/s 254 to entertain for the first time a point of law, provided the fact on the basis of which the issue of law can be adjudicated are already available on record. The Hon’ble Supreme Court made it clear that its decision was limited in the power of the AO. The ld.counsel submitted that in the decision rendered by the Hon’ble Supreme Court in the case of NTPC Ltd. Vs CIT (supra) the Hon’ble Supreme Court had placed reliance on its own decision in the case of Jute Corporation of India vs CIT 1991 AIR 241 (SC). In the said decision the Hon’ble Supreme Court, dealt with the power of the first appellate authority to entertain a claim that was not made in the return of income or before the AO. The new plea in the appeal before it with a rider that the appellate authority must be satisfied ITA No.352/Kol/2011 & ITA No.589/Kol/2011-Essel Mining & Inds.Ltd A.Y.2007-08
that the ground raised was bona fide and the same cwas not raised earlier for good reasons. The ld. Counsel submitted that the ratio laid down in the case of Goetze India Ltd., regarding the power of the Tribunal to entertain a new plea should be construed as applicable to the first appellate authority also in view of the decision in the case of Jute Corporation of India (supra). The ld. DR relied on the order of the AO. 10. We have given a very careful consideration to the rival submissions and are of the view that the stand taken by the ld. Counsel for the assessee deserves to be accepted. As rightly contended by him the facts with regard to the foreign exchange fluctuation gain and the purpose for which the foreign currency loan had been availed viz., to purchase indigenous machineries are not in dispute. The past assessment records also show that the assessee has been consistently excluding similar foreign exchange fluctuation gain from the computation of total income. In the given facts and circumstances of the case we are of the view that the first appellate authority ought to could have entertained the claim of the assessee and examined the same on merits rather than refusing to entertain the claim by relying on the decision of the Hon’ble Supreme Court in the case of Goetze India Ltd . we hold accordingly. 11. The next argument raised by the ld. Counsel for the assessee was that the issue can be adjudicated by the Tribunal rather than remand the issue to the CIT(A) for fresh consideration. In this regard the ld. Counsel for the assessee placed reliance on the decision of the Hon’ble Mumbai High Court in the case of Kansai Nerolac Paints Ltd. 364 ITR 634(Bom) wherein the Hon’ble Bombay High Court held that the Tribunal was not prevented in any manner and in law from considering purely legal issue for the first time especially when this legal issue went to the root of the matter. The Hon’ble court held that the Tribunal in such a situation should answer the issue and ought not to remand the issue to the AO. The ld. Counsel further drew our attention to the decision of the Hon’ble ITAT Ahmedebad ‘A ‘Bench in the case of ACIT vs GHCL Limited vide ITA Nos.830 & 2508/Ahd/2008 order dated 30.09.2015 wherein identical question whether foreign exchange fluctuation gain on foreign currency loan availed for purchase of indigenous machinery had to be excluded from the total income as capital receipt not chargeable to tax, had come up for consideration ITA No.352/Kol/2011 & ITA No.589/Kol/2011-Essel Mining & Inds.Ltd A.Y.2007-08
The question before the Hon’ble Ahmedabad Bench also dealt with the question regarding the applicability of the provisions of Section 43A of the Act, where the foreign exchange fluctuation gain was on foreign currency loan borrowed to acquire indigenous plant and machinery. The AO in that case reduced the value of plant of machinery by the foreign exchange fluctuation gain and allowed depreciation on the remainder. This action was in question before the Hon’ble Tribunal. The Hon’ble Tribunal held as follows :- “12. So far as this ground of appeal is concerned, some material facts will have to be taken note of. During the course of assessment proceedings, the Assessing Officer noted that the assessee has earned foreign exchange fluctuation gain of Rs.1,79,20,653/- on“foreign exchange loan borrowed to acquire indigenous plant and machinery” but has not reduced the same from written down value of the plant and machinery, as,according to the Assessing Officer, was the requirement of section 43A of the Income Tax Act. It was in this background that the Assessing Officer disallowed depreciation, being 25% as applicable on the related plant and machinery, in respect of this amount ofRs.1,79,20,653/-. Aggrieved, assessee carried the matter in appeal before the ld. CIT(A) who deleted this disallowance by observing as follows :- “I have carefully considered the submissions made and the decisions cited by the ld. A.R. and the observations of the A.O. in the assessment order. The appellant has availed foreign currency loan from IDBI and Export Import Bank of India for acquisition of indigenous plant and machinery. The appellant has received exchange fluctuation gain of Rs.1,79,20,653/- during the relevant year. Relying on the decision of S.C. in Sutlej Cotton Mills Ltd. Cited supra, as the gain was in respect of a capital asset it is considered as a capital receipt. As the loan was used for acquisition of capital asset, the said transaction was clearly on capital account. It being a capital receipt it is not taxable. The Assessing officer has not objected to the treatment of the exchange fluctuation gain as a capital receipt, but he has redacted the exchange fluctuation gain from the cost of fixed asset and reduced the depreciation claim applying provisions of Sec. 43A of the I.T. Act. As Plant and machinery was not purchased from a country outside India, the ld. A.R. has strongly contended that provisions of Sec. 43A are not applicable in the case of the appellant. The Act is silent as to how the adjustments will have to be done when asset is brought from India, as there is no provision similar to provision of Sec. 43A. Once the asset is purchased and actual cost is determined, any subsequent change in value of loan cannot alter the cost of asset as held by Hon’ble Supreme Court in case of CIT V. Tata Iron and Steel Co. Ltd. (1998) 231 ITR 285, wherein it was held that at the time of repayment of loan, when there was a fluctuation in the rate of foreign exchange as a result of which, the assessee had to repay a much lesser amount than he would have otherwise paid, this was not a factor, which could alter the cost incurred by the assessee for purchase of the asset. The assessee might have raised the funds to purchase the asset by borrowing but what the assessee had paid for it was the price of the asset. The manner or mode of repayment of the loan had ITA No.352/Kol/2011 & ITA No.589/Kol/2011-Essel Mining & Inds.Ltd A.Y.2007-08
nothing to do with the cost of an asset acquired by the assessee for the purchase of his business. Of course the decision of SC in TISCO 231 ITR 285 (SC) is subject to provisions of Sec. 43A. But when the asset is purchased from India and not from abroad, the provisions of section 43A cannot be applied. It cannot be also said that part of cost is met by somebody else, so cost shall be reduced as per section 43(1) as at the time of purchase of asset the cost was the loan amount. Though the appellant has reduced the cost of capital asset in books of accounts, courts have held that accounting treatment by assessee will not determine tax treatment of any receipt or expenditure. For this the ld. A.R. has relied on the decisions in the case of Tuticorin Alkali Chemicals & Fertilizers Limited 227 ITR 172 (SC), DCIT V. Core Healthcare Ltd. (251 ITR 61) (Guj.). Though Sec. 43(1) has 12 Explanations, the section does not specify a case like that of the appellant i.e. case of gain on foreign currency loan acquired for purchase of indigenous assets. Provisions of Sec. 41(1)will not apply as contended by the A.R. as no deduction has been allowed to the appellant in earlier years. The foreign exchange fluctuation gain in the case of the appellant is definitely a capital receipt as it was utilised for purchase of asset and further it cannot be reduced from the cost of fixed assets for computation of depreciation as the provisions of section 43A are not applicable as the assets have been purchased from India and not abroad. Accordingly the A.O. is directed not to reduce the cost of fixed assets for depreciation purpose. This ground is thus allowed.” 13. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 14. As learned CIT(A) has rightly held, the provisions of section 43A of the Act come into play only when the asset in question is acquired from outside India whereas, as is the undisputed position on the facts of this case, the related plant and machinery was “indigenous”. There is a categorical finding to that effect by the Assessing Officer himself. As such, the provisions of section 43A of the Act do not come into play at all. Learned Departmental Representative could not point out any other statutory provision under which impugned adjustment could have been made. In view of these discussions, we see no reasons to disturb the relief granted by the ld. CIT(A). We approve the same and decline to interfere in the matter.” 12. In the light of the aforesaid decision the ld. Counsel prayed that the claim as made by the assessee in ground nos. 2 and 3 should be allowed. The ld. DR placed reliance on the order of CIT(A). 13. We have given a very careful consideration to the rival submissions. The foreign exchange fluctuation gain to the extent it relates to foreign currency loans utilised for purchase of indigenous plant and machinery in the assessee’s wind power units did not attract the provision of section 43A of the Act. Section 43A of the Act only makes a reference to acquisition of asset from a country outside India and in consequence of
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the change in the rate of exchange after the acquisition there is an increase of reduction in the liability of the assessee as expressed in Indian currency at the time of making payment and compared to the liability existing at the time of acquisition of the asset. The section is not attracted where the asset is not acquired from a country outside India. This aspect has been considered and accepted by the Hon’ble Ahmedabad Bench in the decision referred to by the ld. Counsel for the assessee. Besides the above as is clear from the chart given in the earlier part of the order such gain or loss has been consistently neither offered to tax nor claimed as deduction by the assessee while computing the total income. In the light of the facts and circumstances stated above, we are of the view that the claim made by the Assessee deserves to be accepted. Ground nos. 2 and 3 raised by the assessee are allowed. AO is directed to exclude the foreign exchange fluctuation gain to the extent of Rs.5,79,10,209/- from the total income of the assessee as it is a capital receipt not chargeable to tax. 14. Ground Nos. 4 and 5 raised by the assessee read as follows :- “4. That the Commissioner of Income-tax (Appeals) was wrong in not admitting the appellant's Additional Ground of Appeal relating to the deduction of the demand of Rs.1 00, 14,22,200/- raised by the Railway authorities towards Wharfage/Stacking Charges. 5. That without prejudice to the contention raised in Ground No.4 above, the Commissioner of Income-tax (Appeals) failed to appreciate that the demand raised by the Railways was required to be considered for allowing deduction on Mercantile basis and thus he erred in not admitting the Additional Ground of Appeal raised by the appellant.”
At the time of hearing of the appeal it was noticed that the claim as contained in ground no.4 was not made by the assessee before the AO. This claim was made by him in the form of additional grounds of appeal before CIT(A). The same was not admitted by the CIT(A) for adjudication for the reason that the aforesaid claim was not the subject matter of the assessment order against which the assessee has filed its appeal. 16. The ld. Counsel for the assessee submitted that the facts which were necessary for adjudicating the issue raised in ground No.4 are not available on record either before AO or CIT(A) and in these circumstances the principle laid down by the ITA No.352/Kol/2011 & ITA No.589/Kol/2011-Essel Mining & Inds.Ltd A.Y.2007-08
Hon’ble Supreme Court in the case of Jute Corporation of India as well as NTPC (supra) cannot be applied and the claim of the assessee cannot be entertained by the first appellate authority. Taking into consideration the above submissions of the ld. Counsel for the assessee, we dismiss ground nos. 4 and 5 raised by the assessee. 17. In the result the appeal of the assessee is partly allowed. ITA No.589/Kol/2011 (Revenue’s appeal) 18. Ground No.1 raised by the revenue reads as follows :- “1. That on the facts and circumstances of the case, Ld. CIT(A)-VI, Kolkata has erred in law as well as on facts of the case by deleting the disallowance of 'Net Present Value' (NPV) of~7,11,50,400/-, although it is capital in nature and hence cannot be allowed u/s.37(1) of the LT. Act, 1961, more so as the Hon'ble Supreme Court has held that the compensation paid by the mine owners to the forest department for use of forest land for mining are the fees / compensation for earlier years during which they have taken out 'ores' from 'Mother Earth’. “ 19. In the course of assessment proceedings, AO noticed that the assessee had claimed deduction of a sum of Rs.7,11,50,400/- towards Net Present Value of broken area (NPV). The nature of this payment was that the assessee, as we have already seen, is engaged in the business of mining of ore. The assessee for continuation of mining on forest areas/land had been required to pay Rs.7,11,50,400/- towards Net Present Value of Broken Area(NPV). The said payment had been made to the Divisional Forest Officer in pursuance of the Forest (Conservation) Act, 1980 and as per Demand Notice dated 24.11.05 from the Divisional Forest Officer and as per Order dated 14-16.02.2005 issued by Ministry of Environment & Forests (F. C. Division), Government of India. For the purposes of obtaining Temporary Working Permission for mining the above-mentioned payment was a pre-condition. As per .the Supreme Court Order in Writ Petition (Civil) No. 202 of 1995, NPV was to be deposited by the user agency with the State Forest Department and the State Forest Department was to maintain a Fund in accordance with the Guidelines issued under the Forest (Conservation) Act, 1980. According to the Assessee, the payment of NPV was an essential payment required to be made by the Assessee for continuing its existing mining operation in Keonjhor Division of Orissa. The non-payment of NPV would have resulted in adverse consequences including the stoppage of day to day ITA No.352/Kol/2011 & ITA No.589/Kol/2011-Essel Mining & Inds.Ltd A.Y.2007-08
mining operations and thus for the purpose of carrying on its mining business the Assessee was compulsorily required to incur the expenditure towards payment of NPV. 20. The NPV represented a levy towards compensation for diversion of the forest land into mining activities and the land in respect of which the payment was made, was owned by the Forest Department. By making the payment of NVP, no tangible asset came into existence. The Assessee also submitted that the payment of NPV was not a voluntary payment and it was a payment on the basis of the direction given by the Divisional Forest Officer, Keonjhor working under the Ministry of Environment and Forest, Government of India. It was further submitted by the Assessee that whenever an undertaking was under an obligation to make certain payments as per the directions of the government, the concerned undertaking would be compulsorily required to make such payment in its own business interest and, accordingly, the Assessee had to follow the same. The Assessee further clarified that the payment of NPV being a statutory requirement which had to be complied with by the Assessee wholly and exclusively for the purpose of carrying on of its business, the incurring of such expenditure should be considered as having direct nexus with the business activities of the Assessee. The Assessee thus submitted that before the AO that the payment of NPV should be considered as an allowable revenue expenditure. 21. The AO was however of the view that the payment in question was a onetime payment. He held that in various judicial pronouncements general principle to decide when expenditure can be considered as capital or revenue have been laid down. Three major conditions so laid down was to see as to whether (a) the benefit of the expenditure incurred is for several years or for one year; (b) whether the expenditure is nonrecurring outlay or recurring outlay; (c) whether it is lump sum payment or periodic payment. According to the AO the expenditure in question satisfied all the conditions for being treated as a capital expenditure. He therefore disallowed the claim of assessee for deduction for the aforesaid sum as revenue expenditure.
ITA No.352/Kol/2011 & ITA No.589/Kol/2011-Essel Mining & Inds.Ltd A.Y.2007-08
On appeal by the assessee CIT(A) held that the expenditure was revenue expenditure and had to be allowed as deduction. 23. Aggrieved by the order of CIT(A) the Revenue has preferred the present ground of appeal before the Tribunal. 24. At the time of hearing the learned counsel for the assessee brought to our notice a decision of the Hon’ble ITAT, Kolkata Bench in the case of ACIT vs M/s. Ghanashyam Mishra in ITA No.122/Kol/2009 and ITA No.1521/Kol/2009 for A.Y.2005-06 and 2006-07 order dated 27.01.2014 wherein in respect of an identical payment made by an assessee engaged in the business of mining this Tribunal had allowed the deduction holding that the same as revenue expenditure. The following were the observations of the Tribunal. The question that was considered by the Tribunal in the aforesaid decision was as follows :- “ITA No.122/Kol/09 1) That under the facts and circumstances of the case, ld. CIT(A) had erred in law as well on facts by not considering that Net Present Value is a compensation, paid by the assessee to the Forest Deptt., for utilization of forest land for non-forest purpose. Hon’ble Supreme Court has categorized such payments as fees to be paid by the mine owners to the Forest Deptt., quantified on the basis of the period for which the mine owners taking out different ores, from the Mother Earth. Therefore the NV is directly linked to the earlier previous years which is not allowable as the business expenditure of the current financial year u/s.37(1).” ITA No.1521/Kol/2009 “1. That on the facts and circumstances of the case, ld. CIT(A) has erred in law as well as on facts in concluding(vide his order, page-14) that the assessee did not get any fresh right to mining by making payment of Rs.1,45,00,000/-. 2. That on the facts and circumstances of the case, ld. CIT(A) has erred in law as well as on facts in not considering the order of the Ministry of Environment & Forests (F.C. Division), dated 10.12.2005, circulated vide F.No.8-41/2003-FC, by virtue of which the assessee got right of mining over an additional 25 hector of broken up forest area., 3. That on the facts and circumstances of the case, ld. CIT(A) has erred in law as well as on facts in not considering the fact that the assessee paid Rs.1,45,00,000/- for getting the right of mining over an additional 25 hector of broken up forest area, which is evident from the letter of the DFO, Rairangpur Division vide Memo No.5114 dated 28.11.2005 and addressed to the Ch. Conservator of Forest, Bhubaneswar, Orissa.
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That on the facts and circumstances of the case, ld. CIT(A) has erred in law as well as on facts in not considering the fact that expenses made to acquire any right of business is a capital expenditure and hence, not allowable. 5. That on the facts and circumstances of the case, ld. CIT(A) has erred in law as well as on facts in applying the ratio of the case of Bikaner Gypsums Ltd.[(1991) 187 ITR 39, 49 (SC)] in the case of the assessee, which is not at all applicable. In that case the expense of shifting of Railway Track was incurred by the assessee for the smooth operation of their business.” 24.1. The Tribunal on the above issue held as follows :- “4. Ld. counsel for the assessee further stated that issue is covered in favour of assessee by the Tribunal’s decision of Co-ordinate Bench in the case of ACIT v. Rungta Sons (P) Ltd. in ITA No.933/Kol/2009 dated 05-08-2011, wherein the issue is discussed in para-12 to 15 as under:- “12, The question before us is as to whether the payment being NPV made by the assessee for obtaining forest clearance for mining on the forest area / land under the Forest (Conservation) Act, 1980 is allowable as rev expenditure or not. It is relevant to state that Hon’ble Apex Court in the case of T.N. Godavaram Thirumalpad (supra) has observed that forests are vital components to sustain life support system on the earth. Therefore, thee is an absolute need to take all precautionary measures when forest lands are sought to be directed for non-forest use. Hon’ble Apex Court stated that when forest land is used / diverted for non-forest purposes and there is consequential loss of benefits accruing from the forests, the User Agency of such land be required to compensate for the diversion. Hon’ble Apex Court observed that the User Agency be required to make payment of Net Present Value (NPV) of such diverted land so as to utilize the amounts so received for getting back in long run the benefits which are lost by such diversion. Hon’ble Apex Court vide its guidelines for determination of NPV directed the Ministry of Environment and Forests to formulate a scheme providing that whenever any permission is granted for change of use of forest land for non-forest purposes, and one of the conditions of the permission should be that there should be compensatory afforestation, then the responsibility of the same should be that of user agency. Hon’ble Apex Court observed that the money so received towards NPV should be used for natural assisted re-generation, forest management, protection, infrastructure development, wildlife protection and management, supply of wood and other forest produce saving devices and other allied activities. In the context, Hon’ble Apex Court observed that NPV will not fall under Article 110 or 199 or 195 of the Constitution. It was observed that such payments were levied for rendering service which the state considers beneficial in public
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interest. It is a fee which falls in entries 47 of List-III of 7th Schedule of the Constitution. The fund set up is a part of economic and social planning which comes within Entry 23 of List III and the charge which is levied for that purpose would come under Entry 47 of List III. In that context, it was held by Their Lordships that levy of NPV is a fee that means every mining agency using and converting forest land to non-forest purpose has to pay a fee for continuing carrying on of the business. We agree with ld. AR that non- payment of this NPV could lead to consequences, inter alia, to the stoppage of the business. The Hon’ble Apex Court ha held in the case of Bikaner Gypsums Ltd.-vs.- CIT (supra) at page 49 as under:- ‘Where the assessee has an existing right to carry on a business, any expenditure made by it during course of business for the purpose of removal of any restriction or obstruction or disability would be on revenue account, provided the expenditure does not acquire any capital asset. Payments made for removal of restriction, obstruction or disability may result in acquiring benefits to the business but that by itself would not acquire any capital asset.’ 13. We observe that by making this payment of NPV, no tangible asset come into existence. Further the said payment is a pre-condition to enable the assessee to carry on its mining activities and as such it is not a voluntary one That payment was made on the basis of direction given by the Divisional Forest Officer working in the Ministry of Environment and Forests, Government of India. Since the said payment of NPV being a statutory requirement and has to be paid by the assessee to continue to carry on its mining activities, we are of the considered view that the said payment is wholly and exclusively for the purpose of carrying on its business. Hence, incurring of such expenses should be considered as having direct nexus with the business activities of the assessee. By making this payment of NPV, the assessee has not got any fresh right to mining, but the said payment has been made to overcome any restriction or obstruction or disability that has arisen in continuing of mining business. We are of the considered view that since it is a one-time payment, it could not be considered as capital in nature. Hon’ble Apex Court has held in Empire Ju9te Company Ltd. –vs-CIT [124 ITR 1] that there may be cases where expenditure, even if incurred for obtaining an advantage of any enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. Hon’ble Apex Court observed that if the advantage consisted of merely in facilitating the concerned assessee’s trading operations or enabling the management and conduct of the assessee’s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, expenditure would be on
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revenue account, even though the advantage may be endured for an indefinite future. 14. We observe that in the case before us, assessee has got right to carry on mining operations in 1982 and 1985, i.e. long time ago before the assessee was asked to pay NPV as per direction of Hon’ble High Court and consequently assessee was compelled to make the payment to facilitate to continue its mining business. Therefore, the above decision of Hon’ble Apex Court in the case of Bikaner Gypsums Limited (supra) squarely applies to the case of assessee and it could not be capital in nature. 14.1 A similar issue also came before Hon’ble Karnataka Bench of ITAT in the case of National Aluminium Co. Ltd.-vs.-DCIT [101 TTJ (CTK) 949]. In the said case, assessee-company debited an amount of Rs.6.20 crores towards contribution to Minerals Exploration Fund set up by Government of India. The said payment was required on the direction of State Pollution Control Board and Ministry of Environment and Forests as a condition to renew assessee’s clearance certificate. The Fund was set up for peripheral development works. It was held that the said payment is not a voluntary one and it is a payment on the basis of the direction given by the Government of India, Ministry of Mines, under which the assessee-company comes. When a payment is made as per specific direction of Government of India, it cannot but be in the business interest of the assessee-company to abide by such directions of the Government of India. Accordingly, this payment is a statutory requirement and the expenditure has been considered wholly and exclusively for the purpose of business and has got a direct connection with the business activity of the Company. It was held that since the assessee-company was following mercantile system of accounting and the provisions had been made on the basis of Office order, the same was rightly accounted for in the concerned yea o accruing of the liability and it was held that the same was allowable as business expenditure under section 37(1) of the Act. Special Bench, ITAT, Kolkata in Peerless Securities Limited –vs- Joint Commissioner of Income Tax [93 TTJ 325 (SB)] held that if the advantage consists of merely in facilitating the assessee’s trading operations or enabling the management and conduct of assessee’s business to be carried on more efficiently or more profitability while leaving the fixed capital untouched, expenditure would be on revenue account, even though the advantage may endure for an indefinite future. Ahmedabad Bench, ITAT in Joint Commissioner of Income Tax –vs.- Dewerson Industries Limited [2005 TIOL 236 (AHD.)] held that payments of similar nature to Ministry of Forest and Environment, Government of Gujarat were allowable as business expenditure. ITAT, Mumbai Bench in Industrial development Bank of India –vs.- Deputy Commissioner of Income Tax [91 ITD 34] held that expenditure by assessee in accordance with statutory ITA No.352/Kol/2011 & ITA No.589/Kol/2011-Essel Mining & Inds.Ltd A.Y.2007-08
guidelines is allowable business expenditure. Hon’ble Calcutta High Court in CIT –vs.- Rungta Mines Pvt. Lt. [205 ITR 335] held that where a trader, in his capacity as a trader, by compulsion of statutory obligation, has to incur an expenditure as a compelling requisite for carrying on his trade, the expenditure resulting in a capital asset in the hands of a third party, is to be taken as revenue expenditure because no asset arises to the trader by reason of such expenditure. It was further held that where law imposes on the assessee, an obligation to incur expenses for being permitted to pursue its trading activity, the expenditure would be an outgoing from the profits of the trade. 15. In view of the above decision and the facts of the case before us, we hold that ld. CIT(Appeals) has rightly held that the above expenditure of Rs.3,95,56,500/- paid by the assessee as NPV to enable the assessee to carry on its mining business is revenue in nature, which is allowable as business expenditure under section 37(1) of the Act. Therefore, we uphold the order of ld. CIT(Appeals) by rejecting Ground No.1 of the appeal taken by the Department. Hence, Ground No.1 is rejected.” Similarly, this issue is also covered by the Co-ordinate Bench decision in the case of ACIT v. Freegrade & Co. Ltd. in ITA No. 934/Kol/2009 dated 05-08- 2011. 5. On the other hand, Ld. SR-DR has not denied that the Co-ordinate Bench decision is not applicable to the present facts of the case but he relied on the decision of Hon’ble Supreme Court in the case of T.N. Godavarman Thirumulpad v. Union of India and Others (2006) 1 SCC dated 26-09-2005.According to Ld. SR-DR the NPV is considered as fee. We find that this issue has been considered by this Co-ordinate Bench decision of NPV paid by assessee is held to be revenue expenditure, this liable u/s 37(1) of the Act. Once, this the position issue is squarely covered in favour of assessee and we find no reason to interfere with the order of CIT(A), hence, both the appeals of Revenue are dismissed.” 24.2. The aforesaid ruling was followed in Assessee’s own case in ITA No. 56/Kol/2010 for AY 2006-07 order dated 2.3.2016 on identical issue. Respectfully following the decision of the Tribunal, in Assessee’s own case, we uphold that order of CIT(A) and dismiss ground No.1 raised by the revenue. 25. Ground no.2 raised by the revenue read as follows :- “2. That on the facts and circumstances of the case, Ld. CIT(A)-VJ, Kolkata has erred in law as well as ·on facts of the case by deleting the disallowance u/s.14A of Rs.,94,14,773/- and computing disallowance u/s.14A at Rs.3,99,203/-, @1% of exempt income i.e., Rs.3,99,20,387/- without any basis and logic, which is more so as in the ITA No.352/Kol/2011 & ITA No.589/Kol/2011-Essel Mining & Inds.Ltd A.Y.2007-08
case of CIT vs. Hero Cycles, November 4, 2009 (P&H) it was held that even if the funds are merged in common kitty, the disallowance u/s.l4A is justified and in the case of Godrej & Boyce Manufacturing Co. Ltd. Certain principles have been laid down to compute disallowance u/s.14A.”
The assessee earned dividend income of Rs.3,99,20,387/- The AO invoked the provision of section 14A with Rule 8DD(2)(ii) and (iii) of the Rules and disallowed a sum of Rs.5,94,14,773/- as expenditure incurred to earn exempt dividend income. 27. On appeal by the assessee the CIT(A) held that Rule 8D of the Rules is not applicable for A.Y. prior to A.Y.2008-09 as held by the Hon’ble Bombay High Court in the case of Godrej & Boyce and Manufacturing Co. Ltd. Vs DCIT (2010)328 ITR 81 (Bom) and further held that in respect of A.Y. prior to A.Y.2008-09, disallowance u/s 14A of the Act should estimated on a reasonable basis. The CIT(A) thereafter held that no interest expenses can be disallowed as the assessee had sufficient own funds. With reference to the disallowance of other expenses the CIT(A) held that disallowance of 1% of the exempt income would be reasonable and in this regard placed reliance on the decision of the Hon’ble ITAT, Kolkata Bench. The following were the relevant observations of the CIT(A) in this regard :- “In the above decision Hon'ble Bombay High Court has said that though Rule 8D will not apply to assessment years prior to assessment year 2008-09 but for earlier years the disallowance u/s. 14A should be estimated on a reasonable basis. In the case of the assessee we find that as on 31.03.2007 the total investment are about Rs.295.9 crore but as against this the share capital and reserves and surplus are about RS.1734 crore. Therefore, it can be assumed that the surplus funds of the assessee on which it is not required to pay interest are deployed in the investments from which exempt income is earned. Since borrowed funds prima-facie do not appear to be invested in the investments therefore no disallowance can be made u/s.14A out of the interest expenses. As regards the administrative and other expenses which can be ascribed to the exempt income it is seen that in recent judgment Hon'be ITAT, Kolkata has decided that one percent of the exempt income can be taken as related to administrative expenses. The assessee has already disallowed one percent of the dividend income amounting to Rs.3,99,203/- in its computation of income. Therefore, no further disallowance is required to be made u/s 14A. Hence I delete the disallowance of Rs.5,94,14,773/- made by the A.O. on this ground. “ Aggrieved by the order of CIT(A) revenue has preferred ground no.2 before the Tribunal.
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We have heard the submissions of the ld. Counsel for the assessee and ld. DR. The ld. DR relied on the order of AO while the ld. Counsel submitted that ITAT, Kolkata Bench has been taking a consistent view that 1% of the exempt income would be appropriate and disallowance of other expenses prior to A.Y.2008-09 and this view has also been held by the decision of Hon’ble Calcutta High Court. The following decisions were referred to in this regard : 1. Himtaj Consultants Pvt. Ltd. vs. I.T.O. (ITA No. 721/Ko1l2007- AY. 2004-05) Order dated 27.04.2007. 2. CHNHS Association vs. ACIT(ITA No.74/KoI/2008-AY.2004-05) Order Dated 19.02.2008. 3. I.T.O. vs. M/s S.P.S. Securities (P) Ltd. (ITA NO.123/KoI/2010- AY.2000-01 Order dated 19.08.2010 He further pointed out that the Hon’ble Calcutta High Court in the case of CIT Vs. M/S.R.R.Sen & Brothers Pvt.Ltd. in GA No.3019 of 2012 in ITA No.243 of 2012 dated 4.1.2013 held that computation of 1% of exempt income as disallowance u/s.14A of the Act was proper. The learned DR relied on the order of the CIT(A) and submitted that the disallowance in any case has to be 1% of the exempt income. 29. We have given a very careful consideration to the rival submissions and we are of the view that in the light of the decisions referred to by the ld. Counsel for the assessee the order of CIT(A) is just and proper and calls for no interference. Accordingly ground no.2 raised by the revenue is dismissed. 30. In the result the appeal of the revenue is dismissed. 31. In the result the appeal of the assessee is partly allowed while the appeal of the revenue is dismissed. Order pronounced in the Court on 20.05.2016. Sd/- Sd/-
[M.Balaganesh ] [ N.V.Vasudevan ] Accountant Member Judicial Member Dated : 20.05.2016. [RG PS]
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Copy of the order forwarded to: 1.Essel Mining & Industries Ltd., Industry House, 18th Floor, 10, Camac Street, Kolkata-700017. 2.Addl.CIT, Range-5, Kolkata 3. CIT(A)-VI, Kolkata 4. CIT-II, Kolkata. 5. CIT(DR), Kolkata Benches, Kolkata. True Copy By order,
Asst. Registrar, ITAT, Kolkata Benches Kolkata Benches
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