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Income Tax Appellate Tribunal, BENCH “A”, KOLKATA
Before: Hon’ble Shri N.V.Vasudevan, JM & Shri Waseem Ahmed, AM]
This is an appeal by the Revenue directed against the order dated 27.10.2009 of CIT(A)- V, Kolkata relating to A.Y.2006-07.
Ground No.1 raised by the revenue reads as follows :- ” 1. That the Ld.CIT(A) erred on fact as well as law by deleting the addition of 'Net Present Value' (NPA) of Rs, 1,68,94,820/-, although it is capital in nature and hence cannot be allowed u/s. 37(1) of the I.T. Act, 1961. The Honble Supreme Court has levied it on mine owners as fees/compensation for the earlier years during which they have taken out 'ores' from 'Mother Earth'.”
The Assessee is a company. It is engaged in the business of raising of ore, manufacture of Ferro Alloys. The assessee is also engaged in trading of iron ore and mining ore. In the course of assessment proceedings AO noticed that the assessee had claimed deduction of a sum of Rs.1,68,94,820/- 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.1,68,94,820 towards Net
M/s. Essel Mining & Industries Ltd. A.Yr.2006-07 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 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.
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
M/s. Essel Mining & Industries Ltd. A.Yr.2006-07 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.
5. 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 an 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.
On appeal by the assessee CIT(A) held that the expenditure was revenue expenditure and had to be allowed as deduction.
Aggrieved by the order of CIT(A) the Revenue has preferred the present ground of appeal before the Tribunal.
8. 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 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 M/s. Essel Mining & Industries Ltd. A.Yr.2006-07 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).” “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.
4. 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.”
8.1. 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 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
M/s. Essel Mining & Industries Ltd. A.Yr.2006-07 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 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 revenue account, even though the advantage may be endured for an indefinite future.
M/s. Essel Mining & Industries Ltd. A.Yr.2006-07 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 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.
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.
M/s. Essel Mining & Industries Ltd. A.Yr.2006-07 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 dated 05-08-2011.
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.”
8.2. Respectfully following the decision of the Tribunal we hold that order of CIT(A) and dismiss ground No.1 raised by the revenue.
Ground No.2 raised by the revenue reads as follows :- “2. That the Ld. CIT(A) erred on fact as well as law by deleting the addition of Rs.1,34,08,905/- which was utilised for starting a new project, later on abandoned although the decision of Honble Calcutta High Court in the case of Kanoria Chemicals & Industries vs. CIT (1995) 78 Taxmann 455 (Cal.) squarely applies in it. “
The assessee had claimed in the profit and loss account as deduction while computing income from business a sum of Rs.1,34,08,905/-. The auditor in the accounting policies and notes on accounts highlighted the aforesaid expenditure as incurred by the assessee towards exploration of various new projects by the assessee which have been charged to the profit and loss account and cannot be allowed as deducted treating the same as revenue expenditure. The assessee pointed out that a tender was invited by Eastern Coalfields Ltd. (ECL) for assisting ECL in expansion of production of its Rajmahal OCP and corresponding over burden removal. The tender was an International Competitive Bidding invited by the ECL. For the purposes of Bidding the Assessee had to incur expenses aggregating to Rs.l,34,08,905 by way of payments to Consultants, Travelling and other related expenses. According to the Assessee, since the Assessee was already engaged primarily in the business of mining and sale of iron ore in domestic market as well as overseas, its act of bidding of tender
M/s. Essel Mining & Industries Ltd. A.Yr.2006-07 was in the process of carrying on its day to day business operations. The Assessee submitted before the Assessing Officer that submitting tenders and bids in the field of mining and corresponding over burden removal, was a highly sophisticated technical task for which the Assessee had to incur substantial expenditure before submitting the bid. It was also submitted by the Assessee that incurring of the expenses towards payments to Consultants who acted as advisers and assisted in the preparation of tender documents, their travelling expenses and other related expenses, was wholly of revenue nature. By incurring those expenses the Assessee had neither acquired any capital asset nor had acquired any benefit of enduring nature. The Assessee however was not successful in obtaining the bid. The Assessee submitted that though it had not been successful in obtaining the bid, the relevant expenditure was allowable as revenue expenditure.
10.1. The Assessing Officer however was of the view that expenditure for any new project could not be treated as revenue expenditure and that should be capitalised as preliminary expenses. According to the Assessing Officer the expenses had been incurred for estimating capital and operating costs towards bidding for the contract. He therefore disallowed the claim of the Assessee for deduction of the aforesaid sum as revenue expenditure.
On appeal by the assessee, the CIT(A) deleted the addition made by AO observing as follows :- “I have gone through the A/R's submissions and perused the views taken in the above- referred Court/Tribunal decisions as regards the allowability of expenses, towards bidding. I asked the AIR to submit the details of expenses aggregating to Rs.13,408.905 as well as the relevant evidences. On going through the aforesaid details I observe that the appellant's act of bidding of tender was in the process of carrying on its day to day business operations. By incurring the expenses on Travelling, consultations, etc. in relation to the bidding the appellant had neither acquired any capital asset nor it had acquired any benefit of enduring nature. It is also to be noted that failure to secure a bid does not make the expenditure disallowable. In the Assessment Order the AO treated the entire expenditure allegedly as an expenditure for starting a· new project and on the basis of his such observation he considered the expenditure as allegedly of capital nature. As explained by the A/R the three Court decisions as referred to by the AO are distinguishable from the appellant's case and so those can be applied in the appellant’s case. I am inclined to accept the appellant’s explanations that the expenditure incurred
M/s. Essel Mining & Industries Ltd. A.Yr.2006-07 by the appellant for bidding should be considered as having been incurred for exploring the possibility of extending the appellant’s existing mining business and consequently the entire expenditure aggregating to Rs.13,408,904 should be allowed irrespective of the fact that the appellant ultimately failed to secure the bidding. Accordingly, I delete the disallowance of Rs.13,408,904.”
The learned DR reiterated the stand of the AO as reflected in the order of assessment. The learned counsel for the assessee relied on the order of CIT(A).
We have considered the rival submissions. At page 97 of the assessee’s paper book a copy of the tender for International Competitive Bidding floated by Eastern Coalfield Limited has been filed. A perusal of the same shows that Eastern Coalfield Limited had invited sealed tenders in three parts from technically, financially sound interested parties from India and abroad with relevant experience in mining and extraction of coal for assisting ‘Eastern Coalfields Limited in expansion of the coal production of Rajmahal OCP from 10.5 MTY level to 17 MTY capacity level and corresponding overburden removal. It is a plea of the assessee that since the assessee was engaged primarily in the business of mining and sale of iron ore had explored the possibility of bidding for the aforesaid tender. In this regard the assessee appointed consultants undertook travelling and incurred other related expenses and the details of these expenses are given at page 26 of the assessee’s paper book. The same had been filed by the assessee before AO. The AO had not disputed the genuineness and incurring of the expenditure, nor the purpose for which the same were incurred. He proceeded on the assumption that this expenditure was in connection with supporting a new project which was ultimately abandoned. He primarily placed reliance on the decision of the Hon’ble Calcutta High Court in the case of Kanoria Chemicals & Industries Ltd. Vs CIT (1995) 78 Taxman 455 (Cal) wherein it was held that expenditure incurred in connection with supporting a new project which had to be abandoned is of capital in nature. The AO also placed reliance on the decision of the Hon’ble Gujarat High Court in the case of Saurashtra Cement & Chemical Industries Ltd. Vs CIT 196 ITR 237 and CIT vs Ambica Mills Ltd. 236 ITR 921. In both the decision it was held that the expenditure incurred for feasibility report for putting up a new project which did not materialize is a capital expenditure. This conclusion of the M/s. Essel Mining & Industries Ltd. A.Yr.2006-07 CIT(A) in our view was not correct for the reason that the assessee was already engaged in the business of mining and was exploring the possibility of doing the same business by way of expansion of the existing business. In the decisions referred to by AO, new projects were sought to be explored by Assessee unconnected with the business which the assessee was carrying on. Therefore those decisions were not applicable to the facts of the assessee’s case. The facts of the assessee’s case are identical to the decision rendered by the Hon’ble Bombay High Court in the case of CIT-5 vs M/s. Essar Oil Ltd in of 2006 dated 16.10.2008. In the aforesaid decision the Hon’ble Bombay High Court took a view that the expenditure of a similar nature was revenue expenditure. The assessee in that case was in the business of operation of rigs for extraction of oil. The assessee explored the chances of development in the field of oil exploration for which it had to submit tenders and incur expenditure in that regard. The assessee was not a successful bidder. The expenditure in question was disallowed by the revenue by treating them as capital expenditure. The Hon’ble Bombay High Court upheld the order of Tribunal holding that the expenditure was revenue expenditure. In our view the facts of the aforesaid case are identical to the case of the assessee. Therefore the conclusion drawn by the CIT(A) in our view is correct and does not call for any interference. Accordingly ground no.2 by the revenue is dismissed.
Ground No.3 raised by the revenue reads as follows :-
“3. That The Ld. CIT(A) erred on fact as well as law by deleting the addition of bad debts written off' although it does not qualify the provisions of Sections 36(2) read with Section 36(l)(vii) of the Income tax Act, 1961.”
15. The assessee claimed as deduction a sum of Rs.9,09,900/- under the head bad debts written off. The AO found that the following amounts cannot be allowed as deduction on account of bad debts written off : (i) Advances against expenses Rs.5,898/- (ii) Security Deposit Rs.10,000/- (iii) Outstanding Advances Rs.6,430/-
M/s. Essel Mining & Industries Ltd. A.Yr.2006-07 (iv) Loans against computer and vehicle Rs.38,748/- Total Rs.60,976/- As these expenditures have never been treated as income in the credit side of Profit and Loss Account, therefore, Rs.60,976/- was not allowed as bad debts written off as per section 36(2) read with section 36(1)(vii) of the Income Tax Act, 1961 (Act).
On appeal by the assessee, the CIT(A) found that these were payments made by the assessee in the course of its business and related to the business of the assessee in the earlier years and services for which these payments were made can neither be procured by the assessee nor the assessee could get refund for the aforesaid sum. These were written off and charged to the profit and loss account. The assessee thus pointed out that it was an allowable deduction u/s 37(1) of the Act though it has been claimed in the nomenclature bad debts written off. The assessee thus pointed out that reference made by AO to the provision of section 36(1)(vii) of the Act r.w..s. 36(2) of the Act was not relevant.
CIT(A) on consideration of the aforesaid submissions deleted the addition made by AO by observing as follows :- “I have gone through the AJR's submissions and also perused the Assessment Order. It is observed that in the Assessment Order the AO has just noted that since the specified sums aggregating to Rs.60,976 had not been treated as income in the credit side of the appellant's Profit & loss Account, those were not to be allowed as Bad Debts Written off u/s 36(2) read with section 36(1)(vii). I am inclined to accept the appellant's submissions that the allowability of the concerned sums aggregating to Rs.60,976 should be considered u/s 37(1) and not u/s 36(1 )(vii)/36(2). These write offs were actual loss suffered by the appellant in respect of certain advances made by it earlier in course of its business and accordingly, those should be considered as having been wholly and exclusively incurred in connection with the appellant’s business. So the disallowance of Rs.60,976 made by the AO is deleted.”
Aggrieved by the order of CIT(A) the revenue has preferred ground no.3 before the Tribunal.
M/s. Essel Mining & Industries Ltd. A.Yr.2006-07 19. We have heard the learned DR, who relied on the order of AO. We are of the view that the amount in question was admittedly connected with the business of the assessee and the sum in question was spent by the assessee for the purpose of business. The assessee could neither get refund of the aforesaid sums nor the services for which the aforesaid payments were made. We are therefore of the view that the CIT(A) rightly treated these expenditure as one incurred for the purpose of business of the assessee and allowable as deduction u/s 37(1) of the Act. We do not find any ground to interfere in the order of CIT(A). Consequently ground no.3 raised by the revenue is dismissed.
Ground No.4 raised by the revenue reads as follows :- “4. That the Ld, CIT(A) erred on fact as well as law by deleting the addition on or period' expenses of Rs. 2,03,474/-, although the assessee is maintaining its books of accounts on mercantile basis and there is no provision under I.T.Act 1961 to allow 'prior period' expenses. “
The assessee incurred Software expenses aggregating to Rs.11,30,951. On being asked by the Assessing Officer the Assessee submitted the details in respect of the Software expenses. The Assessing Officer found from the details of the aforesaid expenditure furnished by the Assessee that two sums of Rs.3,474 towards Assets utilisation charges and Rs.2,00,000 towards Consultancy charges for development, customisation and implementation of ERP, were in relation to earlier year and so those two sums aggregating to Rs.2,03,474 was to be disallowed as prior period expenses.
Before CIT(A), the Asssessee pointed out that the Assessing Officer failed to appreciate that advance payment of Rs. 2,00,000/- was made in earlier year towards implementation of ERP and the assessee rightly claimed the total expenditure of Rs.10,96,214/- on completion of implementation of ERP in the assessment year 2006- 07.
The CIT(A) deleted the addition made by AO observing as follows :- I have gone through the submissions made by the A/R as well as the details submitted by him in respect of the Software expenses aggregating to Rs.1,103,591. I observe that M/s. Essel Mining & Industries Ltd. A.Yr.2006-07 Rs.2,00,000 towards Consultation Charges had been paid by the appellant as advance in the Financial Year 2004-05 and on completion of the process of implementation of ERP in the Financial Year 2005-06 the said advance was adjusted as a part of Software Expenses. This is a proper system of accounting under the Mercantile method of accounting and hence this should not be considered as any alleged "earlier year expenditure". Accordingly I delete the disallowance of Rs.200,000 made by the AO and hold the said sum of Rs.200,000 as allowable in the Assessment Year 2006-07. As regards the other sum of Rs.3,474, in view of the fact that the liability for the said sum had been settled in the Financial Year 2005-06, I accept the appellant's submission that the sum of Rs.3,474 should be considered as allowable in the Assessment Year 2006-07. Accordingly the disallowance of Rs.3,474 is deleted.”
Aggrieved by the order of CIT(A) revenue has preferred ground no.4 before the Tribunal.
After hearing the rival submissions we are of the view that the order of CIT(A) does not call for any interference. The sum of Rs.2,00,000/- was incurred as consultation charges paid as advance in the financial year 2004-05 for implementation of ERP and in the financial year 2005-06 was implemented and advance payment adjusted as part of software expenses. The accrual of expenditure was therefore rightly shown in A.Y.2006-07 by the assessee and also a sum of Rs.3,474/- was treated as allowable in A.Y.2006-07, when the sum in question was ultimately settled. We do not find any merits in ground no.4 and the same is accordingly dismissed.
In the result the appeal of the revenue is dismissed.
Order pronounced in the court on 02.03.2016.