DCIT,CIRCLE-6, KOLKATA, KOLKATA vs. M/S. INTEGRATED COAL MINING LTD, KOLKATA

SHRI M.BALAGANESH, AM

These appeals of the assessee as well as the revenue arise out of the common order of the Learned CIT(A), VI, Kolkata in Appeal No.1999/CIT(A)-VI/R-6/2010- 11/Kol dated 18-05-2012 against the order of assessment framed by the Learned AO u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’).

ITA No. 1146 / 2012 – Assessee Appeal 2. The first issue to be decided in this appeal is as to whether the disallowance u/s 14A of the Act could be made in the facts and circumstances of the case.

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2.1. The brief facts of this issue is that the assessee has earned dividend income amounting to Rs. 33,61,665/- during the assessment year under review. The breakup of the same is as below:- Dividend from CESC Ltd - 26,60,000

Dividend from UTI Mutual Fund which was Purchased and sold during the year - 7,01,665 ---------------- 33,61,665

The assesee is holding investments as follows:- 31.3.08 31.3.07 Long Term Investments Investment in Noida Power Co Ltd 8,46,97,380 8,46,97,380 Investment in Crescent Power Ltd (Subsidiary) 56,49,99,940 29,99,99,940 Investment in RPG Power Trading CO Ltd 5,00,000 -

Current Investments Investment in CESC Ltd 26,98,92,628 - Investment in Reliance Power Ltd 11,28,150 - Less: Change in carrying value of current investment (3,30,924) - ------------------- ---------------- 92,08,87,174 38,46,97,320 ------------------- ----------------

2.2. Out of the aforesaid investments, the assessee had earned dividend only from CESC Ltd and from UTI Mutual fund which was purchased and sold during the year. The assessee voluntarily disallowed a sum of Rs. 29,760/- u/s 14A of the Act in the return of income. The Learned AO resorted to ignore this disallowance without adducing any reason and without recording any satisfaction in terms of section 14A read with Rule 8D(1) as to why the disallowance made by the assessee is incorrect, and directly applied Rule 8D (2) by applying second and third limb of the said Rules and made disallowance u/s 14A of the Act in the sum of Rs. 44,91,468/-. The relevant operative portion of the assessment order for framing this addition is reproduced herein below:-

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“The assessee company has earned exempt income i.e. dividend of Rs.33,61,665/- during this financial year relevant to the assessment year 2008-09 for which the assessee company offered Rs.29,760/- as disallowance u/s. 14A. The submission of the assessee company is not acceptable. The disallowance u/s. 14A read with rule 8D is calculated under:-\ Opening Value of Investments Rs. 38,46,97,320/- Closing Value of Investments Rs.92,08,87,174/- Total Rs.130,55,84,494/- Average Value Rs. 62,27,92,247/-……[B] Opening Value of assets Rs.149,88,20,757/- Closing Value of assets Rs.121,75,81,854/- Total Rs.271,64,02,611/- Average Value of assets Rs.135,82,01,305/-…..[C]

2.3. On first appeal, the Learned CITA observed that the Learned AO had derived satisfaction by mentioning that the assessee has not debited any administrative charges or interest expense in respect of exempted income. Therefore he has expressed that the claim of expenditure by the assessee is not correct.

2.3.1. He also held that disallowance need not be proportionate to the earning of dividend and it need not be co-related to the dividend since there is no direct relation between the expenditure incurred by the assessee on investment and dividend from other companies received by assessee. He further observed that in some years the dividend may be more than expenditure and in some years it may be less as enough dividend may not be paid by other companies due to lesser profits. He also observed that the companies in which assessee has made investments are almost from the same group of management and the payment of dividend is dependent on so many factors including the rate at which the same management (group) likes to declare dividend.

2.3.2. He further observed that the assessee may have taken the loans for specific purposes and none of the loan money taken for business purposes may have been utilised for the investments. He observed that there is no separate account maintained

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by the assessee for investments in the form of bank account or to show that only the capital funds are being invested in the investments. The funds are used from the common kitty. There may not be any immediate correlation between the funds taken for loan and investments in the shares.

2.3.3. He observed that there is no presumption provided in the Act that investments were made out of own funds of the assessee if the assessee has interest free loans, his own capital as share capital, reserves and surpluses and interest bearing loans and is earning exempt and taxable income.

2.3.4. The Learned CITA relied on the following decisions of Jurisdictional High Court in support of his contentions:- ISG Traders Ltd vs CIT reported in 2011- TIOL- 621-HC-KOL-IT “12. In the case before us, the original proceedings being taken in appeal before the Tribunal and the Section 14A having been given retrospective operation in case of pending assessment proceedings, the same would be applicable to the appeal before the Tribunal and also in this appeal before us and thus, the Tribunal below did not commit any illegality in applying the said provisions to the pending proceedings. Thus, the approach of the Assessing officer to work out the pro- rata interest expenditure as relatable to earning of dividend was quite in conformity with the provisions of Section 14A of the Act and we do not find any reason to disturb the said order in the light of the amended provisions of Section 14A of the Act. We, therefore, find no substance in the aforesaid contention of Mr. Khaitan that the Revenue cannot get the benefit of Section 14A of the Act and consequently, dismiss this appeal by answering the formulated question in the negative and against the assessee.”

Dhanuka & Sons vs CIT reported in (2011) 12 taxmann.com 227 (Cal) “9. In our opinion, the mere fact that those shares were old ones and not acquired recently is immaterial. It is for the assessee to show that source of acquisition of those shares by production of materials that those were acquired from the funds available in the hands of assessee at the relevant point of time without taking benefit of any loan. If those

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shares were purchased from the amount taken in loan, even for instance, five or ten years ago, it is for the assessee to show by the production of documentary evidence that such loaned amount had already been paid back and for the relevant assessment year, no interest is payable by the assessee for acquiring those old shares. In the absence of any such materials placed by the assessee, in our opinion, the authorities below rightly held that proportionate amount should be disallowed having regard to the total income and the income from the exempt source. In the absence of any material disclosing the source of acquisition of shares which is within the special knowledge of the assessee, the assessing authority took a most reasonable approach in assessment. “

Technopak Advisors (P) Ltd vs Addl CIT reported in (2012) 18 taxmann.com 146 (Del ITAT) wherein it was held that where investment has been made in shares, which did not yield any dividend in the year under consideration, the expenditure incurred for earning the income is deductible notwithstanding the fact that no such income has been earned. It has been held as under:- “3. We have considered the facts of the case and submissions made before us. Section 14A(1) speaks about disallowance of expenditure incurred in relation to income which does not form part of the total income. The first argument of the learned counsel is that only those investments can be taken into account for the purpose of Rule 8D from which income has been earned. No specific argument has been advanced in this behalf. We find that sec. 57(iii) deals with any other expenditure ( not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning the income. In a number of cases decided under this provision, it has been held that actual earning of the income is not sine qua non for deciding the deduction of expenditure laid out or expended wholly or exclusively for the purpose of earning the income. Thus, where investment has been made in shares, which did not yield and dividend in the year under consideration, the expenditure incurred for earning the income is deductible notwithstanding the fact that no such income has been earned. We are of the view that ratio of these cases will apply mutatis mutandis under sec. 14A of the Act also while ascertaining the expenditure incurred for earning tax-free income from investment.”

Cheminvest Ltd vs ITO reported in (2009) 121 ITD 318 (Del ITAT) - what one has to see is whether any expenditure has been incurred by an assessee in relation to an

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income that does not form part of total income of the assessee under this Act, and if the answer is in affirmative then that expenditure cannot be allowed. It held as under: “43. What one has to see is whether any expenditure were incurred by an assessee in relation to an income that does not form part of total income of the assessee under this Act, and if the answer is in affirmative then that expenditure cannot be allowed irrespective of the fact that it was allowable under different provisions of the Act where an different phraseology is used in allowing that expenditure as the focus has to on disallowance within parameters of section 14A, an overriding provision over allowance provisions. It would result in disallowance even of no income has resulted or made or earned by the assessee in the year under consideration. We also make it clear that the disallowance has to be of the entire, amount of the expenditure so related and, as claimed in revenue’s appeal, cannot be reduced by the receipt of interest which has no relation to such expenditure. “

2.3.5. Accordingly, he held that the action on of the Learned AO in adopting Rule 8D(2) of the Rules is in accordance with law. Aggrieved, the assessee is in appeal before us on the following grounds:- “1(a) That on the facts and in the circumstances of the case, the learned CIT(Appeals) erred in confirming the action of the Assessing Officer in invoking Rule 8D to the Income-tax Rules, 1962 ( the ‘Rules’) for the purpose of arriving at the amount disallowable u/s. 14A of the Income-tax Act, 1961 ( the ‘Act’.) 1(b) That the learned CIT(Appeals) erred in confirming the action of the Assessing Officer in disallowing an aggregate further amount of INR 44,91,468/- u/s. 14A of the Act by applying Rule 8D to the Income-tax Rules, 1962. 1( c) That the learned CIT(Appeals) erred in observing that the Assessing Officer has applied Rule 8D and has derived satisfaction by mentioning that the appellant has not debited any administrative charge of interest expenses in respect of exempted income. “

2.4. The Learned AR argued that the borrowings in the form of term loan from bank had come down by Rs 2 crores during the year. Hence the bank term loan could not have been utilized for making investments. A sum of Rs 7 crores was received as

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unsecured loan by the assessee at the fag end of the year which was admittedly utilized only for the purpose of business and not for making any investments by the assessee. No interest was debited in respect of this unsecured loan of Rs 7 crores. He argued that the Learned AO made this disallowance as if the same is automatically to be applied from Asst Year 2008-09 which is quite evident from the assessment order which is reproduced hereinabove. He argued that the assessee has got sufficient own funds to make these investments and borrowed funds were admittedly not utilized for the same.

2.4.1. He argued that the finding given by the Learned CITA that the Learned AO had recorded his satisfaction in terms of Rule 8D(1) of the Rules is based on incorrect facts. He argued that the recording of satisfaction in terms of section 14A of the Act read with Rule 8D(1) of the IT Rules is mandatory for the Learned AO before resorting to Rule 8D(2) . In this connection , he relied on the following decisions in support of his contentions:-

• CIT vs Ashish Jhunjhunwala in G.A.No. 2990 of 2013 in ITAT No. 157 of 2013 dated 8.1.2014 rendered by Calcutta High Court • CIT vs R.E.I. Agro Ltd in GA 3022 of 2013 in ITAT 161 of 2013 dated 23.12.2013 rendered by Calcutta High Court

2.4.2. Alternatively, he argued that the investments that did not yield any dividend income during the year needs to be excluded for the purpose of disallowance u/s 14A of the Act. He stated that the dividend was received only from investment with CESC Ltd which is outstanding at the balance sheet date and other investments did not yield any dividend income.

2.4.3. The Learned AR argued that alternatively investments made in subsidiaries should be construed as strategic investments and hence not to be considered for the purpose of disallowance u/s 14A of the Act.

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2.5. In response to this, the Learned DR vehemently supported the orders of the lower authorities.

2.6. We have heard the rival submissions and perused the materials available on record including the various case laws relied upon by both the sides. We find from the facts of the instant case that the Learned AO has not examined the accounts of the assessee and there is no satisfaction recorded by the Learned AO about the correctness of the claim of the assessee and without the same , he invoked Rule 8D of IT Rules. While rejecting the claim of assessee with regard to expenditure in relation to exempt income, the Learned AO has to indicate cogent reasons for the same. We find that the Learned AO had straight away embarked upon computing disallowance under Rule 8D(2) of the Rules. We find that the case laws relied upon by the Learned AR on the decision of the Jurisdictional High Court are directly on this point and in favour of the assessee.

CIT vs Ashish Jhunjhunwala in G.A.No. 2990 of 2013 in ITAT No. 157 of 2013 dated 8.1.2014 rendered by Calcutta High Court

" While rejecting the claim of the assessee with regard to expenditure or no expenditure, as the case may be, in relation to exempted income, the AO has to indicate cogent reasons for the same. From the facts of the present case, it is noticed that the AO has not considered the claim of the assessee and straight away embarked upon computing disallowance under Rule 8D of the Rules on presuming the average value of investment at ½% of the total value. In view of the above and respectfully following the coordinate bench decision in the case of J.K. Investors (Bombay) Ltd., supra, we uphold the order of CIT (A)".

CIT vs R.E.I. Agro Ltd in GA 3022 of 2013 in ITAT 161 of 2013 dated 23.12.2013 rendered by Calcutta High Court

“The Assessing Officer also disallowed the expenditure under section 14A of the Income Tax Act, 1961 without first recording that he was not

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satisfied with the correctness of the claim as regards the claim that “no expenditure” was made by the assessee.

Challenging the order of the tribunal, the present appeal has been filed.

We have heard Mr.Bhowmik and are of the opinion that no point of law has been raised. Therefore, this appeal is dismissed”.

The aforesaid two decisions of the Jurisdictional High Court are binding on this tribunal and hence the case laws addressed by the Learned CITA in his order are not considered in this order. We also find that one of the decisions relied upon by the Learned CITA is that of Jurisdictional High Court in the case of Dhanuka & Sons (supra)). We find that the facts in the case of Dhanuka & Sons are totally different from the facts of the instant case and moreover, when there are two conflicting decisions of the same court or different courts on the same issue, then the decision favourable to the assessee has to be followed. Reliance in this regard is placed on the decision of the Hon’ble Apex Court in the case of Vegetable Products reported in 88 ITR 172 (SC).

Hence we hold that the action of the Learned AO in directly embarking on Rule 8D(2) of the Rules is not appreciated and hence no disallowance u/s 14A of the Act could be made in the facts of the instant case.

2.6.1. We also find that the assessee has got sufficient own funds to make these investments and the Learned AO had not brought any nexus between the borrowed funds vis a vis the investments made by the assessee. Without doing the same, he cannot directly presume that the investments were made out of borrowed funds. If the action of the Learned AO and Learned CITA are to be upheld, then no assessee could make any investments when there is a interest bearing loan to be repaid. The fact of making the investments has to be viewed from the point of commercial expediency and from the point of view of businessman and not from the view point of the revenue.

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It is well settled that businessman knows his interest best. We place reliance on the decision of Hon’ble Bombay High Court in the case of CIT vs Reliance Utilities & Power Ltd ( 313 ITR 340 ) (Bom) in support of our view that if the own funds are available with the assesee and if the same are more than the investments made by the assessee, then it has to be presumed that the investments were made out of own funds and not out of borrowed funds. Hence we hold that no disallowance u/s 14A of the Act could be made in these circumstances.

2.6.2. We also find that the investments made in subsidiaries by the assessee are only strategic investments and were made with a primary object to acquire controlling interest in group concerns and not for earning any income out of that investment. Reliance in this regard is placed on the decision of the co-ordinate bench of this tribunal in the case of DCIT vs Selvel Advertising P Ltd reported in (2015) 58 taxmann.com 196 (Kolkata Trib.). We hold that even on this count, no disallowance u/s 14A of the Act could be made by the Learned AO.

2.6.3. We also find that the investments that did not yield any dividend income needs to be excluded from the computation of disallowance , if any, u/s 14A of the Act read with Rule 8D of the Rules as the basic intention behind introduction of section 14A itself is only to disallow the expenditure incurred for earning an income which does not form part of the total income. When there is no income which is claimed as exempt, then there is no scope for provisions of section 14A to operate. In the instant case, the assessee derived dividend income which is exempt only from CESC Ltd and from UTI Mutual Fund (which was purchased and sold during the year itself). Hence even assuming if disallowance is to be made u/s 14A read with Rule 8D, the investments which did not yield any dividend income during the year has to be excluded. We agree with the arguments of the Learned AR in this regard. Reliance in this regard is placed on the following decisions:-

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• Alliance Infrastructure Projects Pvt Ltd vs DCIT in ITA No. 220 & 1043 (BNG.)/2013 for Asst Years 2009-10 & 2010-11 dated 12.9.2014 (Bangalore Tribunal) • CIT vs Corrtech Energy Pvt Ltd reported in 352 ITR 97 (Guj) • CIT vs Shivam Motors in ITA No. 88 of 2014 dated 5.5.2014 rendered by Allahabad High Court • CIT vs Lakhani Marketing in ITA No. 970 of 2008 rendered by Punjab & Haryana High Court

• CIT vs Delite Enterprises in ITA No. 110 of 2009 rendered by Bombay High Court

The decision of special bench of Tribunal in the case of Cheminvest Ltd vs CIT reported in 121 ITD 318 had held that disallowance u/s 14A could be made even in an year in which no exempt income was earned or received by the assessee. But this decision has been overruled by Bangalore Tribunal , Gujarat High Court and Allahabad High Court as stated supra. Moreover we also find that the special bench decision in Cheminvest Ltd vs CIT has been overruled by the recent decision of the Delhi High Court in Cheminvest Ltd case itself and hence it is no longer good law. Hence we hold in favour of the assessee the alternative argument of the Learned AR that only investments yielding dividend income during the year should be considered for disallowance u/s 14A of the Act.

Respectfully following the aforesaid judicial precedents, we have no hesitation in directing the Learned AO to delete the addition made u/s 14A of the Act. Accordingly, the ground nos. 1 (a) to (c ) raised by the assessee are allowed.

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“1(d) That the finding recorded by the learned CIT(Appeals) in the appellate order while confirming the action of the Assessing Officer in making the impugned further disallowance of expenditure amounting to INR 44,91,468 u/s.14A of the read with Rule 8D of the Income-tax Rules, 1962 is based merely on conjecture, surmise and presumptions.”

3.1. The Learned AR argued that Rule 8D is meant only for computation of income under normal provisions of the Act and not for book profit u/s 115JB of the Act. The Learned DR argued that the disallowance u/s 14A of the Act would automatically fall in clause (f) of Explanation to section 115JB of the Act and hence needs to be added back for computation of book profits u/s 115JB of the Act.

3.2. We have heard the rival submissions. We find lot of force in the argument of the Learned AR that computation of disallowance under Rule 8D can be used only for computation of income under normal provisions of the Act and not for book profits u/s 115JB of the Act. Unless an item is debited in the profit and loss account, the same cannot be the subject matter of addition to book profits under clause (f) of Explanation to section 115JB of the Act. The disallowance made u/s 14A of the Act read with Rule 8D is only artificial disallowance and obviously the same is not debited in the profit and loss account and the same cannot be imported into clause (f) of Explanation to Section 115JB of the Act.

3.3. We have already held that no disallowance u/s 14A of the Act would operate in the facts and circumstances of the case. Accordingly, the ground no. 1(d) raised by the assessee is allowed.

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4.1. The brief facts of this issue is that assessee debited a sum of Rs. 2,00,576/- in its profit and loss account towards provision for leave encashment based on actuarial valuation. The Learned AO invoked the provisions of section 43B of the Act and sought to disallow the said provision as according to him, the same would be allowed as deduction only in the year in which the same is paid. On first appeal, the Learned CITA confirmed the action of the Learned AO. Aggrieved, the assessee is in appeal before us on the following ground:- “That on the facts and in the circumstances of the case, the learned CIT(Appeals) erred in confirming the action of the Assessing Officer in disallowing a sum of INR 2,00,576 representing amount debited to its Profit & loss A/c by the appellant towards provision for leave encashment based on actuarial valuation, by invoking the provisions of section 43B of the Act.”. 4.2. The Learned AR relied on the decision of the Jurisdictional High Court in the case of Exide Industries Ltd vs Union of India reported in 292 ITR 470 (Cal) wherein the provisions of section 43B (f) of the Act has been struct down as arbitrary. However he fairly conceded that the Hon’ble Apex Court though had stayed the operation of the judgement of Calcutta High Court initially but later, it had directed the assesses to comply with the provisions of section 43B(f) of the Act and pay taxes thereon but parallely claim deduction for leave encashment on provision basis, as an interim measure till the disposal of the civil appeal by the apex court. In response to this, the Learned DR vehemently supported the order of the lower authorities.

4.3. We have heard the rival submissions and we find case laws quoted by the Learned AR. We find that it is relevant to get into the operative portion of the decision of the Calcutta High Court in the case of Exide Industries Ltd vs Union of India reported in 292 ITR 470 . It was held as below:-

“ 11. In this regard the observation of the apex Court in the case of Bharat Earth Movers (supra) is quoted below:

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The law is settled: if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain....

Applying the abovesaid settled principles to the facts of the case at hand we are satisfied that the provision made by the appellant company for meeting the liability incurred by it under the leave encashment scheme proportionate with the entitlement earned by employees of the company, inclusive of the officers and the staff, subject to the ceiling on accumulation as applicable on the relevant date, is entitled to deduction out of the gross receipts for the accounting year during which the provision is made for the liability. The liability is not a contingent liability. The High Court was not right in taking the view to the contrary. 13. The appeal succeeds and is allowed. Section 43B(f) is struck down being arbitrary, unconscionable and de hors the apex Court decision in the case of Bharat Earth Movers (supra)”.

It is observed that the revenue had preferred Special Leave Petition (SLP) before the Hon’ble Supreme Court against the judgement of Hon’ble Calcutta High Court. The Hon’ble Apex Court in SLP proceedings in CC 12060 / 2008 dated 8.9.2008 had held as under:-

“The petition was called on for hearing today. Upon hearing counsel the court made the following Order. Issue Notice. In the meantime, there shall be stay of the impugned judgement, until further orders.”

Later the Hon’ble Supreme Court in CC 22889 / 2008 dated 8.5.2009 had held as under:-

“The petition was called on for hearing today. Upon hearing counsel the court made the following Order

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Delay condoned. Leave granted. Pending hearing and final disposal of the Civil appeal, Department is restrained from recovering penalty and interest which has accrued till date. It is made clear that as far as the outstanding interest demand as of date is concerned, it would be open to the department to recover that amount in case Civil Appeal of the department is allowed.

We further make it clear that the assessee would, during the pendency of this Civil Appeal , pay tax as if Section 43B(f) is on the statute book but at the same time it would be entitled to make a claim in its returns.”

In the aforesaid circumstances, we deem it fit and appropriate , in the interest of justice and fair play, to set aside this issue to the file of the Learned AO to pass orders based on the outcome of the main appeal on merits by the Hon’ble Supreme Court as stated supra. Accordingly, the ground no. 2(a) raised by the assessee is allowed for statistical purposes.

5.1. The brief facts of this issue is that the assessee is engaged in the business of mining and extraction of coal. The mines of the assessee are located within the State of West Bengal. The Government of West Bengal levies and collects two cess namely Rural Employment Cess (‘RE Cess’) and Primary Education Cess (‘PE Cess’) from enterprises engaged in the mining and extraction of coal within the State of West Bengal. The assessee is bound to pay Rural Employment Cess and Primary Education Cess on production of coal of each year payable in the succeeding year. The said cess is collected by the assessee in the sale bills raised by the assessee on the customers and assessee treated the same as advance from customers in the liability side of the balance sheet. When the said cess is paid in the subsequent year, the concerned liability

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account is debited by the assessee and the entire transactions is not routed through the profit and loss account of the assessee. The assessee has been consistently following this practice over the years commencing from Asst Year 2003-04 onwards. A detailed note in this regard was also mentioned in the notes to tax audit report stating the reasons for not statutorily accruing this receipt in the asst year under appeal. The Learned AO however observed that these receipts in the form of cess collected out of sale invoices are nothing but trading receipts and hence if the same are not paid within the due date of filing the return of income, then the same are liable for disallowance u/s 43B of the Act by placing reliance on the decision of the Hon’ble Apex Court in the case of Chowringhee Sales Bureau P Ltd vs CIT reported in 87 ITR 542 (SC). The Learned AO accordingly disallowed Rs. 30,44,09,948/- towards RE Cess and Rs. 7,61,02,510/- towards PE Cess. On first appeal, the Learned CITA held that the provisions of section 43B of the Act would come into operation in the facts of the case and also held that though the cess collected from customers becomes payable in the succeeding year as per The West Bengal Rural Employment and Production Act, 1976 , the said Act does not override the Income Tax Act and hence the cess collected from customers would become trading receipts as per the Supreme Court decision relied upon supra. While doing so, the Learned AO did not give deduction for cess paid from 1st April to the due date of filing the return of income u/s 139(1) of the Act even as per his own analogy in applying the provisions of section 43B of the Act. Aggrieved, the assessee is in appeal before us on the following grounds:- “3(a) That on the facts and in the circumstances of the case, the learned CIT(Appeals) erred in confirming the disallowance of Rural Employment Cess (RE Cess) of INR 30,44,09,948/- and Primary Education Cess (PE Cess) of INR 7,61,02,510 aggregating in all to INR 38,05,12,458. 3(b) That the learned CIT(Appeals) erred in not following his predecessor’s order for the assessment year 2003-04 (first year) on the same issue which has been accepted by the Department. 3( c) That the leanred CIT(Appeals) failed to appreciate that both RE Cess and PE Cess having not statutorily accured during the financial

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year under consideration, are outside the ambit of section 43B of the Act. 3(d) That the learned CIT(Appeals0 erred in observing that the RE Cess and PE Cess aggregating to Rs.38,05,12,458/- collected are nothing but trading receipts of the appellant and taxable in the previous year under consideration. 3(e) That without prejudice to the above, having disallowed the RE Cess and PE Cess u/s. 43B of the Act/treating the same as trading receipt in the hands of the appellant, the learned CIT(Appeals) should have allowed deduction u/s.43B of the Act of the RE Cess and PE actually paid by the appellant from 1st April, 2007 to the due date of filing of return i.e. upto 30th September, 2008.”

5.2. The Learned AR argued that the cess was collected from customers in the sale invoices and the same are payable only in the succeeding year as per The West Bengal Rural Employment and Production Act, 1976 and The West Bengal Primary Education Act, 1973. He took us to the relevant provisions of the said Act in this regard. He argued that the cess collected remains only as a liability and it does not become payable under the relevant law and hence the provisions of section 43B of the Act would not come into operation. In response to this, the Learned DR argued that the cess is collected by the assessee from the sale invoice and hence takes the character of a trading receipt and accordingly relied on the decision of the Hon’ble apex court as stated supra.

5.3. We find that the Learned CITA also had reproduced the relevant provisions of The West Bengal Rural Employment and Production Act, 1976 and The West Bengal Primary Education Act, 1973 which states that the cess would be collected by the person engaged in the production of coal from the customers and the same would become payable in the succeeding year only. Hence the concept of accrual of liability to pay the cess had not arose during the asst year under appeal. In other words, the cess does not become payable in the asst year under appeal. Now let us go into the provisions of section 43B of the Act which is reproduced herein below:- “[ Certain deductions to be only on actual payment]

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43B Notwithstanding anything contained in any other provision of this Act, a deduction other- wise allowable under this Act in respect of- [(a)] any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or] (b) to [(f) *** *** *** *** *** *** *** *** shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him: [Provided that nothing contained in this section shall apply in relation to any sum, which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return. [Explanation 2.- For the purposes of clause (a), as in force at all material times," any sum payable" means a sum for which the assessee incurred liability in the previous year even though such sum might not have been payable within that year under the relevant law.]

From the aforesaid provisions, it could be seen that what is contemplated in section 43B(a) read with Explanation 2 is tax, duty or cess should become payable under the relevant Act. The expression ‘payable under the relevant Act’ in the context of the impugned issue means the cess payable by the assessee under the provisions of The West Bengal Rural Employment and Production Act, 1976 and The West Bengal Primary Education Act, 1973. Hence in these facts and circumstances, the version of the Learned CITA that the other acts shall not override the provisions of Income Tax Act is not at all relevant. We hold that the cess collected from customers out of sale price in the facts and cirumstances of the instant case cannot be construed as trading receipts chargeable to tax as the same are collected in advance for payment to the exchequer in the succeeding year under the relevant Act. Hence we cannot import a different meaning of accrual of liability for payment of cess into this relevant Act when more so the provisions of section 43B of the Act itself specifically states that amounts payable under the relevant law shall be allowed as deduction only on payment basis. Hence in these facts and circumstances, the decision of the Hon’ble

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Apex Court in the case of Chowringhee Sales Bureau Pvt Ltd vs CIT reported in 87 ITR 542(SC) is not applicable to the facts of the assessee.

5.3.1. We also find that Asst Year 2003-04 was the first year of operation for the assessee wherein similar addition made by the Learned AO was deleted by the Learned CITA and the revenue had not preferred any appeal against the same before this tribunal. Similarly in Asst Year 2006-07, no disallowance under this head was made by the Learned AO eventhough the assessment was completed u/s 143(3) of the Act. These are the only two scrutiny assessments done by the Learned AO on the assessee prior to the assessment years under appeal. Hence we find lot of force in the arguments of the Learned AR that the principle of consistency should not be given a go by on the ground that principle of res judicata does not apply to income tax proceedings. Reliance in this regard was made on the decision of the Hon’ble Apex Court in the case of Radhasoami Satsang vs CIT reported in 193 ITR 321 (SC), wherein it was held that : As we are aware of the fact that, strictly speaking res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and the parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.

We find that the assessee has been consistently following this practice of treating the cess collected as a liability and the same are debited as and when the said cess is paid in the immediately succeeding assessment year and in case if the same is not paid in the succeeding year, the same is disallowed u/s 43B of the Act. This practice of the assessee is evident from the following chart :-

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5.3.2. We hold that the reliance placed by the Learned AR on the decision of the Hon’ble Apex Court in the case of CIT vs Excel Industries Ltd and CIT vs Mafatlal Industries P Ltd reported in 358 ITR 295 (SC) wherein their Lordships had held as follows:-

“Secondly as noted by the tribunal, a consistent view has been taken in favour of the assesssee on the questions raised, starting with the assessment year 1992-93 , that the benefits under the advance licences or under the duty entitlement pass book do not represent the real income of the assessee. Consequently, there is no reason for us to take a different view unless there are very convincing reasons, none of which have been pointed out by the learned counsel for the revenue.

It appears from the record that in several assessment years, the revenue accepted the order of the tribunal in favour of the assessee and did not pursue the matter any further but in respect of some assessment years the matter was taken up in appeal before the Bombay High Court but without any success. That being so, the revenue cannot be allowed to flip-flop on the issue and it ought let the matter rest rather than spend the taxpayers’ money in purusing litigation for the sake of it.

5.3.3. We are also reminded of the observations of Hon’ble Justice P.N. Bhagwati while rendering the judgement in the case of Distributors (Baroda) P Ltd vs Union of India & Ors reported in 155 ITR 120 (SC) – larger bench decision as below:-

“To perpetuate an error is no heroism. To rectify the same is the compulsion of judicial conscience.”

In the facts of the instant case, the assessee had commenced its operations from Asst Year 2003-04 and in the very first year, this issue was taken up for disallowance and the same was deleted by the Learned CITA and the revenue chose not to file an appeal before this tribunal. The next scrutiny assessment was made for Asst Year 2006-07 wherein no addition on this account was made. This goes to prove that the revenue had already accepted to the contentions of the assessee on the impugned issue and

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satisfied that the cess collected from customers have been duly remitted in the succeeding year in accordance with the provisions of The West Bengal Rural Employment and Production Act, 1976 and The West Bengal Primary Education Act, 1973 and was also satisfied with the manner of treatment of the same by the assessee for tax purposes. Having done so, there is no good reason for the revenue to shift its stand in the assessment year under appeal. To this extent, the decisions of the Hon’ble Apex Court and the observation made by the apex court (supra) are relevant to the facts of the instant case.

In view of the aforesaid facts and circumstances and in view of the judicial precedents relied upon hereinabove, we hold that the cess collected from customers in the sale invoices shall not be chargeable to tax in the year of collection and accordingly, the grounds raised by the assessee in this regard are allowed.

In the result, the appeal of the assessee is partly allowed.

ITA No. 1138 / 2012 - Department Appeal

6.1. The brief facts of this issue is that the assessee claimed additional depreciation of Rs. 75,400/- on survey instrument which was acquired on 8.12.2007. According to the Learned AO , the assessee is enaged in mining of coal and not in manufacturing or producing any thing or article. Hence he felt that the assessee is not eligible for additional depreciation. On first appeal, the Learned CITA held that coal mining would fall under the phrase production of any article or thing by placing reliance on the decision of the Jurisdictional High Court in the case of CIT vs G.S.Atwal & Co

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reported in 254 ITR 592 (Cal) . Aggrieved, the revenue is in appeal before us on the following ground:- “1. That on the facts and circumstances of the case, ld.CIT(A) erred in law in holding that additional depreciation of rs.75,400/- should be allowed on the basis that coal mining is production of cost.”

6.2. The Learned AR relied on the order of the Learned CITA. In response to this, the Learned DR argued that coal mining does not bring into effect any new product as even after mining, the end product is only coal and hence no transformation happens in the said process. He further placed reliance on the definition of ‘manufacture’ in section 2(29BA) of the Act which defines as follows:- “[29BA) “manufacture “ with its grammatical variations, means a change in a non-living physical object or article or thing- (a) Resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or (b) Bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure;.”

6.3. We have heard the rival submissions and we find that the only issue is whether the assessee engaged in coal mining could be construed as production of coal and if so, the assessee is entitled for additional depreciation. We find that this issue is squarely covered by the decision of the Jurisdictional High Court in the case of CIT vs G.S.Atwal & Co reported in 254 ITR 592 (Cal) wherein it was held as below:- “13. Following an old and long standing decision given by Chakravarti C.J in 1959, which was later approved by the Supreme Court, the Division Bench opined that the winning of coal is no doubt production. At paragraph 12 of the judgment it said that after winning coal something that was not there comes up, and it is, therefore, a production of coal. The Division Bench followed its own decision in the later case of Khalsa Bros v. CIT [1996] 217 ITR 185. Mr. Bajoria also relied on the interesting case of CIT v. Shann Finance (P) Ltd [1998]

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231 ITR 308 where the Supreme Court opined that a financier owning machinery might still be entitled to investment allowance even if the machinery is actually used by its lessee for the purpose of production. Going on the language of sub-sections (1) and (2) of the said section, the Supreme Court found, on an accurate assessment of the language ( we say this with the greatest respect), that the language does not disentitle the financier from investment allowance in the above circumstances. 14. Even considering the later Supreme Court decision given by Mr. Agarwalla, we are still of the opinion that the view taken by our Division Bench as to winning of coal being production is, with due respect, perfectly sound and consistent with common sense. We have absolutely no reason to differ from the reasoning given in Mercantile Construction Co.’s case (supra) and we respectfully adopt the same. 15. The point that the assessee is still not an industrial undertaking even though it might be engaged in production of coal is, in our opinion, also be decided against the revenue. Under the definition of an industrial undertaking given under section 33B of the Act. Explanation, mining activity would bring the assessee within the definition of an industrial undertaking. But we need not import the definition of another section to the present one, although ordinarily the definition given in one section in an Act can be used for the purposes of another section unless the context indicates otherwise. 16. so far as the assessee is concerned, an undertaking it certainly is. We have found no facts from which we can opine that the assessee is not an industrial undertaking. Ordinarily speaking if a manufacturing activity or an article producing activity is carried on, an undertaking carrying on such activity is to be classed as an industrial one. It might be small scale or large scale, that doe not matter much. Even if an undertaking is manufacturing or producing articles, but is still not be classed as an industrial one for this, clear indications have to be given as to why this difference should be made in the case of the undertaking in question, so that it stands out from the general category. We were not shown any such particular difference excepting that the assessee was also said to carry on transport business. 17. It suffices in this regard to mention that on the principle of Shan Finance (P) Ltd’s case (supra), if the assessee owns the machinery for which investment allowance is claimed, and such machinery is used for production then the section applies, it does not matter if the use for production is made by the lessee or only in one industrial part of the assessee’s business undertaking. Accordingly, the transport business of the assessee does not tilt the question one way or the other.”

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Respectfully following the aforesaid decision of Hon’ble Calcutta High Court, we find no infirmity in the order of the Learned CITA in this regard. Accordingly, the ground raised by the revenue in this regard is dismissed.

Sd/- Sd/- ( Mahavir Singh, Judicial Member ) (M. Balaganesh, Accountant Member)

Date 30 /11/2015

Copy of the order forwarded to:- The Appellant: M/s. Integrated Coal Mining Limited 6 Church Lane, 1st Fl., Kol-1. . 1.. The Respondent-The Deputy Commissioner of Income Tax Cir-6 Aaykar Bhawan, P-7 2 Chowringhee Square, Kolkata 700 069. 3 /The CIT, 4.The CIT(A)

DR, Kolkata Bench 5. 6. Guard file. True Copy, By order, Asstt Registrar

**PRADIP SPS

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