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ORDER R.K. Panda, A.M.
1. These six appeals filed by the assessee are directed against the orders of the learned CIT(A)-II, Bhubaneswar, relating to asst. yrs. 1994-95 to 1998-99 and 2000-01. Since common issues are involved all the six appeals are disposed of in this consolidated order for the sake of convenience.
ITA No. 66/Ctk/2003, asst. yr. 1994-95 :
2. Ground of appeal No. 1 is as under:
1(a). That the learned CIT(A) has erred, both on fact and law, in holding that the loss of Rs. 4,86,70,639 on account of valuation of non-moving stores and spares, is not allowable as revenue expenditure.
(b) That the learned CIT(A) ought to have allowed the claim of Rs. 4,86,70,639 on account of valuation of non-moving stores and spares.
3. The facts in brief are that the AO disallowed an amount of Rs. 4,86,70,639 on account of valuation of non-moving stores and spares holding that these items are neither trading items nor moving stores and spares. According to the AO, the loss can be considered as capital loss. In appeal, the learned CIT(A) upheld the disallowance holding basically that the loss does not necessarily relate to the previous year and the loss quantified is notional and ad hoc estimation.
3.1 The learned Counsel appearing for the assessee submitted that the loss was claimed in the computation statement in the shape of notes attached to the return of income. He referred to p. 77 of the paper book and submitted that the unit-wise break-up of the provision for non-moving stores and spares were given which are as under :
Mines Unit 19,17,574
Refinery Unit 1,40,54,138
Smelter Unit 1,99,97,112
CPP Unit 1,20,11,855
Port Unit 6,89,960
___________
Total 4,86,70,639
___________
4. Referring to pp. 4 to 215 of the Vol. II of the paper book, the learned Authorised Representative submitted that the details of stores and spare parts are given item-wise which have not moved for the last five years. Referring to the paper book pp. 1 to 3 of Vol. II, the learned Authorised Representative drew the attention of the Bench to the extracts of annual accounts of M/s Rashtriya Ispat Nigam Ltd., M/s Hindustan Zinc Ltd. and M/s Steel Authority of India Ltd., where similar provisions have been made. Referring to paper book pp. 78 and 79, the learned Counsel drew the attention of the Bench of the observations of the GAG relating to non-moving stores and spares. The learned Authorised Representative further referred to Schedule. VI of the Companies Act and the AS-2 relating to valuation of inventories issued by the ICAI and the MAOCARO as applicable to the company. The learned Authorised Representative further submitted that this method has been adopted consistently by the assessee in the subsequent years. He submitted that whenever there is a change in the method there may be a profit or loss. However, this being a public sector undertaking the bona fides of such change by the company should not be doubted. Accordingly, he submitted that the observations of the AO and the learned CIT(A) are factually illegal and legally not tenable.
5. The learned Counsel further submitted that the depletion in cost of the items of stores and spares which have deteriorated in value on account of sheer storage has been implemented in accounts. It has been done to arrive at the value of consumption due to use or shortage. This method is being used consistently and the same has been used as an accounting policy of the company. He further submitted that loss on account of diminution in the value of a stock-in-trade is always a revenue loss. He further submitted that the provision in reality is not a provision for liability, but is valuation loss of current assets.
6. The learned Counsel also relied on a number of case decisions.
7. The learned Departmental Representative submitted that there is no debit in the P&L a/c about the claim of such expenditure. The assessee has not identified those as obsolete or non-moving. He submitted that the reduction of 20 per cent of the value is on ad hoc basis. It is not correct to say that the loss has arisen during this year. The learned Departmental Representative further submitted that the assessee is entitled to change the method of accounting provided the same is bona fide and is followed consistently. However, in the present case the assessee has not consistently followed the above method in the subsequent years. The assessee has also not established the basis of reduction in stock by 20 per cent during this year. The learned Departmental Representative Accordingly, relied on the orders of the AO and the learned CIT(A).
8. We have considered the rival submissions made by both the sides and perused the orders of the authorities below and the paper book filed on behalf of the appellant. We have also considered the various case decisions cited by both the sides.
9. We find that the CAG after going through the audited accounts for the financial year 1992-93 had given this comments, a copy of which is placed at pp. 78 and 79 of the paper book and reads as under:
Audit Memo No. 10Balance sheet as at 31st March, 1993 Inventories (Schedule. 1.6) Stores and spares at cost Rs. 16,458.50 lakhs Details of unit-wise position of the items of stores and spares non-moving for 3 years and above as on 31st March, 1993, were found as follows :
(Rs. crores) C.P.P. Smelter Damanjodi Total Items not moved for 3 years 6.5503 -- -- 6.5503 Items not moved for more than 5,0470 1.8115 0.8653 7.7238 3 years Items not moved for more than 4 years (including items not moved at all) 3.2492 7.3756 10.6248
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14.8465 9.1871 0.8653 24.8989
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During scrutiny of the unit records (CPP), it was noticed that there have been lying surplus items, scrap materials and stores and spares not issued at all since their receipts. Smelter steps are being taken to dispose of such materials but very low prices are being offered by the buyers.
It is natural that most of the long non-moving stores and spares due to their old-ness and/or obsoleteness have lost their worth. However, in the accounts those stores and spares, as shown in the table above, have been exhibited at their full value which has resulted in over statement of actual value of the same, approximate quantum of which is detailed below :
Over statement (in Rs. crores) 1.25% of the items not moved for 3.56 (25% of Rs. 14.2741 crores) 3 years and above 2.50% of the items not moved for 4 years and above.(including it-
ems not moved at all since their receipts) 5.31 (50% of Rs. 10.6248 crores) Thus, it is viewed that stores and spares, correspondingly profit have been overstated to the extent of Rs. 8.87 crores as detailed above. 10. We have also gone through the paper book pp. 4 to 215 of Vol. II where the assessee had given item-wise details of stores and spare parts which have not moved for the last five years.
11. We find from the notes on accounts of the published accounts of M/s Rashtriya Ispat Nigam Ltd. for the accounting year 2001-02 a copy of which is placed at paper book p. 1 where the non-moving items, stores and spares are recognized at 80 per cent of their cost. We further find from the notes on accounts of M/s Hindustan Zinc Ltd. for the accounting year 1998-99 a copy of which is placed at paper book p. 2 where the closing stock of stores and spares are valued at weighted average cost except stores and spares unmoved for more than 2 years which are valued at 25 per cent of weighted average cost. We further find from the published accounts of M/s Steel Authority of India for the accounting year 1996-97 a copy of which is placed at paper book p. 3 where stores and spares are valued at cost. However, in the case of stores and spares declared obsolete/surplus and stores and spares not moved for five years or more, provision is made at 75 per cent and 10 per cent, respectively, of the book value and charged to revenue.
12. From reading of the notes on accounts of the above 3 public sector undertakings we are of the opinion that the diminution of value because of obsolescence at 20 per cent of historical cost cannot be said to be without any basis. Neither this can be said to be improper. We are further of the opinion that although the stores and spares relate to past years, the appellant had made the revaluation during the current year and subsequent years on the basis of audit objections by the C&AG when they pointed out that the profit has been overstated. Accordingly, the bona fides of such change also should not be doubted. The change effected by the assessee is bona fide and aimed at obtaining correct business profit as such obsolete stocks/non-moving spare parts went on losing their values thereby distorting the true profits of the appellant.
13. We further find that the Kerala High Court in the case of CIT v. Travancore Cochin Chemicals Ltd. has held as under (short notes) :
The assessee was compelled to change the method of valuation at the instance of the Accountant General (Audit), Kerala. The assessee had followed the same changed method of valuation in the subsequent year. Whenever there is a change in the method of valuation, there is bound to be some distortion in the calculation of profits in the year in which the change takes place. The change adopted by the assessee was bona fide and intended to be followed in the future years and it was not adopted for the same assessment year only but to be consistently followed for the subsequent years. Hence, the revised method of valuation of closing stock was rightly accepted by the Tribunal and we find no reasons to interfere with the order of the Tribunal. Hence, questions Nos. 4 and 5 are to be answered in favour of the assessee and against the Revenue.
14. We further find that Hon'ble Kerala High Court in the case of Forest Industries Travancore Ltd. v. CIT (1964) 51 ITR 329 (Ker) has held as under (short notes) :
The assessee who had purchased a lot of spares and stores for machinery from the war disposals in 1947 and used to value his stock at cost, wrote off seventy-five per cent of the book value of the spare parts and stores on the last date of the accounting year 1956-57 on the basis of a certificate of an engineer that twenty-five per cent of their original value can be taken to be the market value, and claimed as 'loss on revaluation of stores and spares' a sum of Rs. 1,41,035 representing the seventy-five per cent, so written off and continued to value the stock, stores and spares at their market value in subsequent years. The claim was disallowed on the ground that such a change of method could not be allowed and also because the loss written off was really the accumulated loss of several previous years :
Held, that the assessee was entitled to change his method of valuation of stock in this manner even though the Revenue may be affected adversely by such change. It is a concession given to the assessee based on the well recognized wage of the trade and the principle underlying that concession is in no way violated when the assessee changes his method of valuation from cost to market value, when the latter is less than the cost price, provided the change is bona fide and the new system is continued in subsequent years. The assessee's claim for deduction of Rs. 1,41,035 was allowable in law.
15. We find that the Hon'ble Madras High Court in the case of India Motor Parts & Accessories (P) Ltd. v. CIT has held as under (short notes) :
The assessee-company, which dealt in spare parts of cars the import of which was banned, treated part of its stock as obsolete and part as slow-moving, and valued them notionally at 100 per cent and 50 per cent less than the cost price, respectively. The articles were valued at higher prices for purposes of obtaining overdrafts from banks. Some of the articles were sold at a price higher than the cost price. The Tribunal added back a sum of Rs. 45,483 in the value of the closing stock. On the question whether the Tribunal was right in rejecting the method of accounting and enhancing the value of the closing stock:
Held, that the method of valuation adopted by the assessee was a recognized method. The fact that occasionally a solitary item was sold for a price higher than the cost price would not detract from the nature of the system. The figures furnished by the assessee to the banks for obtaining overdraft were not concerned with the actual stock valuation for determining the trade results for purposes of ascertaining the profits derived from the business. It was not shown that the method was improper or patently false. The method could not, therefore, be rejected. Sec. 13 was not applicable and the Tribunal was not, justified in sustaining the revision in the valuation of closing stock by enhancing it by Rs. 45,488.
16. We find that Tribunal, Delhi Bench, in the case of Milton Cycle Industries Ltd. v. Dy. CIT (1996) 54 TTJ (Del) 380 has held as under (short notes):
We have heard the learned Representatives and also perused the relevant record. On a perusal of relevant facts and circumstances as detailed above, we are of the view that the change effected by the assessee is bona fide and aimed at obtaining correct business profit. It is nobody's case that assessee has not accumulated such stocks in the past. Undoubtedly, such stocks went on losing their values for the purposes of assessee's business thereby distorting assessee's profits year in and year out when a decision was taken to investigate the entire matter by appointing a committee of experts on whose recommendations, based on proper study of market condition, the assessee-company reduced the value of the impugned stocks to the extent of Rs. 2,90,299 and this very value has been carried forward to the next year and assessed as such. Therefore, on a consideration of relevant facts and circumstances, we are of the view that the change effected by the assessee in the method of valuation of its stocks was bona fide, the same having been made on permanent basis and the changed method having been followed in the subsequent years. Therefore, we are of the view that assessee's claim was justified. We accordingly allow this ground of appeal.
17. We find that the Hon'ble Delhi High Court in the case of CIT v. Bharat Commerce & Industries Ltd. has held as under (short notes):
An assessee is free to adopt a particular method of valuation of its closing stock which it has to follow regularly from year to year. At the same time it is well-settled that irrespective of the basis adopted for valuation for earlier years, the assessee has an option to change the method of valuation of closing stock, provided the change is bona fide and followed regularly thereafter. The Tribunal being the final fact-finding authority under the Act, the High Court in the exercise of its advisory jurisdiction can neither go behind the facts stated by the Tribunal nor can disturb the same unless a challenge is provided specifically by a question framed in a reference against the validity of the impugned findings of fact on the ground that there is no evidence to support them or they are the result of a misdirection in law.
Held, that, in view of the findings of the Tribunal, the assessee had resorted to revaluation of the raw materials on the basis of specific instances of fall in value of the goods--when such goods could not be sold even at cost price, there was nothing wrong in valuing the goods at an estimated realizable value. The assessee has an option to change the method of valuation of closing stock if the change is bona fide and followed regularly thereafter. The loss arising out of revaluation of closing stock was allowable.
18. We further find that the Hon'ble Supreme Court in the case of Chainrup Sampatram v. CIT has held as under (short notes) :
It is a misconception to think that any profit 'arises out of the valuation of the closing stock' and the situs of its arising or accrual is where the valuation is made. Valuation of unsold stock at the close of an accounting period is a necessary part of the process of determining the trade results of that period, and can in no sense be regarded as the 'source' of such profits. Nor can the place where such valuation is made be regarded as the situs of their accrual. The source of the profit and gains of a business is indubitably the business, and the place of their accrual is where the business is carried on. As such profits can be correctly ascertained according to the method adopted by an assessee only after bringing into the trading account his closing stock wherever it may exist, the whole of the profits must be taken to accrue or arise at the place of carrying on the business.
The assessee, a registered firm consisting of two partners and carrying on business at Calcutta as bullion merchants dealing mainly in silver kept its books on the mercantile basis. In the relevant year of account some bars of silver were sent to the Indian State of Bikaner where the partners resided and their value at cost was credited in the assessee's books. In the assessment of the assessee it was alleged that the silver bars had been sold to the partners for their domestic use but the IT authorities held that the alleged sale was not genuine and the silver bars still formed part of the assessee's stock-in-trade at the close of the year of account. They accordingly, included in the taxable profits a sum of Rs. 2,20,887 as the excess arising from the valuation of the silver bars at market rate at which the rest of the closing stock at Calcutta was valued in the assessee's books. The Tribunal on appeal upheld the action of the IT authorities. On a reference under Section 66(2) of the question, 'whether in the circumstances of the case and on a true construction of Section 4(1)(b) and Section 14(2)(c) of the Indian IT Act the sum of Rs. 2,20,887 was in law assessable to tax', the High Court answered the question in the affirmative. On appeal by special leave granted by the Supreme Court:
Held, that on the finding of the IT authorities that the silver bars lying at Bikaner had not been really sold but remained part of the unsold stock of the assessee's business at the end of the accounting year, the whole of the profits of that year must be taken to have accrued or arisen at Calcutta where the business was carried on, no part of that business having admittedly been transacted at Bikaner. Consequently, the sum of Rs. 2,20,887 was in law assessable to tax.
19. Considering the totality of the facts of the case and relying on the above case decisions we set aside the order of the CIT(A) on this ground and direct the AO to allow the claim of loss on account of value of non-moving stores and spares at Rs. 4,86,70,639. We direct accordingly. The ground of appeal No. 1 by the appellant is accordingly, allowed.
20. Ground of appeal No. 2 by the assessee is as under:
2. (a) On the facts and in the circumstances of the case, the learned CIT(A) has erred, both on facts and in law, in not allowing the sum of Rs. 229.26 lakhs under the nomenclature 'Prior Period Adjustments'.
(b) That the learned CIT(A) has erred in stating that details and explanations were not given to him in respect of Rs. 227.58 lakhs under the head 'Prior Period Adjustments' and ought not to have allowed the same as a deduction.
(c) Without prejudice to (a) and (b) above that the learned CIT(A), out of the above-said Rs. 227.58 lakhs, ought and have deleted the following being amounts covered under Section 43B and having been paid during (the current year) as envisaged under Section 43B, notwithstanding the amount related to prior years:
(i) Road tax for water sprinklers paid Rs. 8,78,992 (ii) Road tax for water sprinklers paid Rs. 18,06,368 (iii) Sales-tax on canteen sales paid Rs. 36,015
(d) Without prejudice to (a) to (c) above, sufficient and reasonable opportunity was not accorded by the learned CIT(A) for filing the details of Rs. 227.58 lakhs under 'Prior Period Adjustments' upto his satisfaction and the learned CIT(A) has erred in enhancing the disallowance under 'Prior Period Adjustments' by the said Rs. 227.58 lakhs.
(e) Without prejudice to (a) to (d) above, the learned CIT(A) ought to have considered the net amount under the head 'Prior Period Adjustments' (i.e. taking into account both credits and the debits under the head 'Prior Period Adjustments') and ought not to have restricted only to the disallowances of debit items under the said 'Prior Period Adjustments' account.
21. The facts in brief are that during the course of assessment proceedings, the AO found that the assessee-company has shown prior period expenses under the head 'Prior Period Adjustments' on six items which are as under:
Rs.
(i) Other manufacturing expenses 2.51 lakhs (ii) Employees remuneration and benefits 226.48 lakhs (iii) Administrative, selling and distribution 227.58 lakhs (iv) Depreciation 108.38 lakhs (v) Interest and finance charges 66.77 lakhs (vi) Miscellaneous expenses written off 348.69 lakhs
The assessee suo moto had added back an amount of Rs. 108.36 lakhs on account of depreciation and Rs. 348.69 lakhs on account of miscellaneous expenses. However, in absence of any satisfactory explanation by the assessee, the AO added the remaining items to the total income. In appeal, the learned CIT(A) discussed and decided each and every item included in the prior period adjustments. He deleted the addition on account of employees remuneration and benefits and interest and finance charges amounting to Rs. 66.77 lakhs. However, he upheld the addition amounting to Rs. 2.51 lakhs on account of other manufacturing expenses and addition amounting to Rs. 227.58 lakhs on account of administrative selling and distribution of expenses. Being aggrieved, the assessee is in appeal before us.
22. The learned Authorised Representative referring to pp. 116 and 216 to 268 of Vol. II of the paper book submitted that the details of the prior period expenses are given. He submitted that in the asst. yr. 1989-90 the prior period expenses were allowed. The Revenue has not gone in appeal to the Tribunal which otherwise means that, they have accepted the principle.
23. The learned Authorised Representative further submitted that detailed head-wise break-up of expenses were given. Though the expenses are for a particular period, claims/bills settlement, etc. are accepted and passed during the year only. He submitted that inspite of filing the details of administrative, selling and distribution expenses, the CIT(A) finds it not possible to ascertain whether the liability crystallized during the year. Accordingly, he submitted that additions be deleted.
24. The learned Departmental Representative, on the other hand, relied on the orders of the authorities below.
25. We have considered the rival submissions made by both the sides and perused the orders of the authorities below and the paper book filed on behalf of the appellant.
25.1 We find that the learned CIT(A) had confirmed an amount of Rs. 1,68,203 under other manufacturing expenses and Rs. 227.58 lakhs under 'administrative, selling and distribution expenses'. As regards other manufacturing expenses, we find that the appellant had issued 18.675 kgs. of nitric acid for consumption during the financial year 1992-93. However, by mistake the issue voucher was prepared at 1867.5 kgs. This difference was found out during the inventory verification in the financial year 1993-94 and the amount short charged during the financial year 1992-93 was debited to the P&L a/c during the financial year 1993-94 as prior period expenses. We find that this is the only way in which the assessee could rectify this mistake by debiting the prior period expenses. Accordingly, we direct the AO to delete the above addition.
26. As regards administrative, selling and distribution expenses, we find that the appellant during the course of appeal hearing had filed only item-wise expenses amounting to Rs. 22,597,648 on 14 items. However, no further details were filed for which it was impossible on the part of the learned CIT(A) to conclude that liability in regard to the above items had crystallized in the relevant previous year. We further find that at the time of hearing before us, apart from the said submissions, the appellant had not furnished any further evidence to this effect. Accordingly, considering the totality of the facts of the case and in the interest of justice, we restore the issue back to the file of the AO directing him to give one more opportunity to the appellant to produce the details. Accordingly, the grounds raised by the appellant are partly allowed for statistical purposes.
27. Ground of appeal Nos. 3 and 4 were not pressed for hearing for want of COD approval. Accordingly, they are dismissed.
28. Ground of appeal No. 5, being general in nature is dismissed.
29. In the result, the appeal file by the assessee for the asst. yr. 1994-95 is partly allowed.
ITA No. 67/Ctk/2003 (asst. yr. 1995-96)
30. Ground of appeal No. 1 is as under:
1(a). That the learned CIT(A) has erred, both on facts and in law, in holding that the loss of Rs. 40,47,757 on account of valuation of non-moving stores and spares, is not allowable as revenue expenditure.
(b) That the learned CIT(A) ought to have allowed the claim of Rs. 40,47,757 on account of valuation of non-moving stores and spares.
31. After hearing both the sides, we find that the above ground is identical to that of ground No. 1 in ITA No. 66/Ctk/2003 for the asst. yr. 1994-95. We have already decided the ground in favour of the assessee. Following the same principle, the ground of appeal No. 1 is allowed in favour of the assessee.
32. Ground of appeal No. 2 is as under:
2. (a) That the learned CIT(A) has erred, both on facts and in law, in holding that 'Interest on electricity duty' falls under Section 43B of the Act.
(b) That the learned CIT(A) ought to have allowed the sum of Rs. 2,15,83,861 towards 'Interest on electricity duty', as the same is a trading liability of the year under consideration.
33. The facts in brief are that the AO during the course of assessment proceedings found that the electricity component includes interest component of Rs. 2,15,83,361 being provision of interest @ 18 per cent per annum for delay in payment of electricity duty. The explanation of the assessee, that as per Orissa Electricity Duty Act interest is leviable at 18 per cent per annum for delay in payment of electricity duty and as the full duty has not been paid the interest at the statutory rate are being charged in the accounts to show true profit was not accepted by the AO. The AO was of the view that payment of interest is always associated with any default/infraction of law. He was further of the opinion that the assessee-company was having surplus funds during the previous year and has been earning tax-free interest from bonds and has made donations to various agencies which has no nexus with the business of the assessee. Accordingly, he held that there is no justification for paying interest and on that account for making any provision for interest for non-payment of electricity duty in time.
34. In appeal, the learned CIT(A) confirmed the additions made by the AO although on different ground. While doing so, he was of the opinion that the payment of interest being mandatory by statute in the same manner as electricity charges and the collection of both the duty and interest thereupon is governed by the provisions of Section 43B of the IT Act, 1961, and Section 5 of the Orissa Electricity Duty Act, 1961, dealing with collection of electricity duty. Accordingly, he was of the opinion that interest being a part of the duty will attract the provisions of Section 43B of the IT Act, 1961. The learned CIT (A) also distinguished the decisions in the cases of Hindustan Motors Ltd. v. CIT and CIT v. Padmavati Raje Cotton Mills Ltd. and relied upon by the assessee. Being aggrieved with the order of the learned CIT(A), the assessee is in appeal before us.
35. The learned Authorised Representative referring to paper book pp. 221 to 229 in Vol. I of the paper book drew the attention of the Bench towards the provision of Section 5 of the Orissa Electricity Duty Act. He submitted that interest on electricity duty is not a penalty in nature but is compensatory in nature and has to be allowed as a general business expenditure. He submitted that Clause (a) of Section. 43B does not include the word interest and as such the provision of Section 43B is not applicable to interest on delayed payment of electricity duty. He also relied on the decisions of the Hon'ble Calcutta High Court in the cases of CIT v. Orient Beverages Ltd. and CIT v. E.L Properties Ltd. and submitted that the analysis by the learned CIT(A) is erroneous.
36. The learned Authorised Representative further submitted that interest is different to tax, duty, cess or fee which are distinguishable as per the Act. They are separate from each other. He further submitted that the analysis by the learned CIT(A) is erroneous. He further submitted that Clause (a) of Section 43B does not include the word interest.
37. The learned Departmental Representative, on the other hand, relied on the orders of the AO and learned CIT(A).
38. We have considered the rival submissions made by both the sides and perused the orders of the authorities below and the paper book filed on behalf of the appellant.
39. We find that Clause (a) of Section 43B reads as under :
(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.
Thus, the above provision does not include the word 'interest'.
40. We further find that Section 5 of the Orissa Electricity Duty Act, 1961, reads as under:
The electricity duty shall be collected from the consumer and paid to the State Government:
(a)...
(b)...
(c)...
Provided further that where the amount of electricity duty collected by licensee from a consumer or the amount of such duty payable by the person specified in Clause (c) is not paid to the State Government within the prescribed period, the licensee or such person shall be liable to pay interest at the rate of eighteen per cent per annum on the amount of the electricity duty remaining so unpaid until the payment thereof is made.
(ii) The duty and the interest, if any, so payable shall be a first charge on the amount recoverable by the licensee or appointed authority for the energy supplied by him and shall be a debt due by him to the State Government.
41. We further find that Hon'ble Calcutta High Court in the case of CIT v. Orient Beverages Ltd. (supra) has held that:
Interest payable for arrears of municipal taxes is compensatory in nature and not a penalty or tax and, therefore, unpaid amount of interest is not liable to be disallowed under Section 43B.
42. The operative para of the said decision is as under:
6. We have carefully examined the scope and ambit of Section 43B of the Act. In our view, this section has two parts. The first part is that whether the interest paid in addition will at all be deductible under this section and if so, then the question would arise whether the assessee would be entitled to the deduction until and unless the said amount is actually paid. So far as this case is concerned, we are not concerned with the second part. Therefore, let us concentrate ourselves on the first part of the Section 43B of the Act. The Question that is to be decided is, whether the interest paid under Section 43B(a) of the Act would be deductible under the said section. No dispute has been raised by Mr. Agarwal, learned advocate appearing for the Department, that in this particular case Section 43B(a) would be applicable. The Section 43B(a), as noted earlier, provides, notwithstanding anything contained in any other provision of this Act, a deduction otherwise 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. In our view, this question has been set at rest by the decision of the Supreme Court as well as by another decision of this Court.
7. In Mahalakshmi Sugar Mills Co. v. CIT (supra), as noted herein earlier, the Supreme Court, while considering a case under Section 3(3) of the U.P. Sugarcane Cess Act, 1956, on arrears of cess payable held that the interest payable did not fall within the scope of Section 10(2)(xv) of the Indian IT Act, 1922, because it was paid by way of penalty or infringement of the Cess Act. In that actual situation the Supreme Court held that the interest payable under Section 3(3) of the Cess Act was not a penalty paid for an infringement of law and was an allowable deduction under Section 10(2)(xv) of the Act. At p. 434 of the said decision, the Supreme Court has made the following observation :
In truth, the interest provided under Section 3(3) is in the nature of compensation paid to the Government of delay in the payment of cess. It is not by way of penalty.
From the above it is clear that in this decision the Supreme Court has made it clear that the interest paid under the Cess Act is not a penalty but a compensation paid to the Government. Mr. Agarwal, learned advocate appearing on behalf of the Department, however, seeks to distinguish this decision on the footing that this decision was rendered on a different fact situation. This argument of Mr. Agarwal, we are afraid, is not acceptable because on the similar question subsequent decision was rendered by a Division Bench of this Court in Russels Properties (P) Ltd. v. CIT (supra) following the aforesaid decision of the Supreme Court in Mahalakshmi Sugar Mills Co. v. CIT (supra), in the said case, Their Lordships also came to a conclusion that interest paid under the Calcutta Municipal Act, 1951, which is also a matter for consideration by us in this case, is not for defiance of law and, therefore, this is an allowable deduction under the Act.
At p. 365 of the said decision, Sabyasachi Mukherjee, J. observed as follows:
The Supreme Court was of the view that interest payable on arrears of cess under Section 3(3) was in reality part and parcel of the liability to pay cess. It was an accretion to the cess. The arrears of cess, according to the Supreme Court, if the cess was not paid within the prescribed period, a larger sum would become payable as cess. We have not noticed the nature of Sub-section (3) of Section 236 of the Calcutta Municipal Act, which is more or less on similar terms. It is also a like expression as used in Section 3(3) of the U.P. Sugarcane Cess Act, 1956, which enjoins that 'interest shall be payable'. The Supreme Court was of the view 'that in truth the interest provided under Section 3(3) of the U.P. Sugarcane Cess Act, 1956, was in the nature of compensation paid to the Government for delay in the payment of cess. It was not by way of penalty for which provision has been separately made by Section 3(5).
From the above, we cannot agree with Mr. Agarwal, learned advocate for the Revenue, that since the principle laid down in the said decision of the Supreme Court cannot be applied to the facts of this case, as we find that Sabyasachi Mukherjee, J. (as His Lordship then was) in the aforesaid Division Bench decision considered the Cess Act as well as the Calcutta Municipal Act, with which we are not therefore (sic), it cannot be disputed that the decision of Hindustan Motors Ltd. (supra), as rendered by Sabyasachi Mukherjee, J. (as His Lordship then was) was so rendered applying the principles laid down in the aforesaid decision of the Supreme Court and the submission of Mr. Agarwal that the decision of the Supreme Court was not applicable in this case, cannot be alleged. That apart, we are also fortified by a recent decision of this Court in the case of Hindustan Motors Ltd. v. CIT . It appears that there was a difference of opinion on the question mentioned above between the Hon'ble Chief Justice Mr. K.C. Agarwal (as His Lordship then was) and the Hon'ble Justice Mrs. Ruma Pal (while she was in this Court). The matter was referred to a Third Judge, the Hon'ble Justice Prabir Kumar Majumdar (as His Lordship then was). His Lordship by his order dt. 20th Feb., 1995, agreed with the views expressed by Ruma Pal, J. and held that he was not inclined to agree with the answer put forward by the Hon'ble Chief Justice K.C. Agarwal, but on the other hand, he accepted and agreed with the answer proposed by Ruma Pal, J. There is yet another Division Bench decision of this Court in CIT v. Padmavati Raja Cotton Mills Ltd. , which also laid down the same principle following the Division Bench decision just now referred to above in the case of Hindustan Motors Ltd. v. CIT (supra). In the case of Pratibha Processors and Ors. v. Union of India and Ors. (1966) 11 SCC 101, in para 13, the Supreme Court has observed as follows :
In fiscal statutes, to import of the words 'tax', 'interest', 'penalty', etc.' are well known. They are different concepts. Tax' is the amount payable as a result of the charging provision. It is a compulsory extraction of money by a public authority for public purposes, the payment of which is enforced by law. Penalty is ordinarily levied on an assessee for some contumacious conduct in character and is imposed on an assessee, who has withheld payment of any tax and when it is due and payable, the levy of interest is geared to actual amount of tax withheld and the extent of the delay in paying the tax in the due date. Essentially, it is compensatory and duty for penalty--which is penal in character.
In view of our discussion made hereinabove, it is, therefore, clear that the interest payable for arrears of principal taxes is really compensatory in nature and not a penalty/tax.
43. We also filed that the Hon'ble Calcutta High Court in the case of CIT v. E.L. Properties (P) Ltd. (supra) has held as under (short notes) :
It is settled beyond dispute that interest on late payment of municipal rates is not in the nature of a payment of penalty, and is thus clearly deductible as a general business expenses under Section 37. The requirement of Section 43B that even for assessees following the mercantile system, payments by way of tax, duty, cess, etc. cannot be claimed as deductions unless actual payment has been made in the previous year, is also not applicable in this case, because the words of the section encompass the municipal rates but interest thereon--CIT v. Padmavati Raje Cotton Mills Ltd. and Hindustan Motors Ltd. v. CIT followed.
Interest payable on unpaid municipal rates is not in the nature of penalty and therefore, it is clearly deductible under Section 37; Section 43B is also not attracted as it is applicable to municipal rates and not to interest thereon.
44. Considering the totality of the facts of the case and relying on the above decisions, we are of the considered opinion that the interest on electricity duty is compensatory in nature and has to be allowed as a general business expenditure. The provision of Section 43B is not applicable for such interest. The AO is directed to allow the same as business expenditure. Accordingly, the ground by the appellant is allowed.
45. Ground of appeal No. 3 is as under:
3(a) That the learned CIT(A) has erred, both on facts and in law, in enhancing the disallowance under 'Peripheral Development Expenses' to Rs. 38.26 lakhs.
(b) That the finding of the learned CIT(A) in holding that the sum of Rs. 38.26 lakhs under 'Peripheral Development Expenses' does not have any nexus with the business of the assessee is contrary to facts, based on irrelevant considerations, presumptions, conjectures and surmises and being arbitrary, unjustified and accordingly, the disallowance of the same is erroneous and legally untenable.
46. The facts in brief are that the AO found that the assessee has debited an amount of Rs. 60.54 lakhs towards peripheral development expenses as against Rs. 18.12 lakhs claimed during the preceding accounting year. In response to the query of the AO the assessee furnished the details of such peripheral developmental expenses by giving the break-up of the expenses incurred under four different units. Based on the nomenclature of the expenses and in the absence of any specific reply to the query the AO treated Rs. 30,00,000 on estimate basis out of the claim under alumina, and smelter plant as capital expenditure and allowed depreciation at 10 per cent. Accordingly, he made a net addition of Rs. 27,00,000. In appeal, the learned CIT(A) found that out of the total expenditure of Rs. 60.65 lakhs the expenditure of Rs. 22.28 lakhs on repair of N.H. 42 road from Nalco Nagar to FCI Chhak will meet the requirement of Section 37(1) as the improved road facilitates the movement of goods and personnel from the business premises of the company to the highway. Since the company is a major beneficiary, the business nexus cannot be denied. Even though the benefit may be long-term, it will be revenue in nature as the road or the land in question does not belong to the appellant. The remaining expenditure of Rs. 38.28 lakhs was held by him as disallowable under Section 37(1). Being aggrieved, the assessee is in appeal before us.
47. The learned Authorised Representative referring to paper book pp. 117 to 122 submitted that head-wise details of the expenses have been filed. Expenses were incurred to maintain industrial harmony, cordial business relationship and promote its business interests for commercial expediency. The learned Authorised Representative further submitted that all expenses were incurred on its employees and persons who have been displaced long back when the plant was constructed reside. Since Nalco is not the owner of all such properties, the expenses are in the nature of revenue expenditure. Most of the expenses were incurred on the directions of certain authorities like Orissa State Pollution Control Board, Ministry of Environment & Forest as a precondition to review its clearing certificate. The learned CIT(A) does not find all these expenses except drinking water and roads, etc. to have any nexus with the company's business needs. He also referred to the gazette notification, minutes of peripheral development committee, various newspaper clippings and statistics of land displaced persons employed in Nalco and residing in the peripheral area, copies of which are placed in the paper book. Referring to paper book pp. 198 to 222, the learned Authorised Representative referred to the directions of the pollution control board. He also relied on a number of case decisions.
48. The learned Departmental Representative, on the other hand, submitted that the assessee had not fulfilled the conditions laid down in Section 37(1) that the expenditure is wholly and exclusively laid down for business purposes. He Accordingly, relied on the orders of the authorities below.
49. We have considered the rival submissions made by both the sides and perused the orders of the authorities below and the paper book filed on behalf of the appellant. From the details as furnished by the appellant in p. 117 of the paper book we find that the appellant had incurred expenditure to the tune of Rs. 60,53,890 out of which an amount of Rs. 38.26 lakhs was disallowed by the CIT(A) which is as under:
(Rs. in lakhs) Unit Details Amount Drinking Water Alumina Construction of open well and renovation of pond 0.34 at. Goudaguda 0.34
------
CPP Drinking water supply to different villages 0.40 0.40
Roads ------
Alumina Construction of weiry, Rajmunda 1.94 1.94
------
Smelter Road repair Kandsar Village 1.43
Repair of Balramprasad road 2.25
Repair of Giranga road 1.71
Repair of Manpur road 1.17 6.56
------
Community Centre
Alumina Renovation of community centre 0.18 0.18
------
Smelter Construction of Mahila Samiti building at 0.83 0.83
Mangalpur ------
Cultural activity
Smelter Literacy programme on peripheral area 0.26 --
Financial help to Kulad high school 0.54 --
Books for Budapal college library 0.10 0.90
------
Health care
Smelter Identification and rehabilitation of physically 0.09 0.09
handicapped ------
Const/Development Work
Alumina Socio Economic Study (DA received from Corp. 3.11 --
Office)
Renovation of Class Room at Machiliguda 0.07 3.18
------
Smelter Renovation of Giranga School building 0.03 --
Repair of school and tube well in Munda Hurting 0.05 --
Renovation of Kandsar school building 0.28 --
Tree plantation in peripheral area 1.80 --
B.D.O. Angul and Banarpal for periphery 19.28 --
Development
Construction of additional building in Dasnali UP 0.70 --
School
Renovation of Banarpal Girl's High School building 0.39 22.53
------
CPP Renovation of school at Gotamara and Balaram 0.11 0.11
------
Prasad Village
Corp. Haridaspur Seva Samiti, Replacement of door, 0.12 1.12
window of hospital ceiling fan to junior hostel, BJB ------
college, BBSR
Relief (Cyclone/Fire/Flood, etc.)
Smelter Clothing held to flood affected people of Angul 0.08 1.12
------
Total : 38,26
------
From the above details we find that the appellant had incurred certain expenses on its employees and persons who have been displaced when the plant was constructed. We further find that some of the expenses have been incurred on the directions of the authorities like Orissa State Pollution Control Board, Ministry of Environment and Forest as per condition to review its clearance certificate. We also find that money has been spent by the appellant as a good corporate citizen and to earn the goodwill of the society thereby creating an atmosphere in which the business can succeed in a greater measure with the aid of such goodwill.
50. We further find Gazette Notification No. XI. III. 121/81/9789/I. placed at p. 119 of the paper book which is as under:
Government of Orissa Industries Department Resolution Bhubaneswar, the 7th April, 1982.
Sub--Constitution of a standing committee for monitoring programme of rehabilitation of the affected tribal committee due to establishment of Aluminium Complex in the State of Orissa :
Establishment of large industries in backward areas predominantly inhabited by the scheduled tribes causes serious imbalance in the traditional economy and create misery for many indigenous people. This includes rehabilitation problems.
An Alumina/Aluminium complex has been set up in the State by the National Aluminium Company Ltd. It has been desired by the Prime Minister that in such circumstances where establishment of a public sector unit affects the tribals in the area, adequate precautionary measures should be taken to ensure that tribes living in the areas derive benefit rather than suffer disadvantage from development of the complex.
Accordingly, the State Governments have been pleased to set up a standing, committee with the following members with the object of effecting a total and comprehensive programme rehabilitation of the affected tribal communities and also to keep linkage with the standing committee established at the national level by the Ministry of Steel and Mines, Department of Mines, in their O.M. No. 20/10/81-Cen., dt. 20th May, 1981.
1. Collector, Koraput--Chairman.
2. Local M.P.
3. Local MLAs concerned.
4. S.D.O., Koraput
5. Dy. Secretary, Industries Department
6. Project Administrator, ITDP, Koraput.
7. Representative, Nalco
8. One Representative of the displaced tribal person (Sri Kashinath Patra) The committee may meet as often as is required.
Order : Ordered that the resolution be published in the next issue of Orissa Gazette.
By Order of Governor Sd/-
K.C. Mahapatra Addl. Secretary to Government.
51. We further find that funds placed by Nalco for peripheral development works are monitored by a committee consisting of seven members as per paper book p. 125 1. Collector, Koraput : Chairman 2. Proj. Director, DRDA, Koraput : Member 3. A.D.M. (Gen.), Koraput : Member 4. Sub Collector, Koraput : Member 5. B.D.O., Koraput/Semaliguda/Poligangi/Laxmipur/E.O., Member NAG, Sunabeda : 6. Unit Head and Head of Personnel & Administration Deptt. Member of Nalco, Damanjodi : 7. L.A.O. (Gen.), Koraput : Member
52. We further find from the copy of the pollution control board placed at pp. 198 to 222 of the paper book that for the purpose of expansion of production capacity of aluminium metal from 2,18,000 MTY to 3,45,000 MTY of the Nalco, the pollution control board had put certain conditions. According, to the said order, Clause (xvii) and (xix) read as under:
(xvii) That regular health survey shall be carried out by the Nalco to assess the health status, with particular reference to fluoride of the workers, general human and bovine population residing within a radius of 10 Kms. from the factory.
(xix) That sufficient number of trees shall be planted within and outside the premises of the factory to provide a good green belt. The Department of Forest and the Department of Soil Conservation shall be consulted for the choice of trees.
53. We further find that the Hon'ble Madras High Court in the case of CIT v. Madras refineries Ltd. has held as under (short notes) :
The concept of business is not static. It has evolved over a period of time to include within its fold the concrete expression of care and concern for the society at large and the people of the locality in which the business is located in particular. Being known as a good corporate citizen brings goodwill of the local community, as also with the regulatory agencies and the society at large thereby creating an atmosphere in which the business can succeed in a greater measure with the aid of such goodwill.
For the asst. yr. 1992-93, the assessee, a public limited company, as a good corporate citizen as a measure of gaining goodwill of the people living in and around its industry which was to some extent a polluting industry, provided funds for establishing drinking water facilities to the residents in the vicinity of the refinery and also provided aid to the school run for the benefit of the children of those local residents. It incurred an expenditure of Rs. 15,32,000 for that purpose. The AO declined to allow that expenditure on the ground that it was not an item of expenditure incurred by the assessee for earning the income in that year. The Tribunal allowed it. On appeal to the High Court:
Held, that the amount spent for bringing drinking water as also for establishing or improving the school meant for the residents of the locality in which the business was situated could not be regarded as being wholly outside the ambit of the business concerns of the assessee, especially where the undertaking owned by the assessee was one which to some extent a polluting industry. The expenditure was deductible.
54. The Tribunal 'F' Bench, Mumbai, in the case of Hindustan Petroleum Corporation Ltd. v. Dy. CIT (2005) 92 TTJ (Mumbai) 168 has held as under (short notes) :
While the basic requirements for invoking Sub-section 37(1) and 80G are quite different, but nonetheless the two sections are not mutually exclusive. Thus, there are overlapping areas between the donations given by the assessee and the business expenditure incurred by the assessee. In other words, there can be certain amounts, though in the nature of donations, and nonetheless, these amounts may be deductible under Section 37(1) as well. Therefore, merely because an expenditure is in the nature of donation, or, to use the words of the CIT(A), 'prompted by altruistic motives', it does not cease to be an expenditure deductible under Section 37(1). The assessee is a company owned by the Government of India and working under the control and directions of the Government of India. The expenditure on 20 point programmes was incurred in view of specific directions of the Government of India. This factual aspect is not even disputed or challenged by the Revenue at any stage. It cannot but be in the business interest of the assessee-company to abide by the directions of the Government of India which also owns the assessee-company. Monies spent by the assessee as a good corporate citizen and to earn the goodwill of the society help creating an atmosphere in which the business can succeed in a greater measure with the help of such goodwill. The monies so spent, therefore, are required to be treated as business expenditure eligible for deduction under Section 37(1). What is the expenditure for the implementation of 20 point programme is solely for the welfare of the oppressed classes of society for which even the Constitution of India sanctions positive discrimination and for contribution to all-round development of villages, which has always been the central theme of Government's development initiatives. An expenditure of such a nature cannot but be a concrete expression of care and concern for the society at large and an expenditure to discharge the responsibilities of a good corporate citizen which brings goodwill with the regulatory agencies and society at large, thereby creating an atmosphere in which the business can succeed in a greater measure with the aid of such goodwill'. Even if an expense is incurred voluntarily, it may still be construed as 'wholly and exclusively'. Just because the expenses are voluntary in nature and are not forced on the assessee by a statutory obligation, these expenses cannot cease to be a business expenditure. Keeping all these facts in mind, as also entirety of the case, the disallowance of expenditure incurred on implementation of 20 point programmes is not sustainable.
55. The Hon'ble Orissa High Court in the case of CIT v. Rupsa Rice Mills has held as under (short notes):
In the great diversity of human affairs and the complicated nature of business operations it is difficult to lay down any single test which would apply to all situations to determine whether an expenditure is of the nature of capital or of revenue. However, the Courts have deduced three broad criteria which could be applied for deciding this question. They are : 1. An outlay is deemed to be capital when it is made for the initiation of a business or for extension of a business, or for a substantial replacement of equipment. 2. Expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade. 3. It should be seen whether for the purpose of the expenditure any capital was withdrawn or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of the business. Again, it is to be seen whether the object of incurring the expenditure was to employ what was taken in as capital of the business. Again, it is to be seen whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital.
These tests are virtually exclusive. They have to be applied one after the other from the business point of view and a conclusion must be arrived at on a fair appreciation of the whole situation. The question is one of fact to be determined by the IT authorities and the Courts of law would not ordinarily interfere with such findings of fact if they have been arrived at on a proper application of the principles.
The assessee claimed an amount of Rs. 12,137 donated for the construction of a primary health centre as business expenditure. The Tribunal found that the primary health centre was the property of the Government. The assessee had made the contribution in consideration of the fact that the health centre was located near its factory premises and would provide treatment to its ailing workmen. Under the Employees' State Insurance Act the assessee had an obligation to maintain a hospital or meet the expenses on medical treatment of its workers. In view of the overall situation the Tribunal recorded the finding that the amount contributed was business expenditure. On a reference :
Held, that on the facts and in the circumstances of the case, the amount of Rs. 12,137 donated by the assessee for the construction of the primary health centre building was an admissible revenue expenditure.
56. The Tribunal, Cuttack Bench, in the case of Orissa Forest Development Corporation Ltd. v. CIT (2002) 75 TTJ (Cuttack) 87 : (2002) 80 TTD 300 (Cuttack) has held as under (relevant portions from the short notes) :
The expression 'business needs' should not be looked into from a narrow angle and the immediate benefits arising out of spending a particular amount of money should not be the lookout of a businessman. The overall needs of the business running over a long span of time is envisaged in business expediency. Furthermore, under the modern day concepts, even social and similar other obligations are also required to be considered as part of the business obligations of a businessman. From that angle also, the expenditure incurred by the assessee towards plantation cannot be considered to be unrelated to its business.
Furthermore, it was not a case of fulfilling the whims and fancies of the owner of the assessee-corporation. On the other hand, the afforestation programme was closely connected with the actual business operations of the assessee although the assessee might not be expected to derive any direct benefit out of the spending in that regard in the immediate future.
When a Government undertaking is under the obligation to carry out some loss thereby, the loss cannot be ignored in computing the total income of the undertaking.
There was no reason to consider the expenses incurred by the assessee being not connected with its business operations. The result of the stand taken by the Department would be that whereas, on the one hand, the Government undertakings would be required to incur expenses towards various social and other purposes under the instructions of the Government, at the same time again, such expenses being denied in their income-tax assessments, they will be required to pay huge amounts of taxes on notional profits not actually earned by them. This state of affairs cannot accord with the canons of justice in the field of income-tax assessments.
57. Considering the totality of the facts of the case and relying on the case decisions cited above, we are of the considered opinion that the remaining amount of Rs. 38,26,000 has to be allowed as business expenditure under Section 37 of the IT Act. We direct accordingly. The ground of appeal No. 3 by the appellant is accordingly, allowed.
58. The other grounds of appeal are not pressed for adjudication. Accordingly, they are dismissed.
59. In the result, the appeal filed by the appellant is partly allowed. ITA No. 68/Ctk/2003 (asst. yr. 1996-97):
60. Ground of appeal No. 1 is as under:
1(a) That the learned CIT(A) has erred, both on facts and law, in holding that the loss of Rs. 169.57 lakhs on account of valuation of non-moving stores and spares is not allowable as revenue expenditure.
(b) That the learned CIT(A) ought to have allowed the claim of Rs. 169.57 lakhs on account of valuation of non-moving stores and spares.
61. After considering the rival submissions made by both the sides, we find that the above ground is identical to that of ground No. 1 in IT A No. 66/Ctk/2003 for the asst. yr. 1994-95. We have already decided the issue in favour of the assessee. Following the same ratio the above ground by the appellant is allowed.
62. Ground of appeal No. 2 is as under:
2. (a) That the learned CIT(A) has erred, both on facts and in law, in holding that 'Interest on electricity duty' falls under Section 43B of the Act.
(b) That the' learned CIT(A) ought to have allowed the sum of Rs. 2,27,000 for 'Interest on electricity duty' as the same is a trading liability of the year under consideration.
63. After considering the rival submissions made by both the sides, we find that the above ground is identical to that of ground No. 2 in ITA No. 67/Ctk/2003 for the asst. yr. 1995-96. We have already decided the issue in favour of the assessee. Following the same ratio, the above ground by the appellant is allowed.
64. Ground of appeal No. 3 is as under :
3. (a) That the learned CIT(A) has erred, both on facts and in law, in treating Rs. 1,51,18,676 (Rs. 1,30,21,508 'Water charges' payable to Government of Orissa and Rs. 20,97,168 for interest on 'Water charges' payable to Government of Orissa) as 'fees' and confirming both under purview of Section 43B of the Act.
(b) That the learned CIT(A) has erred, both on facts and in law, in holding that Rs. 20,97,168 for interest on 'Water charges' payable to Government of Orissa falls under purview of Section 43B of the Act.
(c) That the learned CIT(A) ought to have allowed the sum of Rs. 1,30,21,508 and Rs. 20,97,168 for 'Water charges' payable to Government of Orissa and for interest on 'Water charges' payable to Government of Orissa, respectively, as the same are trading liabilities of the year under consideration.
65. The facts in brief are that during the course of assessment proceedings the AO found from Annex. VI to the tax audit report that the auditors have mentioned about non-payment of the provision towards water charges debited at Rs. 1,30,21,508 and interest on water charges amounting to Rs. 20,97,168. The contentions of the appellant, that unpaid water charges along with interest thereon should not be treated as cess/fee/tax/duty under the purview of Section 43B of the IT Act, was not accepted by the AO. The AO further found that the amounts were debited under the P&L a/c by making provisions consequent upon Government notification. The AO also did not agree with the assessee that the water charges payable to the Government are for services provided and is not a tax or duty or cess. The AO has contended that the absence of the nomenclature of tax or duty or cess or fee will not make any difference as Clause (a) to Section 43B covers payment in nature of tax, duty, cess or fee "by whatever name called, under any law for the time being in force". The AO Accordingly, made a disallowance of Rs. 1,51,18,676. In appeal, the learned CIT(A) confirmed the actions of the AO relying on the decision of the Hon'ble Calcutta High Court in the case of CIT v. Orient Paper & Industries Ltd. and confirmed the actions of the AO. He also distinguished the various decisions relied upon by the appellant. Being aggrieved, the assessee is in appeal before us.
66. The learned Authorised Representative referring to p. 241 of Vol. I of the paper book submitted that Nalco uses the river water for its plants and township at Angul/Damonjodi and the water is lifted from the river by Nalco using its own water supply system. For the water so used from the river, water charges are payable to Tehsildar/Collector (Government of Orissa), as notified. The water charges which remained unpaid as on 31st March, 1996, amounted to Rs. 1,30,21,508 and interest on the unpaid balance amounting to Rs. 20,97,168. Thus, the total amount of Rs. 1,51,18,676 is a statutory liability and is accounted for in the books of account on "accrual basis" as per the mandatory accounting standards and is an allowable expenditure vide Kedamath Jute Mfg. Co. Ltd. v. CIT . The liability for water charges is neither a tax nor a duty nor a fee nor a cess and, therefore, does not fall under the purview of Section 43B of the Act. The learned Authorised Representative also relied on the following decisions :
(b) CIT v. Shree Warna Sahakari Shakar Karkhana (2002) 173 CTR (Bom) 188 : (2002) 253 ITR 226 (Bom)
(c) CIT v. Varas International (P) Ltd.
(d) Hindustan Motors Ltd. v. CIT (supra)
(e) CIT v. Padmawati Raja Cotton Mills Ltd. (supra).
67. The learned Departmental Representative, on the other hand, relied on the orders of the authorities below.
68. We have considered the rival submissions made by both the sides and perused the orders of the authorities below and the paper book filed on behalf of the appellant. We find that the appellant has made provisions towards water charges as per the notification of the Government of Orissa, Ministry of Water Resources. We further find that there is no dispute that the water charges are in the nature of statutory liability. We further find that the learned CIT(A) while deciding the appeal against the assessee relied upon the decision of the Hon'ble Calcutta High Court in the case of Orient Paper & Industries Ltd. (supra). We further find that the Hon'ble High Court in the case of Orient Papers & Industries Ltd. (supra) has held as under (short, notes) :
The assessee had two factories for the purpose of manufacture of paper. The assessee was required to pay cess under the Water (Prevention and Control of Pollution) Cess Act, 1977, for water consumed in the two factories. The assessee contended that the cess was a price for the water consumed and could not be considered as tax or duty and, hence, the provisions of Section 43B were not applicable to the cess paid. The AO rejected the contention of the assessee. The CIT(A) accepted the contention of the assessee. The Tribunal affirmed the order of the CIT(A). On a reference :
Held, that as a result of the amendment to Clause (a) of Section 43B by the Finance Act, 1988, Section 43B is now applicable not only to tax and duty but also to cess or fee, by whatever name called, payable under any law for the time being in force. This amendment is clarificatory in nature, and, therefore, has retrospective operation. Therefore, the provisions of Section 43B were applicable to the water cess payable by the assessee.
69. We further find that the learned CIT(A) has clearly distinguished the various case law relied upon by the appellant and has decided the issue. The operative para of the said order is as under:
I have considered the order of the AO and the submissions made by the appellant-company carefully. The appellant-company has not filed the copy of the relevant notification before me. However, it is not being disputed that the water charges are in the nature of statutory liability. The principal argument of the appellant-company is that the water charges are for services rendered and cannot be in the nature of tax, duty, cess or fee so as to attract the provisions of 43B. The case law have been relied upon in support of the above view. However, none of the case law are on the nature of 'water charges' as such. In the case of Sri Balaji & Co. (supra), the issue was payment of kist (rental) for vending toddy/arrack; In the case of Shree Warna Sahakari... (supra), the issue was audit fees and in the case of Vardhari Plantation , the issue was vending fee. The ambit of Section 43B was expanded by Finance Act, 1988 w.e.f. 1st April, 1989. The replaced clause went beyond 'tax or duty' and added 'cess or fee by whatever name called'. There is a clear-cut distinction between tax and fee. While tax is an 'imposition made for public purpose without reference to any special benefit conferred on the payer of the tax, fee is payable when some special service is intended or envisaged as a quid pro quo. Similarly, cess is relatable to special benefit or service received. In CIT v. Orient Paper & Industries Ltd. , the Calcutta High Court has held that the cess payable under the Water (Prevention and Control of Pollution) Act for water consumed in factories came within the ambit of Section 43B. The above decision has a direct bearing on water charges discussed here. Therefore, the fact that water charges are payable for services rendered do not keep it outside the purview of Section 43B and the absence of the term 'cess' or 'fee' will not make any difference. There is also another aspect to the above claim. Even though the relevant details have not been filed the appellant is stated to be still in dispute about the payment of water charges and major amount has not been paid. Therefore, the liability is far from determinate. In any case allowability of the above claim will be subject to the provisions of Section 43B as held by the AO. By the same logic, the interest on water charges will attract the mischief of Section 43B.
70. Considering the totality of the facts of the case and relying on the decision in the case of Orient Paper & Industries Ltd. (supra) we do not find any infirmity in the order of the learned CIT(A) so far as disallowance of unpaid water charges at Rs. 1,30,21,508 under Section 43B of the IT Act, 1961 are concerned. Accordingly, we confirm the same.
71. However, as regards the provision of unpaid interest on water charges amounting to Rs. 20,97,168 we are of the considered opinion that the same is compensatory in nature and does not fall within the purview of Section 43B as per our earlier findings in ground of appeal No. 2 vide ITA No. 67/Ctk/2003 for the asst. yr. 1995-96 on account of interest on electricity duty. Accordingly, we direct the AO to allow the interest on such unpaid water charges as a general business expenditure under Section 37(1) of the IT Act. We direct accordingly. The ground raised by the appellant is partly allowed.
72. Ground of appeal No. 4 is as under:
4(a) That the learned CIT(A) has erred, both on facts and in law in enhancing the disallowance under 'Peripheral Development Expenses' to Rs. 48.23 lakhs.
(b) That the finding of the learned CIT(A) in holding that the sum of Rs. 48.23 lakhs under 'Peripheral Development Expenses' does not have any nexus with the business of the assessee is contrary to facts, based on irrelevant considerations, presumptions, conjectures and surmises and being arbitrary, unjustified and accordingly, the disallowance of the same is erroneous and legally untenable.
73. After considering the rival submissions made by both the sides we find that the above ground is identical to that of ground of appeal No. 3 in ITA No. 67/Ctk/2003 for the asst. yr. 1995-96. The above ground has already been decided in favour of the appellant. Following the same ratio the above ground of appeal is allowed in favour of the appellant.
74. Ground of appeal No. 5 is as under:
5. (a) That the learned CIT(A) has erred both on facts and in law, in not allowing Rs. 620 lakhs towards contribution to Mineral Development Fund set up by Government of India.
(b) That the observations of the learned CIT(A) that the abovesaid sum of Rs. 620 lakhs towards Mineral Development Fund set up by Government of India is a donation and does not have any nexus with the business of the assessee is contrary to facts, based on irrelevant considerations, presumptions, conjectures and surmises and being arbitrary, unjustified and accordingly, the disallowance of the same is erroneous and legally untenable.
75. The facts in brief are that the assessee has debited an amount of Rs. 6.20 or ores towards contribution to Mineral Exploration Fund for the first time. The explanation of the assessee that it is required to contribute to MEF, Government of India, as per letter dt. 29th Jan., 1996, of the Ministry of Mines and the contribution is payable on the basis of proven reserve of bauxite @ 20 paise per MT of bauxite reserve was not accepted by the AO. The AO was of the opinion that the said contribution is in the nature of application of income and hence it could not be considered as expenditure incurred by the assessee. Accordingly, he made an addition of Rs. 6.20 crores. In appeal, the learned CIT(A) confirmed the actions of the AO holding that the above expenditure has got no nexus to the business needs of the assessee. Being aggrieved with the order of the learned CIT(A), the assessee is in appeal before us.
76. The learned Authorised Representative referring to pp. 267 to 269 of the paper book submitted that the Government of India, Ministry of Mines, vide Office Order No. 38/13/95-M.L, dt. 29th Jan., 1996, had decided to set up the "Mineral Exploration Fund under the administrative control of the Ministry of Mines for promoting sustainable exploration and development activities in the field of mines. He further submitted that the appellant was required to contribute on provisioning of mines vide Office Order dt. 29th Jan., 1996. The payment is directly related to the nature of the business as the same was made for Punch Pat Mali bauxite deposit where 300 million tonnes of reserves have been established as per report of MECL way back in the year 1979-80. The payment was computed at 20 paise per tonne. Bauxite is a raw material for the appellant. The learned Authorised Representative submitted that contribution is payable on the basis of proven data of recognized agency, MECL. The assessee is following mercantile system of accounting and any dues payable on the basis of official order has to be accounted for in the year of accruing of the liability. The AO has confused the estimated quantity of Bauxite with the amount of liability and has disallowed the same treating as contingent liability. The amount was actually paid to the Ministry of Mines, Government of India, on 31st Dec., 1998 (in financial year 1998-99) and thus the assessee had actually parted with the amounts. As regards quantification of demand, the notification is sufficient. It cannot be considered as application of income since the payment is not voluntary. The expenditure has been incurred wholly and exclusively for the purpose of business. Payment is statutorily required to be made and it has got a direct nexus with the business of the company and is not a voluntary payment.
77. The learned Departmental Representative, on the other hand, relied on the order of the AO.
78. We have considered the rival submissions made by both the sides and perused the orders of the authorities below and the paper book filed on behalf of the appellant. We find that there is no dispute about the fact that the appellant is a Government of India undertaking and comes under the jurisdiction of Ministry of Mines, Government of India. We further find from the paper book pp. 267 to 269 that Government of India, Ministry, of Mines, vide Office Order No. 38/13/95-M.L, dt. 29th Jan., 1996, had decided to set up the Mineral Exploration Fund under the administrative control of the Ministry of Mines for promoting sustainable exploration and development activities in the field of minerals. We further find from p. 274 of the paper book that a letter has been received by the appellant from the Jt. Secretary to the Government of India, Ministry of Steel and Mines, Department of Mines, which reads as under :
Government of India Ministry of Steel and Mines Department of Mines No. 38/13/95-M.T. New Delhi, the 19th Jan., 1996 To The Chairman-cum-Managing Director Nalco, TDCO Tower, Janpath Bhubaneswar. Sub : Creation of Mineral Exploration Fund for promoting sustainable activities for exploration & development of minerals-- Sir,
I am directed to say that this Department has established "Mineral Exploration Fund" (MEF) for promoting sustainable activities for exploration and development of minerals vide office order of even number dt. 29th Jan., 1996 (copy enclosed). It was decided by Government that the PSUs under control of Department of Mines shall make one-time contribution to the tune of Rs. 16.41 crores on the basis of reserves of minerals established by MECL for these PSUs. Accordingly, the concerned PSUs under this department were requested vide letter dt. 29th Jan., 1996 (copy enclosed), to deposit the amount concerning them to MEF.
2. In order to finalise the issue of contribution of funds towards the MEF by the PSUs viz. Balco, Nalco, HCL and HZL, the matter was recently discussed in the QPR meetings of the respective PSUs, held during the months of Octobers, November, 1998.
3. In view of the decision taken in the above-referred QPR meetings, you are requested to confirm the contribution of your company to the MEF at the earliest.
Yours faithfully, Sd/- (Aruna Bagchee) Jt. Secretary to the Government of India
79. We further find from the paper book p. 272 that the above issue was considered in the 127th board meeting held on 9th Dec., 1998, and further find from the paper book p. 275 that the board has decided and approved to release Rs. 6.2 crores to the proposed Mineral Exploration Fund. The relevant portion of the said minutes are as under:
Extracts from the minutes of the 127th board meeting held on 27th Nov., 1998 and 9th Dec., 1998 :
Item No. 127/20 Contribution to Mineral Exploration Fund The board considered the matter and gave its approval to release of Rs. 6.20 crores to the proposed Mineral Exploration Fund in the agenda note.
Thus, from the above, we find that the 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 appellant comes and has been paid as per the proven deposit of Bauxite on the basis of proven data. When a Government undertaking is under the obligation to make certain payments as per specific direction of the 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 which also owns the assessee-company. Accordingly, in our considered opinion, the above payment is a statutory requirement and the expenditure has been incurred wholly and exclusively for the purpose of business and has got a direct nexus with the business activity of the company. We further find that the above amount has been released on 31st Dec., 1998. Since the assessee is following the mercantile system of accounting and the provision has been made on the basis of office order, the same has been rightly accounted for in the year of accruing of the liability. Considering the totality of facts of the case, we are of the considered opinion that the above expenditure has to be allowed as a business expenditure under Section 37(1) of the IT Act. We direct accordingly. The grounds of appeal filed by the appellant is accordingly, allowed.
80. The other grounds are not pressed for hearing. Accordingly, these grounds are dismissed.
81. In the result, the appeal filed by the assessee is partly allowed.
IT A No. 459/Ctk/2003 (asst. yr. 1997-98):
82. Grounds of appeal No. 1, 4, 6, 10, 11, 13 and 14 are not pressed for hearing at the time of hearing of the appeal. Accordingly, the above grounds are dismissed.
83. Grounds of appeal Nos. 2(a) and (b) are as under:
2. (a) Payments made under Benevolent Scheme : (a) That the learned CIT(A) has grossly erred, both on facts and in law, in upholding the disallowance of Rs. 11.19 lakhs under 'Benevolent Scheme'.
(b) That the learned CIT(A) has confused himself that payments under 'Benevolent Scheme' by the employer in the event of death of.employee is a contribution to fund falling under Section 40A(9) whereas the fact remains that amount involved is not a 'fund' at all and the disallowance of Rs. 11.19 lakhs is on irrelevant considerations, presumptions, conjectures and surmises, arbitrary, excessive, unwarranted, unjustified, wrong and legally not tenable.
84. The facts in brief are that the assessee has claimed an expenditure of Rs. 11.19 lakhs on account of contribution towards benevolent fund. The explanation of the assessee that the above amount has been contributed towards the benevolent fund and in order to maintain cordial and harmonious industrial relation with its employees and to promote its business interest, was not accepted by the AO. The AO further found that the contribution paid to the fund is not an approved one. Accordingly, he disallowed the above amount. In appeal, the learned CIT(A) confirmed the actions of the AO holding that the scheme is being managed by the company and since both the employer and the employees are contributing to it, it is not clear why the scheme is distinguished from. "fund". Accordingly, he was of the opinion that the scheme is hit by provisions of Section 40A(9) of the IT Act. Being aggrieved, the assessee is in appeal before us.
85. The learned Counsel submitted that both the AO and the learned CIT(A) misunderstood the nature of the expenditure. It is not a fund. It is an actual payment made by the employer during the year to the families of the deceased employees. This is not the case where funds are being kept separately. The scheme consists of contribution from employees together with a matching contribution by the appellant-company. The scheme provides the financial assistance to the families of the employees who die during the period of employment. Expenses are in the nature of staff welfare expenses and allowable under Section 37(1) of the IT Act. The learned Authorised Representative referred to pp. 169 to 171 of the paper book and submitted the procedure for the employees benevolent scheme. He further submitted that since it is not a fund the question of approval does not arise. He filed a paper containing the names of the employees and the name of the unit and submitted that the amount of Rs 11.19 lakhs has been paid during the asst. yr. 1997-98 to 11 employees on their death which is as under:
___________________________________ SI. No. Name Unit ___________________________________ 1. B.P. Satpathy Corporate 2. Arjun Majhi M&R 3. Niranjan Sahu Smelter 4. J. Jojo Smelter 5. N.K. Majhi CPP 6. D.B. Bhoi M&R 7. P. Mastiputia M&R 8. G. Sahu M&R 9. Barna Gabda M&R 10. S. Bagh M&R 11. P.K. Singh Smelter 12. B. Desnaik M&R 13. P. Gopalkrisna Chennai 14. P.P. Paramanik Smelter 15. L. Behera CPP 16. K.C. Dash Mines 17. C. Jena Smelter 18. K. Ojha Smelter ___________________________________ (18 deaths (r) Rs. 10 per death from 6,232 employees) Rs. 11.19 lakhs. 86. The learned Authorised Representative also relied on the case decisions in the case of Ajay Singh Deol v. Jt. CIT (2004) 87 TTJ (Mumbai) 771 : (2004) 91 ITD 196 (Mumbai). 87. The learned Departmental Representative relied on the orders of the AO and the learned CIT(A).
88. We have considered the rival submissions made by both the sides and perused the orders of the authorities below and the paper book filed on behalf of the appellant. From the list submitted before us we find that the appellant has paid an amount of Rs. 11.19 lakhs to the members of 18 families due to their deaths @ Rs. 10 per death for 6,232 employees as a matching contribution. We further find that the objective of the scheme reads as under:
to provide financial assistance to families of the members of the persons who die while in employment in the company and to provide any other benefit as may be included in the scheme from time to time for the benefit of the member.
89. We further find from the said scheme that the membership is voluntary. We further find that as per the said scheme the deceased person's family shall get @ Rs. 10 multiplied by the number of employees. The sum of Rs. 10 includes contribution by each member @ 5 and matching contribution of Rs. 5 by the company per employee.
90. The Tribunal, Mumbai Bench, in the case of Ajay Singh Deol v. Jt. CIT (supra) has held as under (short notes):
One thing which is immediately discernible is that the sole and proximate reason for the stand so taken by the authorities below is that the assessee was not under, a contractual or legal obligation to reimburse the employee any medical bills for the treatment of employee's family members, or for that purpose, even the employee himself. The proposition, thus, implied by laid down is that unless an assessee has an obligation to incur an expense, or, in other words, when an assessee incurs the expense voluntarily, the same does not constitute an admissible deduction. It is this proposition based on which the assessee has been declined the claim for deduction of medical expenses of employee's family member.
On this fundamental proposition itself, however, we cannot approve the view taken by lower authorities.
In our considered view, as long as expenses are incurred wholly and exclusively for the purposes of earning the income from business or profession merely because some of these expenses are incurred voluntarily, i.e., without there being any legal or contractual obligation to incur the same, those expenses do not cease to be deductible in nature. In other words, it is not necessary that every expense that could be allowed as a deduction should be such as a hard nosed and perhaps devoid of senses of compassion, professional or businessman alone would incur in furtherance of his professional or business pursuits. It is not in dispute that R was an employee of the assessee and the employee cost in respect of R, constitutes an admissible deduction. The question then is that when an assessee incurs more costs on employment of R than the cost, strictly speaking from a legal or contractual point of view, the assessee was required to incur, whether such a cost will be admissible deduction or not.
91. The Hon'ble Calcutta High Court in the case of CIT v. National Engineering Industries Ltd. (1994) 208 JTR 1002 (Cal) has held as under (short notes) :
That the contribution made to the National Engineering Industries Centre and National Engineering Officers and Executive Welfare Scheme had to be made as the assessee's conduct of business had a nexus to the object of the employees' welfare scheme. The expenditure was justified having regard to the business expediency. The refusal to pay such expenditure would have spread disaffection amongst the workers and employees and would have adversely affected the assessee's business. The expenditure incurred merely for the purpose of keeping the workers happy and maintaining the industrial peace and cordial relations with the employees is by now an accepted expenditure for the carrying on of a business. Without such good relations it is not possible to run any business. Therefore, the expenditure was deductible as revenue expenditure.
Considering the totality of the facts of the case and relying on the above decisions, we direct the AO to allow the expenditure as a deductible expenditure.
92. Ground of appeal No. 3 is as under :
3. Peripheral Development Expenses : (a) That the learned CIT(A) has erred both on facts and in law in enhancing the disallowance under 'Peripheral Development Expenses' by Rs. 29.24 lakhs.
(b) That the finding of the learned CIT(A) in holding that the sum of Rs. 51.11 lakhs under 'Peripheral Development Expenses' does not have any nexus with the business of the assessee is contrary to facts based on irrelevant considerations, presumptions, conjectures, and surmises and being arbitrary, unjustified and Accordingly, the disallowance of the same is erroneous and legally untenable.
93. After bearing both the sides, we find that the above ground is identical to that of ground No. 3 in ITA No. 67/Ctk/2003 for the asst. yr. 1995-96. We have already decided the ground in favour of the appellant. Following the same ratio the above ground is allowed in favour of the appellant.
94. Ground of appeal No. 5 is as under :
Advertisement and Publicity Expenses : That the learned CIT(A) has erred in upholding the disallowance of Rs. 2 lakhs under, 'Advertisement and Publicity Expenses' made by the AO on estimation and further that the said disallowance is on irrelevant considerations presumptions, conjectures and surmises, arbitrary, excessive, unwarranted, unjustified, wrong and legally not tenable.
95. The facts in brief are that from the break-up of the advertisement and publicity expenses given by the assessee the AO found that an amount of Rs. 22.06 lakhs has been incurred towards advertisement in souvenirs. From the details furnished by the appellant for the month of July, 1996, amounting to Rs. 98,500, the AO found that the payments of Rs. 2,000 have been made to the National Convention of Government College Teachers Association, Rs. 60,000 to ODISSI Research Centre, Rs. 5,000 to Lok Kalyan Samiti and Rs. 3,000 to Saheed Sporting Club. Accordingly, the AO held that the above payments are in the nature of donation and Accordingly, made an addition of Rs. 2 lakhs on estimate. In appeal, the learned CIT(A) confirmed the actions of the AO. The assessee is in appeal before us.
96. The learned Authorised Representative submitted that the appellant is a Government of India undertaking and all the expenses are properly approved and verified. The accounts of the assessee are audited and the above expenses are supported by proper bills and vouchers and the transactions are fully verifiable. The amount of disallowance has been made on estimate basis and no ad hoc disallowance can be made.
97. The learned Departmental Representative, on the other hand, relied on the orders of the authorities below.
98. We have considered the rival submissions made by both the sides and perused the orders of the authorities below and the paper book filed on behalf of the appellant. There is no dispute that the appellant is a Government of India undertaking and the accounts are audited. We further find that the expenses are supported by proper vouchers and the transactions are fully verifiable. From the details as furnished by the assessee for the month of July, 1996, as discussed by the learned CIT(A), it could not be said that they are donations. Accordingly, the addition is directed to be deleted. The ground of appeal is allowed.
99. Ground of appeal No. 7 is as under :
7. Loss on account of unserviceable materials--That the learned CIT(A) has erred in upholding the disallowance of Rs. 10.04 lakhs under 'loss on account of unserviceable materials' on account of contaminated CT Pitch, a raw material, and further that the said disallowance is on irrelevant considerations presumptions, conjectures and surmises, being arbitrary, excessive, unwarranted, unjustified, wrong and legally not tenable.
100. After hearing both the sides we find that the above ground is identical to that of ground No. 1 in ITA No. 66/Ctk/2003 for the asst. yr. 1994-95. We have already decided the issue in favour of the assessee. Following the same ratio the above ground is allowed in favour of the appellant.
101. Grounds of appeal Nos. 8 and 9 are as under:
8. Liability for post-retirement medical benefits to the employees on the basis of 'Actuarial Valuation' : (a) That the learned CIT(A)'s order to sustain the disallowance of Rs. 4,73,022 (the actual amount is Rs. 4,77,543 being Rs. 3,31,225 upto 31st March, 1996 and Rs. 1,46,318 for the year 1996-97) on account of liability towards post-retirement medical benefits to the employees made on the basis of 'Actuarial Valuation' and accordingly, charged to P&L a/c is on misappreciation of facts and law, arbitrary, unwarranted, unjustified, wrong and legally not tenable. . .
(b) That the learned CIT(A) is wrong in not applying the ratio of the decision of Hon'ble Supreme Court in Bharat Earth Movers Ltd. v. CIT and other judicial pronouncements to the said liability of Rs. 4,77,543 towards post-retirement medical benefits to the employees.
(c) Without prejudice to (a) and (b) above, the learned CIT(A) has misappreciated that the aforesaid liability for 'post-retirement medical benefits' charged to P&L a/c is on account of bona fide change in the method of accounting from 'cash basis' to 'accrual basis' based on the said 'actuarial valuation' and as per accounting standards and as approved by the judicial pronouncements of the Hon'ble Supreme Court and other Courts is allowable under the Act in the year under consideration and hence the disallowance is contrary to facts and law, arbitrary, unwarranted, unjustified, wrong and legally not tenable.
9.(a) Liability for leave encashment for the period upto 31st March, 1996, to the employees on the basis of 'actuarial valuation' : (a) That the direction of the learned CIT(A) to sustain the disallowance towards the liability for 'leave encashment' to the employees for the period upto 31st March, 1996 (amounting to Rs. 354.46 lakhs), determined on the basis of 'actuarial valuation' and Accordingly, charged to P&L a/c on the ground that the same relates to 'prior period' is on misappreciation of facts and law, arbitrary, unwarranted, unjustified, wrong and legally not tenable.
(b) That the learned CIT(A) has misappreciated that the aforesaid liability for 'leave encashment' for the period upto 31st March, 1996 (amounting to Rs. 354.56 lakhs), charged to P&L a/c is on account of bona fide change in the method of accounting from 'cash basis' to 'accrual basis' based on the said 'actuarial valuation' and as per accounting standards and as approved by the judicial pronouncements of the Hon'ble Supreme Court and other Courts, is allowable under the Act in the year under consideration and hence this direction of disallowance of liability towards 'leave encashment' for the period upto 31st March, 1996, is arbitrary, unwarranted, unjustified, wrong and legally not tenable.
102. The facts in brief are that the AO found from the P&L a/c that the assessee has claimed deduction for Rs. 4,41,27,681 which consists of leave encashment of Rs. 4,36,50,138 and post-retirement medical benefits of Rs. 4,77,543 holding the same to be contingent liability. The submissions of the assessee that such liability has been provided on the basis of actuarial valuation as per requirement of Accounting Standard AS-15 issued by the ICAI and as per the decision of the apex Court in the case of Shree Sajjan Mills Ltd. v. CIT , the provision towards ascertained liability has to be allowed as an expenditure under Section 28 or Section 37 of the IT Act, was not accepted by the AO. In appeal, the learned CIT(A) held that liability is not contingent and gave only partial relief in respect of leave encashment. He bifurcated the claims pertaining to current year and upto previous year. Claim of encashment of leave pertaining to earlier years amounting to Rs. 3,54,45,645 was disallowed. The learned CIT(A) also disallowed claim on account of post-retirement medical benefits holding that the appellant is not entitled to claim present cost of the future liabilities of post-retirement medical benefits. Being aggrieved with such order of the learned CIT(A), the assessee is in appeal before us.
103. The learned Authorised Representative submitted that the learned CIT(A) ignored the amendments made by the Finance Act, 1995, effective from asst. yr. 1997-98 whereby it was made mandatory to follow either mercantile or cash system of accounting. All assessees were, therefore, required to switch over from mixed system of accounting to absolutely mercantile system of accounting. The total liability accounted for was as a consequence to change in method of accounting of leave encashment and post-retirement medical benefits from cash system to mercantile system and as such the whole of the amount arising on account of change in method of accounting is allowable. It is an admitted fact that the change in this method of accounting has been accepted by the CIT(A) and is not being disputed. Probably the CIT(A) got carried away with the impression that this is a mistake of earlier years now rectified by the appellant ignoring the fact that this is on account of amendment made in the Act.
The interpretation by the CIT(A) that the post-retirement medical benefit liability is different than liability on account of leave encashment is wrong. The reasoning adopted in Bharat Earth Movers Ltd v. CIT that the liability is in respect of services already rendered by the employees and as such are not contingent. The learned Authorised Representative submitted that the above issue is covered in favour of the assessee by the decision of the Hon'ble Supreme Court in the case of Bharat Earth Movers Ltd. v. CIT (supra). The liability has been provided on actuarial valuation as per requirements of AS-15 issued by the ICAI. The learned Authorised Representative further relied on the decision of the Hon'ble Supreme . Court in the case of Shree Sajjan Mills Ltd. v. CIT (supra) and in the case of Metal Box Co. of India Ltd. v. Their Workmen .
104. The learned Departmental Representative, on the other hand, relied on the orders of the authorities below.
105. We have considered the rival submissions made by both the sides and perused the orders of the authorities below and the paper book filed on behalf of the appellant. After hearing both the sides, we find that the learned CIT(A) as well as the learned Counsel for the appellant rely on the decision of the Hon'ble apex Court in the case of Bharat Earth Movers Ltd. (supra). We further find that the learned CIT(A) has passed the order on the basis of the decision of the Hon'ble apex Court. The relevant portion of the learned CIT(A)'s order is reproduced below for the sake of clarity (para 15.3 of the CIT(A)'s order):
15.3 I have given careful consideration to the matter. This issue now stands settled with the decision of the Supreme Court in Bharat Earth Movers Ltd. v. CIT . In this case the question of law referred to the Supreme Court was that, 'whether on the facts and in the circumstances of the case the provision forming a liability for encashment of leave is an admissible deduction? 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'. The Court further held that, 'for an assessee maintaining his accounts on the mercantile system, a liability already accrued, though to be discharged at a future date would be a proper deduction while working out the profit and gains of his business, regard being had to the accepted principles of commercial practice and accountancy'. The apex Court concluded as under:
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.
The above decision of the Supreme Court is applicable to the provision made by the company towards the leave encashment benefits on the basis of actuarial valuation. It is significant to mention here that w.e.f. 1st April, 2002, the provisions of Section 43B will be applicable to any sum payable by an assessee, as an employer, in lieu of any leave at the credit of his employee'. However, the amended provisions are not applicable to the asst. yr. 1997-98 and, therefore, the ratio of the decision in Bharat Earth Movers Ltd. (supra) will be applicable to the claim of the appellant in this regard. However, it is seen that the appellant has also included a claim in regard to post-retirement medical benefits. It has not been clarified how the future liability in this regard accrues in the current year in the manner of leave encashment. In regard to leave encashment, the right to encash a part of leave due to the employee during the year arises in that year. Since the encashment can be done in any subsequent year, the liability for such expenses is to be recognized actuarially. But, no such liability arises regarding post-retirement medical benefits. The appellant is not entitled to claim present cost of the future liabilities be that be post-retirement pension or medical benefits. Therefore, the relevant claim of Rs. 4,73,022 will not be allowable. It is also seen that the provision made in regard to leave encashment benefits represents not only liability accrued during the previous year but also includes liability of earlier years as well. From the actuarial report filed, it is seen that the liability has been determined as on 31st March, 1997. This does not represent the liability which has arisen during the year. The appellant is only entitled to the liability which has arisen during the year being the difference between the liability as on 31st March, 1996, and 31st March, 1997, determined actuarially. The liability for earlier years has accrued in those years and cannot constitute the liability of the previous year under appeal. The AO is directed to allow only the liability pertaining to the previous year on the basis of relevant details to be furnished by the appellant.
106. After considering the above, we are not inclined to interfere in the findings of the learned, CIT(A) and uphold the same. The ground raised by the assessee is dismissed.
107. Ground of appeal No. 12 is as under:
12. Valuation loss of non-moving stores and spares : (a) That the learned CIT(A) has erred, both on facts and law, in holding that the loss of Rs. 166.18 lakhs on account of valuation of non-moving stores and spares is not allowable as revenue expenditure.
(b) That the learned CIT(A) ought to have allowed the aforesaid claim of Rs. 166.18 lakhs on account of valuation of non-moving stores and spares.
108. After hearing both the sides we find that the above ground is identical to that of ground No. 1 in ITA No. 66 for asst. yr. 1994-95. We have already decided the said ground in favour of the appellant. Following the same ratio the above ground is allowed in favour of the appellant.
109. Ground of appeal No. 15 is as under:
Disallowance of part of profits from generation of power : (a) That the learned CIT(A) has erred both on facts and in law, in not allowing the claim of the assessee for Rs. 45,48,73,179 as deduction under Section 115JA(2)(iv) relating to 'power profits' disregarding judicial pronouncements in Anil Starch Products Ltd. v. CIT and other judicial pronouncements and confirming AO's own method 'of computing the profit from power generation at Rs. 12,74,16,684, is incorrect, thereby the disallowance of Rs. 32,74,56,495 under Section 115JA(2)(iv) is on irrelevant considerations, presumptions, conjectures and surmises, arbitrary, excessive, unwarranted, unjustified, wrong and legally not tenable.
(b) That the assessee adopted realizable price from GRIDCO to whom it sold power which is supported by judicial pronouncements and the issue in dispute being computation of profit derived from power generation, the AO's conclusion that in respect of electricity internally consumed by assessee smelter unit is not eligible to be considered for computation of profit from power generation, since the company cannot sell to itself and thereby the 'notional profit' is to be ignored and thereby both the AO and the CIT(A) has misappreciated and confused themselves inasmuch as there is no question of assessee selling power to itself at profit, but that the question really is of ascertaining what are the true and correct profits or gains earned by the power plant, which is to be deducted as required under Section 115JA(1)(iv) of the IT Act.
110. The facts in brief are that the appellant-company has a captive power plant having installed capacity of 720 MW located at Angul. Besides meeting its smelter requirement the company is also selling power to OSEB/GRIDCO. The company claimed that the CPP is an "industrial undertaking" and qualifies for deduction under Section 115JA(2)(iv) of the IT Act, 1961. Referring to the provisions of Sub-section (9) of Section 80-IA of the IT Act, the assessee contended before the AO that the computation of profit of industrial undertaking is to be treated as an independent and distinct unit and the profits have to be determined on ordinary commercial principles following the decision of the Gujarat High Court in the case of Anil Starch Products Ltd. v. CIT . The submissions of the appellant that the total generation of power including power transferred to its smeltering unit has to be considered at its market value and the profit generated therefrom will be eligible under Section 115JA(2)(iv), was not accepted by the AO who held that neither the provision of 80-IA(9) nor the decision relied upon by the assessee in the case of Anil Starch Products (supra) are applicable to the facts of the case. He held that CPP cannot be considered in isolation. The plant was set upto meet the internal requirement of the company. The AO further held that the.assessee cannot sell to himself and derive profit and following his own method the AO recomputed the deduction under Section 115JA of the IT Act. In appeal, the learned CIT(A) confirmed the actions of the AO distinguishing the various case decisions relied on by the appellant. The learned CIT(A) confirmed the actions of the AO relying on the decision of the Allahabad High Court in the case of CIT v. Hind Lamps Ltd. . Being aggrieved with such order, the assessee is in appeal before us.
111. The learned Authorised Representative submitted that the case decision relied on by the learned CIT(A) supports the claim of the assessee. Referring to the provision of Section 80-IA(8), the learned Counsel submitted that the issue is squarely covered by the above provision whereby it has been specifically provided that where goods and services of eligible business are transferred to any other business carried on by the assessee then the market value of such goods and services shall be taken for computing profit of eligible business for deduction under the section. There is absolutely no ambiguity on this issue. The learned Counsel submitted that the decision of the Hon'ble Gujarat High Court in the case of Anil Starch Product Ltd. v. CIT (supra) is squarely applicable to the facts of the case. He further submitted that from the asst. yr. 1988-89, the company is supplying power of its power unit to its smelter units as well as to OSEB/GRIDCO. There is no dispute as regard to eligibility. The AO himself has allowed the deduction but the .market value of power supplied to smelter unit has been worked out on cost basis as against market value ignoring express provisions of Section 80-1. The learned CIT(A) also commits an error by observing that it will be difficult to hold that the appellant has derived profit from internal consumption of power which is contrary to Section 80-1. In each of its units-- mines, refinery, smelter and power plant, separate books of account are maintained and profitability of each of the units can be separately worked out from the books of account maintained therein. Since the company's power plant is an industrial undertaking and the company is engaged in the business of generation and distribution of power, the profit from such an industrial undertaking qualifies for deduction under Section 115JA. The industrial undertaking has to be treated as an independent and a distinct undertaking and the market value of the products transferred is to be considered for the purpose of computing profits. The AO's contention that the assessee, cannot claim notional profit from sale of electricity to itself at the rate at which electricity was actually sold to GRIDCO, is wrong. The learned Authorised Representative also relied on a number of decisions. He submitted that the issue is covered by the decision of Anil Starch Products Ltd. v. CIT (supra).
112. We have considered the rival submissions made by both the sides and perused the orders of the authorities below. We find that as per the provisions of Section 115JA(2J(iv), the book profit is to be reduced by the amount of profit by an industrial undertaking from the business of generation or generation and distribution of power. The above- provision does not mean that a person can sell to himself. We find that the CIT(A) while deciding the issue has considered the various case decisions relied upon by the appellant and has passed the order. The relevant para of his order at para 22.3 reads as under:
22.3 I have given careful consideration to the order of the AO and the submissions made by the appellant-company. While computing the book profit under Section 115JA of the IT Act, 1961, the book profit is to be reduced by 'the amount of profit derived by an industrial undertaking from the business of generation or generation and distribution of power;' as per Clause (iv) below second proviso to Sub-section (2) of the above section. The appellant-company has a CPP. The power generated in the CPP is principally consumed by the appellant-company itself. It has also sold some power to GRIDCO for Rs. 75.74 crores. The issue to be determined here is how to compute the profit from the CPP which has to be excluded while computing the book profit under Section 115JA. More precisely, whether the profit has to be determined only with reference to the power actually sold to GRIDCO or the determination of profit would also encompass the power generated and consumed internally, as contended by the appellant-company. The words 'derived by' used in Clause (iv) cannot have a wide import so as to include any income which can in some manner be attributed to the business. The profits derived by the eligible business have to mean profits and gains includible in the computation of total income chargeable to tax. In this case, it will be difficult to hold that the appellant has derived profit from internal consumption of power. As AO has rightly observed one cannot sell to himself and derive profit. Therefore, what the appellant-company is advocating for exclusion is the fictional profit. Such fictional profit has to be determined by drawing up another set of accounts by presuming non-existent sale at an assumed rate. Section 115JA does not visualize the exclusion of profit determined notionally on the basis of certain assumptions. What it seeks to exclude is the profit derived from the eligible business and included in the book profit as such. Reliance in this regard is placed on the ratio of the decision of Allahabad High Court in CIT v. Hind Lamps Ltd. rendered in the context of Section 80J(1). The decision in the case of Anil Starch Products Ltd. , relied upon by the appellant is not a judgment directly on this issue.
113. After considering the same, we are not inclined to interfere in the findings of the order of the learned CIT(A) and accordingly, uphold the same. The ground raised by the appellant is dismissed.
114. Ground of appeal No. 16 is as under:
16. Liability for leave encashment and post-retirement medical benefits : (a) That, in computing the 'book profits' under Section 115JA of the Act, the learned CIT(A) ought to have allowed the whole amount of Rs. 4,41,27,681 on account of liability towards leave encashment and post-retirement medical benefits to the employees made on the basis of 'actuarial valuation' and accordingly, charged to P&La/c.
(b) That out of the aforesaid amount of Rs. 4,41,27,681, the learned CIT(A)'s direction to allow only the liability for the year 1976-97 towards leave encashment to the employees made on the basis of 'actuarial valuation' (the amount being Rs. 82,04,493 uptq 31st March, 1996, and Rs. 3,54,45,645 for the year 1976-97 totalling to Rs. 4,36,50,113) is on misappreciation of facts and law, arbitrary, unwarranted, unjustified, wrong and legally not tenable.
(c) That sustaining the disallowance of Rs. 4,73,022 (the actual amount being Rs. 4,77,543 upto 31st March, 1996, Rs. 3,31,225 and for the year 1976-97 Rs. 1,46,318) on account of liability towards post-retirement medical benefits to the employees made on the basis of actuarial valuation by the learned CIT(A) is on misappreciation of facts and law, arbitrary, unwarranted, unjustified, wrong and legally not tenable.
(d) That without prejudice to (a) to (c) above, the aforesaid liability of Rs. 4,41,27,681 towards leave encashment and post-retirement medical benefits to the employees determined on the basis of 'actuarial valuation' is an ascertained liability and the P&L a/c of the assessee having been drawn up in accordance with Schedule. VI to the Companies Act, 1956, taking into account the said liability, falls outside the scope of Section 115JA and hence the additions made by the AO and the direction of the learned CIT(A) to sustain a part of the same (i.e., Rs. 3,59,23,188 - Rs. 3,54,45,645 + Rs. 4,73,022) is arbitrary, unwarranted, unjustified, erroneous and legally not tenable.
115. The facts in brief are that the AO has added back the provision of Rs. 441.27 lakhs made towards leave encashment and post-retirement medical benefits for the purpose of computation of book profit under Section 115JA. The AO invoked the provision of Expln. (c) to second proviso to Section 115JA of the IT Act holding that the above provision to be in the nature of contingent liabilities as admitted in the tax audit report in Form No. 3CD. In appeal, the learned CIT(A) confirmed the actions of the AO. The assessee is in appeal before us.
116. The learned Authorised Representative submitted that the liability is an ascertained liability as the same has been provided on actuarial value. He submitted that the issue is covered in favour of the assessee by the decision of the Hon'ble Supreme Court in the case of Bharat Earth Movers Ltd. v. CIT (supra) where it has been held liabilities on these accounts are not contingent liabilities. As per judgment of Apollo Tyres Ltd. v. CIT , the AO cannot take adjustment to the book profits computed on the basis of audited P&L a/c under the Companies Act.
117. The learned Departmental Representative, on the other hand, relied on the orders of the AO and the learned CIT(A).
118. We have considered the rival submissions made by both the sides and perused the orders of the authorities below. We find that the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. v. CIT (supra) has held as under (at p. 280 para 1) :
Therefore, we are of the opinion, the AO while computing the income under Section 115J has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The AO thereafter has the limited power of making increases and reductions as provided for in the Explanation to the said section. To put it differently, the AO does not have the jurisdiction to go behind the net profit shown in the P&L a/c except to the extent provided in the Explanation to Section 115J.
119. We further find that the learned CIT(A) while deciding the issue has considered the decision in the case of Bharat Earth Movers Ltd. (supra) and has directed the AO to allow deduction while computing the book profit under Section . 115JA on account of liability for leave encashment determined actuarially for the previous year only. Accordingly, we do not find any infirmity in his findings and accordingly, uphold the same. The ground by the appellant is dismissed.
ITA No. Sll/Ctk/2003 (asst. yr. 1998-99):
120. Ground of appeal No. 1(a), (b) is as under:
1. Deduction under Section 80HHC of the Act : (a) That on the facts and in the circumstances of the case, the CIT(A) has grossly erred in not allowing the full deduction of Rs. 255,63,20,153 lakhs under Section 80HHC claimed by the assessee on the basis of excluding 'Excise duty' from 'total turnover' in the formula given below :
Export turnover
--------------- x profits of the business Total turnover For the purpose of computing deduction under Section 80HHC of the Act.
(b) That for the purpose of computing deduction under Section 80HHC of the Act, the issue of 'Excise duty' to be excluded from 'total turnover' in the above formula having already been decided as per judicial pronouncements by the Hon'ble Calcutta High Court, Mumbai High Court and various Benches of Tribunal, being superior in judicial hierarchy to the CIT(A), the learned CIT(A) has grossly erred in not following the judicial pronouncements and his upholding the conclusion of AO that 'Excise duty' is to be included in 'total turnover' for the said formula and thereby sustaining the disallowance of Rs. 25,21,62,651 (i.e., Rs. 255,63,20,13 - Rs. 236,41,51,602 is arbitrary and legally untenable.
121. The facts in brief are that during the course of the assessment proceedings the appellant-company revised its claim for deduction under Section 80HHC. In the revised calculation the appellant-company excluded excise duty from 'total turnover' relying upon the decision of Mumbai High Court in the case of CIT v. Sudarshan Chemicals Industries Ltd. (2000) 163 CTR (Bom) 596 and Others Tribunal decisions. The AO did not accept the above contention. According to AO, Clause (ba) to Explanation below proviso to Sub-section (4A) of Section 80HHC of the Act provide that 'total turnover shall not include freight or insurance'. Therefore, as per the above definition, total turnover will include all receipts including statutory dues and duties. The AO has also referred to the decision of the Supreme Court in the case of Chowringhee Sales Bureau (P) Ltd. v. CIT where it has been held that the statutory taxes and duties received by an assessee from sale of goods would form part of its trading receipts. Therefore, the AO adopted the figure of total turnover as submitted by the appellant-company in the original certificate which included excise duty. The AO also referred to 'profits of the business' as defined in Clause (baa) below Explanation to Sub-section (4B) of Section 80HHC and excluded 90 per cent of other income amounting to Rs. 9,301.95 lakhs from profits of the business and recalculated the deduction available under Section 80HHC(1) accordingly. In appeal, the learned CIT(A) relied on the decisions of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. v. CTO and also in the case of Chowringhee Sales Bureau (P) Ltd. (supra) and held that excise duty and sales-tax will form the part of the turnover. Rejecting the various decisions relied upon by the assessee he upheld the order of the AO, The assessee is in appeal before us.
122. The learned Authorised Representative submitted that the issue is squarely covered in favour of the appellant by various decisions whereby it has been categorically held that excise duty, sales-tax are to be excluded from total turnover while computing 80HHC deduction. The judgment of the Bombay High Court in the case of CIT v. Sudarshan Chemicals Industries (supra) is squarely applicable to the facts of the case and AO and CIT(A) were unjustified in not applying the same as in the judicial hierarchy the judgment of the other High Court needs to be followed unless there is contra judgment of the jurisdictional High Court or the Supreme Court. Even in case of two contradictory judgments other than that of the jurisdictional High Court the interpretation favourable to the assessee has to be adopted as has been held in the case CIT v. Vegetable Products Ltd. .
123. The learned Departmental Representative, on the other hand, relied on the orders of the authorities below.
124. We have considered the rival submissions made by both the sides and perused the orders of the authorities below and the paper book filed on behalf of the appellant.
125. After hearing both the sides we find that the above issue is covered in favour of the assessee by the decisions of the Hon'ble Madras High Court in the case of CIT v. Wheels India Ltd./CIT v. India Pistons Ltd. . In this case the Hon'ble High Court following the -decisions in the cases of CIT v. Sudarshan Chemicals Industries Ltd. (supra), CIT v. Chloride India Ltd. and CIT v. K. Rajendranathan Nair had held that sales-tax and excise duty are not to be included in the total turnover for the purpose of computation of special deduction under Section 80HHC of the IT Act. The learned Departmental Representative could not cite any contrary decision of the jurisdictional High Court or of the Hon'ble Supreme Court to counter the above submissions by the learned Counsel.
126. The Hon'ble Madras High Court in the case of CIT v. Wheels India Ltd. (supra) CIT v. India Pistons Ltd. (supra) has held as under (short notes) :
Under Section 80HHC(1) of the IT Act, 1961, in the case of an assessee being an Indian company or a person resident in India, who is engaged in the business of export out of India of any goods or merchandise to which this section applies a deduction of the profits derived by the assessee from the export of such goods or merchandise will be allowed subject to the provisions of Section 80HHC. Sub-section (3) provides that for the purpose of Sub-section (1)(a) where the export out of India is of goods or merchandise manufactured or processed by the assessee, the profits derived from such export shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee. The Explanation to Section 80HHC gives the meaning of the words 'total turnover'. It says that the total turnover shall not'include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act,' 1962. The proviso thereto says that in relation to any assessment year commencing on or after the 1st day of April, 1991, the expression 'total turnover' shall have effect as if it also exclude any sum referred to in Clause (iiia), (iiib) and (iiic) of Section 28. The word 'turnover', when it is not specifically defined in the Act, would actually assume the meaning that the consideration received must be for the sale of goods and it must be available with the assessee for being turned over or, in other words, it must come to the assessee's till as the money belonging to him. In order that an amount can be included in the total turnover it must either be the purchase or the sale price or something incidental to the transfer of the goods dealt with by the assessee. In other words the turnover must relate to the purchase or the sale of the goods made by the assessee. The incidental expenses such as freight and insurance have been specifically excluded. When the definition of total turnover excludes incidental expenses such as freight and insurance, which amount has to be borne by the assessee for safe transportation of his goods from and out of his pocket, it is highly impossible to accept the contention that the term 'turnover' would include the excise duty and sales-tax components which are all indirect taxes and which the assessee has to collect and pay over to the Government and such statutory dues will not have any element of profit of business. The definition of 'export turnover' read along with 'total turnover' would show that they include anything which has nexus with the sale proceeds. On the other hand they would not encompass anything which has no connection whatsoever to the sale proceeds. Section 80HHC is a code by itself and in order to remove difficulties the legislature thought it fit to explain and give meaning to various expressions employed in that section for the purpose of its working. The object of Section 80HHC is required to be kept in mind while considering that section. The general definition of the word 'turnover' or the definition under the sales-tax laws of the case law dealing with the definition of turnover under the State levy cannot be imported into Section 80HHC of the Act, particularly, when such expressions are incorporated and explained in the provision itself. Sales-tax and excise duty are not to be included in the total turnover while computing the deduction under Section 80HHC.
127. Further the Hon'ble Madras High Court has again held that for the purpose of computation of special deduction under Section 80HHC excise duty is not a part of the total turnover. The Hon'ble High Court in the case of CIT v. Sundaram Fasteners Ltd. has held as under (short notes) :
Excise duty does not form part of the total turnover for the purpose of calculation of deduction under Section 80HHC of the IT Act, 1961. It is settled law that though the 'total turnover' may include the receipts of excise duty and sales-tax, etc. in its general parlance and under specific statutes, because of its wider coverage in the definitions given thereunder, it has to be given a restrictive meaning while computing the 'export profit' for the purposes of Section 80HHC, namely, only that part of the receipt for sale consideration is to be taken as part of the total turnover which has an element of profit therein, and accordingly, the receipts of excise duty and sales-tax which do not include an element of profit should be excluded from the 'total turnover'. The word 'turnover' as defined under the Sales-tax Act, therefore, cannot be given effect to while interpreting the expression 'total turnover' under the IT Act.
128. Relying on the above decisions we hold that excise duty shall not form a part of total turnover for the purpose of calculation of deduction under Section 80HHC of the IT Act, 1961.
129. Ground of appeal No. 2 is as under :
2. Nalco's contribution under benevolent scheme : (a) That the learned CIT(A) has erred, both on facts and in law, in upholding the disallowance of Rs. 9.12 lakhs under 'Benevolent Scheme'.
(b) That the learned CIT(A) has confused himself that payment under 'Benevolent scheme' by the employer in the event of death of employee is a contribution to 'fund falling under Section. 40A(9), whereas the fact remains that amount involved is not a 'fund' at all and the disallowance of Rs. 9.12 lakhs is on irrelevant considerations, presumptions, conjectures and surmises, arbitrary, excessive, unwarranted, unjustified, wrong and legally not tenable.
130. After hearing both the sides we find that the above ground is identical to that of ground No. 2 in ITA No. 459/Ctk/2003 for the asst. yr. 1997-98. We have already decided the ground in favour of the appellant. Following the same ratio the above ground is allowed in favour of the appellant.
131. Ground of appeal No. 3 is as under:
3. Peripheral Development Expenses : (a) That the learned CIT(A) has erred both on facts and in law in enhancing the disallowance under 'Peripheral Development Expenses' by Rs. 32.58 lakhs.
(b) That the finding of the learned CIT(A) in holding that the sum of Rs. 93.06 lakhs under 'Peripheral Development Expenses' does not have any nexus with the business of the assessee is contrary to facts, based on irrelevant considerations, presumptions, conjectures and surmises, arbitrary, unjustified and the disallowance of the same is erroneous and legally not tenable.
132. After hearing both the sides we find that the above ground is identical to that of ground No. 3 in ITA No. 67/Ctk/2003 for the asst, yr. 1995-96. We have already decided in favour of the appellant. Following the same ratio the above ground is allowed in favour of the appellant.
133. Ground of appeal No. 5 is as under:
5. Advertisement and Publicity Expenses : That the learned CIT(A) has erred in upholding the disallowance of Rs. 23,13,729 under 'Advertisement and Publicity Expenses' made by the AO and further the said disallowance is on irrelevant considerations, presumptions, conjectures and surmises, arbitrary, excessive, unwarranted, unjustified, wrong and legally not tenable.
134. The AO during the course of assessment proceedings found that the assessee debited an amount of Rs. 86,69,537 towards advertisement and publicity. From the details furnished by the assessee the AO disallowed an amount of Rs. 23,13,720 holding that the amount does not and cannot be considered to be incurred wholly and exclusively for the purpose of business. In appeal, the learned CIT(A) although allowed the objectives behind such payments upheld the actions of the AO holding that it is difficult to see the nexus between the contributions and the business needs of the appellant. Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us.
135. The learned Counsel appearing on behalf of the assessee referred to paper book pp. 260 to 275 and submitted that all the details were furnished before the AO. They further submitted that the appellant is a Government of India undertaking. No ad hoc disallowance can be made. They further submitted that all expenses are supported by proper vouchers. Transactions are fully verifiable. The accounts are audited and this being a Government organization all expenses are totally approved and verified. They further submitted that the amount of disallowance is only on estimate basis. The learned Counsel relied on the decision of the Hon'ble Delhi High Court in the case of Delhi Cloth & General Mills Co. Ltd. v. CIT .
136. The learned Departmental Representative, on the other hand, relied on the orders of the authorities below.
137. We have considered the rival submissions made by both the sides and perused the orders of the authorities below and the paper book filed on behalf of the appellant. We are of the opinion that the expenditure incurred for banner advertisement for various tournaments and advertisement in the souvenir of Cancer Society will advertise the name of the assessee and will inevitably give publicity to the products marketed by the assessee. Accordingly, we are of the opinion that the expenditure incurred in holding such tournaments and expenditure incurred on account of publication of souvenirs will qualify as admissible deduction. We find that the Hon'ble Delhi High Court in the case of Delhi Cloth Mills v. CIT (supra) has held as under:
Question No. 5 pertains to the admissibility of deductions on account of the assessee running the DCM Football Tournament. In CIT v. Delhi Cloth & General Mills Co. Ltd. , this Court has held that the expenditure incurred by the assessee in organizing football and hockey tournaments was an allowable deduction under Section 10(2)(xv). We take the same view. The question is, therefore, answered in favour of the assessee.
138. Relying on the above decision and the decision of the Hon'ble Delhi High Court in the case of Addl. CIT v. Delhi Cloth & General Mills Co. Ltd. , we direct the AO to delete the addition of Rs. 4,22,020. However as regards the remaining amount of Rs. 18,91,709 incurred on account of other publicity in TV, newspapers including banner display, etc., no details were filed either before the AO or CIT(A).
139. Considering the totality of the facts of the case and in the interest of justice we restore the matter back to the file of the AO directing him to give one more opportunity to the assessee to furnish the details for Rs. 18,91,709 regarding the remaining expenditure incurred. We direct accordingly. The ground is partly allowed for statistical purposes.
140. Ground of appeal No. 8 is as under:
8. Loss on account of unserviceable raw materials : That the learned CIT(A) has erred in upholding the disallowance of Rs. 57.50 lakhs under loss on account of unserviceable materials on account of contaminated CT pitch, to raw material) and further that the said disallowance is on irrelevant considerations presumptions, conjectures, and surmises, arbitrary, excessive, unwarranted, unjustified, wrong and legally not tenable.
141. After hearing both the sides we find that the above ground is identical to that of ground Number 1 in ITA No. 66/Ctk/2003 for the asst. yr. 1994-95, as well as ground No. 7 for the asst. yr. 1997-98. We have already decided in favour of the assessee. Following the same ratio the above ground is allowed in favour of the appellant.
142. Ground of appeal No. 10 is as under:
10. Post-retirement medical benefits : (a) That the learned CIT(A) in order to sustain the disallowance of Rs. 5,17,991 on account of liability towards Post-retirement medical benefits to the employees made on the basis of 'Actuarial Valuation' and accordingly, charged to P&L a/c is on misappreciation of facts and law, arbitrary, unwarranted, unjustified, wrong and legally not tenable.
(b) That the learned CIT(A) is wrong in not applying the ratio of the decision of Hon'ble Supreme Court in Bharat Earth Movers Ltd. v. CIT and other judicial pronouncements to the said liability of Rs. 5,17,991 towards post-retirement medical benefits to the employees.
143. After hearing both the sides we find that the above ground is identical to that of ground No. 8 in ITA No. 459/Ctk/2003 for the asst. yr. 1997-98. We have already decided the ground in favour of the assessee. Following the same ratio the above ground is allowed in favour of the appellant.
144. Ground of appeal No. 12 is as under:
Valuation loss of non-moving stores and spares : (a) That the learned CIT(A) has erred, both on facts, and law in holding that the loss of Rs. 103.36 lakhs on account of valuation of non-moving stores and spares is not allowable as revenue expenditure.
(b) That the learned CIT(A) ought to have allowed the aforesaid claim of loss of Rs. 103.36 lakhs on account of valuation of non-moving stores and spares.
145. After hearing both the sides we find that the above ground is identical to that of ground No. 1 in ITA No. 66/Ctk/2003 for the asst. yr. 1994-95. We have already decided the above ground again in favour of the assessee. Following the same ratio the above ground is allowed in favour of the appellant.
146. Grounds of appeal Nos. 4, 6, 7, 9 and 11 are not pressed by the learned Counsel. Accordingly, the above grounds are dismissed.
ITA No. 512/Ctk/2003 (asst yr. 2000-01) :
147. Ground of appeal No. 1 is as under:
1. Deduction under Section 80HHC of the Act : (a) That on the facts and in the circumstances of the case the CIT(A) has grossly erred in not allowing the full deduction of Rs. 1,400.46 lakhs under Section 80HHC claimed by the assessee on the basis of excluding 'excise duty' from 'total turnover' in the formula given below :
Export turnover
--------------- x profits of the business Total Turnover For the purpose of computing deduction under Section 80HHC of the Act and that in sustaining the disallowance of Rs. 1,400.46 lakhs.
(b) That for the purpose of computing deduction under Section 80HHC of the Act, the issue of 'Excise duty' to be excluded from 'total turnover' in the above formula having already been decided as per judicial pronouncements by the Hon'ble Calcutta High Court, Mumbai High Court and various Benches of Tribunal, being superior in judicial hierarchy to the CIT(A), the learned CIT(A) has grossly erred in not following the judicial pronouncements and his upholding the conclusion of AO that 'Excise duty' is to be included in total turnover' for the said formula is arbitrary and legally untenable.
148. After hearing both the sides we find that the above ground is identical to that of ground No. 1 in ITA No. 511/Ctk/2003 for the asst. yr. 1998-99. We have already decided the ground in favour of the appellant. Following the same ratio the above ground is allowed in favour of the appellant.
149. Ground of appeal No. 2 is as under :
2. Nalco's contribution under Benevolent Scheme : (a) That the learned CIT(A) has erred, both on facts and in law, in upholding the disallowance of Rs. 11.55 lakhs under 'Benevolent Scheme'.
(b) That the learned CIT(A) has confused himself that payment under 'Benevolent Scheme' by the employer in the event of death of employee is a contribution to fund falling under Section 40A(9), whereas the fact remains that amount involved is not a 'fund' at all and the disallowance of Rs. 11.55 lakhs is on irrelevant considerations, presumptions, conjectures and surmises, arbitrary, excessive, unwarranted, unjustified, wrong and legally not tenable.
150. After hearing both the sides we find that the above ground is identical to that of ground No. 2 in ITA No. 68/Ctk/2003 for the asst. yr. 1997-98. We have already decided the above ground in favour of the assessee. Following the same ratio the above ground is accordingly, allowed.
151. Ground of appeal No. 3 is as under:
10. Post-retirement medical benefits : (a) That the learned CIT(A)'s order to sustain the disallowance of Rs. 5,56,333 on account of liability towards post-retirement medical benefits to the employees made on the basis of 'Actuarial Valuation' and accordingly, charged to P&L a/c is on misappreciation of facts and law, arbitrary, unwarranted, unjustified, wrong and legally not tenable.
(b) That the learned CIT(A) is wrong in not applying the ratio of the decision of Hon'ble Supreme Court in Bharat Earth Movers Ltd. v. CIT and other judicial pronouncements to the said liability of Rs. 5,56,333 towards post-retirement medical benefits to the employees.
152. After hearing both the sides we find that the above ground is identical to that of ground No. 8 in ITA No. 459/Ctk/2003 for the asst. yr. 1997-98. We have already decided the above ground in favour of the assessee. Following the same ratio the above ground is accordingly, allowed.
153. Ground of appeal No. 4 is as under:
4. (a) Advertisement and Publicity Expenses : That the learned CIT(A) has erred in upholding 50 per cent of the disallowance of Rs. 1,46,455 (i.e., Rs. 73,222) under Advertisement and Publicity Expenses' on estimate and further the said disallowance is on irrelevant considerations, presumptions, conjecture and surmises, arbitrary, excessive, unwarranted, unjustified, wrong and legally not tenable."
(b) That the learned CIT(A) has erred in both facts and in law holding that the gifts made to various Government officials are personal expenses' and hence do not come within the ambit of Section 37(1) of the Act.
154. The facts in brief are that during the course of assessment proceedings the assessee has paid presentation of articles amounting to Rs. 1,46,445. In absence of any satisfactory explanation the nature and purpose of presentation of such articles along with identification of the persons and for want of proof regarding the business nexus vis-a-vis nature and purposes of presentation, the AO disallowed the entire amount. In appeal, the learned CIT(A) allowed partly holding that it may be personal in such expenses. Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us.
155. The learned Authorised Representative referring to p. 223 of the paper book submitted that all the details were furnished before the AO. He further submitted that all expenses have been incurred in the course of business and there cannot be any personal element in case of a company which is an inanimate person and as such no disallowance on account of personal nature is sustained. He further submitted that the appellant is a Government organization. All expenses are totally approved and verified. All expenses are supported by proper vouchers and all transactions are fully verifiable. He further submitted that the amount of disallowance is only on estimated basis and no ad hoc disallowance can be made. He also relied on the decision in the case of Dy. CIT v. Hariyana Oxygen Ltd. (2001) 73 TTJ (Del) 575 : (2001) 76ITD 32 (Del) and the decision of Gujarat High Court in the case of Dinesh Mills Ltd. v. CIT (2002) 173 CTR (Guj) 478.
156. The learned Departmental Representative, on the other hand, relied on the orders of the authorities below :
157. We have considered the rival submissions made by both the sides and perused the orders of the authorities below and the paper book filed on behalf of the appellant. We find that the AO disallowed the expenses incurred on presentation of articles because the assessee could not furnish the purposes of presentation and nexus of the business. The identification of the recipients of the presents was also not furnished. The assessee had only filed sample of expenses but has not filed the full details before the AO or the learned CIT(A).
158. We further find the submissions of the assessee before the learned CIT(A). After considering them and after going through the details furnished before him he has given his findings which are as under:
3.3 I have given careful consideration to the matter. The AO has disallowed the expenses incurred on presentation of articles as the appellant could not furnish the purpose of presentation and thereby the business nexus. Also, the identity of the recipients of the presents was not furnished. In the sample of expenses filed by the appellant, some of the expenses will qualify to be as per the purpose of business. These are gifts for the 8th Alumini Paceni-Club meeting for Rs. 22,250, gifts during the visit abroad by the CMD for Rs.9,874 and gifts to foreign customers for Rs. 4,972. However, other gifts to the Government officers, some of which cover personal occasions like marriage, etc. will not come under the ambit of Section 37(1). The appellant has only filed a sample of expenses. It is to be expected that this will also be the profile of the remaining expenses. Therefore, the AO is directed to disallow only fifty per cent of the expenses, in question, for Rs. 1,46,145 as not for the purpose of the business.
159. Considering the totality of the facts of the case and the findings of the learned CIT(A), we do not find any reason to interfere in the findings of the learned CIT(A) and accordingly, uphold the same. The ground by the appellant is accordingly, dismissed.
160. Ground of appeal No. 5 is as under:
5(a) That the learned CIT(A) has erred, both on facts and in law, in sustaining the disallowance under 'Peripheral Development Expenses' to Rs. 137.99 lakhs.
(b) That the finding of the learned CIT(A) in holding that the sum of Rs. 38.26 lakhs under 'Peripheral Development Expenses' does not have any nexus with the business of the assessee is contrary to facts, based on irrelevant considerations, presumptions, conjectures and surmises and being arbitrary, unjustified and accordingly, the disallowance of the same is erroneous and legally untenable.
161. After hearing both the sides we find that the above ground is identical to that of ground No. 3 in ITA No. 67/Ctk/2003 for the asst. yr. 1995-96. We have already decided the above ground in favour of the assessee. Following the same ratio the above ground is accordingly, allowed.
162. Ground of appeal No. 6 is as under:
6. Valuation loss of non-moving stores and spares : (a). That the learned CIT(A) has erred, both on facts and law, in holding that the loss of Rs. 21.50 crores on account of valuation of non-moving stores and spares, is not allowable as revenue expenditure.
(b) That the learned CIT(A) ought to have allowed the aforesaid claim of Rs. 21.50 crores on account of valuation of non-moving stores and spares.
163. After hearing both the sides we find that the above ground is identical to that of ground No. 1 in ITA No. 66/Ctk/2003 for the asst. yr. 1994-95. We have already decided the above ground in favour of the assessee. Following the same ratio the above ground is accordingly, allowed.
164. Ground of appeal No. 7 is as under:
7. Charging of interest under Section 115P of the Act : (a) That on the facts and in the circumstances of the case the learned CIT(A) has erred both on facts and in law in not deleting interest levied under Section 115P of the IT Act of Rs. 15,94,666 in respect of deposit of dividend tax of Rs. 9,66,46,444 under Section 115-O of the Act with the Central Government. The assessee denies its liability for imposition of interest under Section 115P of the Act. The AO has held on the alleged ground that Nalco has defaulted in depositing dividend tax of Rs.9,66,46,444 under Section 115-O of the Act in respect of interim dividend declared.
(b) That the learned CIT(A) ought to have appreciated that both on facts and in law, there is no default in depositing the said dividend tax of Rs. 9.66 crores under Section 115-O of the Act, particularly when the Board Resolution for payment of interim dividend was conditioned with "subject to approval of the Central Government under Section 205(l)(c) of Companies Act, 1956.
165. The AO while completing the assessment added an amount of Rs. 15,94,666 and interest under Section 115P of the Act for delay in payment of dividend tax as per provision of Section 115-O(iii) of the IT Act, 1961 r/w 115P and Explanation of Chapter XII-D. In appeal, the learned CIT(A) confirmed the actions of the AO. The assessee is in appeal before us.
166. The learned Authorised Representative submitted that both AO and the learned CIT(A) ignored the express provisions of Section 8 of the Act and failed to make distinction in dividend and interim dividend. The assessee has passed resolution dt. 27th March, 2000, for declaring interim dividend which was subject to the approval of Central Government. The Board resolution is only an intention to pay the dividend and as such cannot be termed as declaration of dividend. Under the Companies Act, the power to declare the dividend is with the shareholders only. The board of directors only recommended the dividend which shareholders may approve and declare and may also refuse. In line with the Companies Act, IT Act has distinct provisions in Section 8. As per provisions of Section 8(b) interim dividend (a) and (b) is considered to be income only in the year in which it is unconditionally made available to members, i.e., paid. Accordingly, CIT(A) and AO have gone wrong that the liability to pay distribution tax shall arise on 27th March, 2000, when Board passed a resolution recommending the dividend, as against 8th May, 2000, when interim dividend was actually paid. As per clarification issued by the Department of Company Affairs [letter No. 8/13(205-A)79-CL-V, dt. 18th July, 1981] declaration of dividend is the privilege of the general meeting, i.e., shareholders of the company. The Board can pay interim dividend if authorized by the articles of association. He further submitted that declaration of dividend by the shareholders in general meeting is a debt against the company and enforceable obligation. The shareholders can claim the same as a matter of right. On the other hand, resolution passed by the board for interim dividend does not create any liability and no shareholder can claim the same as a matter of right. Provisions of Section 8(a) and 8(b) of the IT Act are on the same line.
167. The learned Departmental Representative, on the other hand, relied on the orders of the authorities below.
168. We have considered the rival submissions made by both the sides and perused the orders of the authorities below and the paper book filed on behalf of the appellant. We find that the appellant is a Government company. The appellant declared dividend on 27th March, 2000, and paid tax on the same on 18th May, 2000. The appellant wrote a letter dt. 5th April, 2000, to the Ministry of Law, Justice and Company Affairs seeking approval of Central Government for payment of dividend under Section 205(1)(c) of the Companies Act after the same was declared although conditional, i.e., subject to approval. However, it appears from the records that no such approval has been obtained till now.
169. We further find that considering the submissions of the appellant and considering the facts and circumstances of the case, the learned CIT(A) had given the correct finding which is as under:
I have given careful consideration to the matter. Under Sub-section (3) of Section 115-O, the appellant-company is required to pay tax on the distributed profit within fourteen days from the date of declaration of dividend, distribution of dividend or payment of dividend, whichever occurs the earliest. Any default in this regard invites levy of interest under Section 115P. In this case the appellant declared dividend on 27th March, 2000, and paid the tax on the same on 18th May, 2000, for which the AO has charged interest under Section 115P for Rs. 15,94,666. The contention of the appellant is that the resolution dt. 27th March, 2000, containing the declaration of interim dividend for the financial year 1999-2000, was subject to the approval of Central Government under Section 205(1)(c) of the Companies Act, 1956. Therefore, it cannot be taken as the date of declaration of dividend. In this regard the appellant has also filed a copy of the letter dt. 5th April, 2000, addressed to Ministry of Law, Justice and Company Affairs seeking approval of the Central Government under Section 205(1)(c) of the Companies Act. The appellant has not pointed out the date of receipt of the approval from the Ministry of Company Affairs apparently opined that this being a declaration of interim dividend, no such approval is necessary. Section 205(1)(c) of the Companies Act, 1956, provides that 'the Central Government, may if it thinks necessary so to do in the public interest, allow any company to declare or pay dividend for any financial year out of the profits of the company for that year or any previous financial year or years without providing for depreciation'. Therefore, the proper procedure for the company is to seek and obtain the approval of the Government before declaring dividend. In this case the appellant-company has declared the dividend although conditional on the approval of the Government. If the above is to be construed as declaration of dividend for the purpose of Section 205(1)(c) only, the same has to be followed by a 'final' declaration of dividend. The appellant-company has not made any such declaration. What is relevant here is that if the Ministry of Company Affairs opined against the requirement of approval as pointed out, what would constitute the date of declaration. It can only be 27th March, 2000, which is the date of the resolution declaring the dividend. Therefore, the AO has correctly charged interest under Section 115P of the IT Act, 1961, in the facts and circumstances of the case.
170. After considering the above, we are not inclined to interfere in the above findings of the CIT(A) and accordingly, uphold the same. The ground raised by the appellant is dismissed.
171. The appeal filed by the appellant is partly allowed.
172. In the result, all the appeals filed by the appellant are partly allowed.