Pr. Commissioner Of Income Tax, Kota Rajasthan v. M/S Manglam Cement Ltd., Aditya Nagar

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 357/2017 Pr. Commissioner Of Income Tax, Kota Rajasthan. ----Appellant Versus M/s Manglam Cement Ltd., Aditya Nagar-326520, Morak, TehsilRamganjmandi, Distt Kota Rajasthan. ----Respondent For Appellant(s) : Ms. Parinitoo JainFor Respondent(s): Mr. Sanjay Jhanwar with Ms. Archana HON'BLE MR. JUSTICE K.S.JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYAS Judgment 03/04/2018 1.By way of this appeal, the department has assailed thejudgment and order of the tribunal whereby tribunal has allowedthe appeal of the assessee and dismissed the appeal of thedepartment. 2.Counsel for the appellant has framed following substantialquestions of law:- Appeal No.357/2017 1. Whether the Tribunal was legally justifiedin reversing the order of the CIT(A) andholding that expenditure of Rs.15 lacsincurred on account of contribution forhospital at Ramganj Mandi was allowable asbusiness expenditure u/s 37(1), specifically when there was neither any commercialexpediency nor the expenditure was relatablewholly and exclusively for businesspurposes? 2.Whether the Tribunal was legallyjustified in deleting the addition ofRs.1,05,15,243/- made on account ofdisallowance of various expenses (staffwelfare, general charges, gifts, salespromotion and social welfare) not incurredwholly and exclusively for the purposes ofbusiness and also the same were neitherexplained satisfactorily nor supportingevidences were provided by the assesseespecifically when Rs.29,80,302/- wasconfirmed by the CIT(A)? 3. Whether the Tribunal was legally justifiedindeletingthedisallowanceofRs.53,44,198/- made on account of paymentof compensation to farmers for acquisition oftheir land by holding it to be a revenueexpenditure specifically when as per theregistered deeds the seller did not have anyright of ownership after the transfer of landto the assessee company so it was a capitalexpenditure?indeletingthedisallowanceofRs.53,44,198/- made on account of paymentof compensation to farmers for acquisition oftheir land by holding it to be a revenueexpenditure specifically when as per theregistered deeds the seller did not have anyright of ownership after the transfer of landto the assessee company so it was a capitalexpenditure? 4. Whether the Tribunal was legally justifiedindeletingthedisallowanceofRs.5,82,90,611/- made on account ofpayment of demurrage specifically when theassessee company was not under anobligation to incur the expenditure in termsof agreement with another party? 5. Whether the Tribunal was legally justifiedindeletingthedisallowanceofRs.39,35,948/- made on account of expensesincurred for railway siding as revenueexpenditure specifically when the assesseeitself has shown it as part of fixed asset in itsbalance sheet?”indeletingthedisallowanceofRs.39,35,948/- made on account of expensesincurred for railway siding as revenueexpenditure specifically when the assesseeitself has shown it as part of fixed asset in itsbalance sheet?” 3.The facts of the case are that the return of income was filedby the assessee which was processed u/s.143(1) and the case wasselected for scrutiny. A notice u/s.143(2) was issued. Theassessee company is a private company engaged in the businessof manufacturing of cement and generation of power throughcapital power plants and wind mills. The Assessing Officer, during 3.The facts of the case are that the return of income was filedby the assessee which was processed u/s.143(1) and the case wasselected for scrutiny. A notice u/s.143(2) was issued. Theassessee company is a private company engaged in the businessof manufacturing of cement and generation of power throughcapital power plants and wind mills. The Assessing Officer, during the course of assessment proceedings made various additions.The Assessing Officer disallowed the claim of expenditure of Rs.15lacs incurred by way of contribution made by the assessee toDistrict Administration towardsconstruction of hospitalatRamganj Mandi by holding that the same is a capital expenditureand not revenue expenditure and hence disallowed u/s.37(1) ofthe I.T. Act, 1961. The Assessing Officer disallowed the socialwelfare expensesu/s.371(1) of Rs.12,00,436/- by relying on thedecision of Hon'ble Supreme Court in the case of Arvind MillsLimited vs. CIT (197 ITR 422) which was spent by the assessee ascontribution made to gram panchayat towards its welfare fund,repair o police station at Morak/Dara, supply of sweets forBudhkhan Gram Panchayat and the assessee had claimed it asbusiness expenditure. The Assessing Officer made additions bydisallowing the expenses incurred by the assessee which hasclaimed to be incurred for the purpose of business under theheads staff welfare expenses(Rs.55,82,016/-), general expenses(Rs.5,33,409/-) gift expenses(Rs.14,30,302/-), Sales promotionexpenses(Rs.17,69,080/-) and taxi hiring expenses etc. as theassessee has not produced proper supporting evidence/details ofthe expenditure during the course of assessment proceedingswhich could prove its claim. The Assessing Officer disallowed theexpenditure incurred amounting to Rs.53,44,198/- as theassessee had claimed the same to be compensation of land tofarmersfor mining use. The expenditure was claimed as revenueexpenditure which was disallowed u/s.37(1) and treated as capitalexpenditure by the Assessing Officer. During the year underconsideration the assessee had claimed demurrageunder the main head "Freight Expenses" on account of claims lodged by thedifferent clearing agents. The Assessing Officer disallowed theexpenditure claimed by the assessee of Rs.5,82,90,611/- bystating that in the agreement between the assessee and theclearing agents it has been mentioned that responsibility of anyloss due to shortage and/or damages at railway station as well astransit wagon position would be the responsibility of the clearingagent. There is no clause that reimbursement of demurrage paidby the clearing agents would be made by the assessee company.Moreover, demurrage has been levied in the form of fine for notadhering to the rules byelaws established by the railways. Hence,the expenditure being fine in nature was disallowed by theAssessing Officer During the year under consideration theassessee has debited an amount of Rs.39,35,948/- under theHead "Railway Siding Expenses"claiming it to be of revenueexpenditure in nature. The Assessing Officer disallowed the claimof the assessee and treated the expenditure as capital in natureby stating that as the work for maintenance of the railway sidingwas entrusted to M/s. Khandelwal Construction, Kota vide workorder dated 01.04.2009 and the expenditure on the work ofrailway siding resulted in enduring benefit to the assesseecompany, these expenses were considered as capital in nature.Further, the assessee had shown railway siding under the headFixed assets in the balance sheet. The Assessing officer alloweddepreciation @ 10% on total payment and disallowed theremaining expenditure. Regarding second issue of expenditure of Rs.45lacs incurred on account of contribution forhospital, the same was raised in earlier appealNo.138/2014 however, the same was notadmitted. In that view of the matter, we are ofthe opinion that the said question in appealno.138/2014 was not admitted, thus same isnot required to be considered in this appealand the issue is covered by the decision ofSupreme Court in Sri Venkata SatyanarayanaRice Mill Contractors Co. vs. Commissioner ofIncome Tax reported in (1997) 223 ITR 101(SC) wherein it has been held as under:- The Principles for determining whether thepayment of the kind made by assessee couldbe regarded as a business expense are well-settled. What is to be seen is not whether itwas compulsory for the assessee to make thepayment or not but the correct test is that ofcommercial expediency. As long as thepayment which is made is for the purposes ofthe business, and the payment made is not byway of penalty for infraction of any law, thesame would be allowable as a deduction. Thecontribution which was made by the assesseecould under no circumstances be regarded asillegal payments of payments which wereopposed to public policy. This was not a casewhere the assessee was paying any bribe toany person nor is this a case where money wasbeing contributed to any private fund or for thebenefit of any individual which could beregarded as a form of illegal gratification. By avoluntary scheme, with which the DistrictCollector was associated, the District WelfareFund had been established for the benefit ofthe general public. The payment to such a fundwhich was openly made by the Millers andwhich fund being used for public benefit couldnot be regarded as being opposed to publicpolicy. Requiring payment to be made for thejust cause which would entitle of businessmanto obtain a licence or permitted cannot beregarded against the public policy. Anycontribution made by an assessee to a publicwelfare fund which is directly, connected orrelated with the carrying on of the assesseebusiness which result in the benefit to theassessee business has to be regarded an as allowable deduction under section 37 (1). Sucha donation , whether voluntary or at theinstance of the authorities concerned, whenmade to Chief Minister's Drought relief fund ofa District Welfare Fund established by theDistrict Collector or any other Fund for thebenefit of the public and with the view tosecure benefit to the assessee’s business,cannot be regarded as payment opposed topublic policy. It is not as if the payment in thepresent case had been made as an illegalgratification. There is no law which prohibitsthe making of such a donation. The mere factthat making of a donation for charitable orpublic cause or in public interest results in theGovernment giving patronage or benefit can beno ground to deny the assessee a deduction ofthat amount under Section 37(1) when suchpayment had been made for the purpose ofassessee’s business. 5.Issue no.2 is covered by the decision in ITA No.358/2017where while considering issue no.3, this court has held as under:- Counsel for the respondent has relied on thedecision of Gujarat High Court in CIT-I vs.Indian Petrochemical Corporation Ltd.(2016) 74 Taxmann.com 163 (Gujarat), ithas been held as under:- 5.Issue no.2 is covered by the decision in ITA No.358/2017where while considering issue no.3, this court has held as under:- Counsel for the respondent has relied on thedecision of Gujarat High Court in CIT-I vs.Indian Petrochemical Corporation Ltd.(2016) 74 Taxmann.com 163 (Gujarat), ithas been held as under:- 8. We have heard both the learned counseland perused the record. We have also gonethrough the decisions cited before us. TheTribunal has followed its own decision in thecase of Gujarat Narmada Valley FertilizersCo. Ltd. and held in favour of the assessee.This Court in the case of Gujarat State ExportCorporation Ltd. (supra) has held thatpayment of surtax was not an allowablededuction and that by paying the entrancefee to the sports club the assessee had nointention to acquire any capital asset or takeadvantage for the enduring benefit of thebusiness and that by common sensestandards, it could be stated that it was forrunning the business or for bettering theconduct of its business and therefore theamount paid as entrance fee was deductible.In view of the said decision, we find that thequestion raised is required to be answered infavour of the assessee. 11.Taking into account the same, thetribunal has confirmed the finding arrived atby the CIT(A)observing as under:- 10.3 We have heard the rival contentions,perused the material available on record. TheLd. CIT(A) has given a finding on fact byobserving as under:- “In my opinion, the main purpose ofacquiring the land was to extract lime stoneswhich is the raw material for assessee. Afterthe extraction the land becomes unusable forany other purpose. The assessee cannot usethis land perpetually as in the case of anormal agricultural or residential land, thisland can be used till its deposit (i.e. limestone) lasts. Therefore, I agree with thefinding of the AO in AY 2008-09 wherein heallowed such expenditure in 20equalinstallments. Considering the above, the AOis directed to allow this expenditure equallyin 20 years including the current year.Therefore, addition of Rs. 46,56,887/- isconfirmed. The AO is directed to allowexpenditure of Rs. 2,45,099/-.” There is no dispute with regard to the factthat the AO himself had allowed expenditurein 20 equal installments in AY 2008-09. Inthe year under appeal, the Revenue has notdemonstrated the change into the facts andthe reason for changing the stand. Therefore,we do not see any reason to interfere intothe order of the Ld. CIT(A), same is herebyaffirmed. This ground is dismissed. 12.We are of the opinion that expenseswhich are done for the business purpose wasrightly allowed by the CIT(A), therefore, thisissue will not arise. 6.Issue no.3 is covered by the decision in ITA No.358/2017where while considering issue no.5, this court has held as under:- The counsel for the respondent has reliedupon the decision of Gujarat High Court inIndian Petrochemical (supra). 17.The tribunal has upheld the finding ofCIT(A). We are in complete agreement withthe view taken by the tribunal. Therefore,this question will not arise. The counsel for the respondent has reliedupon on the following decisions:- 19.1 In Mahalakshmi Sugar Mills CompanyLtd. vs. CIT (1984) 19 Taxmann 447 (Delhi),it has been held as under:- Payment of demurrage is not in the natureof damage or penalty and it is merely acharge made by the railway administrationto compensate itself for keeping the goodsof the assessee in its custody beyond aparticular time. Payment of demurrage isincidental to business and its impact is toincrease the cost to the assessee, of thegoodstransported.Therefore,theexpenditure on this account can be said tobe laid out wholly any exclusively for theassessee's business. 19.2 In Nanhoomal Jyoti Prasad vs. CIT,(1980) 123 ITR 269 (Allahabad), it hasbeen held as under:- The counsel for the respondent has reliedupon on the following decisions:- 19.1 In Mahalakshmi Sugar Mills CompanyLtd. vs. CIT (1984) 19 Taxmann 447 (Delhi),it has been held as under:- Payment of demurrage is not in the natureof damage or penalty and it is merely acharge made by the railway administrationto compensate itself for keeping the goodsof the assessee in its custody beyond aparticular time. Payment of demurrage isincidental to business and its impact is toincrease the cost to the assessee, of thegoodstransported.Therefore,theexpenditure on this account can be said tobe laid out wholly any exclusively for theassessee's business. 19.2 In Nanhoomal Jyoti Prasad vs. CIT,(1980) 123 ITR 269 (Allahabad), it hasbeen held as under:- 1. Demurrage charged by part authoritiesis in the nature of compensation for delayin clearing the goods from the godowns ofthe port authorities. It includes amountchargeable for storage and safe custody ofthe goods by the port authorities beyondthe free period allowed under port rules. Inthe instant case, the demurrage paid bythe assessee was not a fine paid for anycriminal act but compensation for use ofthe port facilities beyond the permissiblefree period. 2. once the unauthorized import of goodshad been regularized on payment of fine,commercial expediency dictated the assessto take delivery of the goods after payingthe demurrage failing which its stock-in-trade would have been auctioned by theport authorities to realize their dues. Thepayment was, thus, made by the assesseeto preserve its stock-in-trade and to utilizeit for its manufacturing business. 3.The impugned expenditure was,therefore, held to be a permissible revenue deduction under Section70(2) both theparties had drawn the High Court'sattention to cases of various types dealingwith litigation costs, penalty paid forbreach of contract, expenses incurred forcarrying on illegal business, money 'lostthrough theft, amount paid as fine forinfraction of law, etc., where questionsregarding the admissibility of expensesarose. The High Court, however, observedthat no useful purpose could be served byreferring to decisions in those cases asnone of them dealt with a case of thepresent type.20.In our considered opinion, thedemurrage which has been considered wasnot expenses under Section 37 of theIncome Tax Act and the CIT(A) as well asTribunal while considering the same hasrightly observed as under:- 15.3 We have heard the rival contentions,perused the material available on record.We find that the Ld. CIT(A) has given afinding on fact that there is no clause bywhich the demurrages was required to bepaid by the C & F Agent not by theassessee. It is also not brought on recordby the revenue that the assessee hadclaimed such expenditure from C & Fagent. Under these facts, we are of theview that the Ld. CIT(A) has rightlyfollowed the decision of the Hon’ble DelhiHigh court in the case of Mahalaxmi SugarMills Co. Ltd. Vs. CIT and Hon’bleAllahabad High Court in the case ofNanhoomal Jyoti Prasad Vs. CIT (supra).We do not see any merit into the ground ofrevenue’s appeal, same is hereby affirmed.This ground is dismissed. 8.Issue no.5 is covered by the decision in ITA No.358/2017where while considering issue no.7, this court has held as under:- 16.3 We have heard the rival contentions,perused the material available on record.The issue which required to be adjudicatedis whether the AO was justified indisallowaning the claim of the expenditureincurred on maintenance of railway trackat the railway siding. The AO whiledisallowing the expenditure as relied upon 8.Issue no.5 is covered by the decision in ITA No.358/2017where while considering issue no.7, this court has held as under:- 16.3 We have heard the rival contentions,perused the material available on record.The issue which required to be adjudicatedis whether the AO was justified indisallowaning the claim of the expenditureincurred on maintenance of railway trackat the railway siding. The AO whiledisallowing the expenditure as relied upon the judgment of the Hon’ble Madras HighCourt in the case of CIT vs. Madura Coats205 Taxman 357. The contention of theassessee is that the judgment of theHon’ble Madras High Court is notapplicable as the fact is that the caseswere with regard to replacement of oldmachinery and renovation of the buildings.We find that in the case of CIT vs. MaduraCoats (supra) the AO disallowed the claimin respect of replacement of Auto Corneretc by holding that replacement of oldmachinery cannot be treated as therevenue expenditure. This view of the AOwas upheld by the Hon’ble High Court. Inthe present case, it is not the case ofreplacement of old machinery by newmachinery and repair of rented buildings.In the present case the expenditure isincurred on the day to day maintenance ofthe railway tracks at the railway siding.Therefore, we do not see any reason tointerfere into the order of the Ld. CIT(A),same is hereby affirmed. This ground ofRevenue’s appeal is dismissed. 23. In our considered opinion, it was notfor laying new railway lineand the tribunalhas rightly recorded the finding asreproduced above. 9.In view of the above, no substantial question of law arises. 10.The appeal stands dismissed. (VIJAY KUMAR VYAS),J (K.S.JHAVERI),J Brijesh 21.