By TIOL News Service

KOLKATA, MAR 15, 2016: THE issue is - Whether payment of NPV by mine owners as compensation for earlier years when assessee had mined ores, is to be treated as revenue expenditure. YES is the answer.

Facts of the case

The Assessee, a company, is engaged in the business of raising of ore, manufacture of Ferro Alloys and also in trading of iron ore and mining ore. In the course of assessment proceedings AO noticed that the assessee had claimed deduction of a sum of Rs.1,68,94,820/- towards Net Present Value of broken area (NPV). The assessee for continuation of mining on forest areas/land had been required to pay Rs.1,68,94,820 towards Net Present Value of Broken Area (NPV). The said payment had been made to the Divisional Forest Officer in pursuance of the Forest (Conservation) Act, 1980 and as per Demand Notice dated 24.11.05 from the Divisional Forest Officer and as per Order dated 14-16.02.2005 issued by Ministry of Environment & Forests (F. C. Division), Government of India. For the purposes of obtaining Temporary Working Permission for mining the above-mentioned payment was a pre-condition. As per the Supreme Court Order in Writ Petition (Civil) No. 202 of 1995, NPV was to be deposited by the user agency with the State Forest Department and the State Forest Department was to maintain a Fund in accordance with the Guidelines issued under the Forest (Conservation) Act, 1980. According to the Assessee, the payment of NPV was an essential payment required to be made by the Assessee for continuing its existing mining operation in Keonjhor Division of Orissa. The non-payment of NPV would have resulted in adverse consequences including the stoppage of day to day mining operations and thus for the purpose of carrying on its mining business the Assessee was compulsorily required to incur the expenditure towards payment of NPV.

The NPV represented a levy towards compensation for diversion of the forest land into mining activities and the land in respect of which the payment was made, was owned by the Forest Department. By making the payment of NVP, no tangible asset came into existence. The Assessee also submitted that the payment of NPV was not a voluntary payment and it was a payment on the basis of the direction given by the Divisional Forest Officer, Keonjhor working under the Ministry of Environment and Forest, Government of India. It was further submitted by the Assessee that whenever an undertaking was under an obligation to make certain payments as per the directions of the government, the concerned undertaking would be compulsorily required to make such payment in its own business interest and, accordingly, the Assessee had to follow the same. The Assessee further clarified that the payment of NPV being a statutory requirement which had to be complied with by the Assessee wholly and exclusively for the purpose of carrying on of its business, the incurring of such expenditure should be considered as having direct nexus with the business activities of the Assessee. The Assessee thus submitted that before the AO that the payment of NPV should be considered as an allowable revenue expenditure.

The AO was however of the view that the payment in question was a onetime payment. He held that in various judicial pronouncements general principle to decide when an expenditure can be considered as capital or revenue have been laid down. Three major conditions so laid down was to see as to whether (a) the benefit of the expenditure incurred is for several years or for one year; (b) whether the expenditure is nonrecurring outlay or recurring outlay; (c) whether it is lump sum payment or periodic payment. According to the AO the expenditure in question satisfied all the conditions for being treated as a capital expenditure. He therefore disallowed the claim of assessee for deduction for the aforesaid sum as revenue expenditure.

Further, the assessee had claimed in the profit and loss account as deduction while computing income from business a sum of Rs.1,34,08,905/-. The assessee pointed out that a tender was invited by Eastern Coalfields Ltd. (ECL) for assisting ECL in expansion of production of its Rajmahal OCP and corresponding over burden removal. The tender was an International Competitive Bidding invited by the ECL. For the purposes of Bidding the Assessee had to incur expenses aggregating to Rs.1,34,08,905 by way of payments to Consultants, Travelling and other related expenses. According to the Assessee, since the Assessee was already engaged primarily in the business of mining and sale of iron ore in domestic market as well as overseas, its act of bidding of tender was in the process of carrying on its day to day business operations. The Assessee submitted before the AO that submitting tenders and bids in the field of mining and corresponding over burden removal, was a highly sophisticated technical task for which the Assessee had to incur substantial expenditure before submitting the bid. It was also submitted by the Assessee that incurring of the expenses towards payments to Consultants who acted as advisers and assisted in the preparation of tender documents, their travelling expenses and other related expenses, was wholly of revenue nature. By incurring those expenses the Assessee had neither acquired any capital asset nor had acquired any benefit of enduring nature. The Assessee however was not successful in obtaining the bid. The Assessee submitted that though it had not been successful in obtaining the bid, the relevant expenditure was allowable as revenue expenditure.

The AO however was of the view that expenditure for any new project could not be treated as revenue expenditure and that should be capitalised as preliminary expenses. According to the AO the expenses had been incurred for estimating capital and operating costs towards bidding for the contract. He therefore disallowed the claim of the Assessee for deduction of the aforesaid sum as revenue expenditure.

On appeal by the assessee, the CIT(A) deleted both the addition made by AO.

On further appeal by the Revenue, the Tribunal held that,

++ the ITAT, Kolkata Bench in the case of ACIT vs M/s. Ghanashyam Mishra in ITA No.122/Kol/2009 and ITA No.1521/Kol/2009 for A.Y.2005-06 and 2006-07 order dated 27.01.2014 in respect of an identical payment made by an assessee engaged in the business of mining had allowed the deduction holding that the same as revenue expenditure;

++ respectfully following the decision of the Tribunal, the order of CIT(A) was upheld;

++ a perusal of the tender for International Competitive Bidding floated by Eastern Coalfield Limited shows that Eastern Coalfield Limited had invited sealed tenders in three parts from technically, financially sound interested parties from India and abroad with relevant experience in mining and extraction of coal for assisting 'Eastern Coalfields Limited in expansion of the coal production of Rajmahal OCP from 10.5 MTY level to 17 MTY capacity level and corresponding overburden removal. It is a plea of the assessee that since the assessee was engaged primarily in the business of mining and sale of iron ore had explored the possibility of bidding for the aforesaid tender. In this regard the assessee appointed consultants undertook travelling and incurred other related expenses. The AO had not disputed the genuineness and incurring of the expenditure, nor the purpose for which the same were incurred. He proceeded on the assumption that this expenditure was in connection with supporting a new project which was ultimately abandoned;

++ the AO primarily placed reliance on the decision of the Calcutta High Court in the case of Kanoria Chemicals & Industries Ltd. Vs CIT (1995) 78 Taxman 455 (Cal) wherein it was held that expenditure incurred in connection with supporting a new project which had to be abandoned is of capital in nature. The AO also placed reliance on the decision of the Gujarat High Court in the case of Saurashtra Cement & Chemical Industries Ltd. Vs CIT 196 ITR 237 and CIT vs Ambica Mills Ltd. 236 ITR 921. In both the decision it was held that the expenditure incurred for feasibility report for putting up a new project which did not materialize is a capital expenditure. This conclusion of the AO was not correct for the reason that the assessee was already engaged in the business of mining and was exploring the possibility of doing the same business by way of expansion of the existing business. In the decisions referred to by AO, new projects were sought to be explored by Assessee unconnected with the business which the assessee was carrying on. Therefore those decisions were not applicable to the facts of the assessee's case;

++ the facts of the assessee's case are identical to the decision rendered by the Bombay High Court in the case of CIT-5 vs M/s. Essar Oil Ltd in ITA No.921 of 2006 dated 16.10.2008 - 2008-TIOL-530-HC-MUM-IT. In the aforesaid decision the Bombay High Court took a view that the expenditure of a similar nature was revenue expenditure. The assessee in that case was in the business of operation of rigs for extraction of oil. The assessee explored the chances of development in the field of oil exploration for which it had to submit tenders and incur expenditure in that regard. The assessee was not a successful bidder. The expenditure in question was disallowed by the revenue by treating them as capital expenditure. The Bombay High Court upheld the order of Tribunal holding that the expenditure was revenue expenditure. The facts of the aforesaid case are identical to the case of the assessee. Therefore, the conclusion drawn by the CIT(A) is correct and does not call for any interference.

(See 2016-TIOL-371-ITAT-KOL)