The Assistant Commissioner of Income Tax, Srinagar V. M/s Khyber Industries Pvt. Ltd., Srinagar

ITA 479/ASR/2015

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 5538 (ITAT-AMRITSAR)
• Duration Of Justice: 1 year(s) 10 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-07-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 08-03-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 02-09-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DHARAM SINGH LD
• Assessee Lawyers: P K MISRA LD
• Keywords: Search and seizure; Revenue expenditure; Capital expenditure
• Section: 145; 37; 28

Judgement Text

IN THE INCOME TAX APPELLATE TR IBUNAL AMRITSAR BENCH; AMRITSAR BEFORE SH. T.S. KAPOOR, ACCOUNTANT MEMB ER AND SH. N.K.CHOUDHRY, JUDICIAL MEMBER I.T.A. NO. 479(ASR)/2015 ASSESSMENT YEAR: 2011-12 ASST. CIT, CIRCLE-3, SRINAGAR. PAN:AAACK7457J VS. M/S. KHYBER INDUSTRIES PVT. LTD., KHAYAM BUILDING, NOWPORA, SRINAGAR. (APPELLANT) (RESPONDENT) APPELLANT BY : SH. DHARAM SINGH (LD. D R) RESPONDENT BY : SH. P. K. MISRA (LD. C A) DATE OF HEARING: 26.07.2017 DATE OF PRONOUNCEMENT: 26.07 .2017 ORDER PER N. K. CHOUDHRY (JM): THE PRESENT APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE LD. CIT(A), JAMMU, DATED 0 4.06.2015, RELATING TO THE ASSESSMENT YEAR: 2011-12. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. WHETHER THE LD. COMMISSIONER OF INCOME TAX (A) WAS JUSTIFIED IN DELETING THE ADDITION MADE ON ACCOUNT OF DISALLOWA NCE OF LEAVE ENCASHMENT KEEPING IN VIEW THE FACT THAT NO SUCH LI ABILITY WAS REFLECTED WHILE PREPARING THE BALANCE SHEET FOR THE ASSESSEE IS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING. 2. WHETHER THE LD. COMMISSIONER OF INCOME TAX (A) WAS JUSTIFIED IN DELETING THE ADDITION MADE WHICH DOES NOT CONSOLE W ITH THE PROVISIONS OF SUB-SECTION (1) OF SECTION 145 OF THE INCOME TAX ACT, 1961 AS THE INCOME IS TO BE COMPUTED IN ACCORDANCE WITH THE SYS TEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. ITA NO.479(ASR)/2015 ASST. YEA R: 2011-12 2 3. WHETHER THE LD. COMMISSIONER OF INCOME TAX (A) WAS JUSTIFIED IN RESTRICTING THE DISALLOWANCE OF EXPENSES UNDER VARIOUS HEADS FR OM 15% TO 8 % WHEN THE ASSESSING OFFICER HAD FAILED TO REBUT THE FINDIN G OF THE ASSESSING OFFICER DURING THE APPELLATE PROCEEDINGS ALSO. 4. WHETHER THE LD. COMMISSIONER OF INCOME TAX (A) WAS JUSTIFIED IN HOLDING THAT THE EXPENDITURE ON THE DEVELOPMENT OF ROAD AND QUARRY IS REVENUE EXPENDITURE AND NOT CAPITAL EXPENDITURE AS HELD BY THE ASSESSING OFFICER. 3. THE BRIEF FACTS OF THE CASE AS NOTED IN THE ASSESSM ENT ORDER ARE AS UNDER THAT THE ASSESSEE IS RUNNING A CEMENT MANU FACTURING PLANT AND DURING THE RELEVANT PREVIOUS YEAR 2010-11, THE ASSESSEE HAS DECLARED TOTAL SALE TO THE TUNE OF RS. 140,10,91,19 7/-. AFTER DEBITING VARIOUS EXPENSES THE ASSESSEE DECLARED NET TAXABLE INCOME OF RS. (-) 1,43,92,746/-. A. THE LD. ASSESSING OFFICER DETERMINED THE LIABILITY QUA LEAVE ENCASHMENT BY HOLDING AS UNDER: RS.18,49,982/- IS ON ACCOUNT OF LEAVE ENCASHMENT FOR THE YEAR 2008-09 AND RS. 2,62,744/- FOR THE YEAR 2009-1 0. DURING 2008-09, NO PROVISION WAS MADE FOR LEAVE ENCASHMENT AS MANAGEMENT HAD DECIDED THAT NO LEAVE ENCASHMENT SHA LL PAID AS THERE WAS CONSTANT STRIKES AND HARTALS WHICH RESULT ED IN HUGE LOSS OF PRODUCTION AND EMPLOYEES AT TIMES TOOK UNDUE BEN EFIT OF RANDOM STRIKE CALLS. HOWEVER, DURING THE YEAR UNDER ASSESS MENT, EMPLOYEES NEGOTIATED WITH THE MANAGEMENT AND ARM-TW ISTED THE COMPANY TO PROVIDE FOR THESE LEAVE ENCASEMENTS, WHI CH WERE ACCOUNTED FOR. SINCE THESE LIABILITIES CRYSTALLIZED DURING THE YEAR UNDER ASSESSMENT, THESE HAVE BEEN CLAIMED AS EXPENS E DURING THE YEAR. THE CONTENTION OF THE ASSESSEE IS NOT CONVINC ING FOR LEAVE ENCASHMENT. THE ASSESSEE POINTED OUT THAT DUE TO CO NTINUED DISTURBANCES IN KASHMIR VALLEY DURING EARLIER YEARS , IT HAD TO INCUR HEAVY LOSSES DUE TO SHUT DOWN OF PLANT ON NUMBER OF OCCASIONS AND MANAGEMENT DECIDED TO ADJUST EARNED LEAVES DUE TO T HE EMPLOYEES AGAINST THESE FORCED LEAVES. HOWEVER, DUE TO THE NA TURE OF ACTIVITIES OF THE ASSESSEE, ASSESSEE-COMPANY ACCEDED TO THE DE MANDS OF THE EMPLOYEES DURING THE YEAR UNDER ASSESSMENT FOR PAYM ENT OF LEAVE ENCASHMENT OF EARLIER YEARS. SINCE THE SAID EXPENSE WAS NOT CLAIMED IN EARLIER YEARS, THE SAME IS DISALLOWED AS UNDER ITA NO.479(ASR)/2015 ASST. YEA R: 2011-12 3 MERCANTILE SYSTEM OF ACCOUNTING THE EXPENSE IS TO B E CLAIMED ON ACCRUED BASIS. B. FURTHER THE ASSESSING OFFICER WHILE DEALING WITH UN VERIFIABLE EXPENSES CONCLUDED AS UNDER: THAT THE ASSESSEE COMPANY HAS CLAIMED THE FOLLOWING EXPENSES, WHICH COULD NOT BE VERIFIED COMPLETELY WI TH THE VOUCHERS PRODUCED BECAUSE SOME OF THE VOUCHERS ARE SELF MADE AND NO INDEPENDENT SUPPORT, WAS AVAILABLE DUE TO THE NATUR E OF THE SAID EXPENSE. IN ABSENCE OF PROPER BILLS AND VOUCHERS DI SALLOWANCE OF 15% OF THESE EXPENSES WILL MEET THE END OF JUSTICE. TRAVELLING & CONVEYANCE RS. 40,11,314/- STAFF WELFARE RS. 1,51,158/- ENTERTAINMENT RS. 2,04,714/- LABOUR WELFARE RS. 64,55,332/- MISC. EXPENSES RS. 8,55,988/- ENTERTAINMENT RS. 2,04,714/- TOTAL RS. 1,18,83,220 FURTHER SINCE THE ASSESSEE FAILED TO PRODUCE THE CO MPLETE BILLS AND VOUCHERS IN RESPECT OF THESE EXPENSES DURING THE AS SESSMENT PROCEEDINGS AND COULD NOT SUBSTANTIATE COMPLETELY THE ABOVE EXP ENDITURE. IN ABSENCE OF PROPER BILLS AND VOUCHERS AND UNVERIFIABLE BILLS OF THESE EXPENDITURES, DISALLOWANCE OF 15% OF ABOVE EXPENSES IS MADE TO TH E INCOME OF THE ASSESSEE ON ACCOUNT OF UNVERIFIABLE NATURE OF EXPEN SES CLAIMED BY THE ASSESSEE. C. THE ASSESSING OFFICER FURTHER IN RESPECT OF EXPENDI TURE ON ACCOUNT OF DEVELOPMENT OF ROAD/QUARRY DETERMINED TH E ADDITION BY HOLDING AS UNDER: THE ARGUMENT OF THE ASSESSEE THAT THE EXTRACTION AN D TRANSPORTATION OF LIMESTONE IS GERMANE TO THE CARRY ING ON THE BUSINESS OF THE COMPANY, WHICH CANNOT PRODUCE WITHOUT LIMESTONE AND THE EXPENSE INCURRED IS SIMPLY FOR SMOOTH FUNCTIONING OF THE FA CTORY OF THE COMPANY, HENCE THE SAME IS TO BE CONSIDERED AS REVENUE EXPEN DITURE CANNOT BE ACCEPTED. MERELY BECAUSE THE EXPENDITURE WAS INCURR ED IN CONNECTION WITH THE BUSINESS OF THE ASSESSEE OR FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE OR WAS INCIDENTAL TO THE BUSINESS OF THE ASSESSEE, IT WILL NOT MAKE THE EXPENDITURE REVENUE EXPENDITURE. EXPENDITURE FOR TH E PURPOSE OF BUSINESS OR INCIDENTAL TO THE BUSINESS MAY ALSO BEE OF CAPIT AL NATURE. IN THE CELEBRATED CASE OF BRITISH INSULATED AND HELSBY CAB LES LTD. VS. ATHRTON (1925) (10) TC 155 (HL), LORD CAVE ADDRESSED HIMSEL F FIRST TO THE QUESTION ITA NO.479(ASR)/2015 ASST. YEA R: 2011-12 4 WHETHER THE EXPENDITURE WAS FOR THE PURPOSE OF BUSI NESS. HAVING HELD THAT THE EXPENDITURE WAS INCURRED FOR THE PURPOSE OF BUS INESS, HE EXAMINED THE QUESTION WHETHER THE EXPENDITURE WAS OF CAPITAL OR REVENUE NATURE. LORD CAVE CAME TO THE CONCLUSION THAT, EVEN THOUGH THE E XPENDITURE WAS FOR THE PURPOSE OF BUSINESS, IT HAS BEEN MADE, NOT ONLY ON CE AND FOR ALL BUT WITH A VIEW TO BRINGING INTO EXISTENCE AN ASSET OR AN AD VANTAGE FOR THE ENDURING BENEFIT OF A TRADE. FROM THIS HE CAME TO THE CONCL USION THAT THE EXPENDITURE IN QUESTION IN THAT CASE WAS OF CAPITAL NATURE. SECTION 37 (1) OF THE ACT PROVIDES: GENERAL (1) ANY EXPENDITURE (NOT BEING EXPENDITUR E OF THE NATURE DESCRIBED IN SECTION 30 TO 36 AND SECTION 80VV AND NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENSES OF THE ASSESSEE), LAID OUT OR EXPANDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS OR PROFESSION SHALL BE ALLOWED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OF PROFESSION. THE SECTION ITSELF RECOGNIZES THAT EXPENDITURE FOR THE PURPOSE OF BUSINESS MAY BE IN THE NATURE OF CAPITAL EXPENDITUR E. SUCH EXPENDITURE CANNOT BE ALLOWED AS DEDUCTION IN COMPUTING THE INC OME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSI ON. IN THE CASE OF THE ASSESSEE, AN ASSET OF ENDURING B ENEFIT HAS BEEN BOUGHT INTO EXISTENCE BY INCURRING EXPENDITURE OF C ONSIDERABLE SUM OF MONEY. IT HAS CONSTRUCTED A NEW ROAD. THIS IS NOT T HE CASE OF REPAIR OR ROAD. THOUGH SOME ELEMENT OF REPAIR CANNOT BE RULED OUT KEEPING IN VIEW THE HILLY TERRAIN AND UNUSUAL RAINS IN THIS REGION. THE ASSESSEE HAS PAID THE TOTAL CONSTRUCTION COST OF THE ROAD. IT HAS ACQ UIRED AN ASSET. THERE WAS AN ADDITION TO AND EXPANSION OF PROFIT MAKING APPAR ATUS OF THE COMPANY. HENCE, THE EXPENDITURE HAS TO BE TREATED AS CAPITAL EXPENDITURE. IN VIEW OF THE ABOVE DISCUSSIONS, IT IS CLEAR THAT THE EXPENDITURE OF RS. 23,16,737/- INCURRED BY THE ASSESSEE ON THE CONS TRUCTION OF THE NEW ROAD, WHICH HAS BEEN DEBITED UNDER THE HEAD DEVELO PMENT OF ROAD/QUARRY IS A CAPITAL EXPENDITURE AND NOT REVEN UE EXPENDITURE. THUS, BEING CAPITAL EXPENDITURE THIS EXPENDITURE CLAIMED BY THE ASSESSEE IN ITS P & L ACCOUNT IS DISALLOWED AND ADDED TO THE TOTAL INC OME OF THE ASSESSEE. FINALLY THE LD. ASSESSING OFFICER MADE AN ADDITION OF RS. 23,16,737/- IN THE INCOME OF THE ASSESSEE . 4. FEELING AGGRIEVED BY THE ASSESSMENT ORDER, THE ASS ESSEE PREFERRED THE FIRST APPEAL BEFORE THE LD. CIT(A), W HO BY ITS ORDER DELETED THE DISALLOWANCES WHICH IS UNDER CONSIDERAT ION IN THE INSTANT APPEAL BY HOLDING AS UNDER: ITA NO.479(ASR)/2015 ASST. YEA R: 2011-12 5 A. THE APPELLANT SUBMITS THAT THE ASSESSING OFFICER M ADE DISALLOWANCE ON ACCOUNT OF LEAVE ENCASHMENT A) RS. 1849982/- SHORT PROVIDED DURING THE YEAR 200 8-09 FOR LEAVE SALARY B) RS. 262744/- SHORT PROVIDED DURING 2009-10 FOR LEAVE SALARY A) RS. 18,49,982/- REPRESENTING LEAVE ENCASHMENT FO R THE YEAR 2008-09 IS BECAUSE OF THE FACT THAT NO PROVISION WA S MADE FOR LEAVE ENCASHMENT DURING THAT YEAR IN VIEW OF CONSTANT STR IKES AND HARTALS WHICH RESULTED IN LOSS OF PRODUCTION TO THE COMPANY AND MANAGEMENT DECIDED NOT TO PAY LEAVE ENCASHMENT AND TREATED LEAVES TAKEN DURING HARTALS AND STRIKES AS LEAVES O FFICIALLY AVAILED BY THE EMPLOYEES. IT IS HUMBLY SUBMITTED THAT LEAVE ENCASHMENT BECOMES DUE TO EMPLOYEES WORKING IN THE ORGANIZATIO N WHO DO NOT AVAIL LEAVES ALLOWED AS PER LAW WHICH IS COMPENSATE D MONETARILY FOR SUCH UNAVAILED LEAVES. THE SAID AMOUNT OF RS. 1 8,49,982/- DOES NOT REPRESENT LEAVES DUE TO EMPLOYEES ON RETIREMENT . THE APPELLANT SUBMITS THAT THE IT HAD TO ACCEDE TO THE DEMANDS OF EMPLOYEES IN THE YEAR UNDER APPEAL, THE LEAVE ENCAS HMENT WAS DULY PAID TO THE EMPLOYEES FOR THE YEAR 2008-09. TH E APPELLANT SUBMITS THAT THIS LIABILITY CRYSTALISED ONLY AFTER DELEBRATIONS AND SETTLEMENTS MADE IN THIS YEAR ONLY AND IT COULD NOT HAVE BEEN ANTICIPATED, BECAUSE IT AROSE OUT IN SUDDEN SETTLEM ENT. APPELLANT SUBMITS THAT ALL THESE FACTS HAD BEEN EXPLAINED IN THE REPLY FILED BEFORE THE ASSESSING OFFICER. APPELLANT HAS FURTHER SUBMITTED THAT LEAVE ENCASHME NT FOR THE YEAR 2008-09, EVEN IF, IT WOULD HAVE BEEN PROVIDED FOR I N THE YEAR OF ITS ACCRUAL, IT WOULD NOT HAVE BEEN ALLOWED AS DEDUCTIO N IN VIEW OF THE PROVISIONS OF SECTION 43B(F), BECAUSE IT IS TO BE A LLOWED IN THE YEAR OF ITS PAYMENT. AND NON-PROVISION OF LEAVE ENCASHME NT IN THE YEAR 2008-09 HAS NO RELEVANCE SO FAR AS PROVISIONS OF IN COME TAX ARE CONCERNED, BECAUSE IN TERMS OF PROVISIONS OF SECTIO N 438(F) EVEN IF PROVISION WOULD HAVE BEEN MADE IN THE ACCOUNTS FOR LEAVE ENCASHMENT PAYABLE DURING FINANCIAL YEAR 2008-09, T HE SAME WOULD NOT HAVE BEEN ALLOWED AS DEDUCTION AND THE SA ME IS ALLOWABLE ONLY IN THE YEAR OF ITS PAYMENT WHICH IS THE YEAR UNDER APPEAL. I AM CONVINCED WITH THE ARGUMENTS OF THE AP PELLANT AND RELIEF OF RS. 18,49,982/- IS ALLOWED. ITA NO.479(ASR)/2015 ASST. YEA R: 2011-12 6 (B) RS.2,62,744/- IS ON ACCOUNT OF LEAVE ENCASHMENT FOR THE YEAR 2009-10. APPELLANT SUBMITS THAT THIS AMOUNT REPRESENTS SHORT PROVISION OF LEAVE ENCASHMENT DURING FINANCIAL YEAR 2009-10. THE APPEL LANT SUBMITS THAT IN TERMS OF PROVISIONS OF SECTION 43B(F) EVEN IF PROVI SION WOULD HAVE BEEN MADE IN THE ACCOUNTS FOR LEAVE ENCASHMENT PAYABLE D URING FINANCIAL YEAR 2008-09, THE SAME WOULD NOT HAVE BEEN ALLOWED AS DE DUCTION AND THE SAME IS ALLOWABLE ONLY IN THE YEAR OF ITS PAYMENT W HICH IS THE YEAR UNDER APPEAL. APPELLANT FURTHER SUBMITS THAT WHILE FINALIZING BAL ANCE SHEETS ON MERCANTILE BASIS, THE MANAGEMENT HAS TO RESORT TO E STIMATES WHICH ARE NOTHING BUT APPROXIMATIONS WHICH NEED REVISION AS A ND WHEN ADDITIONAL/FINAL INFORMATION IS AVAILABLE WITH THE COMPANY. ANY CHANGE IN FIGURES ON ACCOUNT OF ERROR IN APPROXIMATION CANNOT HE HELD TO BE PRIOR PERIOD EXPENSE AND HELD TO BE DISALLOWABLE. APPROXI MATIONS ARE BOUND TO DIFFER FROM ACTUAL FIGURES. IT IS HUMBLY STATED THA T THE ASSESSEE HAS BEEN REGULARLY FOLLOWING THE SAME METHOD OF ACCOUNTING A ND WHENEVER ANY EXCESS PROVISION IS MADE THE SAME IS REVERSED IN NE XT YEAR. THESE MINOR ADJUSTMENTS DUE TO ERROR IN ESTIMATES DUE TO APPROX IMATION CANNOT BE EQUATED WITH OTHER PRIOR PERIOD EXPENSES. AS-5 ISSUE D BY INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA STATES THAT 'INCOME O R EXPENSE RECOGNIZED ON THE OUTCOME OF A' CONTINGENCY WHICH PREVIOUSLY C OULD NOT BE ESTIMATED RELIABLY DOES NOT CONSTITUTE PRIOR PERIOD ITEM. I A M CONVINCED WITH THE ARGUMENTS OF THE APPELLANT AND RELIEF OF RS. 262744/ - IS ALLOWED. B. WITH REGARD TO THE UNVERIFIABLE EXPENSES, THE LD. CIT(A) CONSIDERED THE SUBMISSIONS OF THE ASSESSEE AND FINA LLY IN PARA NO. 4.4 OF THE ORDER REDUCED THE DISALLOWANCES TO T HE TUNE OF 8% INSTEAD OF 15%, WHICH IS REPRODUCED HEREIN, FOR THE SAKE OF BREVITY AND CONVENIENCE: 4.4. GROUND OF APPEAL NO. 5 RELATES TO ADDITION OF RS. 17,82,483/- ON ACCOUNT DISALLOWANCE OUT OF TRAVELLING & CONVEYANCE , STAFF WELFARE, ENTERTAINMENT, LABOUR WELFARE, MISC. EXPENSES @ 15% . THE APPELLANT SUBMITS THAT THE ASSESSING OFFICER HAD TAKEN ENTERT AINMENT EXPENSES OF RS. 204714/-, TWICE WHILE MAKING CALCULATION OF TOTA L EXPENSES. THE APPELLANT IS RIGHT IN POINTING OUT THE MISTAKE, THE DISALLOWANCE MADE TWICE TO THE TUNE OF RS. 30,707/- (I.E. 15% OF 204714/-) O N ACCOUNT OF ENTERTAINMENT EXPENSES TAKEN TWICE, IS DELETED. THE ASSESSING OFFICER HAS MADE ADHOC DISALLOWANCE W ITHOUT ASSIGNING ANY DEFECT. THE PLEA OF THE APPELLANT THAT EVERY TIME E XTERNAL VOUCHERS ARE NOT PRACTICALLY POSSIBLE BECAUSE THE ASSESSEE OPERATES IN REMOTE AREA AND IT IS NOT POSSIBLE TO OBTAIN RECEIPT OF EACH PAYMENT. I A GREE TO SOME EXTENT WITH THE APPELLANT THAT EXIGENCIES OF BUSINESS SOMETIME COMPEL TO RESORT TO SUCH PRACTICE, BUT THE FACT REMAINS THAT EXPENDITURES AR E NOT FULLY VERIFIABLE. AT ITA NO.479(ASR)/2015 ASST. YEA R: 2011-12 7 THE SAME TIME, I FIND THAT ADHOC DISALLOWANCE OF 15 % IS HIGHER AND I RESTRICT THE ADHOC ADDITION TO 8% IN PLACE OF 15%. THE APPELLANT GETS RELIEF OF RS. 8,17,495/-. C. WITH REGARD TO THE DEVELOPMENT OF THE ROAD THE LD. CIT(A) ANALYSES THE FACTUAL POSITION AND SUBMISSIONS OF TH E PARTIES, AND RELEVANT CASE LAW, DELETED THE SAID DISALLOWAN CE TO THE TUNE OF RS. 23,16,737/- BY HOLDING AS UNDER: 4.5. GROUND OF APPEAL NO 6 RELATES TO DISALLOWANCE OF EXPENDITURE ON ACCOUNT OF DEVELOPMENT OF ROAD & QUARRY HOLDING I T AS CAPITAL EXPENDITURE AMOUNTING TO RS. 23,16,737/- THE APPELLANT SUBMITTED THAT THE COMPANY HAS INCURR ED EXPENSE PRIMARILY ON BAJRI, SAND AND LABOUR ENGAGED THROUGHOUT THE YE AR AND THE ROAD CONSTRUCTED CANNOT BE PUCCA ROAD AS NO SUCH MATERIA L HAS BEEN PURCHASED AS WOULD ENTAIL AN ENDURING BENEFIT. THE APPELLANT FURTHER SUBMITTED THAT THESE ROADS ARE USED ONLY FOR THE PURPOSE OF CARRYI NG EXTRACTED LIMESTONE FROM MINES TO THE FACTORY SITE. OTHER THAN THIS, TH ESE ROADS ARE OF NO USE BECAUSE EXPLOSIONS ARE CARRIED OUT IN THIS AREA FOR EXTRACTION OF LIMESTONE AND THE AREA IS OUT OF BOUND FOR ALL OTHERS. THESE ROADS ARE OF NO USE ONCE IT IS ESTABLISHED THAT LIMESTONE AVAILABLE ON THAT ROUTE HAS BEEN EXTRACTED OR LIMESTONE AVAILABLE IS NOT OF DESIRED QUALITY AN D IN SUFFICIENT QUANTITY. THE APPELLANT FURTHER SUBMITS THAT THE NATURE OF BU SINESS IS SUCH THAT ACCESS TO QUARRY OR MINING PLACE IS OF PRIME IMPORT ANCE WITHOUT WHICH NO EXCAVATION CAN BE DONE. ALSO MINING ACTIVITY IS CARR IED OUT IN HILLY TERRAINS, WHICH DO NOT HAVE ANY PATHWAYS FOR THE MOVEMENT OF MEN AND GOODS. THIS IS NOT IN THE NATURE OF ROAD OF ENDURING BENEF ITS BECAUSE IT BREAKS DOWN BECAUSE OF RUNNING OF HEAVY DUTY TRUCKS AND VE HICLES CARRYING LIME STONE AND ALSO THESE ROADS DO NOT LAST LONG AND HAV E TO BE MAINTAINED AND REPAIRS TO BE CARRIED OUT EVERY YEAR AS THESE ROADS GET WIPED OUT IN RAINY SEASONS. I HAVE PERUSED THE NATURE OF EXPENSE AND THE EXPLAN ATIONS SUBMITTED BY THE APPELLANT. I AM CONVINCED WITH THE SUBMISSIONS MADE BY THE APPELLANT AS MATERIAL PURCHASED BY THE APPELLANT DOES NOT CON TAIN ANY SUCH MATERIAL WHICH WOULD HAVE RESULTED IN CREATING ANY ASSET OF ENDURING BENEFIT. THE MINES ALLOTTED TO THE APPELLANT ARE IN THE HILLS WH ICH DO NOT HAVE PATHWAYS AND THE APPELLANT COMPANY HAS TO MAKE TEMPORARY PAT HWAYS TO FACILITATE MOVEMENT OF MEN FOR EXTRACTION OF LIMESTONE FROM TH E MINES AND THEN TO CARRY EXTRACTED LIMESTONE TO THE FACTORY SITE WHICH IS IN THE FOOTHILLS OF THE MINES. THE EXTRACTION OF ITA NO.479(ASR)/2015 ASST. YEA R: 2011-12 8 LIMESTONE IS GERMANE TO THE BUSINESS OF THE APPELLA NT COMPANY. AND ROADS DEVELOPED BY THE COMPANY ARE NOT OF ANY USE OTHER T HAN THAT FOR EXTRACTING AND CARRYING LIMESTONE FOR ITS CONSUMPTION. THE APPELLANT GETS RELIEF OF RS. 23,16,737/-. 5. FEELING AGGRIEVED BY THE ORDER PASSED BY THE LD. CI T(A), THE DEPARTMENT PREFERRED THE INSTANT APPEAL UNDER CONSI DERATION AND IN SUPPORT OF ITS APPEAL, THE LD. DR SUBMITTED THAT SECTION 43B(F) WAS INSERTED BY FINANCIAL ACT 2001 WHICH SAYS NOTWITHST ANDING ANYTHING CONTAINED IN ANY OTHER PROVISIONS OF THIS ACT, A DE DUCTION OTHERWISE ALLOWABLE UNDER THIS ACT IN RESPECT OF (A)(B)(C )(D)(E)(F) ANY SUM PAYABLE BY THE ASSESSEE AS AN EMPLOYER IN L IEU OF ANY LEAVE AT THE CREDIT OF HIS EMPLOYER SHALL BE ALLOWED (IRR ESPECTIVE OF THE PREVIOUS YEAR IN WHICH THE LIABILITY TO PAY SUCH SU M WAS INCURRED BY THE ASSESSEE ACCORDING TO THE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY HIM) ONLY IN COMPUTING THE INCOME REFER RED TO IN SECTION 28 OF THAT PREVIOUS YEAR IN WHICH SUCH SUM IS ACTUA LLY PAID BY HIM. FURTHER THE LD. DR EMPHASIZED THAT NO LIABILITY CAN BE DEFERRED, THEREFORE THE LD. ASSESSING OFFICER WAS RIGHT WHILE DISALLOWING THE LEAVE ENCASHMENT UNDER THE MERCANTILE SYSTEM OF ACC OUNTING THE EXPENSES IS TO BE CLAIMED DISALLOWED THE ENCASHMENT BECAUSE THE SAID EXPENSES WERE NOT CLAIMED IN THE EARLIER YEARS AND THE SUM IS DISALLOWED AS UNDER MERCANTILE SYSTEM OF ACCOUNTING THE EXPENSE IS TO BE CLAIMED ON ACCRUAL BASIS. FURTHER THE LD. DR WITH REGARD TO THE GROUND NO. 2 SUBMITTED THAT THE LD. CIT(A) WAS NOT JUSTIFIED IN DELETING T HE ADDITION MADE WHICH DOES NOT A CONSOLE WITH THE PROVISIONS OF SUB -SECTION 1 OF SECTION 145 OF THE INCOME TAX ACT AS THE INCOME IS TO BE COMPUTED IN ACCORDANCE WITH THE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. ITA NO.479(ASR)/2015 ASST. YEA R: 2011-12 9 FURTHER THE LD. DR IN RESPECT OF GROUND NO. 3 WITH REGARD TO THE UNVERIFIABLE EXPENSES SUBMITTED THAT THE ASSESSEE C OMPANY FAILED TO PRODUCE THE COMPLETE BILLS AND VOUCHERS IN RESPECT OF EXPENSES QUA TRAVELING & CONVEYANCE, STAFF WELFARE, ENTERTAINMEN T, LABOUR WELFARE, MISC. EXPENSES, ETC. DURING THE ASSESSMENT PROCEEDI NGS AND EVEN OTHERWISE BEFORE THE LD. CIT(A) AS WELL AS BEFORE T HIS BENCH THEREFORE, IN THE ABSENCE OF PROPER BILLS AND VOUCHERS AND UNV ERIFIABLE BILLS OF THIS EXPENDITURE, THE LD. CIT(A) WAS NOT JUSTIFIED TO RE DUCE THE DISALLOWANCES TO TUNE OF 8% INSTEAD OF 15% WHERE WE RE ALLOWED BY THE ASSESSING OFFICER. IN RESPECT OF GROUND NO. 4 QUA WITH REGARD TO THE EXPENDITURE ON ACCOUNT OF DEVELOPMENT OF ROAD/QUARRY, THE LD. D R SUBMITTED THAT THE SAID EXPENSES FOR THE CONSTRUCTION OF THE ROAD WHICH HAS BEEN DEBITED UNDER THE HEAD (SHORT DEVELOPMENT OR ROAD/ QUARRY (11) IS A CAPITAL EXPENDITURE AND NOT A REVENUE EXPENDITURE B ECAUSE ACCORDING TO THE KARNATAKA HIGH COURT JUDGMENT IN I.T. REFERRE D NO. 75/1974 TITLED AS D. P. CHIRANIA & COMPANY VS. CIT MASSORE, EMPHASIZED THAT EXPENDITURE INCURRED ON THE CONSTRUCTION OF ACCESS ROAD IS OF ENDURING NATURE BECAUSE THE EXPENDITURE WAS MADE FOR ACQUIRI NG OF BRINGING INTO EXISTENCE OF COMMON ASSET OR ADVANTAGE FOR THE ENDURING BENEFIT OF THE BUSINESS, IT IS IN THE NATURE OF CAPITAL EXP ENDITURE, ON THE OTHER HAND, IF IT IS NOT MADE FOR THE PURPOSE OF BRINGING INTO EXISTENCE ANY SUCH ASSET OR ADVANTAGE, BUT FOR RUNNING THE BUSINE SS OR WORKING IT TO PRODUCE PROFITS, IT IS A REVENUE EXPENDITURE, IN TH E INSTANT CASE, THE CONSTRUCTION OF ROADS BRINGS INTO EXISTENCE OF AN A DVANTAGE BECAUSE IT WAS MADE DURING THE PERFORMANCE OF THE CONTRACT OF TRANSPORTATION. ITA NO.479(ASR)/2015 ASST. YEA R: 2011-12 10 6. ON THE OTHER HAND, THE LD. AR SUBMITTED THAT TH E ASSESSEE IS WORKING IN THE REMOTES AREA OF SRINAGAR WHERE MANY TIMES AND ON VARIOUS OCCASIONS HARTALS, STRIKES AND BANDS ETC. O R A COMMON AND ENDURING ASSESSMENT YEAR 2008-09 ON NO PROVISION WA S MADE AS MANAGEMENT HAS DECIDED THAT NO LEAVE ENCASHMENT SHA LL BE PAID AS THERE WERE CONSTANT STRIKES AND HARTALS WHICH RESUL TED INTO HUGE LOSS OF PRODUCTION AND EMPLOYEES AT TIMES TOOK UNDUE BEN EFIT OR RANDOM STRIKE CALLS. HOWEVER, DURING THE YEAR UNDER ASSESSM ENT, EMPLOYEES NEGOTIATED WITH THE MANAGEMENT AND ARM-TWISTED THE COMPANY TO PROVIDE FOR THESE LEAVE ENCASHMENT, WHICH WERE ACCO UNTED FOR. SINCE THESE LIABILITIES CRYSTALLIZED DURING THE YEAR UNDE R ASSESSMENT, THEREFORE, THE SAME HAVE BEEN CLAIMED AS EXPENSES D URING THE YEAR. IT WAS FURTHER SUBMITTED THAT LEAVE ENCASHMENT IN NORM AL CIRCUMSTANCES IS AVAILABLE TO EMPLOYEES, HOWEVER, CIRCUMSTANCES O F THE KASHMIR ARE NOT NORMAL AS THERE ARE NUMEROUS CALLS FOR STRIKES AND HARTALS, SOME OF WHICH ARE HOAX AND HAVE NO OR VERY LITTLE IMPACT ON NORMAL LIFE IN THE VALLEY AND MANY TIMES EMPLOYEES TAKE UNDUE BENE FITS OF SUCH STRIKE CALLS AND AVOID ATTENDING TO THEIR OFFICIAL DUTIES THEREFORE, THE MANAGEMENT IN THE CONSTANT CIRCUMSTANCES DECIDED NO T TO PROVIDE LEAVE ENCASHMENT TO EMPLOYEES FOR THE YEAR 2008-09 AND THE SAID DECISION WAS IN THE INTEREST OF THE COMPANY. WITH REGARD TO THE GROUND NO. 2, IT WAS ARGUED BY T HE LD. CIT(A) WAS JUSTIFIED WHILE DELETING THE ADDITIONS I N CONSOLATION WITH THE PROVISIONS OF SUB-SECTION 1 OF 145 OF THE I. T. ACT . WITH REGARD TO THE GROUND NO. 3, THE LD. AR SUBMIT TED THAT THE ACCOUNTS WERE AUDITED AND EVEN OTHERWISE THE LD. CI T(A) CORRECTLY REDUCED THE DISALLOWANCES OF EXPENSES UNDER VARIOUS HEADS FROM 15% TO 8% AS REASONABLE. ITA NO.479(ASR)/2015 ASST. YEA R: 2011-12 11 WITH REGARD TO THE GROUND NO. 4, IT WAS ARGUED BY THE LEARNED COUNSEL OF THE ASSESSEE THAT LD. CIT(A) NOT ONLY CO NSIDERED THE FACTS AND CIRCUMSTANCES OF THE CASE BUT ALSO ANALYSES THE CASE LAWS DECIDED BY VARIOUS HIGH COURTS AND APEX COURT AND IN ORDER GIVE SOUND FINDING FOR DELETION OF THE DISALLOWANCE IN RESPECT OF CONS TRUCTION OF ROADS THEREFORE IN OVER ALL CIRCUMSTANCES THE ORDER PASSE D BY THE LD. CIT(A) IS DESERVED TO BE UPHELD AND DOES NOT REQUIRE ANY I NTERFERENCE BY THIS BENCH. 7. WE HAVE GONE THROUGH WITH THE FACTS AND CIRCUMSTAN CES OF THE CASE AS WELL AS CASE LAWS CITED BY THE PARTIES AND DOCUMENTS RELIED UPON. DECISION OF GROUND NO. 1. THE REVENUE DEPARTMENT CHALLENGED THE DELETION OF THE ADDITION MADE ON ACCOUNT OF DISALLOWANCE OF LEAVE ENCASHMENT , KEEPING IN VIEW THE FACT THAT NO SUCH LIABILITY WAS REFLECTED WHILE PREPARING THE BALANCE SHEET FOR THE ASSESSEE BECAUSE THE ASSESSEE IS FOLL OWING THE MERCANTILE SYSTEM OF ACCOUNTING, IN THE INSTANT CAS E WHICH IS A FACT THAT GENERALLY HARTALS, STRIKES AND BANDS ARE BEING ORGANIZED AND ADMITTEDLY THE CONDITION OF THE AREA OF JAMMU KASHM IR WHERE THE ASSESSEE OPERATING IS REMOTE AREA AND THE ASSESSEE COMPANY IS WORKING IN ABNORMAL CIRCUMSTANCES AND EVEN OTHERWIS E THERE IS NO CONTRARY MATERIAL AGAINST THE HARTALS/ STRIKES BY T HE EMPLOYEES IN RELEVANT PERIOD AND THE ASSESSEE ACCEDED TO THE DEM ANDS OF THE EMPLOYEES IN THE YEAR UNDER APPEAL AND THEREFORE TH E LEAVE ENCASHMENT WAS DULY PAID TO THE EMPLOYEES FOR THE Y EAR 2008-09 AND EVEN OTHERWISE THE LIABILITY WAS CRYSTALLIZED ONLY AFTER DELIBERATIONS AND SETTLEMENTS MADE IN THE RELEVANT YEAR ONLY AND IT C OULD NOT HAVE BEEN ANTICIPATED, BECAUSE THE SOME AROSE OUT IN THE SUD DEN SETTLEMENT AND ALL THESE FACTS HAVE BEEN DULY EXPLAINED IN THE REP LY FILED BEFORE THE ITA NO.479(ASR)/2015 ASST. YEA R: 2011-12 12 ASSESSING OFFICER. ACCORDING TO OUR MIND NO PROVISI ON WAS MADE FOR LEAVE ENCASHMENT DURING THAT YEAR IN VIEW OF THE CO NSTANT STRIKE AND HARTALS WHICH RESULTED IN LOSS OF PRODUCTION TO THE COMPANY AND EVEN IF LEAVE ENCASHMENT WOULD HAVE BEEN PROVIDED FOR IN TH E YEAR OF ITS ACCRUAL, IT WOULD NOT HAVE BEEN ALLOWED AS DEDUCTIO N IN VIEW OF THE PROVISIONS OF SECTION 43B(F), BECAUSE IT IS TO BE A LLOWED IN THE YEAR OF ITS PAYMENT AND NON-PROVISION OF LEAVE ENCASHMENT I N THE YEAR 2008- 09 HAS NO RELEVANCE SO FAR AS PROVISIONS OF INCOME TAX ACT ARE CONCERNED, BECAUSE IN TERMS OF PROVISIONS OF SECTIO N 43B(F) EVEN IF PROVISION WOULD HAVE BEEN MADE IN THE ACCOUNTS FOR LEAVE ENCASHMENT PAYABLE DURING THE FINANCIAL YEAR 2008-09, THE SAME WOULD NOT HAVE BEEN ALLOWED AS DEDUCTION AND THE SAME IS ALLOWABLE ONLY IN THE ORDER OF ITS PAYMENT WHICH UNDOUBTEDLY THE YEAR UNDER APP EAL THEREFORE, ON THE AFORESAID OBSERVATION, WE DO NOT HAVE HESITATIO N TO HOLD THAT THE LD. CIT(A) CORRECTLY DELETED THE ADDITION MADE ON A CCOUNT OF DISALLOWANCE OF LEAVE ENCASHMENT. DECISION ON GROUND NO. 2 ALTHOUGH THE LD. DR HAS NOT SPECIFICALLY EMPHASIZE D ON THIS GROUND HOWEVER WE HAVE GIVEN THOUGHTFUL CONSIDERATI ON TO THE ORDER PASSED BY THE LD. CIT(A) AND FOUND THAT THE LD. CIT (A) WAS JUSTIFIED IN DELETING THE ADDITIONS BECAUSE THE SAME CONSOLE WIT H THE PROVISION OF SUB-SECTION 1 OF SECTION 145 OF THE I. T. ACT. IN V IEW OF THE FACTS THAT THE ASSESSEE IS REGULARLY FOLLOWING THE SYSTEM OF A CCOUNTING FOR COMPUTATION OF ITS INCOME. DECISION ON GROUND NO. 3 AGAIN IT IS NOT IN CONTROVERSY THAT THE ASSESSEE I S WORKING IN THE REMOTE AREA OF JAMMU KASHMIR WHERE EVERY TIME EXTER NAL VOUCHERS TO ITA NO.479(ASR)/2015 ASST. YEA R: 2011-12 13 OBTAIN RECEIPT OF SUCH PAYMENT IS NOT PRACTICALLY P OSSIBLE AND IN EXIGENCIES THE BUSINESS, SOMETIME THE ASSESSEE CONS TRAINED TO RESORT TO SUCH PRACTICE. ACCORDING TO OUR CONSIDERED VIEW ALTHOUGH IT WAS OBSERVED BY THE LD. CIT(A) THAT THE FACT REMAINS TH AT EXPENDITURE ARE NOT FULLY VERIFIABLE BUT HE FINALLY CONCLUDED THAT THE ADDITION OF DISALLOWANCES AT THE RATE OF 15% IS HIGHER AND FIND ING PROPER AND REASONABLE, THE LD. CIT(A) RESTRICTED IT TO 8%, WE ARE IN CONSONANCE WITH THE OBSERVATIONS OF THE LD. CIT(A) AND DO NOT FIND ANY GROUND OR MATERIAL TO INTERFERE WITH IT. DECISION ON GROUND NO. 4 DELETION OF DISALLOWANCE OF EXPENDITURE ON ACCOUNT OF DEVELOPMENT OF RAID AND QUARRY HOLDING IT AS REVENU E EXPENDITURE AMOUNTING TO RS. 23,16,737/-, IN THE INSTANT CASE, IT IS NOT IN CONTROVERSY THAT THE APPELLANT HAS INCURRED EXPENSE S PRIMARILY ON BAJRI, SAND AND LABOUR ENGAGED THROUGHOUT THE YEAR AND THE ROAD CONSTRUCTED CANNOT BE PUCCA ROAD AS NO SUCH MATERIA L HAS BEEN PURCHASED AS WOULD ENTAIL AN ENDURING BENEFIT AND T HE SAID ROADS ARE USED ONLY FOR THE PURPOSE OF CARRYING EXTRACTED LIM ESTONE FROM MINES TO THE FACTORY SITE AND OTHER THAN THIS, THIS THE S AME ARE OF NO USE AND THE NATURE OF BUSINESS IS SUCH THAT ACCESS TO QUARR Y OR MINING PLACE IS OF PRIME IMPORTANCE WITHOUT WHICH NO EXCAVATION CAN BE DONE AND FURTHER BECAUSE THE APPELLANT IS WORKING IN THE HIL LS WHICH DO NOT HAVE ANY PATHWAYS AND IN THE COMPELLING CIRCUMSTANCES HA S TO MAKE TEMPORARY PATHWAYS TO FACILITATE MOVEMENT OF MEN FO R EXTRACTION LIMESTONE TO THE FACTORY SITE WHICH IS IN THE FOOTH ILLS OF THE MINES AND THE EXTRACTION OF LIMESTONE IS GERMANE TO THE BUSIN ESS OF THE APPELLANT ITA NO.479(ASR)/2015 ASST. YEA R: 2011-12 14 COMPANY AND EVEN OTHERWISE THE ROAD GETS WIPED OUT IN RAINY SEASON AND DO NO LAST LONG AND EVERY YEAR REPLACED TO BE C ARRIED OUT. EVEN OTHERWISE HON'BLE APEX COURT IN LAXMIJI SUGAR MILLS PVT. LTD. VS. CIT, HELD THAT APART FROM ELEMENT OF COMPU LSION, ROAD WHICH WERE CONSTRUCTED AND DEVELOPED WERE NOT THE PROPERT Y OF THE ASSESSEE, AND IN CIT VS. MADRAS AUTO SERVICE PVT. L TD., THE APEX COURT HELD THAT BUILDING CONSTRUCTED ON THE LEASED LAND I S REVENUE EXPENDITURE AS IN THE INSTANCE CASE, THE LAND WHERE THESE PATHWAYS ARE CONSTRUCTED IS LEASED FORM DEPARTMENT OF GEOLOG Y AND MINING THEREFORE IT COULD NOT BE TERMED AS PROPERTY OF THE ASSESSEE ON THE AFORESAID ANALYZATION AND OBSERVATION, WE DO NOT FI ND ANY MATERIAL TO DISAGREE WITH THE DECISION OF THE LD. CIT(A) FOR TH E SAID GROUND. HENCE IN CUMULATIVE EFFECT OF THE GROUNDS RAISED BY THE DEPARTMENT STANDS DISMISSED AND ORDER OF THE LD. CI T(A) IS UPHELD. 8. IN THE RESULT, THE APPEAL OF THE DEPARTMENT STANDS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 2 6.07.2017. SD/- SD/- (T. S. KAPOOR) (N.K. CHOUDHRY) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 26.07.2017. /GP/ SR.PS. COPY OF THE ORDER FORWARDED TO: (1) THE ASSESSEE: (2) THE (3) THE CIT(A), (4) THE CIT, (5) THE SR DR, I.T.A.T., TRUE COPY BY ORDER