Contribution to Compensatory Afforestation Fund is revenue expenditure: Bombay HC

PCIT-2 Vs Tata Steel Ltd (Bombay High Court)

The recent legal battle between PCIT-2 and Tata Steel Ltd before the Bombay High Court revolved around the treatment of Tata Steel’s substantial contribution to the Compensatory Afforestation Fund (CAF). The verdict of this case not only impacts Tata Steel but also sets a precedent for similar disputes in the future.

The core contention of the case lay in the classification of Tata Steel’s contribution of Rs. 212.52 crores to the Compensatory Afforestation Fund. The Income Tax department, represented by the PCIT-2, contended that this contribution should be treated as capital expenditure. On the contrary, Tata Steel argued that it should be considered as revenue expenditure.

The Commissioner of Income Tax, exercising powers under Section 263 of the Income Tax Act, issued a notice to Tata Steel, challenging the original assessment order. The original assessment, completed on 29th December 2009, determined Tata Steel’s income at Rs. 4489.32 crores. However, the CIT set aside this order, directing the Assessing Officer to reconsider the allowability of Tata Steel’s contribution to CAF.

Subsequently, the Assessing Officer disallowed Tata Steel’s contribution to CAF. Dissatisfied with this decision, Tata Steel appealed to the Commissioner of Income Tax (Appeals) (CIT(A)), who upheld the decision of the Assessing Officer.

Tata Steel then escalated the matter by filing appeals before the Income Tax Appellate Tribunal (ITAT). The ITAT, in its order dated 3rd February 2017, ruled in favor of Tata Steel, allowing the appeals. The ITAT held that the CIT’s invocation of Section 263 was unjustified and that Tata Steel’s contribution to CAF should be treated as revenue expenditure.

The ITAT’s decision was based on precedents where similar issues had been decided in favor of the taxpayers. Notably, the ITAT cited cases where contributions to CAF were deemed revenue expenditure. This ruling aligned with the position taken by the Bombay High Court (Goa Bench) in previous cases, further strengthening Tata Steel’s argument.

Conclusion:

In conclusion, the Bombay High Court’s verdict in the PCIT-2 vs. Tata Steel Ltd case reaffirms Tata Steel’s entitlement to treat its contribution of Rs. 212.52 crores to the Compensatory Afforestation Fund as revenue expenditure. The court’s decision, supported by legal precedents and consistent interpretations, marks a significant victory for Tata Steel and provides clarity on the tax treatment of such contributions.

FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT

1. This is an appeal under Section 260A of the Income Tax Act, 1961 (“the Act”).

2. Assessee is engaged in the business of manufacturing of iron and steel products. Assessee had filed the return of income for Assessment Year 2006-2007 on 20^th November 2006 declaring total income of Rs. 44,22,82,61,971/-. The return of income was processed under Section 143(1) of the Act and later assessment under Section 143(3) of the Act was completed on 29^th December 2009 determining the income at Rs. 4489.32 crores.

3. The Commissioner of Income Tax (“CIT”) exercising powers under Section 263 of the Act, issued a notice dated 11^th May 2011 to Assessee and by an order dated 16^th December 2011, set aside the original assessment order on three issues with a direction to the Assessing Officer (“AO”) to pass the assessment order afresh. Only one of the three issues we are concerned with in this appeal and that relates to allowability of Assessee’s contribution to the Compensatory Afforestation Fund (“CAF”) amounting to Rs. 212.52 crores.

4. The AO passed an order dated 1^st March 2013 under Section 143(3) read with Section 263 of the Act. The AO disallowed the contribution made by Assessee to CAF. Aggrieved by the order, an appeal was preferred by Assessee to the Commissioner of Income Tax (Appeals) (“CIT(A)”), who dismissed the appeal by an order dated 29^th November 2013.

5. Assessee filed two appeals before the Income Tax Appellate Tribunal (“ITAT”), one impugning the order passed by the CIT on 16^th December 2011 under Section 263 of the Act and the other against the order dated 29^th November 2013 passed by the CIT(A).

6. By an order dated 3^rd February 2017, the ITAT allowed both the appeals. On the issue of CAF, the ITAT observed that identical issue has been decided in favour of Assessee by various Benches of ITAT and also in the case of sister concerns of Assessee. Relying upon the order passed by the ITAT in The Commissioner of Income Tax and Another v. M/s. Ramgad Minerals & Minings Pvt. Ltd.¹, the ITAT held that the CIT was not justified in invoking the provisions of Section 263 of the Act. It is this order of the ITAT, which is impugned in this appeal and the following three substantial questions of law are proposed :

“1. Whether in the facts and circumstances of the case and in law, the Hon’ble Tribunal was justified in holding that the CIT-2 was not justified in invoking the provisions of section 263 with regard to issue of allowability of the assessee’s contribution to the Compensatory Afforestation Fund (CAF) amounting to Rs. 212.52 crores.

2. Whether in the facts and circumstances of the case and in law, the Hon’ble Tribunal was right in disregarding the judgement of Hon’ble Supreme Court in the case of T. N. Godavarman dated 29.10.2002 on the whole scheme of compensatory afforestation, and such capital expenditure is capital in nature giving enduring benefits.

3. Whether in the facts and circumstances of case and in law, whether the ITAT was right in deciding afforestation expenditure as revenue expenditure wherein the expenditure was in nature of additional lease premium towards mining lease and has to be held as capital expenditure.”

7. The only issue considering the facts and circumstances of case and also the proposed substantial questions of law, which arise in this appeal is “whether Assessee was entitled to treat the contribution of Rs. 212.52 crores to CAF as capital in nature or as revenue expenditure as claimed by Assessee”.

8. This issue is no more res-integra as even The Bombay High Court (Goa Bench) in the case of The Commissioner of Income Tax v. Dr. Prafulla R. Hede and Another² has accepted that contribution to CAF will be revenue expenditure and not capital in nature. Even the Special Leave Petition that was filed by the Revenue against Dr. Prafulla R. Hede (supra) has been dismissed on 21^st November 2014.

9. In the circumstances, in our view, no substantial question of law arises. Appeal dismissed.

Notes:

¹ ITA No. 5021 of 2009 dated 6^th January 2012.

² Tax Appeal No. 15 of 2012 dated 6^th February 2012.