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874 SELECTED ORDERS OF ITAT [Vol. 22005] NEYVELI LIGNITE CORPN. LTD. v. ASSTT. CIT (CHENNAI) 873

[2005] 2 SOT 863 (CHENNAI)IN THE ITAT CHENNAI BENCH B

Neyveli Lignite Corporation Ltd.

v.Assistant Commissioner of Income-taxS.V. MEHROTRA, ACCOUNTANT MEMBER

AND N. VIJAYAKUMARAN, JUDICIAL MEMBERIT APPEAL NO. 2315 (MAD.) OF 2003

[ASSESSMENT YEAR 2001-2002]AUGUST 18, 2004

I. Section 28(i) of the Income-tax Act, 1961 - Business loss/deductions - Year in whichdeductible - Assessment year 2001-02 - Whether if liability has accrued during relevant

previous year and quite reasonably can be estimated on basis of material available withassessee, then merely because quantification of same is done in a subsequent year, it

cannot be said that provision made for said liability on a reasonable estimate basis is notallowable deduction - Held, yes - Assessee claimed deduction of certain amount on

account of pay revision in assessment year 2001-02 and contended that list of demandswas submitted by workers union on 1-1-1997 and process for it was started in year 1999

and that liability had been created in accounts for pay revision as per AccountingStandard-4, which deals with events occurring after date of balance sheet but before date

of approval of accounts by board of directors - Commissioner disallowed assesseesclaim on ground that wage agreement was entered into between assessee and workers

union on 29-6-2001 and that liability germinated in subsequent year and could not berelated back to earlier year - Whether liability in question was an impending liability and,

therefore, Commissioner was wrong in disallowing assessees claim for deduction ofaforesaid amount - Held, yes

II. Section 145 of the Income-tax Act, 1961 - Method of accounting - Valuation of stock -Assessment year 2001-02 - Assessee was engaged in manufacture of urea - Urea being an

essential commodity, its sale price was subject to administrative price control - With aview to ensure that fertilizer companies did not incur losses, Government had fixed

retention price based on various facts and difference between retention price and saleprice of Urea was given by Government as a grant or subsidy - There was a provision for

reworking of retention price on basis of variation in cost of various inputs going intocomputation for retention price - Assessee had to claim escalation on quarterly basis

specifying variation in input cost and also giving working for claim - Assessee changedits method of accounting of valuation of closing stock of Urea inasmuch as it changed its

method of accounting in respect of escalation

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in cost of inputs on cash basis instead of mercantile basis earlier followed by it - Whethersince whatever retention price was approved by Government was not received by

assessee, change in method of valuation of closing stock could be said to be mala fide -Held, no - Whether, therefore, change in method of valuation of closing stock was liable

to be accepted - Held, yes

III. Section 80-IB of the Income-tax Act, 1961 - Deductions - Profits and gains fromindustrial undertakings other than infrastructure development undertakings - Assessmentyear 2001-02 - Whether activity of excavation of lignite is an activity of production of

article or thing for purposes of section 80-IB - Held, yes - Whether after substitution ofsection 80-IB for section 80-IA with effect from 1-4-2000 merely because assessee made

a claim under section 80-IA, same could not be denied for technical reasons if it wasentitled to same under section 80-IB - Held, yes

IV. Section 80-IB of the Income-tax Act, 1961 - Deductions - Profits and gains fromindustrial undertakings other than infrastructure development undertakings - Assessment

year 2001-2002 - Assessee was extracting lignite from mines located in two sectors, viz.Stage I and Stage-II - Whether since assessee had adopted an in-house mechanism for

price fixation due to which profits of stage-II considerably swelled, apportionment of coston basis of ratio of tonnage of extraction of lignite was not correct and it should have

been done on basis of actuals - Held, yesV. Section 80-IA of the Income-tax Act, 1961 - Deductions - Profits and gains from

industrial undertakings engaged in infrastructure development, etc. - Assessment year2001-2002 - Assessee included in its eligible income for deduction under section 80-IA

certain amount in mining income and in power generation segment as additional incomeunder head Income-tax reimbursement - Whether since agreement entered into between

assessee and various electricity boards clearly indicated that it was primarily income-taxliability of recipient on its income relating to particular stream which had to be

reimbursed to assessee, said income could not be said to be part of sale price of power -Held, yes - Whether, therefore, assessee was not eligible for deduction under section 80-

IA in respect of said income - Held, yesI. Facts

The assessee had claimed deduction in the assessment year 2001-02 of certain amount onaccount of pay revision. It stated that a list of

demands was submitted by the workers union on 1-1-1997 and the process for it wasstarted in the year 1999. It also pointed out that liability had been created in accounts for

the pay revision as per Accounting Standard-4, which deals with the events occurringafter the date of balance sheet

but before the date of approval of accounts by the board of directors. The AssessingOfficer accepted the assessees claim and allowed the deduc-

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tion. Subsequently, the Commissioner taking note of the fact that the wage agreementwas entered into between the assessee and the workers union on 29-6-2001 and treating

that as a fresh event which had taken place in the subsequent year, for which there was nowhisper in the previous year, held that that liability germinated in the subsequent year

and could not be related back to the earlier year. He further observed that the principle of

prudence as referred to Accounting Standard-4 was applicable to known liabilities andnot to the liabilities of the subsequent years. He, therefore, disallowed the deductionclaimed by the assessee.

On appeal to the Tribunal :I. Held

If liability had accrued during the relevant previous year and quite reasonably could beestimated on the basis of material available with the assessee, then merely because

quantification of the same is done in a subsequent year, it cannot be said that theprovision made for the said liability on a reasonable estimate basis was not allowable

deduction. In the instant case, the Workers Progressive Union submitted its list ofdemands for the ensuing wage revision period starting from 1-1-1997 on 25-6-1997 itself.

Therefore, it was an impending liability. Vide letter dated 14-1-1999 it was pointed outby the Government of India, Department of Public Enterprises that wage settlement

should be negotiated by public sector enterprises for which broad guidelines were made.Thus, the process started in January, 1999 itself and the assessee was also informed of

that decision of the Government of India on 22-2-1999. In pursuance of this, P&ADepartment of company issued instructions on 26-3-2001 in regard to revision of pay

scales for executives with effect from 1997. Thus, as far as provision in respect of wagerevision relating to executives was concerned, there could not be any dispute that the

same had to be allowed. Negotiations with workers trade union were also going onsimultaneously and, therefore, that liability also was very much existing because under no

circumstances wage revision to employees could be denied. Now the question forconsideration was whether the assessee could reasonably make estimate of liability on

account of wage revision relating to workers. In that regard the assessee was havinginstructions of P&A Department of the company dated 25-3-2001 in regard to wage

revision of executives and two settlements of public sector undertakings, viz., NTPC andBHEL prior to 31-3-2001, where also wage revision was to be effected on the same lines

as in the case of the assessee. Therefore, the assessee could reasonably estimate itsaccrued liability as the services had already been rendered by 31-3-2001. It was,

therefore, fully justified in making that provision. It was not a new event occurring in thecase of the assessee. The revenue had pointed out that the assessee should have made the

provision in the respective years. However, for arriving at the provision there should besome basis available to the assessee and that was in the form of settlements

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reached for pay revision of its executives and also by NTPC and BHEL which were alsomade available to the assessee before 31-3-2001.

Therefore, the order passed by the Commissioner was liable to be set aside. [Para 5]II. Facts

The assessee was engaged in the manufacture of urea. Urea being an essential

commodity, sale price of urea was subject to administrative price control. The assesseehad changed the method of accounting of valuation of closing stock of urea and in thatregard it pointed out that with a view to ensure that fertilizer companies did not incur

losses the Government had fixed retention price based on various facts, that thedifference between the retention price and the sale price of urea was given by the

Government as a grant or subsidy, that there was a provision for reworking of retentionprice on the basis of variation in the cost of various inputs going into the computation for

the retention price, that it had to claim escalation on quarterly basis specifying thevariation in input cost and also giving the working for the claim, that earlier it had been

accounting its claim for the escalation amount at the time of raising the claim, thatkeeping in view the uncertainty of the acceptance of the claim for escalation, profits of

the year were not truly reflected by accounting the claim of escalation in the year ofmaking the claim itself and, therefore, it decided to account for the claim for escalation in

respect of cost on various inputs in the year in which the Government accepted the claim;and that, thus, it changed its method of accounting in respect of escalation in the cost of

inputs on cash basis instead of on mercantile basis earlier followed by it. In regard to thededuction in value of closing stock by Rs. 18.69 crores, the assessee pointed out that

during the assessment year 2001-02 there was an agreement with the Electricity Boardregarding power tariff by which the power tariff was changed with effect from 1997-98,

that as a result, it had raised the claim for escalation of retention price on account of thatchange and that on account of uncertainty about the acceptance of the claim by the

Government, it had decided to account for the same on cash basis. The Commissioner(Appeals) held that due to change in method of accounting of valuation of closing stock

of urea, the closing stock was undervalued by Rs. 18.6 crores. He, therefore, rejected thechange in basis of valuation of closing stock of urea.

On appeal to the Tribunal :II. Held

There was no dispute about the fact that the retention price fixed by the Government ofIndia was subject to revision from time to time with retrospective effect depending upon

cost of inputs in production of fertilizer. The Commissioner (Appeals) had pointed outthat formula for computing subsidy was known to both the parties and there was

no instance where the Government of India had gone back by disputing the

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formula. However, from facts it could not be said that whatever retention price wasapproved by the Government was also received by the assessee. As per AS-9, where the

ability to assess the ultimate collection with reasonable certainty is lacking at the time ofraising any claim, such as escalation of price, export incentives, interest, etc., revenue

recognition should be postponed to the extent of uncertainty involved. In such cases it

would be more appropriate to recognise revenue only when it is reasonably certain thatultimate collection will be made. Therefore, it was not a case of mere delay in receivingthe claim but also associated with uncertainty in receiving the claim. Therefore, the

change in method of valuation of closing stock could not be said to be mala fide. Furthermere lodging of claim does not result in accrual of income. The revenues objection was

that after the amendment in section 145, the assessee could not adopt the hybrid systemof accounting. That could not be said to be deviation from the mercantile system of

accounting regularly employed by the assessee. It was only the change in method ofvaluing of closing stock necessitated on account of uncertainty associated in receiving the

claim made by the assessee.Hence, the order of the Commissioner (Appeals) was liable to be set aside.

III. FactsThe assessee had claimed deduction under section 80-IA on the profits arising from its

activity relating to mining lignite and generation of power using the mined lignite. TheCommissioner (Appeals) held that the mining activities of the assessee did not involve

manufacture or production of any article or thing and, therefore, the assessee was notentitled to the benefit of section 80-IA.

On further appeal :III. Held

For claiming deduction, if any, in respect of income accruing on account of activity ofmining, the relevant section in the assessment year in question was section 80-IB and not

section 80-IA. Further, section 80-IA and section 80-IB were substituted for section 80-IA by the Finance Act, 1999 with effect from 2000. Prior to its substitution, deduction

was available under section 80-IA in respect of profits and gains, from industrialundertaking in certain cases. Under these circumstances, merely because assessee made a

claim under section 80-IA, the same could not be denied for technical reasons if it wasentitled to the same under section 80-IB. Whether profits and gains derived from the

activity of mining were eligible for deduction under section 80-IB also would dependupon whether the activity of mining of lignite constituted production or manufacture of

an article or thing or not because as per the provisions of section 80-IB(2)(iii), theindustrial undertaking should have, inter alia, fulfilled the condition of manufacture or

production of any article or thing.

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On going through the details given by the assessee in respect of process of production oflignite, it was clear that the process of production of lignite is quite cumbersome. In short,

the first stage is the removal of overburden consisting of different soil characteristics toexpose the lignite below. This requires drilling and blasting which is also technically

complicated procedure requiring a lot of accuracies. In the process, there is one more

very important procedure employed for controlling the upward pressure of the water so asto keep that below the bottom of the lignite scene. Lignite is found in huge blocksextending over a large area and, therefore, in order to use it in boilers it is required to be

reduced to small size rubbles. This process is also highly technically advanced and afteremploying the same, huge stream of lignite is reduced to a uniform 50mm to 150mm

size. Thereafter comes the procedure of removal of marcasite and impurities and blendingat the production yard to assure acceptable and appropriate quality. It was pointed that

impure lignite with marcasite cannot be fed into the boiler as it would hurt the boiler.Therefore, it is an essential procedure before excavated lignite can be put to use. The

blending of lignite is also an essential part of making the lignite useful for thermal powerstations. Thus, it is evident that though lignite is found embedded in the earth in big

blocks, but it is useful only after it has undergone various processes.As per the Explanation to section 33B which was earlier referred to in section 80-IA for

defining the term industrial undertaking, industrial undertaking means any undertakingwhich, inter alia, was engaged in the business of mining. Thus, prior to the amendment of

section 80-IA, by the Finance Act, 1999 April, 2000, because of the statutory provisionitself being there, the deduction under section 80-IA could not be denied to the assessee

since mining activity came within the eligibility of deduction under section 80-IA. Thenagain according to section 33(1)(b)(i) where machinery or plant is installed for the

purpose of business or construction, manufacture or production of any one or more of thearticles or things specified in the list in the Fifth Schedule, it would be entitled to

development rebate. Items mentioned at Sl. No. 3 of the Fifth Schedule include lignite.Thus, here again the activity of excavation of lignite is related as production of article or

thing. Section 80-IB(9) entitles an undertaking engaged in commercial production orrefining of mineral oil for purposes of deduction under section 80-IB. It is noticeable that

in the Fifth Schedule at Sl. No. 3 along with coal, lignite, etc., mineral oil has also beenmentioned. Thus, by applying the principle of ejusdem generis it can be reasonably

concluded that excavation of lignite would also come within the term production of anyarticle or thing.

It was, however, submitted by the revenue that the activity carried out by the assesseewas primarily activity of mining and, therefore, the assessee was not entitled to deduction

under section 80-IB also. The assessee, on the other hand, submitted that the activity ofexcavation of lime stone

could not be compared with the activity carried on by the assessee which was

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very cumbersome and more than Rs. 5,000 crores of investment was made in order tocarry out the activity of excavation of lignite.

Lignite is found embedded beneath the earth in huge blocks. However, it can be put touse only after it is crushed to a uniform 50 to 150 mm size and after all the impurities are

removed and the excavated lignite is blended. Therefore, it cannot be held that the lignite

which is put to use is in the same form in which it is found embedded in earth.As the Madras High Court in the case of CIT v. Gomatesh Granities [2000] 246 ITR737/[2001] 118 Taxman 141 (Mad.) had clearly held that the term production is of

much wider import and, therefore, applying the same principles, the order of theCommissioner (Appeals) was liable to be set aside and the matter was liable to be

returned to the file of the Assessing Officer to examine the fulfilment of other conditionsunder section 80-IB in accordance with law. [Para 9]

iv. FactsThe assessee was extracting lignite from the mines located in two sectors, viz., Stage-I

and Stage-II. The Commissioner (Appeals) did not agree with the apportionment of indirect cost to two stages and adopted the following formula for arriving at the power

expenditure towards lignite and power as under : Total tonnes of lignite/power consumed the rate at which they were transferred to Stage-I. Total income of lignite/power

consumed the rate at which they were transferred to Stage-II.On further appeal :

iv. HeldThe assessee had adopted an in-house mechanism for price fixation due to which profits

of Stage-II considerably swelled. Therefore, apportionment of cost on the basis of ratio oftonnage of the extraction of lignite was not correct. It should have been done on the basis

of actuals. The important aspect was in regard to allocation of power cost. The assesseehad also submitted that transfer price was fixed on the basis of actual cost involved in the

production. Therefore, the assessee should furnish the actual cost of power consumed forStage-II for computing correct profit of Stage-II. That ground was, accordingly, allowed

for statistical purposes. However, that issue would be relevant only when assesseesatisfied the Assessing Officer regarding fulfilment of conditions under section 80-IB.

[Para 11]v. Facts

The Commissioner (Appeals) having noted that the assessee had included in its eligibleincome for deduction under section 80-IA certain amount in the mining income and in the

power generation segment as an additional income under the head Income-taxreimbursement, held that the said amount was not part of sale price of power and,

therefore, the assessee was not eligible for deduction under section 80-IA, in respect ofthe said amount.

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On further appeal to the Tribunal :v. Held

Admittedly, the agreement was entered into with various electricity boards for supply ofpower and was titled as bulk power supply agreement. Clause 4 of the said agreement

was with regard to the computation of generation tariffs. Annexure-A to the said

agreement referred to in clause 4.1 laid down the principles and parameters for fixation ofgeneration tariffs. One of the items mentioned in the said Annexure was for including therate of return on equity and internal resources at 12 per cent for both power station and

mine. Clause 6 of the agreement dealt with the liability in respect of income-tax, if any,on the income stream of NLC. It also laid down the overall limit of income-tax

reimbursement by recipient. It was noticeable in that connection that clause 4 dealingwith tariff did not refer to tax liability on income. Clause 4 and clause 6 were

independent clauses. Therefore, it was wrong to conclude that income-tax reimbursementto the limited extent as contained in clause 6 was part of tariff. The combined reading of

all these clauses clearly indicated that it was primarily the income-tax liability of therecipient on its income relating to a particular stream which had to be reimbursed to the

assessee. This could not be held to be income derived from industrial undertaking and,therefore, was rightly held by the Commissioner (Appeals) as not being part of sale price

of power.The order passed by the Commissioner (Appeals) was, therefore, justified.

Cases referred toBharat Earth Movers Ltd. v. CIT [2000] 245 ITR 428/112 Taxman 61 (SC) (para 2),

Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC) (para 4), CIT v.Coimbatore Cotton Mills Ltd. [1983] 140 ITR 562/13 Taxman 208 (Mad.) (para 4),

Hukumchand Jute & Industries Ltd. v. CIT [2000] 241 ITR 517/[1999] 107 Taxman 596(Cal.) (para 4), CIT v. Mahindra Ugine & Steel Co. Ltd. [2001] 250 ITR 84/[2002] 120

Taxman 250 (Bom.) (para 4), CIT v. United Motors (India) Ltd. [1990] 181 ITR 347(Bom.) (para 4), South-Eastern Coalfields Ltd. v. Joint CIT [2003] 260 ITR 1 (Nag.)

(AT) (para 4), CIT v. Elgi Equipments Ltd. [2002] 176 CTR (Mad.) 305 (para 6),Chrestian Mica Industries Ltd. v. State of Bihar 12 STC 150 (SC) (para 9), Minerals &

Metal Trading Corpn. of India v. Union of India 1983 30 ELT 1541 (SC) (para 9), CIT v.Pooshya Exports (P.) Ltd. [2003] 262 ITR 417/127 Taxman 369 (Mad.) (para 9), CIT v.

Gomatesh Granites [2000] 246 ITR 737/[2001] 118 Taxman 141 (Mad.) (para 9), CIT v.Bishal Enterprises [2001] 247 ITR 484 (Mad.) (para 9), CIT v. Gem India Mfg. Co.

[2001] 249 ITR 307/117 Taxman 368 (SC) (para 9), Lucky Minmat (P.) Ltd. v. CIT[2000] 245 ITR 830/[2001] 116 Taxman 1 (SC) (para 9), CIT v. Singareni Collieries Co.

Ltd. [1996] 221 ITR 48/[1997] 90 Taxman 185 (AP) (para 9) and CIT v. Sesa Goa Ltd.[2004] 266 ITR 126 (Bom.) (para 9).

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R. Vijayaraghavan for the Appellant. Smt. Pushya Sitaraman for the Respondent.Order

S.V. Mehrotra, A.M. - This appeal is against the order under section 263 of the Income-tax Act, 1961 passed by the CIT, dated 25th Nov., 2003. At the time of hearing, the

learned counsel for the assessee pointed out that the Committee on Disputes has not

accorded its approval for raising the issue regarding jurisdiction of the CIT invoking theprovisions under section 263 of the IT Act. Accordingly, this ground of appealchallenging the assumption of jurisdiction by CIT was not pressed before us.

Accordingly, the said ground is dismissed as not pressed.2. The second effective ground of appeal is that the learned CIT erred in directing the

Assessing Officer to disallow the business deduction of Rs. 180.92 crores, being arrearsof salary. Brief facts apropos this ground are that the assessee had made a claim of Rs.

180.92 crores on account of pay revision. The assessee in its reply pointed out thatliability had been created in the accounts for the pay revision as per Accounting

Standard-4, which deals with the events occurring after the date of balance sheet butbefore the date of approval of accounts by the board of directors. The assessee also

referred to the decision in the case of Bharat Earth Movers Ltd. v. CIT [2000] 245 ITR42811. 112 Taxman 61. (SC) and pointed out that it has been decided in that case that all

known liabilities though not fully quantified had to be provided for. Since this was anexisting liability, the same was provided.

3. The course of events giving rise to the pay revision was like this. The wage structure ofworkmen of Neyveli Lignite Corporation was determined through a memorandum of

understanding dated 8th July, 1995 between the management and workmen of theNeyveli Lignite Corporation represented by the joint council of unions. Settlement under

section 12(3), of the Industrial Disputes Act, 1947, was subsequently signed on 26thAug., 1995 which was valid till 31st Dec., 1996. On account of expiry of the existing

settlement, a bipartite committee was constituted on 29th Sept., 1999 and modified on17th April, 2001, subsequent to identification of NLC Workers Progressive Union as the

majority union through secret ballot election as per the directions of the Honble HighCourt of Madras. The Neyveli Lignite Corporation Workers Progressive Union vide their

strike notice dated 18th April, 2001 raised an industrial dispute against the managementof Neyveli Lignite Corporation (NLC) over the issue of finalizing the new wage revision

from 1st Jan., 1997. There was a work to rule agitation from 17th May, 2001, a sit onstrike on 21st May, 2001 and general strike from 22nd May, 2001 to 26th May, 2001.

Negotiations on the revised charter of demands of the recognized union commenced on23rd April, 2001 and the Committee had meetings on various dates and finally

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on 26th May, 2001 and after protracted discussions on the unions charter of demands, amemorandum of understanding was reached between the representatives of management

and recognized union on 27th May, 2001. Consequent to the arriving at a memorandumof understanding between the management of NLC and NLC workers progressive union,

the strike was withdrawn. The dispute was ceased in consultations and conciliation

provided on various dates as on 2nd May, 2001, 23rd May, 2001, 24th May, 2001, 25thMay, 2001, 26th May, 2001 and finally on 29th June, 2001.4. After protracted and prolonged discussions finally on 29th June, 2001, both the parties

agreed to arrive at a settlement under section 12(3) of the Industrial Disputes Act. Thelearned CIT taking note of the fact that the wage agreement was entered into on 29th

June, 2001 and treating this as a fresh event which had taken place in the subsequentyear, for which there was no whisper in the previous year, held that this liability

germinated in the subsequent year and could not be related back to the earlier year. Hefurther observed that the principle of prudence, as referred in Accounting Standard-4, is

applicable to known liabilities and not to the liabilities of the subsequent years.The learned counsel for the assessee submitted that pay revision was effective from 1st

Jan., 1997, the process for which was started in 1999. However, list of demands wassubmitted by workers union on 1997 itself. In this regard, he referred to the letter of

workers union dated 26th June, 1997 contained at p. 19 of the paper book, which reads asunder :

We, the Workers Progressive Union, submitted list of demands for the ensuing wagerevision period starting from 1st Jan., 1997 and decided to furnish the memorandum to

the management with request all this demands.He also referred to p. 14 of the paper book, wherein letter dated 22nd Feb., 1999 from the

Director of Ministry of Coal, Government of India addressed to the Chairman, Coal IndiaLtd., and CMD, Neyveli Lignite Corporation Ltd., is contained wherein it is pointed out

as under :I am directed to forward herewith the office memorandum issued in the Department of

Public Enterprises vide No. 2(11) 96-UPE(LC) dt. the 14th Jan., 1999, which contains thedecisions of the Government, regarding the policy for the Sixth Enterprise. It may kindly

be ensured that the wage settlements are negotiated strictly in accordance with theparameters laid down in the aforesaid O.M. of the Department of public enterprises.

The learned counsel further referred to p. 15 of the paper book containing the officememorandum dated 14th Jan., 1999 referred to in the letter of the director and pointed out

that this office memorandum followed for the sixth round of wage negotiations in publicsector undertakings

and copy of this was endorsed to the assessee-company also and received in the office ofthe chairman on 22nd Feb., 1999. The learned counsel submitted that services had been

rendered before 31st March, 2001 and this liability did not accrue after 31st March, 2001but actually accrued

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prior to March, 2001 and a reasonable estimate in respect of the said liability waspossible. In support of his argument regarding reaching at reasonable estimate, the

learned counsel referred to p. 35 of the paper book wherein are contained the instructionsdated 25th March, 2001 for revision of pay scales, fitment, DA, fringe benefit, etc., in

respect of the executives for implementation with the approval of the Government of

India. Thus, the learned counsel submitted that framework for arriving at the revised paystructure had already been framed and, therefore, the assessee had to follow the sameparameters for arriving at reasonable estimate of its accrued liability in respect of

workers. The learned counsel pointed out that there could not be any conflict betweenwage revision of employees and executives and since instructions had been received

regarding wage revision of executives, on the same lines provision for liability accruingon account of wage revision of employees could reasonably be made as the services had

already been rendered by the workers. The learned counsel further referred to p. 15 of theadditional paper book wherein a letter dated 2nd March, 2001 of Personnel Department

of National Thermal Power Corporation Ltd., is contained. He pointed out that NTPC hadgiven the revised pay scales on 2nd March, 2001 and uniformity had to be had with other

public sector undertakings. He also referred to p. 47 of the paper book wherein thecircular of Corporate Personnel Department of Bharat Heavy Electricals Ltd., dated 15th

Nov., 2000 is contained which also deals with revision of pay and allowances ofemployees. The learned counsel submitted that all these facts were available to the

assessee prior to 31st March, 2001 and, accordingly, the assessee had made provision forthis liability. The learned counsel submitted that once a liability is known, the provision

is an allowable deduction. In this regard he relied on following decisions :Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC)In this case the

Honble Supreme Court, inter alia, observed as under :Contingent liabilities discounted and valued as necessary, can be taken into account as

trading expenses if they are sufficiently certain to be capable of valuation and if profitscannot be properly estimated without taking them into consideration. An estimated

liability under a scheme of gratuity, if properly ascertainable and the present value isdiscounted, is deductible from the gross receipts while preparing the P&L a/c.

CIT v. Coimbatore Cotton Mills Ltd. [1983] 140 ITR 562 (Mad.)11. 13 Taxman 208. Inthis case it was held that provision for gratuity made on actuarial valuation was the

proper deduction from the profits. Hukumchand Jute & Industries Ltd. v. CIT [2000] 241ITR 51722. [1999] 107 Taxman 596. (Cal.) In this case, the assessee was a public limited

company. During the year relevant to the assessment year 1981-82, the assessee-companyconsumed electricity and received a notice of demand for additional fuel surcharge in

September, 1983 relevant to the assess-

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ment year 1984-85. In the original return for the assessment year 1981-82, the assesseedid not claim deduction in respect of the amount of Rs. 25,48,047 on account of

additional fuel surcharge for power consumption. But the assessee claimed it before theIAC in the proceedings under section 144B of the Act. The claim of the assessee was not

allowed by the IAC for the assessment year 1981-82 on the ground that the amount of

liability was not ascertained and quantified, an ad hoc provision of Rs. 3,71,980 had beenmade by the assessment year 1981-82 for additional fuel surcharge. The Honble CalcuttaHigh Court, after taking note of cls. 19, 20 and 25(9) of the agreement entered into

between the Board and the assessee, wherein it was agreed that fuel charges would formpart of the bill issued monthly and would depend upon the units consumed by the

assessee during the month, held that the liability accrued under the agreement when theelectricity was consumed by the assessee in the previous year relevant to the assessment

year 1981-82 though quantification was made later. Accordingly, it was held that theassessee was entitled for deduction of additional fuel charge liability in the assessment

year 1981-82.Bharat Earth Movers Ltd. (supra) The Honble Supreme Court observed

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: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 futuredate. 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. Theliability is in praesenti though it will be discharged at a future date. It does not make anydifference if the future date on which the liability shall have to be discharged is not

certain.CIT v. Mahindra Ugine & Steel Co. Ltd. [2001] 250 ITR 8411. [2002] 120 Taxman 250.

(Bom.) In this case it was held that where, after perusing the terms and conditions of thewage settlement entered into by the assessee-company, the Tribunal found that under the

conciliation proceedings a lumpsum payment was to be paid to the workers and hence, adebit was made in the P&L a/c to discharge the increased liability, and that the provision

was made on a reasonable basis for anticipated expenditure, it was an allowablededuction.

CIT v. United Motors (India) Ltd. [1990] 181 ITR 347 (Bom.)In this case, the assesseewas an agent for sale of motor vehicles. It also carried out repairing motor vehicles. The

terms and conditions of service of workmen employed by the assessee were governed bywards. In

October, 1970 the trade union representing the workmen of the assessee gave notice tothe assessee terminating the award with effect from four months thereafter. The

assessees board of directors noted this at a meeting held on 25th Feb., 1970. A provisionwas made for Rs. 1 lakh in view of the

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impending liability on account of the change in service conditions of the assesseesworkmen in the accounts for the year under consideration. Negotiations between the

assessee and the trade union resulted in settlement dated 2nd May and 6th Oct., 1972.Pursuant thereto the assessee paid a sum of Rs. 28,600 to the workmen in the month of

May and June, 1972 on account of salary, etc. Later another ad hoc payment of Rs.

48,000 was made to the workers pursuant to the said settlement. The assessee claimeddeduction of the aggregate sum of Rs. 76,680 in the assessment year 1972-73. It was heldthat though the provision of Rs. 100 lakhs itself was an allowable deduction, but since the

same was denied, the assessee was entitled for the quantified liability of Rs. 76,680.The learned Departmental Representative submitted that either the amount should have

been apportioned over the years to which it related or it should have been debited in theP&L a/c in the year in which settlement reached. The learned Departmental

Representative referred to p. 53 of the paper book wherein the memorandum ofsettlement under section 12(3) of the Industrial Disputes Act, 1947, between the company

and NLC Workers Progressive Union is contained. She pointed out that the saidsettlement was entered into on 29th June, 2001. The learned Departmental Representative

submitted that nothing happened in assessment year 2001-02 and, therefore, it could notbe allowed. She referred to the decision of the Tribunal in the case of South Eastern

Coalfields Ltd. v. Jt. CIT [2003] 260 ITR 1 (Nag.) (AT). In this case, the assessee-company had made a provision for interim relief payable to its employees covered by the

National Coal Wage Agreement for the period 1st July, 1991 to 31st March, 1994 to theextent of Rs. 3,266 lakhs and amount payable to the employees covered by executives

rules for the period 1st Jan., 1992 to 31st March, 1994 to the extent of Rs. 62.49 lakhs.The Tribunal held that as far as provision of Rs. 3,266 lakhs made by the assessee-

company in respect of interim relief payable to the employees governed by the NationalCoal Wage Agreement was concerned, a letter was issued by the holding company, i.e.,

Coal India Ltd., on 11th Feb., 1994, which was carrying on the negotiations with therepresenting trade unions, intimating the assessee that amicable settlement between the

parties had been arrived at, according to which Rs. 100 per month of interim relief to theemployees covered by the National Coal Wage Agreement was payable w.e.f. 1st July,

1991. The Tribunal allowed this provision. However, in regard to the provision of Rs.62.49 lakhs in respect of employees covered by executives rules for the period from 1st

Jan., 1992 to 31st March, 1994, it noted that the negotiations with the concerned unionreached the stage of settlement only after the end of the relevant accounting year vide

letter intimating such settlement forwarded by Coal India Ltd., on 3rd May, 1994.Accordingly, it was held that it was not possible for the assessee-company to anticipate

the liability to pay interim relief to this class of employees and that the provision was notwarranted. The learned Departmental Representative thus submitted

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that the liability can be said to have accrued only when the final settlement was reached.The learned Departmental Representative submitted that strike notice was given after the

end of accounting year and, therefore, it could not be said that liability had accrued in anycase during the previous year 2001-02.

5. We have considered the rival submissions and have perused the records of the case.

From the various judicial pronouncements noted earlier, it is clear that if liability hadaccrued during the relevant previous year and quite reasonably could be estimated on thebasis of material available with the assessee, then merely because quantification of the

same is done in a subsequent year, it cannot be said that the provision made for the saidliability on a reasonable estimate basis was not allowable deduction. In the present case,

we find that the Workers Progressive Union submitted its list of demands for the ensuingwage revision period starting from 1st Jan., 1997 on 25th June, 1997 itself. Therefore, it

was an impending liability. Vide letter dt. 14th Jan., 1999 it was pointed out by theGovernment of India, Department of Public Enterprises that wage settlement should be

negotiated by public sector enterprises for which broad guidelines were made. Thus, theprocess started in January, 1999 itself and the assessee was also informed of this decision

of Government of India on 22nd Feb., 1999. In pursuance of this, P&A Department ofcompany issued instructions on 26th March, 2001 in regard to revision of pay scales for

executive w.e.f. 1st Jan., 1997. Thus, as far as provision in respect of wage revisionrelating to executives is concerned, there cannot be any dispute that the same has to be

allowed. Negotiations with workers trade union were also going on simultaneously and,therefore, that liability also was very much existing because under no circumstances

wage revision to employees could be denied. Now we have to see whether the assesseecould reasonably make estimate of liability on account of wage revision relating to

workers. In this regard the assessee was having instructions of P&A Department ofcompany dated 25th March, 2001 in regard to wage revision of executives and two

settlements of public sector undertakings, viz., NTPC and BHEL prior to 31st March,2001, where also wage revision was to be effected on the same lines as in the case of the

assessee. Therefore, the assessee could reasonably estimate its accrued liability as theservices had already been rendered by 31st March, 2001. It was, therefore, fully justified

in making this provision. It was not a new event occurring in the case of this company.The learned Departmental Representative has pointed out that the assessee should have

made this provision in the respective years. However, for arriving at the provision thereshould be some basis available to the assessee and that was in the form of settlements

reached for pay revision of its executives and also by NTPC and BHEL which were alsomade available to the assessee before 31st March, 2001.

In view of the aforesaid facts, we set aside the order of the learned CIT in respect of thisissue. This ground is allowed.

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6. The second issue involved in the present appeal is regarding rejection of change inbasis of valuation of closing stock of urea. The learned CIT in para 8 of his order has held

that due to change in method of accounting of valuation of closing stock of urea, theclosing stock was undervalued by Rs. 18.6 crores. The brief facts appropos this issue are

that the assessee was manufacturing urea in its Fertilizer Division. Urea being an

essential commodity, sale price of urea was subject to administrative price control. In thenote on the urea, subsidy, filed in the paper book, it has been pointed out by the assesseethat with a view to ensure that fertilizer companies do not incur losses, the Government

fixed what is known as retention price based on various facts like expenses, depreciation,fuel charges, electricity charges, return on investment etc., of the fertilizer company. The

difference between the retention price and the sale price of urea is given by theGovernment as a grant or subsidy. It has been further pointed out that there is a provision

for reworking of the retention price on the basis of variation in the cost of various inputsgoing into the computation for the retention price. The assessee had to claim escalation

on quarterly basis specifying the variation in input cost and also giving the working forthe claim. For claiming this enhancement in subsidy, the fertilizer companies were

required to make an application to the Government along with the relevant particularsand documents. The Government had to approve the application and then only payment

could be made. One of the elements of input is the power cost which is determined by theagreement with the Electricity Board. Power cost on different occasions had been varied

with retrospective effect, for example there was variation in power cost in 1997, 1998 and1999. On the basis of these variations the assessee had claimed escalation of retention

money from 1996-97 onwards aggregating to Rs. 6.97 crores. It is pointed out in the notethat this amount was not settled by the Government nor was there any acceptance of

claim as on 31st March, 2001. In regard to other items also it is pointed out in the notethat it has been the experience of the assessee that even in respect of other claims for

escalation, the Government had not accepted the full claim nor did they give reason forreduction or rejection of the claim of the assessee. In regard to change in method of

accounting, it is pointed out that earlier the assessee had been accounting its claim for theescalation amount at the time of raising the claim. However, keeping in view the

uncertainty of the acceptance of the claim for escalation, profits of the year were not trulyreflected by accounting the claim for escalation in the year of making the claim itself.

Accordingly, the assessee decided to account for this claim for escalation in respect ofcost on various inputs in the year in which the Government accepted the claim. Thus, in

sum and substance, the assessee changed its method for accounting in respect ofescalation in the cost of inputs on cash basis instead on mercantile basis earlier followed

by it. In regard to the deduction in value of closing stock byRs. 18.69 crores, it is pointed out in the Note that during the assessment year 2001-02,

there was an agreement with the Electricity Board regard-

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ing power tariff by which the power tariff was changed w.e.f. 1997-98. As a result, theassessee had raised the claim for escalation of retention price on account of this change in

power tariff amounting to Rs. 18.69 crores for the period 1997-98 to 2000-01. Here againon account of uncertainty about the acceptance of the claim by the Government, the

assessee had decided to account for the same on cash basis. It is pointed out that this

change in method was mentioned in the balance sheet and the same has also beenaccepted by the Comptroller and Auditor General of India. The learned counsel for theassessee referred to p. 59 of the paper book wherein a letter of Ministry of Commerce and

Fertilizer, Department of Fertilizer dated 11th Jan., 2002 is contained intimating theassessee regarding revision in retention price on account of escalation/de-escalation w.e.f.

1st April, 1997 to 1st April, 2001. The learned counsel also referred to pp. 61 and 62 ofthe paper book to demonstrate as to how the assessee was making quarterly escalation

claim on account of increase/decrease in the cost of various inputs. He further referred top. 73 of the paper book, para 24(iii), which reads as under :

Differential retention price of urea and closing stock of urea accounted on ad hoc priceor estimated realizable price whichever is less and supplementary/escalation claim

accounted in the year of acceptance/realization as against the earlier policy of accountingthe claim of estimated realizable price.

The learned counsel referred to the decision of the Honble Madras High Court in thecase of CIT v. Elgi Equipments Ltd. [2002] 176 CTR (Mad.) 305. In this case, the

assessee had changed its method of accounting only in respect of export cash assistancefrom accrual to cash basis as the amount was not being regularly received. In this case, it

was held that change in the method of accounting from mercantile to cash system ofaccounting only in respect of export incentive on bona fide reasons and with a view to

avoid genuine problems was permissible. The learned counsel therefore submitted thatthe change in the method of accounting of subsidy on receipt basis was a bona fide

change and, therefore, no interference was called for, with such change in method ofaccounting. The learned Departmental Representative submitted that the decision of

Honble Madras High Court in CIT v. Elgi Equipments Ltd.s case (supra) was renderedwith respect to assessment year 1981-82. However, thereafter section 145 has been

amended by Finance Act, 1995 w.e.f. 1st April, 1997 and thereafter the assessee isentitled to either follow the cash or mercantile system of accounting regularly. The

learned Departmental Representative submitted that the closing stock has to be valued onthe basis of cost or market price, whichever is less. Therefore, the change was not

permissible. The learned Departmental Representative submitted that before we considerthe bona fides of the change in method of accounting, it should be kept in mind that the

assessee had closed its fertilizer unit. The learned counsel in rejoinder submitted that ifthe learned Departmental Representatives plea is accepted regarding adopt-

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ing the market price being lower of the cost or market price, then the value of closingstock will be much less. It was submitted that if there is uncertainty of receipt, then it is

not necessary to account for the same. The learned counsel submitted that continuance ofbusiness is not relevant. He pointed out that once bona fide change was accepted by CAG

subsequently mala fide cannot be attributed.

7. We have considered the rival submissions and have perused the records of the case.There is no dispute of the fact that retention price fixed by the Government of India wassubject to revision from time to time with retrospective effect depending upon cost of

inputs in production of fertilizer and it is evident from the letter dated 11th Jan., 2002 ofSection Officer of the Ministry of Commerce and Fertilizer, Department of Fertilizer that

escalation with effect from 1st April, 1997 was recognized by the Government of India inJanuary, 2002. The learned CIT in his order has pointed out that it is not disputed that the

formula for computing subsidy is known to both the parties and there is no instancewhere the Government of India has gone back by disputing the formula. The main thrust

for this conclusion is that mere delay in receipts of portion of subsidy cannot be a reasonfor undervaluing the closing stock. In this regard it is noteworthy that urea retention price

w.e.f. 1st Jan., 2000 was fixed at Rs. 1,12,214 metric tonne but it was revised to Rs.9,475 per metric tonne vide letter dated 11th Jan., 2002. It is also pointed out in the note

as already noted earlier, that the claim made to the Government of India in regard topower cost from 1996-97 aggregating to Rs. 6.97 crores were neither settled by the

Government nor was there any acceptance of the claim as on 31st March, 2001.Therefore, it cannot be said that whatever retention price was approved by the

Government of India was also received by the assessee. As per AS-9, where the ability toassessee the ultimate collection with reasonable certainty is lacking at the time of raising

any claim, such escalation of price, export incentives, interest etc., revenue recognitionshould be postponed to the extent of uncertainty involved. In such cases it would be more

appropriate to recognise revenue only when it is reasonably certain that ultimatecollection will be made. Therefore, it is not a case of mere delay in receiving the claim

but also associated with uncertainty in receiving the claim. Under these circumstances,the change in method of valuation of closing stock could not be said to be mala fide.

There are plethora of judicial pronouncements on the issue that mere lodging of claimdoes not result in accrual of income. The learned Departmental Representatives

objection is that after the amendment in section 145, the assessee could not adopt thehybrid system of accounting. In our considered opinion, this cannot be said to be

deviation from the mercantile system of accounting regularly employed by the assessee.It is only the change in method of valuing of closing stock necessitated on account of

uncertainty associated in receiving the claim made by the assessee. In this view of thematter, we set aside the order of the learned CIT.

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8. Ground No. 3 is regarding allowability of deduction under section 80-IA in respect oflignite production. The assessee had claimed deduction under section 80-IA on the profits

arising from its activity relating to mining lignite and generation of power using themined lignite. The learned CIT examined in detail whether the assessee was the

manufacturer or producer of an article or a thing and after elaborate discussion held that

the mining activities of the assessee did not involve manufacture or production of anyarticle or thing and, therefore, the assessee was not entitled to the benefit of section 80-IA.

9. We have considered the elaborate submissions of both the parties carefully. Beforeconsidering the issue whether the activity of mining constitutes manufacture or

production of any article or a thing, we may observe that for claiming deduction, if any,in respect of income accruing on account of activity of mining, it was section 80-IB in the

relevant assessment year and not section 80-IA. The learned counsel for the assesseesubmitted that merely because a claim has been made under a wrong section, the same

cannot be denied to the assessee and it should be considered under the appropriate sectionviz., section 80-IB. However, the learned Departmental Representative vehemently

objected and submitted that since assessee had claimed deduction under section 80-IA,the same cannot be allowed/she submitted that the fact that mining is not listed as an

infrastructure development activity and, therefore, this straightaway throws it outside thepurview of section 80-IA. We find that section 80-IA and section 80-IB were substituted

for section 80-IA by the Finance Act, 1999 w.e.f. 1st April, 2000. Prior to its substitutiondeduction was available under section 80-IA in respect of profits and gains from

industrial undertaking in certain cases. Under these circumstances merely becauseassessee made a claim under section 80-IA, the same cannot be denied for technical

reasons if he is entitled for the same under section 80-IB. Whether profits and gainsderived from the activity of mining are eligible for deduction under section 80-IB also

will depend upon whether the activity of mining of lignite constitutes production ormanufacture of an article or thing or not because as per the provisions of section 80-

IB(2)(iii), the industrial undertaking should have, inter alia, fulfilled the condition ofmanufacture or production of any article or thing. We, therefore, proceed to decide the

issue whether mining of lignite would amount to manufacture or production of article orthing. The assessee has given in detail the process of production of lignite which is

reproduced hereunder :The first step is removal of overburden. The overburden consisting of different soil

characteristics has to be removed to expose the lignitebelow. The overburden is excavated in four benches. In the high capacity mines of 10-5-

MTPA, the top three benches are operated with maximum bench height of 24mm eachwith high capacity system, consisting of 1400

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L. BWE, a number of 2400/2000 mm wide steel cord belt conveyors, 20,000/11,000 t perhr. tripper and spreader. The fourth bench is operated with two 700 L. BWE loading into

2000 mm. vide steel cord belt conveyor and matching spreader of 11,000 t/hr, whereasthe 3 MTPA mine has got 700 L BWEs and the connected system in each bench. All the

overburden excavation and dumping systems are interlinked so as to operate the

excavation side without interruption if any of the connecting dumping system goes underbreakdown or planned stoppage.Drilling and Blasting :

The overburden of Neyveli mines consists of soft and sticky alluvium and hardCuddalore sandstone. The deployment of BWE for excavation of sandstone without

blasting experience heavy shock load on the machines causing structural damages andcutting teeth worn out in a very short duration. The cutting resistant and the compressive

strength of the Cuddalore sandstone are 22 to 250 Kg. per cm. and 200 Kg. per sq. cm,respectively. The binding media of the sandstone are generally clay and in some places

the silicon itself form a binding medium. The mafic minerals like Fe, Mg, Mn, also act asbinding media resulting in a very hard strata. These hard strata pose manifold effects on

the working of the mine.The hardness in the strata is neither uniformly distributed along the length of the mine

nor it follows any pattern in the vertical plane. The degree of hardness also varies.To aim at proper parameters for drilling and blasting, experiments were conducted in

collaboration with different explosive manufacturers adopting different bore hole spacingand pattern, different charge ratio and different firing orders.

Drilling of short hole :The blast holes are being drilled using a straight rotary drill. A drag bit is used for driving

the hole to diameter of 200mm. In a quarry the depth of the hole is normally the benchheight, which is to be 24 to 26mm. In places of high hard band occurrence a central hole

up to the hard band bottom is drilled to have exclusive charge exactly at that strata.Normally, dry drilling is carried out using high pressure air compressors to flush out

cutting materials. If there is moisture in the strata, the cutting materials will not come out.In such places water is being used to drill the holes.

Blasting Operation :The drilled holes may contain some water which may either react with the explosives to

be charged or will not allow the explosive to reach the required location. These water areto be bailed out and reamers are to be used to smoothen the inner edge of the hole and

also to clean the sledges at the bottom of the hole.

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Ground Water Control :The lignite deposit is in a basin with confined aquiferic condition. The upward pressure

of the aquifer poses water problem while excavation of lignite unless otherwise thepressure is controlled and kept below the bottom of the lignite seam. To tackle this

problem number of pump tests were conducted to steady the aquiferic parameters like

permeability, storability, transmissibility, etc., that aided to design the pump well and themethod of pumping.Geo-hydrological studies, large scale pumping tests and hydrological computations

suggested that establishment of pump wells having 1000 GPM capacity is ideal for GWCoperations. The pump well was designed step by step equipped with the specified

parameters. The main procedure of designing the pump well is as follows :(a) Screen diameters

(b) Bore hole diameters(c) Gravel packing

(d) Screen openingThe GWC wells are drilled by Jet Hole Master with rock roller bits to a diameter of

1000mm and depth varies from 80mm to 160 mm. The hole is cased with 500 mmcasings and 5 to 8 stages of submersible pumps (squirrel cage induction motors of 175 to

250HP) ore lowered for pumping 1000 GPM continuously.Storm Water Control :

The vast open cast mine is in the monotonic belt and experienced 1500 mm/annum ofrain on an overage. This rainwater, unconfirmed water and extraneous water are together

designated as storm water which poses problem in the mining operation. The stormwater is collected in the sumps located suitably at the pit bottom and pumped out by

means of float pumps mounted in pontoons, 2000/4000 GPM centrifugal pumps with170/250 HP motors are mounted on a float, to pump to a head of 42/85 m. The high head

pumps are having 350 kw/650 kw motors with the pumping capacity of 2000/4000 GPMto a head of 140 m. Intermediate booster stations are established to pump out the storm

water to surface level.Dust Suppression :

The dust emanated from the mining activity is well controlled by spraying of waterthrough water lorries, water dumpers in the moving benches and haul roads. Flexible

water hoses for spraying along the conveyors tap water supply pipelines laid along thepermanent conveyors. Similar arrangements are made in lignite bench and lignite bunker

areas.

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II. Production of lignite :The production of lignite is a complex, complicated operation involving use of advance

technologies and sophisticated machinery. Production of lignite cannot be compared withexcavation of minerals like limestone and granite, which are available on the surface and

are not mixed with any great amount of other material. Removal of limestone and granite

are easy and does not involve any complicated operations and processes.Lignite occurs naturally as a huge continuous blocks extending over a large area. As thelignite is to be used in boilers, lignite is required to be reduced to small sized rubble.

Cutting, crushing and transportation of lignite :Lignite deposits is in huge continuous block. There are two methods of excavating the

lignite. Scoop blocks of lignite and then use crusher to reduce it into rubble. Alternativelyat the time of digging itself the machines are so designated that the lignite block is broken

into small sized lumps and transported.Huge bucket wheel excavators are employed for cutting into lignite formations. They are

huge machines with rotating buckets with teeth. The buckets perform a three dimensionalmotion and the size of the teeth and the gaps between the teeth are so designed that

lignite is broken/crushed into small lumps of about 500 mm size even at time of digging.Thereafter the lumps are loaded into the conveyor system. The conveyors carry the lumps

at a predetermined speed. At regular intervals, there is a break in the conveyors. Thelumps are thrown out and hit iron buffer doors at an angle and speed. Then the lumps fall

down into another conveyor system. These are so designed that the impact and fallfurther break any larger lumps of lignite loaded by BWE into smaller size. This is

achieved through angle of throw fall of height at discharge points and speed impact andfriction during transportation.

At the stack yard, blending process is carried out by deploying 2 BW reclaimers. Thisprocess achieves uniform calorific value of lignite. This process also breaks any

remaining large lumps of lignite.Due to the above, the huge streams of lignite is reduced to lump of the size of 500mm at

the BWE stage gets crushed to a uniform 50-150mm size at the stacker.Quality control of lignite :

This involves Removal Marcasite and impurities; and blending at the production yard toassure acceptable and appropriate quality.

Removal of marcasite and impurities :Lignite that is produced from the mines and crushed to appropriate sizes still have

impurities embedded in them through layers of marcasite and

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interburdened waste. Marcasites are dimorphate of pyrite and the physical properties ofmarcasites are as follows :

Chemical composition:

FeS2 (Ferric Sulphide)

Colour:

Pale bronze yellow

Appearance:

Metal like

Shape:

Boulder, Lenticular Leins,

Platty and Massive

Hardness:

6 to 6.5

Specific gravity:

4.89

Compressive strength:

150 to 800 Kg/CM2

Nature:

Non Magnetic.

As could be seen from the above, these are non-magnetic and that compressive strengthupto 800 Kg./CM2. The impure lignite with marcasite cannot be fed into the boiler and it

would hurt the boiler because of the nature described above.There are also layers of clay and sand which are not combustible also to be removed to

make the lignite of acceptable quality. After the impurities are removed the lignite isblended with specific quality of lignite to ensure that the batch of production is of

acceptable quality and fit enough to be fed for consumption by the Thermal Unit.Blending of lignite :

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The quality of lignite extracted from the mine varies as this is a natural occurrence. Inorder to give the required quality of lignite to the down stream thermal power station,

suitable test semples are taken from the lignite bench and analyzed. Depending upon thegrade and quality, the excavation of lignite is blended in the bench itself by deploying

two bucket wheel excavators at different ureas/horizons and sent to stack yard. In the

stack yard two lignite stacks are maintained quality wise, which are again mixed bydeploying two reclaimers in both the stacks simultaneously. In the stackyard also theblending is fine-tuned with the help of claimers. The lignite reaches its exact required

quality when it is further blended in the thermal stackyard with the help of reclaimers.Moreover, to avoid contamination in the bench area, the floor is finely dozed off to have

a cleaner lignite top. The tackling of inter burden also needs special skill as this maycontaminate the lignite excavated. The lignite produced in this manner is fed to thermal

power station for power generation. A full-fledged laboratory is functioning to carryingout the lignite sampling in order to maintain quality. The learned counsel pointed out that

more than Rs. 5,000 crores of investment has been made for this purpose. The learnedcounsel has also relied on the decision of the Honble Supreme Court in Chrestian Mica

Industries Ltd. v. State of Bihar 12 STC 150 (SC).

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From the foregoing discussions, it is clear that the process of production of lignite is quitecumbersome. In short, the first stage is the removal of overburden consisting of different

soil characteristics to expose the lignite below. This requires drilling and blasting whichis also very technically complicated procedure requiring lot of accuracies. In the process,

there is one more very important procedure employed for controlling the upward pressure

of the water so as to keep that below the bottom of the lignite scene. Lignite is found inhuge blocks extending over a large area and, therefore, in order to use it in boilers it isrequired to be reduced to small size rubbles. This process is also highly technically

advanced procedure and after employing the same, huge stream of lignite is reduced to auniform 50mm to 150mm size. Thereafter comes the procedure of removal of marcasite

and impurities and blending at the production yard to assure acceptable and appropriatequality. It is pointed in the procedure noted above that impure lignite with marcasite

cannot be fed into the boiler as it would hurt the boiler. Therefore, it is an essentialprocedure before excavated lignite can be put to use. The blending of lignite is also an

essential part of making the lignite useful for thermal power stations. Thus, from theaforementioned discussion, it is evident that though lignite is found embedded in the

earth in big blocks, but it is useful only after it has undergone various processes.Before we consider the various precedents cited by both parties, we may point out that we

have before us in the form of statutory evidence the Explanation to section 33B, whichwas earlier referred to in section 80-IA for defining the term industrial undertaking. As

per the Explanation to section 33B industrial undertaking means any undertaking which,inter alia, was engaged in the business of mining. Thus, prior to the amendment of section

80-IA, by the Finance Act, 1999 w.e.f. 1st April, 2000, because of the statutory provisionitself being there, the deduction under section 80-IA could not be denied to the assessee,

since mining activity came within the eligibility of deduction under section 80-IA. Thenagain we have before us section 33(1)(b)(i) in the form of statutory evidence, according

to which where machinery or plant is installed for the purpose of business orconstruction, manufacture or production of any one or more of the articles or things

specified in the list in the Fifth Schedule, it would be entitled for development rebate.Items mentioned at Sl. No. 3 of the Fifth Schedule include lignite. Thus, here again the

activity of excavation of lignite is treated as production of article or thing. Section 80-IB(9) entitles an undertaking engaged in commercial production or refining of mineral oil

for purposes of deduction under section 80-IB. It is noticeable that in the Fifth Schedulenoted earlier at Sl. No. 3 along with coal, lignite etc., mineral oil has also been

mentioned. Thus, by applying the principle of ejusdem generis it can be reasonablyconcluded that excavation of lignite would also come within the term production of any

article or thing.

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Now we will consider the various case laws relied upon by both the parties. The learnedDepartmental Representative has referred to following case laws :

Minerals & Metal Trading Corporation of India v. Union of India 1983 (30) ELT 1541(SC). The learned Departmental Representative has pointed out that in this case, it was

held by the Supreme Court that separating walfrom ore from rock does not amount to

production or manufacture. She also referred to the decision in Hyderabad Industries Ltd.v. Union of India 78 ELT 641 (SC) wherein it has been held that separating asbestos fibrefrom rock in which it is embedded does not amount to production or manufacture. She

referred to the decision of the Honble Madras High Court in CIT v. Pooshya Exports (P.)Ltd. [2003] 262 ITR 41711. 127 Taxman 369. and submitted that the Honble Madras

High Court has held that quarrying and mining granite blocks does not amount tomanufacture. In this case, the Honble Madras High Court decided the issue in favour of

Revenue following the decision of Honble Madras High Court in CIT v. GomateshGranites [2000] 246 ITR 73722. [2001] 118 Taxman 141. and CIT v. Bishal Enterprises

[2001] 247 ITR 484 (Mad.). In the case of Gomatesh Granites (supra) the HonbleMadras High Court held that activity of extracting granite from hill does not amount to

manufacturing activity. In this case, the assessee was an exporter of unpolished graniteblocks which were excavated from hills and after employing a simple procedure of

thoroughly washing with water to see whether there were any cracks in them or not, theywere lifted by cranes and exported. In the case of Bishal Enterprises (supra) the Honble

Madras High Court followed the decision in the case of Gomatesh Granites (supra). Thelearned Departmental Representative further referred to the decision of the Honble

Supreme Court in CIT v. Gem India Mfg. Co. [2001] 249 ITR 3073117 Taxman 368.,wherein it was held that cutting and polishing uncut raw diamonds did not amount to

manufacture or production of article or thing. The learned Departmental Representativefurther referred to the decision in Lucky Minmat (P.) Ltd. v. CIT [2000] 245 ITR 83044.

[2001] 116 Taxman 1. (SC) wherein it was held that mining of lime stone and marbleblocks and cutting and sizing them does not amount to manufacture or production of

article. Referring to all these decisions, the learned Departmental Representativesubmitted that the activity carried out by the assessee was primarily activity of mining

and, therefore, the assessee was not entitled for deduction under section 80-IB of the Actalso.

The learned counsel for the assessee, however, submitted the activity of excavation oflime stone cannot be compared with the activity carried

on by the assessee which was very cumbersome as noted earlier and more than Rs. 5,000crores of investment was made in order to carry out the

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activity of excavation of lignite. The learned counsel further submitted that all the caselaws relied upon by the learned Departmental representative are with reference to section

80HH where under sub-section (10), a clear-cut statutory prohibition was there to denydeduction in respect of undertakings engaged in mining. However, no such prohibition is

there under section 80-IB. On the contrary, as noted earlier, the deduction is available

specifically in respect of mining activity. In this regard he referred to section 35E andpointed out that where the assessee is engaged in any operation relating to prosecuting orextraction of or production of any mineral, then it would be entitled for deduction under

section 35E. Thus, he pointed out that taking out mineral is production. The learnedcounsel further referred to various case laws which are discussed hereunder.

Chrestian Mica Industries Ltd.s case (supra), wherein it was held by the HonbleSupreme Court that mica mining operations by which crude mica is taken out of the mine

and processed into split mica amount to production.CIT v. Singareni Collieries Co. Ltd. [1996] 221 ITR 4811. [1997] 90 Taxman 185. (AP),

wherein it was held that extraction of minerals amounts to production. The learnedcounsel further pointed out that the Honble Madras High Court in Gomatesh Granites

(supra) held as under :This is not to say that the activity of cutting the extracted block to smaller sizes,

polishing the same, and thereafter exporting the polished slabs, would not amount toproduction. It is not necessary for us to express any opinion finally on that question as

that question does not arise for our consideration in these cases.The learned counsel pointed out that impliedly the Honble Madras High Court has

approved the decision of the Andhra Pradesh High Court in CIT v. Singareni CollieriesCo. Ltd.s case (supra) which is evident from its observations contained at p. 744 :

Though the word production is wider than the word manufacture, and manufacturingactivity is not always essential before a process is described as production, nevertheless

must involve process which involves labour and skill, and the process involved shouldalso be processes which involve some degree of complexity. Before holding that mica

mining and processing amounted to production, the process involved was carefullyanalysed by the Apex Court and it was in the light of the process so set out, which

indicated several stages through which the mineral is passed from the time of extractionof crude mica to the stage of split mica which is commercially valuable that it was held

that it is on account of the nature of process involved thereon that the term productioncould be aptly applied to the production of split mica.

The learned counsel further pointed out that the decision of the Honble Supreme Court isnot applicable to the facts of the case. The Honble

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Supreme Court was considering the deduction under section 80H of the Act. He pointedout that the Honble Supreme Court has observed that conversion into lime and lime dust

or concrete by stone crusher could legitimately be considered to be manufacturingprocess. The learned counsel for the assessee after distinguishing these cases referred to

the decision of the Bombay High Court in CIT v. Sesa Goa Ltd. [2004] 266 ITR 126 and

submitted that this decision is squarely applicable to the facts of the case, wherein it washeld that extraction and processing of iron ore amounts to production of article. Hepointed out that the Honble Bombay High Court elaborately considered all the case laws

on this issue. The Honble Bombay High Court observed as under :Ore has to be extracted or raised from the earth in which it is embedded and has to be

brought to the surface. What is brought to the surface is something new which comes intoexistence, as an article or thing. If that be the case, winning or extracting of ore would fall

within the expression production.From the case laws noted as above, it is clear that because of specific prohibition under

section 80HH(10) regarding mining activity, the decisions rendered with reference to thesaid section are of little help to the Department. In the present case, we find that lignite is

found embedded beneath the earth in huge blocks. However, it can be put to use onlyafter it is crushed to a uniform 50 to 150 mm size and after all the impurities are removed

and the excavated lignite is blended. Therefore, it cannot be held that the lignite which isput to use is in the same form in which it is found embedded in earth. The test laid down

in various judicial precedents is consistent and it is whether the article produced isregarded in the trade by those who trade in it as distinct in identity from the commodity

involved in its manufacture.We are of the opinion that keeping in view the statutoryevidence in the form of various sections noted earlier, the various stages involved in the

process and the decisions of the Honble Madras High Court in the case of GomateshGranites (supra) Honble Bombay High Court in the case of Sesa Goa Ltd. (supra) and

the Honble Supreme Court in Chrestian Mica Industries Ltd. case (supra) the irresistibleconclusion is that the assessee was engaged in the production of lignite. As noted earlier,

the Honble Madras High Court in the case of Gomatesh Granites (supra) has clearly heldthat the term production is of much wider import and, therefore, applying the same

principles, we set aside the order of the learned CIT on this point and restore this issueback to the file of the Assessing Officer to examine the fulfilment of other conditions

under section 80-IB in accordance with law. In the result, this ground is allowed forstatistical purposes.

10. The next issue raised in this appeal is regarding the allocation of indirect cost ofproduction of lignite to Stage-II.

11. The learned CIT has noted that the assessee was extracting lignitefrom the mines located in two sectors, viz. Stage-I and Stage-II. There is

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no dispute that the income generated from the extraction of lignite from Stage-I is noteligible for deduction under section 80-IA and the assessee was claiming deduction under

section 80-IA on the income generated from the lignite extracted from Stage-II. Thelearned CIT has summarized the working of both the stages and the total profits from

mining activity as submitted by the assessee during the course of hearing which is

reproduced below :Mine II - Workings for IT claim under section 80-IA

Stage-IStage-II

Percentageof

difference

Physical production27,623,343.05

35,692,006.8329.2

(Tonnes)

Expenditure : variable cost210,503,517.20

271,990,720.3129.2

fixed cost

1777,560,169.092567,928,962.22

44.46

Total Expenditure2003,685,050.38

2868,170,275.51

2497,106,570.684458,349,389.72

78.5

Total income488,421,520.31

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1590,179,114.22220.5

The learned CIT noted that both variable and fixed costs were proportionately divided on

the basis of the ratio of tonnage of the extraction of lignite from Stage-I and Stage-II

except interest cost and depreciation, which was on actual basis. The assesseesexplanation was that the ratio of the quantitative extraction of lignite was taken becausemost of the input costs were related to the quantity of lignite extracted. The learned CIT

noted that though the extraction of lignite was more by about 29 per cent in Stage-II, vis-a-vis Stage-I, the net income of Stage-II is about 224 per cent more even after allocating

higher interest and depreciation amounts. It was explained to the CIT that as per the pricefixation formula, the assessee charges lesser rate on in-house transfer of lignite of Stage-I

to the power generation unit whereas the same lignite of Stage-II is charged at a muchhigher rate when it is transferred for in-house power generation purpose. It was also

pointed out that this methodology of price fixation was adopted because of the cost plusformula adopted in the price formulation wherein certain percentage of return was fixed

on the investment made on these projects. Consequently, newer and costlier the project,higher will be the price vis-a-vis older and cheaper units.The learned CIT did not agree

with the apportionment of indirect costs to two stages and adopted the following formulafor arriving at the power expenditure towards lignite and power as under :

Total tonnes of lignite/power consumed

The rate at which they were transferred to Stage-I.

Total income of lignite/power consumed

The rate at which they were transferred to Stage-II.

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The learned counsel submitted that the transfer price is fixed not on the basis of marketvalue but on the basis of actual expenditure incurred and, therefore, apportionment of

indirect cost on the basis of actual tonnage produced is the correct method in assesseescase. The learned Departmental Representative submitted that the actual rate of power

should be taken since the same was used for Stage-II only. We have considered the

submissions of both the parties. The assessee had adopted an in-house mechanism forprice fixation due to which profits of Stage-II considerably swelled. Therefore,apportionment of cost on the basis of ratio of tonnage of the extraction of lignite was not

correct. It should have been done on the basis of actuals. The important aspect is inregard to allocation of power cost. The learned counsel has also submitted that transfer

price is fixed on the basis of actual cost involved in the production. Therefore, theassessee should furnish the actual cost of power consumed for Stage-II for computing

correct profit of Stage-II. This ground is accordingly allowed for statistical purposes.However, we may clarify that this issue will be relevant only when assessee satisfies the

Assessing Officer regarding fulfilment of conditions under section 80-IB.12. The next issue is regarding allowance of deduction under section 80-IA in respect of

grossed-up taxes. Brief facts apropos this issue are that on detailed examination of theworking of the claim of the assessee under section 80-IA, the learned CIT noted that the

assessee had included in its eligible income for deduction under section 80-IA a sum ofRs. 34,94,69,000 in the mining income segment and Rs. 45,55,92,000 in the power

generation segment as an additional income under the head income-tax reimbursement.The assessees submissions have been reproduced in para 11.3 in which, inter alia, it was

submitted that any payment under the bulk power purchase agreement was a payment forpurchase of power and the recovery of income-tax is only a component of two part tariff

for sale of power and this was done as per Notification dated 30th March, 1992 issued bythe Ministry of Power in exercise of the powers conferred on the Central Government

under sub-section (2) of section 43A of the Electricity Supply Act, 1948. It was pointedout that it was not reimbursement of the companys tax liability. The learned counsel for

the assessee submitted that for deciding the purchase price, deemed tax on return ofinvestment was notionally taken and it was not the actual tax. The learned counsel

referred to pp. 9 to 47 of the paper book and referred to p. 21 of the paper book whereinthe agreement entered into between the company and various electricity boards is

contained, where under clause 6 in regard to income-tax liability, if any, on the variousincome streams of the company were to be borne by the recipients. He specifically

referred to clause 6.2, which reads as under :6.2 The total tax liability of the recipients shall however be :

(a) the tax payable on the return on equity and internal resources relating toMine-II and Power Station-II adopted in the tariff calculations and grossed-up tax thereon

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or(b) the actual tax, assessed for the above streams, whichever is less.

The learned counsel also referred to section 195A to submit that where under anagreement, tax chargeable on any income is to be borne by the person by whom income

is payable, then, for the purpose of deduction of tax, such income is to be increased by

the tax component. The learned counsel also referred to pp. 122 and 128 of the paperbook wherein the working regarding tax collection is contained. The learned counselpointed out that tax at 39.55 per cent was allocated to various units on the basis of return

on split basis. He pointed out that though the actual tax liability was Rs. 28,31,407 lakhsthe total grossed-up tax was Rs. 12,505 out of which Rs. 455.82 lakhs pertains to Stage-II

which was recovered from electricity boards in the form of purchase price. In sum andsubstance, the learned counsel submitted that the agreement was for purchase of power

and it was not the actual tax which was recovered but only a component of price. Thelearned Departmental Representative submitted that the income-tax reimbursement does

not form part of tariff. Since this was not income derived from generation of electricity,no deduction was allowed.

13. We have considered the rival submissions and perused the record of the case.Admittedly, agreement was entered into with various electricity boards for supply of

power and was titled as bulk power supply agreement. Clause 4 of the said agreement iswith regard to the computation of generation tariffs. Annexure-A to the said agreement

referred to in clause 4.1 lays down the principles and parameters for fixation ofgeneration tariffs. One of the items mentioned in the said Annexure is for including the

rate of return on equity and internal resources at 12 per cent for both power station andmine. Clause 6 of the agreement deals with the liability in respect of income-tax, if any,

on the income stream of NLC. It also lays down the overall limit of income-taxreimbursement by recipient. It is noticeable in this connection that clause 4 dealing with

tariff does not refer to tax liability on income. Clause 4 and clause 6 are independentclauses. Therefore, it is wrong to conclude that income-tax reimbursement to the limited

extent as contained in clause 6 was part of tariff. The combined reading of all theseclauses clearly indicate that it is primarily the income-tax liability of the recipient on its

income relating to a particular stream which has to be reimbursed to the assessee. Thiscannot be held to be income derived from industrial undertaking and, therefore, was

rightly held by the learned CIT as not being part of sale-price of power. This ground isaccordingly dismissed.

14. In the result, the appeal is treated as partly allowed for statistical purposes.