AI Drafter - (New and Powerful) 
Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter. 
TaxTMI 
TaxTMI 
2017 (11) TMI 1199
X X X X Extracts X X X X
X X X X Extracts X X X X
....egal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by allowing depreciation of Rs. 44,81,811. (b) Alternatively, in the facts and in the circumstances of the case and in law the learned Commissioner of Income-tax (Appeals) erred in not allowing the deduction under section 37(1) of the Income-tax Act, 1961, of the compensation amount of Rs. 35,00,000 paid during the year to the land owner, for using the land for mining. The action of the learned Commissioner of Income-tax (Appeals) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by allowing the deduction of Rs. 35,00,000 under section 37(1) of the Income-tax Act, 1961. 2. In the facts and in the circumstances of the case and in law the learned Commissioner of Income-tax (Appeals) erred in confirming the action of the learned Assessing Officer in making the disallowance of revenue expenditure of Rs. 18,00,000 under section 35(2AB) of Income-tax Act, 1961. The action of the learned Commissioner of Income-tax (Appeals) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by allowin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on of Rs. 35,00,000 under section 37(1) of the Act. Before we refer to the contentions of the learned authorised representative, it would be relevant to refer to the relevant findings of the learned Commissioner of Income-tax (Appeals) which are under challenge before us. The same are reproduced as under : "I have gone through the assessment order, statement of facts, grounds of appeal, written submission, remand report and rejoinder carefully. It is seen that the appellant was granted mining lease by the Mining Engineer, Pratapgarh which was renewed vide letter dated February 11, 2015 further till March 31, 2020. During the previous year relevant to the assessment year 2013-14, the appellant paid Rs. 35 lakhs to Shri Ranga who was having in his possession, a piece of land (Khasra No. 53, Araji No. 157, Rakba 3 bigha and 8 biswa), as this piece of land was part of the total area allotted by the Government to the appellant for mining the soap stone. The appellant had in the past also made such payments to other persons for getting possession of the land in order to do the mining in the area. All the amount paid in the earlier years amounting to Rs. 1,61,77,243 was shown by ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....allowed for each one of the relevant previous years a deduction of an amount equal to one-tenth of the amount of such expenditure. (2) The expenditure referred to in sub-section (1) is that incurred by the assessee after the date specified in that sub-section at any time during the year of commercial production and any one or more of the four years immediately preceding that year, wholly and exclusively on any operations relating to prospecting for any mineral or group of associated minerals specified in Part A or Part B, respectively, of the Seventh Schedule or on the development of a mine or other natural deposit of any such mineral or group of associated minerals : Provided that there shall be excluded from such expenditure any portion thereof which is met directly or indirectly by any other person or authority and any sale, salvage, compensation or insurance moneys realised by the assessee in respect of any property or rights brought into existence as a result of the expenditure. (3) Any expenditure- (i) on the acquisition of the site of the source of any mineral or group of associated minerals referred to in sub-section (2) or of any rights ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mutated in its name in the revenue records. 9. During the relevant previous year, the assessee-company paid an amount of Rs. 35,00,000, as part of the compensation for surrender of land to Mr. Ranga, S/o. Mr. Panchiya Meena. In order to effectuate the surrender of land, following documents were executed : * Undertaking given by land owner for surrendering the land and also confirmation that the land is situated within the lease area of the assessee-company * Surrender letter or samarpan patra executed by the land owner * Chain of events documented by Tehsildar * Letter written by land owner to Tehsildar surrendering the land * Report of Tehsildar for verification of facts * Statement of witness * Evidence that the land surrendered by Mr. Ranga was mutated in the name of the Government of Rajasthan in the revenue records. 10. It was contended before the learned Commissioner of Income-tax (Appeals) that the amount of compensation paid by the assessee-company during the year amounting to Rs. 35,00,000 is to be allowed as revenue expenditure. The relevant clauses of the lease agreement were brought to the notice of th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s is a part of cost of gypsum only and no capital asset is acquired by the assessee by incurring these expenditure. Nature of loss to farmers is immaterial while judging the nature of expense in the hands of the assessee and therefore same cannot be basis for treating the expenditure as capital in nature. The learned Commissioner of Income-tax (Appeals) has rightly allowed the expenditure as revenue which does not call for any interference. Thus ground No. 1 of the Revenue is dismissed.' Again for assessment years 2003-04 and 2004-05, such expenditure were allowed by the Income-tax Appellate Tribunal in order dated June 26, 2009. The learned Commissioner of Income-tax (Appeals) has allowed the claim of the assessee by following the said decisions. We, therefore, do not find any reason to interfere with the order of Commissioner of Income-tax (Appeals). The same is thus upheld. The ground of the Department is thus dismissed. Therefore this issue is decided against the revenue." 13. It was further submitted that the learned Commissioner of Income-tax (Appeals) rejected the claim of the assessee-company by referring to sub- section (3) of section 35E, wherein it has be....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e assessee for the relevant previous year only to the extent of 1/10th of the expenditure incurred. In appeal against the order passed under section 263, following contentions were raised by the assessee before the hon'ble Income-tax Appellate Tribunal : (i) The assessee had commenced its business in 1957 and was mainly in the business of excavating lignite. (ii) Section 35E was applicable only for expenditure incurred for the purpose of identifying and prospecting the mines. (iii) Such expenditure did not result into any asset being created for the assessee nor did it result into any benefit of enduring nature. The hon'ble Income-tax Appellate Tribunal, accepting the contentions raised by the counsel of the assessee allowed the claim of such expenditure under section 37(1) and held the provisions of section 35E not to be applicable in the present case. Relevant extract of order of the hon'ble Income-tax Appellate Tribunal is as under (page 145 of 309 ITR (AT) : "We are unable to agree with the contention of the learned Departmental Representative that section 37 of the Act is not attracted to this extent because the same is cov....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ection 37(1) of the Act. 17. The learned authorised representative also drawn support from the judgment of the hon'ble Supreme Court in the case of Bikaner Gypsums Ltd. v. CIT reported in [1991] 187 ITR 39 (SC) wherein the hon'ble Supreme Court has laid down the principles of allowability of expenditure which is incurred for removal of restriction which obstructed the carrying on of the business of mining within the leased area (page 48). "Whether payments made by an assessee for removal of any restriction or obstacle to its business would be in the nature of capital or revenue expenditure, has been considered by the courts. In Commissioners of Inland Revenue v. Carron Co. [1968] 45 TC 18, the assessee carried on the business of iron founders which was incorporated by a charter granted to it in 1773. By passage of time many of its features had become archaic and unsuited to modern conditions and the company's commercial performance was suffering a progressive decline. The charter of the company placed restriction on the company's borrowing powers and it placed restriction on voting rights of certain members. The company decided to petition for a supplementary ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nsists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account even though the advantage may endure for an indefinite future. We agree with the view taken in the aforesaid two decisions. In our opinion where the assessee has an existing right to carry on a business, any expenditure made by it during the course of business for the purpose of removal of any restriction or obstruction or disability would be on revenue account, provided the expenditure does not acquire any capital asset. Payments made for removal of restriction, obstruction or disability may result in acquiring benefits to the business, but that by itself would not acquire any capital asset." 18. The learned Departmental Representative has vehemently argued the matter and submitted that the learned Commissioner of Income-tax (Appeals) has rightly invoked the provisions of section 35E and in view of that, the provisions of section 37(1) are not attracted in the instant case. He further relied upon the orde....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (ii) on the acquisition of the deposits of such mineral or group of associated minerals or of any rights in or over such deposits ; or (iii) of a capital nature in respect of any building, machinery, plant or furniture for which allowance by way of depreciation is admissible under section 32, shall not be deemed to be expenditure incurred by the assessee for any of the purposes specified in sub-section (2)." 21. The provisions of section 35E were brought on the statute books by the Taxation Laws (Amendment) Act, 1970. Circular No. 56, dated March 19, 1971 issued by the Central Board of Direct Taxes explains the rationale and salient features of the said provisions and the same reads as under : "48. New section 35E, also inserted by section 8 of the Amending Act, provides for the amortisation of expenditure incurred wholly and exclusively on any operations relating to prospecting for the specified minerals or groups of associated minerals or on the development of a mine or other natural deposit of any such mineral or group of associated minerals. The minerals and the groups of associated minerals for the purposes of this provision have been specified in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....achinery, plant or furniture for which allowance by way of depreciation is admissible under section 32. 52. The amortisation of the qualifying expenditure will be allowed in equal instalments over a 10 year period against the profits arising from the commercial exploitation of any mine or other natural deposit of any of the specified minerals or associated minerals in respect of which the expenditure was incurred, not only where such commercial exploitation resulted from the operations of prospecting or development in question but also where commercial production had been established as a result of operations undertaken earlier. However, the amortisation will not be allowable against any other income of the assessee. Accordingly, it has been specifically provided that where the instalment of amortisable expenditure relating to a given year cannot be wholly absorbed by the profit against which the amortisation is to be allowed, the unabsorbed amount shall be carried over to the subsequent year and added to that year's instalments and so on for succeeding previous years. Such carry over will be allowed only up to and including the 10th previous year as reckoned from the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bility of provisions of section 37(1) cannot be excluded merely on account of the fact that the expenditure is covered under section 35E of the Act. The applicability of provisions of section 37(1) have therefore to be tested independently on satisfaction of other conditions specified therein. Applicability of section 37(1) 23. For applicability of the provisions of section 37(1) of the Act, we refer to the legal proposition laid down by the hon'ble Supreme Court in case of Bikaner Gypsums Ltd. [1991] 187 ITR 39 (SC) as under (page) : "Where the assessee has an existing right to carry on a business, any expenditure made by it during the course of business for the purpose of removal of any restriction or obstruction or disability would be on revenue account, provided the expenditure does not acquire any capital asset. Payments made for removal of restriction, obstruction or disability may result in acquiring benefits to the business, but that by itself would not acquire any capital asset. The facts of each case have to be borne in mind in considering the question having regard to the nature of business, its requirement and the nature of the advantage in commercial....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sum of Rs. 3 lakhs towards the cost of shifting the railway construction. The payment made by the assessee was for removal of disability and obstacle and it did not bring into existence any advantage of an enduring nature. The Tribunal rightly allowed the expenditure on revenue account." 24. As held by the hon'ble Supreme Court, in considering the cases of mining business as in the instant case, the nature of the lease, the purpose for which expenditure is made, its relation to the carrying on of the business in a profitable manner should be considered. Where the assessee has an existing right to carry on a business, any expenditure made by it during the course of business for the purpose of removal of any restriction or obstruction or disability would be on revenue account, provided the expenditure does not acquire any capital asset. Payments made for removal of restriction, obstruction or disability may result in acquiring benefits to the business, but that by itself would not acquire any capital asset. 25. In the instant case, during the relevant previous year, the assessee-company paid an amount of Rs. 35,00,000, to Mr. Ranga, S/o. Mr. Panchiya Meena. It is the conten....