TaxTMI 
TaxTMI 
2024 (2) TMI 923
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....ssed u/s 143(3) of the Act by the ld. AO being barred by statutory time limit, is liable to be set aside and the income returned by the assessee be restored". 3. First, we will take up revenue's appeal. Facts of the case are that Assessee is a closely held public company engaged in the business of Mining and raising contract operations, transportation, crushing, screening and other allied activities. Return for AY 2011-12 was filed on 26.09.2011 declaring loss of Rs. (-) 2,69,00,84,200/-. Return was processed u/s. 143(1) of the Act on 13.01.2012 and refund of Rs. 97,96,340/- was issued to Assessee. Assessee had offered income of Rs. 11,09,96,181/- during assessment proceedings on amount accrued during the year on extraction of 139740 metric tons of lignite in the Kapurdi and Jalipa lignite mines which was lying at mine head on 31.03.2011 and invoiced in the next FY upon the finalization of rates by the Regulator RERC (Rajasthan Electricity Regulatory Commission). Assessee had capitalized this receipt in its books in next FY as per accounting policy followed. Evidence filed in support of this included the following:- * Copy of return filed with Coal Controller, Kolkata and RSSML....
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....'s accounting policy, these mining development expenses of Rs. 2,94,58,47,713/- was amortized over a period of contract commencing from subsequent year ended on 31.03.2012 when RERC approval was received and invoices were raised towards excavation charges. Assessee stated that for purpose of Income Tax, there is no provision for Amortization of expenses, therefore, the whole amount was claimed as expenses u/s. 37 of the Act. Mining operations commenced during FY 2010-11. Assessee offered receipts on accrual basis of Rs. 11,09,96,181/- related to excavation charges on 139740 metric tons of lignite mined till 31.03.2011 but not billed as approval of RERC was not received till that date. 4. The ld. A.O. made observation that these Mine Development expenses are covered u/s. 35E and not u/s. 37 of Act. Assessee stated that Section 35E is applicable only when the assessee is owner of mines and / or in the business of prospecting of minerals. Assessee contended that company neither owns the mines nor is in business of prospecting of minerals, hence, Section 35E of the Act is not Applicable. Assessee stated before the ld. AO that expenses incurred by it in mining operations is to remove t....
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....o carry out mining operations for mining of lignite from Jalipa and Kapurdi lignite mines in Rajasthan for period of 30 years starting from 01.04.2010. Before entering the agreement, assessee engaged a German agency i.e. M/s. Vattenfall Europe Mining AG for vetting report of Geological Survey of India regarding reserves of lignite at specified sites. Fees of Rs. 2,61,67,491/- was paid to agency. After receipt of report from agency, the said agreement was signed by assessee with BLMCL. * As per agreement, assessee was entitled to carry out the mining operations and deliver at the delivery point as per schedule a certain quantity of lignite of specific calorie content as per agreement. Rate of lignite was to be determined by RERC. Amount receivable by assessee is determined as per quantity and quality of lignite supplied to BLMCL In pursuance, the assessee started excavation work at given sites (Jalipa and Kapurdi in Rajasthan) and entered into agreement with two concerns i.e. M/s. PC Patel & Co. and M/s. MD Enterprises to carry out excavation work. * AO asked the assessee to justify the claim that was not debited to P & L account but made in computation of income. Assessee conte....
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.... be "Wholly and Exclusively for purpose of business" and it should not be covered u/s. 30 to 36 of the Act. * In view of these facts, the AO held that these expenses cannot be allowed u/s 37 of the Act and has to be dealt with u/s. 35E of the Act. Hence, the expenses claimed of Rs. 2,87,72,03,599/- was disallowed by ld. AO. 4.3 Assessee informed the ld. AO vide letter dated 25.03.2014 that it commenced commercial production of lignite in FY 2010-11. Since price of lignite was not finalized by RERC at the time of 31.03.2011 and lignite was not delivered and no invoice was raised, therefore, value of lignite was not properly accounted for value of 139740 metric ton of lignite excavation was Rs. 11,09,96,181/- as determined by RERC in October 2011. In support, the return filed with Dy, Director, O/o Coal Controller, Ministry of Coal, Kolkata was submitted informing production of lignite in FY 2010-11. Since the Commercial Production started in FY 2010-11, the revenue w.r.t. lignite extracted and lying as stock as on 31.03.2011 should be accounted in FY 2010-11 following accrual system of accounting. 4.4 A sum of Rs. 11,09,96,181/- relating to lignite extraction during FY 2010-11 t....
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....sallowed in current year for claiming it in future years as specified in Section 35E of Act. As a result, total income of Assessee was calculated as Rs. 18,71,19,400/-. Aggrieved by the said order passed u/s 143(3) of Act by the ld. AO, this appeal was filed. 5. The ld. CIT(A) observed that the main receipt of Assessee is excavation charges received on excavation of Lignite from mines owned by BLMCL * As against the same Assessee has debited the Mining Development Expenses for removal/clearing of Over burden. * There is clear nexus between receipt and expenses. * Expenditure is incidental to carrying on its business in view of the wider expression "for the purpose of business" which is wider in meaning than the expression "for the purpose of earning profits". There is compelling necessity to incur the expenses as without the removal/clearing of over burden the Lignite mining cannot be started. * Thus, the MDE is wholly and exclusively for the purpose of Assessee's business and all the facts in knowledge of Assessee were explained before the AO during the assessment proceedings. Hence, he observed that these "Mining Development Expenses" are wholly and exclusively for the....
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....The nature of expenses for removal of overburden is no way connected to ownership or development of mine. The claim of expenditure in "Computation of Income" no way bars the claim while filing the ITR when the same is allowable as an expense in hands of Assessee as held by the Hon'ble Supreme Court in case of Taparia Tools Ltd Vs. JCIT (372 ITR 605) (SC) that entry in books of account is not conclusive. 5.5 In view of the facts discussed above, the ld. CIT(A) observed that the expenditure incurred by Assessee on removal of overburden is held to be a Revenue expenditure and not capital expenditure. This overburden removal expenditure and Mining Development Expanses is an allowable expense u/s 37(1) of Act. 6. The ld. D.R. submitted as follows:- (i) The said expenditure is in the nature of developing a mine and such expenditure needs to be claimed as per the provisions of sec 35E of the IT Act, as it does not speak of ownership of mine for such claim. (ii) On verification of P&L A/c for the FY 2010-11, it is noticed that the assessee did not claim this expenditure. Instead, said expenditure has been categorized as a capital in nature and made a part of its balance sheet which i....
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....es. These expenses will be amortized upon- commencement of commercial operations and resultant billing there from in the proportion of quantity of material excavated vis a vis, quantity of Total Commercial Mineable Reserves during the contract period. 6.5 Further, she drew our attention to the Significant Accounting Policies which reads as follows: "The company has entered into Mine Development & Operation Agreement under a Long Term Contract at Barmer (Rajasthan) with Barmer Lignite Mining Company Limited (BLMCL) for Excavation of Lignite from their Mines. In the year 2010-11, the Company has commenced the activity for Development of Kapurdi Mines (an open cast mine) and has incurred Direct Expenses of Rs. 29458.48 lacs on Mines Development & Overburden Removal, up to the year end. The above amount is shown under Mine Development Expenses in Balance Sheet. These expenses will be written off as per the accounting policy disclosed, once the company starts accounting revenues on this account upon commencement of regular excavation of Lignite. 6.6 Thus, she submitted that the assessee made contrary statements one before the shareholders and one before the income tax authorities, w....
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....it in the year of incurring the expenditure. What was meant to be a concession and what was intended to confer a benefit to the assessee, if such an approach is adopted, will end up becoming a disincentive and burden to the assessee. Section 35E, as can be seen in the stand taken by the Central Board of Direct Taxes vide Circular no. 56, dated 19-3-1971, was meant to be a 'benefit' and not a 'restriction on the deductions available to the assessee'. In view of the above submissions, he submitted that the expenditure relating to over burden removal is not a capital expenditure. Once the said expenditure is not a capital expenditure, it does not fall under the ambit of Section 35E and therefore the said section is inapplicable in the case of the assessee. 7.3 He further submitted that the Learned Assessing Officer in his endeavour to bring the Assessee Company's case under section 35E of the Act states that the Assessee Company is into prospecting of lignite ore. Here again, the Ld Assessing Officer failed to understand that the Assessee Company is a mere contractor and has no mandate to prospect the lignite ore. Nowhere in the contract between the Assessee Company and B....
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.... The ld. A.R. submitted that from the above sub-section, it is evident that the legislature intends to give the benefit of section 35E only to assessees who are into commercial production. Commercial production envisages freedom to deal with the products produced in the open market. In the Assessee Company's case, attention is sought to Clause No.3.4, wherein the Assessee Company has no right to sell or deliver the lignite excavated to any person of its choice but on the other hand, has a sole obligation to deliver (not sell) the lignite mined only to parties as instructed by BLMCL. Thus, the Assessee Company does not have the right to commercially deal/sell the lignite excavated in the open market and therefore any production/excavation activity carried on the Assessee Company cannot be regarded as commercial production whatsoever. The extract of the Clause 3.4 is reproduced below: "The Mine Operator hereby acknowledges and accepts that the Mines shall be and shall at all times remain the exclusive and absolute property of the Owner and neither the Mine Operator nor any other person claiming through or under the Mine Operator shall, subject to clause 3.4.4 and Clause 10.3, ....
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....er the activity of the assessee as mining development and bring under the ambit of Section 35E. * The nomenclature of the Agreement that says "Mining Development and Operation Agreement is itself a sufficient proof that the assessee is into Mining Development and hence section 35 E is clearly applicable. * The Learned Assessing Officer cannot be so naive as to say that the nomenclature of the agreement decides the nature of the agreement. As stated above, as per the relevant Clause no. 3.4 of the agreement, the contract is only for excavation of the lignite mined and nothing more. * No explanation with regard to no TDS under section 194C on payment made by BLMCL in itself means that it is not a mere contract for excavation, * The Learned Assessing Officer has completely ignored the TDS made by BLMCL and has observed that no TDS has been made by BLMCL. * The treatment of the said expenditure in the accounts of the Assessee Company and the expenditure not being routed through the profit and loss account in itself indicates the Assessee company's understanding of Section 35E of the Act. * As stated above in the submissions, it is the company's policy to write off t....
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.... 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. Accordingly, the order of the High Court was to be set aside and that of the Tribunal was to be restored." 7.8 The ld. A.R. for the assessee submitted that from the above, it is clear that the sum and substance of the above judgements is that whatever may be the expenditure that will facilitate the commercial activity should be treated as the revenue expenditure. Accordingly, the ld. A.R. for the assessee prayed to allow the expenditure on Over Burden removal claimed under the head Mine Development Expenditure to be allowed as a revenue expenditure u/s 37 of the Act. Further, he has also referred various Tribunal Judgements, wherein it is held that the expenditure incurred on overburden removal are treated as revenue expenditure. In view of the above, the ld. A.R. for the assessee prayed before us to allow the claim of the assessee company with respect to overburden removal as allowable u/s 37 of the....
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....urred by the assessee for any of the purposes specified in sub-s. (2). (4) The deduction to be allowed under sub-s. (1) for any relevant previous year shall be-(a) An amount equal to one-tenth of the expenditure specified in sub-s. (2) (such one-tenth being hereafter in this sub-section referred to as the instalment); or (b) Such amount as is sufficient to reduce to nil the income as computed before making the deduction under this section) of that previous year arising from the commercial exploitation whether or not such commercial exploitation is as a result of the operations or development referred to in sub-s. (2) of any mine or other natural deposit of the mineral or any one or more of the minerals in a group of associated minerals as aforesaid in respect of which the expenditure was incurred, whichever amount is less : Provided that the amount of the instalment relating to any relevant previous year, to the extent to which it remains unallowed, shall be carried forward and added to the instalment relating to the previous year next following and deemed to be part of that instalment, and so on, for succeeding previous years, so, however, that no part of any instalment shal....
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....(ii) The provisions of this section shall, as far as may be, apply to the resulting company as they would have applied to the demerged company, if the demerger had not taken place. (8) Where a deduction under this section is claimed and allowed for any assessment year in respect of any expenditure specified in sub-s, (2), the expenditure in respect of which is so allowed shall not qualify for deduction under any other provision of this Act for the same or any other assessment year. 8.1 A plain reading of the above statutory provision shows that the expenses which are covered by the scope of s. 35E are the expenses which are incurred "wholly and exclusively on any operations relating to prospecting"-as is the expression used in s. 35E(2) which, in turn is defined under s. 35E(5)(a) as expenses "undertaken for the purpose of exploring, locating or proving deposits of any mineral, and includes any such operation which proves to be infructuous or abortive". CBDT Circular No. 56 dt. 19th March, 1971, which explains the rationale behind introduction of sec. 35E of the Act, states that "New section 35E, also inserted by sec. 8 of the Amending Act, provides for the amortization of exp....
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....n the basis of volume of excavation. However, actually, the payments are made to-the assessee based on not only the quantum but also the quality of lignite mined and delivered as per the schedule agreed upon in the agreement. Therefore, the claim that the assessee is a mere work contractor, having nothing to do with successful mining of lignite at the specified sites, is totally unfounded. It needs to be noted that the agreement with BLMCL itself is titled as "Mine Development & Operation Agreement'. Further, as admitted by the assessee itself in its letter dated 19-3-2014, 'as per the terms of agreement the assessee company has to fulfill various obligations ensuring the supply of lignite to the Barmer Lignite Mining Company Limited ', but not merely carrying out excavation. 5) If the agreement were a mere work contract as claimed, the assessee should have had explanation for not applying provision of section 194C to the payments receivable/received from BLMCL for execution of the contract. As vouched by the facts, the payments relieved/receivable by the assessee from BLMCL were not subjected to any TDS, whereas the assessee subjected to TDS the payments made by it ....
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....nditure to the P & L A/c instead of claiming it in the statement of computation, had it been really believed to be allowable expenditure as claimed by the assessee itself. 10) As far as allowance u/s 37 is concerned, it needs to be noted that any expenditure incurred wholly and exclusively for the purpose of the business can be allowed u/s 37 only when the said expenditure fulfils the condition, inter alia, that it is not covered by any other section from 30 to 36. Obviously the expenditure in question which is admitted by the assessee itself as 'Mine Development Expenditure' is covered by the provisions of section 35E and therefore, it fails to qualify for allowance u/s 37(1)." 8.3 On the other hand, ld. CIT(A) has allowed the claim of the assessee u/s 37 of the Act and observed that removal of overburden is revenue expenditure and not the capital expenditure and the over burden removal expenditure and mining development expenses are allowable expenses u/s 37(1) of the Act. 8.4 Now we proceed to examine the provisions of section 37 of the Act. The following conditions have to be fulfilled to claim the expenditure u/s 37 of the Act: 1. The expenditure should not be ....
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....o BLMCL regarding reserves of lignite at the specified sites, the assessee engaged a private German agency M/s. Vattenfall Europe Mining AG, for the purpose of vetting the report of the GSI. After receipt of such a report to its satisfaction from the said agency which was paid a fee of Rs. 2,61,67,491/- signed the agreement with BLMCL. As per the agreement the assessee is entitled to carry out mining operations and deliver, at the delivery point as per schedule, certain quantity of lignite of certain calorific value as given in the agreement. The rate of the lignite supplied will be determined by the Rajasthan Electricity Regulatory Commission (RERC) and thus, the amount receivable by the assessee will be determined on the quantity as well as quality of the lignite supplied to BLMCL. Like any other agreement, this agreement also had clauses of termination and remedies for resultant exigencies. In pursuance of the agreement, the assessee went ahead with excavation work at the given sites (i.e., Jalipa and Kapurdi in Rajasthan), entering into agreements with two concerns, viz., M/s. PC Patel & Company and M/s HD Enterprises for carrying out excavation work. 8.8 Thus, the assessee cl....
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....xpenses incurred on the overburden removal by excavation contractor, no matter what be the stage of lignite/minerals/ores extraction levels in that mine, are cannot be treated as capital expenditure. That would essentially lead to a situation that even when overburden removal is a part of the process of extracting the lignite/minerals/ores from the lower seams, such expenditure will still be treated as revenue expenditure. In the case of Kirkend Coal Co (77 ITR 530), Hon'ble Supreme Court had an occasion to adjudicate on the question as to whether or not the expenses incurred on stowing operations are capital expenses or revenue expenses and their observation is as under: "There is a factual finding that this expenditure has been treated as revenue expenditure as "stowing is an operation carried out in the process of extraction of coal and unless it is carried out extraction of coal is not possible irrespective of the fact whether depillaring has been done or not in this year", and, on that basis, concluded that it has been rightly treated as revenue expenditure. It is, therefore, clear that when overburden removal is carried out in the process of extraction of coal and the e....
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....e criterion set out in Section 35E (2). Let us examine that aspect of the matter. 8.14 Section 35E (2), so far as relevant for our adjudication, provides that (a) the expenses should be incurred, after 31st March 1970, during the year of commercial production and any one or more of the four years immediately preceding that year; and (b) the expenses should be incurred wholly and exclusively on (i) 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 (ii) on the development of a mine or other natural deposit of any such mineral or group of associated minerals. There are certain exclusion clauses but those exclusions are not relevant for the present purposes. 8.15 As regards the limitation placed in Section 35E (8), in our humble understanding, this limitation does not come into play unless the assessee, on his own, claims the deduction under section 35E and the deduction is granted to the assessee. It cannot, therefore, be open to the Assessing Officer to first thrust the deduction under section 35 E even though he does not seek the same, and then deny deduction in respect of....
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....n the stand taken by the Central Board of Direct Taxes vide Circular no. 76 dated 19th March 1971, was meant to be a "benefit" and not a "restriction on the deductions available to the assessee". While introducing this Section, the Central Board Direct Taxes had this to say: "48. New s. 35E, also inserted by s. 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 a new Seventh Schedule inserted by s. 58 of the Amending Act. 49. As in the case of preliminary expenses, amortisation in respect of expenditure on prospecting for, and development of, the specified minerals, will also be allowed only in the case of Indian companies and resident assessees other than companies. The benefit of amortisation (emphasis by underlining supplied by us) will not be available to a foreign company even if such company declares its div....
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....ions 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 installment of amortizable 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 year of commercial production. If there is any unabsorbed amount at the end of the 10th year, it will lapse. 53. As in the case of amortisation of preliminary expenses under s. 35D, the amortisation of expenditure on prospecting for, and development of, specified minerals is also subject to the requirements that, where the assessee is a person other than a company or a co-operative society, his accounts for the year or years in which the expenditure is incurred have been audited by a ch....
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....venue expenditure and this will be written off as per the accounting policies disclosed once the company starts accounting revenue on this account of commencement of regular excavation of lignite. 8.19 In the present case, we have gone through the letter of intent and also various agreements entered by the assessee with Barmer Lignite Mining Company Ltd. The Assessee Company had received a letter of intent on 30/12/2008 for the appointment as Mine operator, for Kapurdi and Jalipa Mines, from Banner Lignite Mining Company Limited (hereinafter referred to as BLMCL). One of the terms of letter of intent is that the contract rates are subject to approval of the lignite transfer price by the Rajasthan Electricity Regulatory Commission (hereinafter referred to as RERC). To formalize the above said arrangement, the Assessee Company entered into agreement on 28/12/2010 with Barmer Lignite Mining Company Limited. The contract is for 30 years from the effective date 01/04/2010 subject however to the cancellation of the Contract by Barmer Lignite Mining Company Limited under certain circumstances. As per the terms of agreement, the Assessee Company has to fulfil various obligations ensuring ....
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....me in the accounts has no bearing on the allowance or otherwise under the Act. Accordingly, the Assessee Company has claimed the said expenditure in the current year in which such expenditure is incurred u/s 37 of the Act. 8.20 Being so, in our opinion, assessee company cannot be called as a Mining Company as stipulated u/s 35E of the Act. As such, the impugned expenditure incurred by assessee cannot fall u/s 35E of the Act and it should be allowed u/s 37 of the Act. The accounts and accounting policies disclosed by assessee is under Company Act and for the purpose of computation of income of the assessee, which should be governed by Income Tax Act not under Company Act. As such, the ld. AO is not justified in holding that since the assessee has disclosed the accounting policies and its income to be recognized as per accounting policies disclosed in the financial statements is not justified. In other words, the accounting of the assessee is governed by Section 145 of the Act. If there is deviation from the method of accounting as per section 145 of the Act, the ld. AO should tinker the same. On the other hand, the ld. AO cannot rest upon the computing the income of the assessee un....
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....ll be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed. 4.3 On a fair reading of subjection (2) of the Section 263 it can be seen that as mandated by subjection (2) of Section 263 no order under Section 263 of the Act shall be "made" after the expiry of two years from the end of the financial year in which the order sought to be revised was passed. Therefore, the word used is "made" and not the order "received" by the assessee. Even the word. "dispatch" is not mentioned in Section 263 (2). Therefore, once it is established that the order under Section 263 was made/passed within the period of two years from the end of the financial year in which the order sought to be revised was passed, such an order cannot be said to be beyond the period of limitation prescribed under Section 263 (2) «f the Act. Receipt of the order passed under Section 263 by the assessee has no relevance for the purpose of counting the period of limitation provided under Section 263 of the Income Tax Act. In the present case, the order was made/passed by the learned Commissioner on 26.03.2012 and according to t....