TaxTMI 
TaxTMI 
2024 (2) TMI 923
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....aw, has erred in ignoring that the assessment order was passed 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:- ....
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....es during the year. A sum of Rs. 2,87,72,03,599/- was claimed as deduction. As per assessee'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. Asses....
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....t said activities and perform obligation as per JV agreement. Later BLMCL entered into agreement with assessee during FY 2010-11 to 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....
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....d on commencement of commercial production as per notes to accounts. • Agreement with mine owner is for 30 years. As per Section 35E this expenditure can be claimed for 10 years. • No explanation of assessee for not debiting these expenses in P & L account. • For expenses u/s. 37 of the Act the expenses should 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 ....
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.... commercial production commenced from FY. 2010-11. 4.6 In view of above observations the ld. AO held as under: o Assessee has not commenced commercial production during the AY. 2011-12. o Amount of Rs. 11,09,96,181/- claimed by Assessee to be taken as income from supply of lignite during 2010-11 cannot be reckoned as such. o Allowance of 1/10^th of Mining Expenditure u/s 35E cannot be entertained. o Assessee can carry forward the entire MDE disallowed 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 p....
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....orce the amortization of such expenditure over a period of 10 years rather than allow it as deduction in the year of incurring the expenditure. As per CBDT Circular No. 56 dated 19.03.1971, the provision of Section 35E is meant to be 'Benefit' and not a 'restriction on the deduction already available to assessee'. 5.4 The moot question is whether the expenses incurred by Assessee qualify u/s 35E or u/s 37 of the Act. These expenses are not on account of development of mine but for work of assessee as a Mine Contractor. 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 D....
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....f section 35E of the Act and as such the said expenditure does not qualify for allowance u/s 37 of the Act. 6.4 Further, she submitted that Mine development expenditure has been capitalized in the balance sheet and it has not claimed as revenue expenditure and she drew our attention to the significant accounting policies of the assessee in para 1.17, which reads as follows: Mine development expenditure The Expenses incurred on Development of Mines, where the Company is working on long term contract in the capacity of Contractor are classified as Mine Development Expenses. 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 Com....
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.... section 35E of the Act are enabling provisions to allow a deduction in respect of a capital expenditure which is not otherwise deductible and the provisions cannot be put to use to restrict the deductibility of expenses which are anyway deductible. This principle has been upheld in the case of Northern Coalfields Vs. ACIT [2015] 59 taxman 394 (Jabalpur ITAT). It has been further held that as long as the expenditure was admissible for deduction under section 37, there could not be any occasion to invoke section 35E of the Act so as to force amortization of such expenditure over ten years rather than allow 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 expendit....
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....e reproduced the relevant part of the said sub section as follows: "The expenditure referred to in sub-section (1) is that incurred by the assesses after the date specified in that sub-section at am/ time during the near of commercial production and any one Of 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 E, 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". 7.5 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 in....
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....nner: • The Learned Assessing Officer counters that the contract price is fixed on the quantum and quality of the lignite mined by the Assessee and therefore the assessee is responsible for the quality of the lignite mined and hence it is not a mere contract for excavation but a mine development contract. • The Revenue is not in the capacity to dictate terms of the agreement entered into between the parties. The contracting parties are free to agree to the terms which are commercially viable. The Learned Assessing Officer cannot use this argument to say that the contract is not just a mere contract for excavation and consider 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 ....
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....ourt was justified in holding that the expenditure in dispute was a revenue expenditure." (ii) Bikaner Gypsum Ltd. Vs CIT 187 ITR 39 (SC,) wherein it has been held as follows: "In considering the cases of mining business 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. In the instant case, existence of railway station, yard aftd buildings on the surface of the demised land operated as an obstruction to the assessee's business of mining. The Railway authorities agreed to shift the Railway establishment to facilitate the assessee to carry on his business in a profitable manner and for that purpose the assessee paid a 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. 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 su....
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....rom 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-s. (2) or of any rights in or over such site; (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 t>y way of depreciation is admissible under s. 32, shall not be deemed to be expenditure incurred 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 c....
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....f ten years specified in sub-s. (1), to another Indian company in a scheme of amalgamation-(i) No deduction shall be admissible under sub-s. (1) in the case of the amalgamating company for the previous year in which the amalgamation takes place; and (ii) The provisions of this section shall, as far as may be, apply to the amalgamated company as they would have applied to the amalgamating company if the amalgamation had not taken place. (7A) Where the undertaking of an Indian company which is entitled to the deduction under sub-s. (1) is transferred, before the expiry of the period of ten years specified-, in sub-s. (1), to another Indian company in a scheme of demerger,-(i) No deduction shall be admissible under sub-s. (1) in the case of the demerged company for the previous year in which the demerger takes place; and (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 o....
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....the claim of the assessee that it has not involved in any prospecting activity is exposed by its own admittance of engaging a German agency 'Vattenfall Europe Mining AG' for vetting the report given by the premier Govt agency (GSI) to the original mine owner regarding mineral reserves and commercial viability of mining at the given sites. It needs to be noted that, prior to entering into the agreement with BLMCL for carrying out mining, the assessee has paid a whopping sum of Rs. 2.62 crores to the said German agency for examining the availability and feasibility of commercial production of lignite at the given sites. Thus, the claim of the assessee not involving in any prospecting is not entirely true. 4) Had the agreement been a mere contract for excavation, as being claimed by the assessee, the charges should have been paid to the assessee on 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 successfu....
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....al. Further, as stated by the AR of the assessee (vide submission dated 24-3-2014), such termination is possible only on default of the assessee and failure to cure such event of default within thirty days after the other party to the agreement issues notice to the assessee, provided the breach is remediable. The agreement contains clauses which enable termination of agreement by the assessee as well, which the assessee is conveniently silent about. Thus, the termination clauses in the agreement*are general in nature as a feature of any agreement. In this context, it needs to be underscored that allowability of an expenditure is governed by the provisions of Income Tax Act, 1961 but not the contingent exigencies of each agreement which are to be necessarily dealt with as per the provisions in the agreement concerned. 9) The assessee has no explanation for not debiting the said expenditure 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 exclusive....
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....different levels below the surface as it need not be parallel to the surface level all along. 8.7 In the present case, originally, M/s Rajasthan State Mines and Minerals Ltd and M/s Rajasthan West Power Ltd (RWPL), after entering into a Joint Venture Agreement in 2006 to develop and operate mines for supply of lignite to RWPL power plant, have incorporated M/s. Barmer Lignite Mining Company Limited (BLMCL) to carry out the said activities and perform the obligations as per the Joint Venture Agreement. Later, BLMCL, in turn entered into an agreement (hereinafter referred to as 'the agreement') with the assessee company, during the year under consideration, for carrying out mining operations for mining of lignite from Jalipa and Kapurdi Lignite Mines in Rajasthan for a period of thirty years with effect from 1-4-2010. Notably, before entering in to the agreement, unsatisfied with the report of the Geological Survey of India (GSI) given to 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 satisfactio....
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.... place, which are required to be removed before lignite/minerals/ores can be extracted from the next lignite/minerals/ores seam level, and also because even to reach other segments of the same lignite/minerals/ores seam, which need not always be parallel to the surface, overburden is required to be removed. Overburden removal process does not, therefore, come to a halt upon reaching the lignite/minerals/ores level. Of course, there is a difference in the character of overburden removal expenses till the regular, lignite/minerals/ores extraction process starts vis-a-vis the overburden removal expenses after the regular lignite/minerals/ores extraction starts, and this approach is implicit in the accounting policy which treats the overburden removal expenses, till the point of time a mine is a development mine and the regular lignite/minerals/ores extraction on commercial basis has not yet started, as a capital expenditure. 8.11 In other words, entire expenses 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....
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.... facts of the case. While the Assessing Officer observed that the overburden removal expenses to be considered in connection with Section 35E of the Act. However, the ld. CIT(A) proceeded on the basis that Section 35E governs treatment of any expenses which are relatable to development of a mine and the present assessee is not engaged in Development of mine as it is not owned by it and the assessee is only an excavation contractor only engaged in extraction of lignite ores from the mines owned by third party. 8.13 A plain reading of this section 35E of the Act reveals that this section applies to an assessee who is engaged in any operations relating to prospecting for, or extraction or production of, any mineral" but it applies only with respect to the expenditure specified in Section 35E (2). While the assessee fulfils the criterion so far as activity of the assessee is concerned, the question is whether overburden removal expenses on revenue mines can meet the 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, ....
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....ith the extension of his undertaking or in connection with his setting up a new unit" which, as is the settled legal position, inadmissible for deduction as revenue expenses. This also indicates that Section 35 E belongs to the same genus as Section 35 D which allows deduction, though spread over a ten year period, in respect of expenses which are not otherwise admissible for deduction. 8.16 The same principle, in our considered view, is equally applicable in the context of Section 35E as well. Therefore, as long as an expenditure is admissible for deduction under section 37, there cannot be any occasion to invoke Section 35E so as to force amortization of such an expenditure over ten years rather than allow 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 35 E, as can be seen in 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 t....
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....he following categories of expenditure are specifically excluded from the expenditure eligible for amortisation under s. 35E: (1) Expenditure on the acquisition of the site qf the source of any of the specified minerals or groups of associated minerals or of any rights in or over such site. (2) Expenditure on the acquisition of the deposits of any of the specified minerals or groups of associated minerals or of any rights in or over such deposits. (3) Expenditure of a capital nature in respect of any building, machinery, plant or furniture for which allowance by way of depreciation is admissible under s. 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 am....
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.... other provision of the Act for the same or any other assessment year." 8.17 For the reasons set out above, in our considered view, deduction under section 37(1) could not be declined on the ground that the expenditure in question was eligible for deduction under section 35E. The deduction under section 35E is normally available in respect of the expenditure which is not eligible for deduction under section 37 (1) and just because the deduction under section 35E may be available in respect of an expenditure, even if that be so, cannot be reason enough to decline the deduction under section 37 (1). Of course, it is besides the fact that once the commercial production had commenced in the respective mines, there was no occasion to invoke the provisions of Section 35E in respect of any expenditure incurred in the years after the year of commercial production. 8.18 On the contrary to this, the ld. D.R. submitted that assessee in its annual accounts disclosing its accounting policies stated that mine development expenses as a deferred revenue expenditure and this will be written off as per the accounting policies disclosed once the company starts accounting revenue on this acco....
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....ad incurred an expenditure relating to removing/clearing the overburden amounting to Rs. 294,58,47,713/-. Out of the said expenditure, a sum of Rs 6,86,44,114/- was disallowed in the computation of income u/s 40A(ii) and 43B for non-deduction of TDS and non-payment of statuary dues during the year and a net sum of Rs 287,72,03,599/- was claimed as deduction being revenue expenditure incurred wholly and exclusively for the purpose of its business as mining contractor u/s 37 of the Act. As per the accounting policy of the company vide Note no 1.17 of notes to accounts the Assessee Company amortizes the Mining development expenditure in proportion of quantity of lignite mined vis-a-vis the total minable reserves. However, such amortization is not permissible under the Income Tax Act, 1961. It is now well settled that revenue expenditure is allowable in entirety in the year in which it is incurred though it is written off in the books over a period of years. Further, it is also well settled law that the treatment of any particular expenditure/income in the accounts has no bearing on the allowance or otherwise under the Act. Accordingly, the Assessee Company has claimed the said expendi....
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.... the issue involved in the present appeal has become academic, considering the fact that the question of law raised in the present appeal is the pure question of law and therefore we are inclined to decide the said question of law. 4.1 The short question of law which is posed for consideration before this court is, whether in the facts and circumstances of the case, the High Court and the learned ITAT are right in holding that the order passed by the learned Commissioner passed under Section 263 was barred by period of limitation provided under Section 263 (2) of the Act? Whether the High Court is right in holding that the relevant date for the purpose of considering the period of limitation under Section 263(2) of the IT Act would be the date on which the order passed under Section 263 by the learned Commissioner is received by the assessee? 4.2 While deciding the aforesaid issues and question of law, Section 263 (2) of the Income Tax Act, which is relevant for our consideration is required to be referred to, which reads as under: Q'(2) No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the o....