TMI Blog2024 (2) TMI 923X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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. 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 year - 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 expenditure in the current year in which such expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Financial statements prepared for AY 2011-12 prepared prior to assessment proceedings. These evidences were filed in support of assessee's claim that extraction of Coal from said mines had indeed commenced during the FY 2010-11. 3.1 In the order passed u/s. 143(3) of Act served on 24.04.2014 the AO disallowed the claim of deduction u/s 37 of the Act being the Mine Development Expenditure hereinafter called MDE to extent of Rs. 2,87,72,03,599/-. After adjusting prepaid tax, the ld. AO raised demand of Rs. 2,91,88,430/- after charging inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the over burden as per the terms of contract to initiate the extraction of mineral / ores and same is not a capital expenditure enabling the assessee of any perpetual benefit. Assessee further stated before the ld. AO that on termination of contract after the contract period the assessee is liable to lose the entire expenditure incurred on mining operations irrespective of fact whether same is capitalized and amortized over a period of time in its books of accounts. Ld. AO rejected this claim of assessee of Rs. 2,87,72,03,599/- holding that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 contended that this expenditure for excavation is in pursuance of. contract with BLMCL and is allowable u/s. 37 of Act. AO held that provisions of section 35E are squarely applicable to assessee's claim of expenditure. Assessee objected to applicability of Section 35E due to following reasons:- Assessee is not owner of mines but a mine contractor Assessee is not in business of prospecting of minerals. Section 35E of the Act is applicable on mine owners engaged in prospecting of minerals. As per termination clause of agreement, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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 though determined in AY 2012-13 pertains to AY 2011-12. The corresponding income w.r.t. said production of Rs. 11,09,96,181/- was not considered while finalizing accounts and ITR for reasons beyond control of assessee as the value of lignite had to be determined by RERC which determined it in October 2011. Due to this, the said amount was offered for taxation in AY 2011-12 during the course of assessment proceedings. 4.5 The ld. AO examined this plea of assessee and observed as under:- This strange plea needs to be seen in light of disallowing of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tween 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 purpose of assessee s business as per Section 37 of the Act. 5.1 Further the ld. CIT(A) observed that it is clear that Assessee has satisfied the conditions prescribed u/s 37 of Act and claimed the expenditure related to removal of overburden u/s 37 of Act. Assessee is a regular mining contractor and not the Owner of these Lignite mines. As per terms of contract the mines and the Lignite mined belongs to the Owner of mines i.e. BLMCL. Assessee is entitled to excavation charges fixed by RERC who approves the Transfer Price of Lignite. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... den 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 is evident from financial statements of the assessee. (iii) On perusal of audit report of the Chartered Accountant in Form 3CD schedules vide point No. 1.17, the auditor has commented in respect of Mine Development expenses as under: 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 therefrom in the prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed (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, which cannot be given any importance. 7. On the other hand, ld. A.R. submitted that the Assessee Company has fulfilled all the conditions laid down u/s 37 of the Act and therefore rightly claimed the expenditure relating to removal of overburden u/s 37 of the Act. He stated that the Assessee Company is a regular mining contractor and is not the owner of the above said Kapurdi and Jalipa Lignite Mines. As per the contract, neither the mine nor the lignite mined belongs to the Assessee Company, what the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted 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 BLMCL has it been mentioned that there is an obligation on the part of the Assessee Company to conduct the activity of prospecting of any ore. 7.4 He further submitted that the Learned Assessing Officer has failed to understand that prospecting has been done by Geological Survey of India (GS1) the premier surveying and prospecting agency of the Government of India. The contract between the assessee company and BLMCL has been entered into after the above said prospecting activity and for the purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, have or shall at any time claim any property, right, title or interest in such Mines. The Mine Operator Acknowledges that the entire Lignite mined from the Mines belongs to the Owner shall, subject to Clause 3.4.4 and Clause 10.3, also be the property of the owner. However, title to all movable or immovable assets constructed at or bought into the site by the mine operator for the performance of the works shall remain with the Mine Operator. The Mine Operator shall deliver to the buyer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 the overburden removal expenditure in proportion of the lignite mined to the total lignite reserves. The Learned Assessing officer ought to have appreciated that the accounting policy and the treatment thereof has no relevance to the allowability of the said expenditure under the Act. The Learned Assessing Officer observed that the closing stock has not been accounted in financial year 2010-11. The learned assessing officer failed to appreciate that the stock of lignite excavated does n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 Act. 8. We have heard the rival submissions and perused the materials available on record. In this case, the main controversy is with regard to allowability of expenditure u/s 35E of the Act vis- - vis 37 of the Act. For the better understanding, it is appropriate to understand the provisions of section 35E of the Act. Sec. 35E of the IT Act, 1961, which is relevant for the present purposes, is as follows: Sec. 35E : Deduction for expenditure on prospecting, etc., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear 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 shall be carried forward beyond the tenth previous year as reckoned from the year of commercial production. (5) For the purposes of this section, (a) Operation relating to prospecting means any operation 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; (b) Year of commercial production means the previous year in which as a result of any oper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 expenditure wholly and exclusively on any operations relating to prospecting for the specified minerals . It is thus clear that in order to be eligible for amortization of expenses under s. 35E, the expenses must have been incurred wholly and exclusively for exploring, locating or proving deposits of any minerals, and includes such operations which prove to be infructuous or abortive . 8.2 The ld. AO disallowed the claim of the assessee u/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 to the two concerns (M/s PC Patel Company and M/s HD Enterprises} that were engaged by the assessee for execution of excavation contract. Thus, it emerges that the assessee engaged the above mentioned two concerns as mere work contractors for excavation while BLMCL engaged the assessee for mine development and extraction of lignite as per the agreement. 6) Conspicuously the assessee itself has admitted the expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of the nature described in S 30 to 36. 2. It should have been incurred in the accounting year. 3. It should be in respect of a business which was carried on by the assessee and should be incurred after the business is set up, 4. It should not be in the nature of personal expenses of the assessee. 5. It should have been laid out or expended wholly and exclusively for the purpose of such busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 claimed the expenditure incurred in the process of excavation of a contract with BLMCL to the tune of Rs. 2,87,72,03,599/- as a revenue expenditure u/s 37 of the Act. The same was disallowed by ld. AO as discussed in earlier para. 8.9 Now let us appreciate the fact that overburden removal process is not one time process in any mining site. Because Minerals or Ores always located below the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill 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 extraction of coal is not possible without doing so, such overburden expenses is required to be treated as revenue expenses. Reverting to the facts of this case in this light, we find that once a mine has been treated as a revenue mine, the coal mining is clearly in progress because at least one of the three criterions has been met, i.e. reaching the coal seam over two years ago, prod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 qualifying expenditure under any other section, such as section 37(1), on the ground that the assessee has been granted a deduction under section 35 E and the limitation under section 35E (8) has thus come into play. In any event, section 35E (8) is clearly intended to avoid a double deduction rather than restrict an otherwise admissible deduction. It is only elementary tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 dividends in India, and regardless of the pattern of its share-holding. It will also not be available to non-resident taxpayers generally. 50. The expenditure to be amortised under s. 35E will be the expenditure incurred under the specified heads after 31st March, 1970, during a 5-year period ending with the year of commercial production'1, i.e., the previou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 chartered accountant or other person and also subject to the requirement that the assessee furnishes along with his return of income for the first year in which the amortisation is claimed, the report of such audit in a form to be prescribed for the purpose, duly signed and verified by the chartered accountant or other person setting forth such pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gnite 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 the supply of lignite to the Banner Lignite Mining Company Limited. Further, as per the Clause No 3.4 of the said agreement it is very clear that the mines shall always be the exclusive and absolute property of the mine owner i.e Banner Lignite Mining Company Limited. Under the same clause, it is also clear that the lignite mined ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 under Company Act. In view of this, we uphold the order of ld. CIT(A) on this issue and dismiss the revenue s appeal. 9. In the result, appeal of the revenue in ITA No.457/Bang/2023 is dismissed. 10. With regard to CO, the contention of the assessee is that ld. AO has not made the assessment order within time allowed u/s 143 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the department it was dispatched on 28.03.2012. The relevant last date for the purpose of passing the order under Section 263 considering the fact that the assessment was for the financial year 2008-09 would be 31.03.2012 and the order might have been received as per the case of the assessee - respondent herein on 29 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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