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2021 (7) TMI 107 - AT - Income TaxDisallowance of loss claimed on the reasoning that the assessee has not set up its business - assessee has not started commercial production, i.e., extraction of minerals during the years under consideration - HELD THAT:- It is well settled proposition of law that “setting up of business” and “commencement of production” are two different activities. Once the business is set up, the assessee would be entitled for deduction of revenue expenses. In case of business relating to “exploration and extraction” of minerals, the activity of exploration of minerals itself is a long process. Once a person identifies the area, where minerals are available, then only the activity of extraction of minerals would start, that too, if it is viable to undertake those activities. Hence generation of revenue, as observed by the tax authorities, should not be the criteria for determining the date of setting up of business. The fact that the generation of revenue would take several years is well recognized in sec.35E of the Act, which provides for amortization of expenses incurred in previous four years preceding the year of commercial production. We notice from the financial statements that the assessee has employed personnel and has started exploration activities. The reconnaissance license has been obtained by one of the shareholders of the assessee company. Hence, there appears to be merit in the contention of the assessee that it has set up its business. As observed the provisions of section 35E of the Act is applicable to facts of the present case, as per which the expenditure incurred within four years prior to the year of commencement of production have to be accumulated and should be amortised in succeeding ten years. Thus, the special provisions of section 35E contemplates accumulation of expenses, i.e., they are not treated as “business loss” as per normal provisions of the Act. Hence the question of “setting up” of business is not relevant for the provisions of sec.35E of the Act. Admittedly, the A.O. has not examined the case of the assessee in terms of section 35E of the Act. However, the Ld A.R submitted that the assessee has not commenced extraction activities and accordingly contended that normal provisions of the Act should apply for the years preceding the “four years period” mentioned in sec.35E of the Act. As per the provisions of the Act, the business loss is allowed to be carried forward only for a period of eight years. For both the years under consideration, the prescribed period of eight years has already elapsed. Hence the claim of the assessee becomes academic. In any case, the question whether the provisions of sec.35E should apply for the years beyond the prescribed period of four years or normal provisions of the Act should apply appears to be a debatable one. At the time of hearing of cases, the bench proposed to restore the matter to the file of the AO for examining entire issue afresh in terms of sec.35E of the Act. Both the parties agreed to the same.
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