TMI Blog2011 (12) TMI 409X X X X Extracts X X X X X X X X Extracts X X X X ..... ad 'income from other sources' instead of 'business income' as claimed in the return of income - There is various case law on the issue, holding if the capital funds are kept in deposits then the income is to be assessed as income from other sources and if the working capital funds are kept then to be treated as business income but, most of the case law was given on respective facts. Most of the issues arose as deductions are being claimed on non-operational incomes also. In that context various decisions were rendered depending on facts and applicable law. The discussion will become only academic in nature in this case without there being any consequential effect as interest income is eligible for set off to business loss whether assessed as income from business or income from other sources. The Assessing Officer is however directed to allow the set off of business loss as per the provisions of the Act. - Appeals are partly allowed - ITA No. 40/Mum/2006, ITA Nos. 6193 and 86/Mum/2007, ITA Nos. 6560 and 6561/Mum/2007, ITA No.6562/Mum/2007, - - - Dated:- 16-12-2011 - D.K. Agarwal, B. Ramakotaiah, JJ. R. Muralidhar for the Appellant D.S. Sunder Singh, DR for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above expenditure pertains to prospecting activities, the assessee claimed balance of expenditure to an extent of ₹ 27,88,030/- and depreciation of ₹ 7,13,781/- under section 37(1) being a non-prospecting expenditure. The Assessing Officer held that the assessee has not commenced its business and allowed the capitalization of the entire expenditure claimed including the depreciation claim. The assessee has contested the same before the CIT (A) who while admitting that under section 35E expenditure of 1/10th only can be allowed to the appellant, considered that the assessee has not commenced the mining activity and since the mining activity of the company has not commenced in the year under consideration, there is no question of allowing non prospecting of expenditure of Rs..27.88 lakhs to the assessee in the current year. Similarly, claim of depreciation was also disallowed. Therefore, the assessee is in appeal before us. 4. Referring to the orders of the Assessing Officer and the CIT(A), the learned Counsel submitted that the assessee obtained FIPB permission as early as October, 1996 which was amended by the letters dated 15/07/1997, 26/05/1998, 06/11/1998 and 0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missions and the legal propositions on the issue it was submitted that the assessee has commenced its activities of prospecting in Assessment Year 2001-02 itself and so the business of the assessee has been set up and expenditure allowable was under section 37(1) of the Income Tax Act. The learned Counsel placed reliance on the various decisions: i) Saurashtra Cements and Chemical Industry Ltd 91 ITR 170(Guj). ii) Sarabhai Management Corporation Ltd 192 ITR 151(SC) iii) CIT vs. Franco Tosi Ingegneria (2000) 241 ITR 268 (Mad.) iv) DCIT vs. ACC RIO Tinto Exploration Ltd., (125 TTJ)(Del) (92). v) DDIT v. Stork Engineers andContractors BV India Project Office (127 ITD 211)(Mum) = (2009-TII-53-ITAT-MUM-INTL). He also distinguished the decisions relied by Assessing Officer in CIT vs. Sponge Iron India Ltd.[201 ITR 770] A.P and CIT vs. L and T Macneil Ltd. (1993) 202 ITR 662 (Bom). He raised various prepositions on the basis of the above case law to submit that the assessee has commenced its business activities of prospecting and so there is no need for disallowance of the expenditure claimed. 5. The learned Departmental Represent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted by the Department of Industrial policy and promotion, the assessee is permitted to undertake prospecting and mining activities for diamonds originally and subsequently prospecting for other minerals also (except coal and iron ore) for private participation. This indicate that the assessee was permitted to indulge in mining activities only with reference to diamonds whereas it was not permitted to involve in mining activities for other minerals. Prospecting is an activity prior to activity of mining. Without prospecting and without examining whether particular precious stones/minerals were available in a particular area, it is not possible to undertake mining activities. It is also observed that the FIPB permits various foreign companies having expertise in various fields to undertake various activities in India and in the case of the assessee initially it was permitted to undertake prospecting and mining activities for diamond and subsequently modified to include prospecting for other minerals except coal and iron ore. This indicates that the activities of prospecting are itself a separate business activities. The Hon'ble Delhi High Court in the case of CIT vs. ACC RIO Tin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. The issue of commencement of the business was discussed elaborately by the Hon'ble High Court of Gujarat in the case of Saurashtra Cements and Chemical Industry Ltd,91 ITR 170 wherein the assessee started extracting lime stone from the leased area from 1958, completed installation of plant and machinery in the year 1960 and started manufacturing of cement in October, 1960. It was held that the assessee had commenced its business in 1958 when it started its activity of extracting limestone by quarrying leased area of land. While allowing, the Hon'ble High Court has held as under: To determine what was the business of the assessee, one must consider what were the activities which constituted such business without being misguided by loose expressions of vague and indefinite import. The activities which constituted the business of the assessee were divisible into three categories: the first category consisted of the activity of extraction of limestone by quarrying leased area of land. This activity was necessary for the purpose of acquiring raw material to be utilized in manufacture of cement. The second category comprised the activity of manufacture of cement by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT vs. Sarabhai Management Corporation Ltd 192 ITR 151 also took similar view in holding that it cannot be said that the assessee commenced its business only when licensee or lessee occupied the premises and started paying rent. Hon'ble Madras High Court in the case of CIT vs. Franco Tosi Ingegneria (2000) 241 ITR 268 considered that assessee has commenced its business from the time it opened its site office and allowed the expenditure under section 37(1). In view of the principles decided in above cases, we are of the opinion that the assessee's activities of prospecting which is a permitted activity by the FIPB in which the assessee has considerable expertise and further, considering that various permissions granted by the Govt. of Andhra Pradesh was only for reconnaissance with reference to exploration of diamonds, it can be concluded that the assessee has commenced its business from the time it started the prospecting activity. It is also seen from the permissions granted by the FIPB that in some cases the assessee was permitted to undertake for prospecting only for other minerals (except coal and iron ore). Therefore, prospecting activity itself is to be considered as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r section 37(1) of the Act. The Assessing Officer has, however, proceeded on the basis that since assessee is, inter alia, engaged in the business of prospecting minerals-all the expenses incurred by the assessee are to be treated as eligible for amortization under section 35E, unless he can demonstrate that the expenses are incurred for earning an income which is taxable in the hands of the assessee. That is clearly an incorrect approach on the part of the Assessing Officer. The assessee even when engaged in the business of prospecting minerals, is eligible for amortization of such expenses as are eligible under section 35E(2) r.w.s. 35E(5)(a). All other expenses are eligible for deduction as in the normal course of computation of business income . 10. In view of this, respectfully following the same we direct the Assessing Officer to allow the expenses on non-prospecting activities amounting to Rs..27,88,030/- and depreciation Rs..7,13,781/- claimed in this year. 11. Ground No.2 in assessee's appeal is with reference to taxing the interest received on short term deposit under the head 'income from other sources' instead of 'business income' as c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 13. With these directions, the appeal is considered as partly allowed. ITA No.6193/Mum/2007 for Assessment Year 2001-02: 14. In this appeal the assessee is contesting in Ground No.2 claim of expenditure on non prospecting activities amounting to ₹ 8,75,744/- and in Ground No.3 taxing of interest of ₹ 2,58,505/- as income from other sources. For the reasons stated in ITA No.40/Mum/2006 on the similar issue, we direct the Assessing Officer to allow the expenditure on non prospecting activities under section 37(1) and direct to set off to the interest income as per the provisions of the Act. In view of the above directions, Ground No.1 contesting about reopening of the assessment under section 147 becomes academic in nature which the learned Counsel also admitted as such. Therefore, Ground No.2 is considered allowed and Ground Nos.1 and 3 are rejected. In the result appeal in ITA No/6193/Mum/2007 for the Assessment Year 2001-02 is partly allowed. ITA No.86/Mum/2007 for the Assessment Year 2003-04: 15. In this appeal the assessee is contesting in Ground No.1 claim of expenditure on non-prospecting activities amounting to ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f depreciation is allowed and the Ground No.2 on heads of income to be considered for interest income is dismissed as academic in nature in ITA No 6561/Mum/04. Hence appeals in ITA Nos. 6560 and 6561/Mum/2007 for the Assessment Years 2001-02 and 2003-04 are partly allowed. ITA No.6562/Mum/2007 for Assessment Year 2003-04: 17. De Beers India Minerals (P) Ltd is the subsidiary of De Beers Mauritious (P) Ltd commenced its operations under approval from FIPB dated 2.11.1998 as amended by letter dated 12.9.2000, initially for conducting diamond prospecting and mining and subsequently for prospecting and mining of other minerals (except coal and iron ore). The company obtained permissions from the Govt. of Andhra Pradesh on 28.2.2001 and started its operation of exploration in the State of Andhra Pradesh. During the year the assessee declared a loss of ₹ 42,85,363/- after capitalizing an amount of ₹ 57,245/- being the amount covered under section 35E. For the reasons discussed by the Assessing Officer in 2002-03 in the case of De Beers India Prospecting, the Assessing Officer disallowed the revenue expenditure but allowed it to be capitalized the same along ..... X X X X Extracts X X X X X X X X Extracts X X X X
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