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Northern Coalfields Limited, Versus DCIT, Circle 2 (1) , Jabalpur

2016 (8) TMI 1032 - ITAT JABALPUR

Allowability of expenditure incurred on removal of overburden - Held that:- As relying on assessee's own for Assessment Year 2010-11 we have no hesitation in holding that the expenditure incurred on removal of overburden is to be allowed u/ s 37 (1) of the Income Tax Act, 1961 as against 1/ 10th of the expenditure allowed u/ s 35B of the Act. Before parting, we would also like to put on record our deep sense of anguish on the conduct of the Department for perpetrating a protracted litigation spr .....

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302013 passed by the Ld. New Delhi for assessment year 2006-07. 2. The facts of the case are that the assessee i.e. M/S Northern Coalfields Limited is a Mini Ratna Government of India controlled company with its head office at Singrauli (MP) and had came into existence on 28th November 1985, When it took over the coal mines of Singrauli division of Central Coal fields (CCL) and is a subsidiary company of Coal India Limited whose 90% shares are held by President of India. All commercial activitie .....

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i KHADIA 09/1985 1993-94 viii NIGAHI 11/1987 1990-91 ix BLOCK-B 07/2006 2007-08 x KRISHANSHILA 05/2006 2007-08 3. For the year under consideration, the company filed its return of total income on 26909.2012 returning an income of ₹ 4553,39,88,290/-. The aggregate value of sales out of the coal extracted/ produced from aforesaid ten mines aggregated to ₹ 7916.52 crores and the gross value of sale of coal aggregated to ₹ 10,176.94 crores. The coal extracted aggregated to 632.08 l .....

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y development expenditure (see para 7.1-7.4 at page 21-23) 9 25 Iv Miscellaneous welfare expenses (see para 8.1-8.6 at page 23-25) Rs.2.29 Mine development expenditure (see para 9 to 9.4.1 at page 25-27) Rs.3.12 Total assessed Income Rs.6568.78 4. Being aggrieved against the aforesaid order of assessment, the assessee preferred an appeal before the learned CIT (A). The Id. CIT(A) vide order dated 23.09.2015 has sustained a disallowance of an aggregate expenditure incurred of R.s 2466.34 crores ( .....

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.2006 1999-00 443-459 F. ITA 43/JAB/2002 dated 25/03/2004 1998-99 460-529 G. ITA 42/JAB/2002 dated 25/03/2004 1997-98 460-529 5. Aggrieved, the assessee is in appeal before us and has raised the following grounds of appeal: l. That the learned Commissioner of Income Tax (Appeals) has grossly erred both on facts and in law in confirming a disallowance of ₹ 2466.34 crores made by the learned Deputy Commissioner of Income Tax by invoking the provisions of section 35E(2) of the Income Tax Act, .....

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deration, sustained the disallowance and has made a valiant attempt to support his own view taken for the A. Y. 2011-12, even when he accepted that the findings recorded by the Hon 'ble Income Tax Appellate THbunal in the assessee's own case for the A. Y. 2010-11 were applicable to the findings recoded for the A. Y. 2011-12 4. That the learned Commissioner of Income Tax (Appeals) has, in his attempt to sustain the disallowance made by the Deputy Commissioner of Income Tax, held that the .....

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no distinguishing features, facts or circumstances warranting such a finding. 6. That the findings and observations recorded in the order at page 78 that, "the A.O. has discovered a completely new fact in respect of the month wise OBR debited and coal production", is not only factually incorrect but is also based on misconceived facts, that the learned Commissioner Of Income Tax (Appeals) has overlooked that the month wise OBR debited and coal production does not have any correlation .....

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month wise production and month wise expenditure incurred on OBR to determine the nature of expenditure incurred. 8. That the learned Commissioner of Income Tax (Appeals) has failed to comprehend that the month wise expenditure and month wise production of coal does not determine the character of the expenditure incurred and the same does not have any direct or indirect effect on the watching principle 9. That the learned Commissioner of Income Tax (Appeals) has further erred in holding that th .....

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radictory when he did not disputed either the receipt of the sale proceeds or the expenditure incurred, when all receipts as shown have been accepted and all expenditure incurred have been held to be verifiable and have been allowed. Thus the attempt made by the learned Commissioner of Income Tax (Appeals) in the order in sustaining the addition is not only misconceived but is highly arbitrary. 11 That the reliance placed by the learned Commissioner of Income Tax (Appeals) in the appellate order .....

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trary, misconceived but have absolutely no application whatsoever with the instant assessee. 11.2 That the learned Commissioner of Income Tax (Appeals) has also overlooked the principle laid down in the leading case of Quinn vs. Leathern [19011 AC 495 (HL)_which has subsequently been followed by the Supreme Court in numerous judgments, (see 188 ITR 402, Goodyear India Ltd. vs. State of Haryana). 12. That the learned Commissioner of Income Tax (Appeals) has also failed to appreciate the concept o .....

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e assessee to compute the income which was as per the statutory provisions of law and has also been upheld by the Tribunal. 14. The findings recorded by the learned Commissioner of Income Tax (Appeals) in his order and drawing support from the appellate order in assessee's own case for the A. Y. 1988-89 (page 104 of the order) shows non-application of mind and distortion of the facts in arriving at a conclusion contrary to the conclusion arrived by the Hon'ble Income Tax Appellate Tribun .....

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to appreciate that aforesaid expenditure was claimed in respect of the 'development mines' and not in respect of 'revenue mines' and since during the instant year all the mines have started commercial production much prior to the assessment year as such, expenditure incurred on 'removal of overburden' cannot be equated with 'mine development expenditure' as both the expenditures are totally different. 15. That the learned Commissioner Of Income Tax (Appeals) has .....

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e findings recorded by the learned Commissioner of Income Tax (Appeals) are perverse and have been recorded without considering the submissions/ evidences/ material produced on record and hence such findings are vitiated and deserves to be deleted It is therefore prayed that the adverse findings recorded by the learned Commissioner Of Income Tax (Appeals) in his appellate order which are highly misconceived and are based on extraneous consideration being not valid and sustainable in law, be held .....

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l but is a recurring expenditure and has regularly been incurred in the course of the production of the coal and is not an expenditure incurred for the development of the mine. It was submitted that the issue of treating the OBR expenditure u/ s 35E of the Act was considered by the Tribunal in its order dated 11,05.2007 in the case of assessee itself in ITA No. 96 & 97 for the AY 1988-89 wherein it has been held by the Tribunal that mine development expenditure in respect of the mines where .....

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the Hon'ble High Court of Madhya Pradesh recalling its order dated 24.04.2015 (to which the Ld, CIT (A) has referred in the impugned order), in fact does not overturn the finding of the order of the Tribunal. It was submitted that the observation of the learned CIT (A) in respect of the order of the High Court of Madhya Pradesh recalling its order dated 24.04.2015 was wholly irrelevant as order of the Tribunal was still subsisting. The Ld. AR submitted that all what had been done by the High .....

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ommenced commercial production i.e. they all had become revenue generating mines instant assessment year and that none of the afore said mines were at the stage of the development or had yet to commence commercial production. It was submitted that aforesaid facts are undisputed by the learned AO and learned CIT (A). 9. The Ld. AR further submitted that all the mines of the assessee were open cast mines and not drilling mines where the mining is done by use of human labour by adopting mechanized .....

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ed. The assessee, however, for the purpose of reporting to the ministry of coal, groups various such expenses that had been incurred for the removal of the overburden. It was submitted that as per books of account, total expenditure incurred on removal of overburden is of ₹ 2963.29 crore, however since the depreciation claimed was as per the Companies Act, while computing the taxable income, the assessee has added back ₹ 378.09 crore in respect of Depreciation and ₹ 162.08 cror .....

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ld not have been able to earn revenue from the production of the coal. It was emphasized that till the mines became revenue mines, the assessee had not claimed such expenditure and the same was debited in the books under the head 'development of mine' 11. The Ld. AR also submitted that the aforesaid issue is no longer res integra as the nature of expenditure incurred had first been examined by the Tribunal way back on 25.03.2004 for AY 1997-98 and 1998-99, wherein after extensive discuss .....

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he aforesaid order has further been followed by the Tribunal in its orders for the AY 19990000 and AY 2008-09. 12. The Ld. AR further submitted that recently, while deciding the appeals for the AY 2010-11, the Tribunal once again threadbare examined the disallowance of aforesaid expenditure in its order dated 05.05.2015 which is reported in (2015] 69 SOT 637 (Jabalpur - Trib.). The aforesaid order of the Tribunal has further been followed by the Tribunal for the immediately preceding assessment .....

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es are revenue mines and are not development mines. It was submitted that revenue has completely overlooked the provisions of section 35E (2) of the Act. It was submitted that the learned CIT (A) has in fact not disputed that the expenditure incurred is revenue expenditure but has opined that the same should have been spread over number of years. It was submitted that aforesaid approach of the learned CIT (A) is legally misconceived and that it is settled law that under the. Income Tax Act there .....

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f expenditure in respect of OBR through a chart which is reproduced as under- S.No. Name of Subsidiary Treatment of Actual OBR expenditure by AO Bharat Cooking Coal Ltd. Allowed ii. South Eastern Coalfields Limited Allowed Western Coalfields Limited Allowed iv. Eastern Coalfields Limited Allowed Central Coalfields Limited Allowed vi. Mahanadi Coalfields Limited Disallowed and allowed under section 35 E. However CIT(A) deleted the addition on the basis of Judgment of ITAT, Jabalpur 14. The Ld. CI .....

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ced for a ready reference as under:- 8.51 It is submitted that recently, while deciding the appeals for the AY 2010-11, Tribunal once again threadbare examined the disallowance of aforesaid expenditure in its order dated 05.05.2015 which is reported in [2015] 69 SOT 637 (Jabalpur - Tribe) XXXXX 16. Coming to the merits of the impugned disallowance, it is first of all necessary to understand as to what is the nature of open cast mining and the activity of 'overburden removal' in this proc .....

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l covering the -coal, This •surface material could be plants and vegetation, top soil, rocks and other material covering the coal. Obviously, open cast mining is economic when the coal seam is not much below the surface level. Such large opencast mines can cover an area of many square kilometres, as indeed in the case of this assessee. 18. What is very crucial, however, is to appreciate the fact that overburden removal process is not a onetime process in one coal mining site because even in .....

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hows different coal seams and intervening layers of overburden which are required to be removed before reaching the next level of coal seam. In between Purewa top seam and Purewa bottom seam, shown on the left, there are layers of overburden which is required to be removed before the coal extraction can be done from the next coal seam .level) 19. Let us, at this stage, go back to the line of reasoning adopted by the Assessing Officer. She has justified the disallowance, inter alia, on the ground .....

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uot; and that 'Therefore, the OBR in project, being contiguous to others, cannot be treated as revenue merely because the process of coal mining has started in one of the projects . Quite clearly these observations show that, in the understanding of the authorities below, once overburden is removed so as to reach the coal seam that is end of the overburden removal so far as that site is concerned. The Assessing Officer proceeds on this assumption as she is of the view that removal of overbur .....

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e layers of material such as rocks and soil, between the two or more coal seams at the same place, which are required to be removed before coal can be extracted from the next coal seam level, and also because even to reach other segments of the same coal 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 coal level. Of course, there is a difference in the character of overbu .....

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consistent all along and has been accepted by the income tax department not only in assessment of this assessee but also in the assessments of other similarly placed assessees such as subsidiaries of the Coal India Limited. As the learned CIT(A) has noted, in the extracts reproduced earlier in this order, until the point of time when coal production in a mine reaches 25% of rated capacity in a given mine, it is generally treated as a 'development mine' and thereafter, the 'revenue m .....

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eates from year to year and which has reached finality. It is indeed true that the principles of res judicata do not apply to the income tax assessments but, as is the settled position of law, once a factual aspect of the matter, which permeates different assessment years, has reached finality one way or the other, there is no good reason to disturb the same. We may, in this regard, refer to the following observations of Hon ble Supreme Court, in the case of Radhasoami Satsang V. CIT (1992) 193 .....

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refore, entire expenses incurred on the overburden removal, no matter what be the stage of coal extraction levels in that mine, are 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 coal from the lower seams, such expenditure will still be treated as capital expenditure. That is clearly an incongruous position and not sustainable in law. In the case of Kirkend Coal Co. (supra), Hon'ble Supre .....

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ar and, on that basis, concluded that it 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 t .....

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is not possible unless that overburden is removed. Given the nature of expenses, in the light of the foregoing discussions, such an inference is clearly incorrect and unsustainable in law. 27. We have also noted that a lot of emphasis has been placed by the authorities below on the scope of Section 35 E The Assessing Officer has observed that, "with due deference to Hon'ble ITA T judgments, it is stated that the relevance of the OBR expenses can be examined in connection with section 35 .....

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s requires the overburden removal expenses to be examined in connection with Section 35 E, the CIT(A) seems to proceed on the basis that Section 35E governs treatment of any expenses which are "relatable to development of a mine. XXXX 32. Coming back to the scope of Section 35 E, the concept of 'commercial production' is crucial to this section inasmuch as in the cases in which there cannot be commercial production, such as in the cases of prospecting simplictor, this section cannot .....

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well, inasmuch it has no application in the years after the year in which commercial production start because in such a situation the expenses in question are anyway admissible expenses. In form no 3 AE prescribed by the Central Board of Direct Taxes, with respect to claim of deduction under section 35E, it is, inter alia, required of the auditor to state "Name(s) of mineral(s) or group(s) of associated minerals in respect of which operation relating to prospecting or development were under .....

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any application on the facts of this case. XXX 35. 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 35 E. The deduction under section 35 E 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 35 E may be available in respect of an expenditure, even if t .....

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