TMI Blog2017 (9) TMI 718X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of section 37(1) cannot be excluded merely on account of the fact that the expenditure is covered under section 35E of the Act. The applicability of provisions of section 37(1) have therefore to be tested independently on satisfaction of other conditions specified therein. Given that the piece of land falls within the mining area in respect of which assessee has an existing right to carry on its mining operations and the fact that assessee wishes to carry on the mining area in that area, the assessee was required to pay compensation to the land owner so that the latter doesn’t obstruct or challenge the carrying of the mining activity underneath the surface of land which belongs to him. The payment is for the purposes of removing the disability or obstruction and to facilitate the carrying on its business. No fresh rights have been acquired by the assessee by virtue of paying the said compensation. The assessee was already having a right to carry on the mining operations. The fact that land stand mutated in the name of the Government of Rajasthan post surrender by Shri Ranga also shows that the land or the surface rights therein have not being acquired by the assessee. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. Briefly stated the facts of the case are that the assessee company has shown assets worth ₹ 1,96,77,243/- in its financial statements including addition of ₹ 35,00,000/- made in the financial year relevant to the subject assessment year. The assessee company has shown these assets under the head Mining Rights and claimed depreciation @ 25% under section 32 of the Act. As per the Assessing Officer, the expenditure incurred by the assessee is for acquiring various parcels of land and not towards purchase of any Mining Rights as claimed by the applicant. Accordingly, the depreciation claimed was disallowed by the Assessing Officer. 4.1 Being aggrieved, the assessee carried the matter in appeal before the CIT(A). The assessee also took an additional ground of appeal before the ld CIT(A) stating that alternatively, the amount of ₹ 35,00,000/- which is paid by the assessee during the year to the land owner as compensation for using the land for mining should be allowed as allowable deduction u/s 37(1) of the Act. The ld. CIT(A) confirmed the action of the Assessing Officer in disallowing the claim of depreciation u/s 32 of the Act. Regarding alternate claim o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hises, or any other business or commercial rights of similar nature. I am of the considered view that by making the payment of ₹ 35 lac to Shri Ranga for getting the possession of the land falling in the area allotted to the appellant by the government for mining purpose, the appellant has not got any know-how, patents, copyrights, trademarks, licenses, franchises, or any other rights of similar nature. Therefore, it is held that the assessee is not entitled for any depreciation u/s 32 in respect of any right that might have been acquired by it by making payment of ₹ 35 lac to Shri Ranga or any other payment made earlier. Accordingly, the disallowance made by the AO of depreciation of ₹ 44,81,811/- claimed by the appellant u/s 32 is hereby confirmed. Regarding the additional ground of appellant that alternatively the entire payment of ₹ 35 lac made by the appellant to Shri Ranga may be allowed as revenue expenditure, it is seen that section 35E of the I.T. Act, 1961 deals with the deduction for such expenditure . For ready reference, the relevant provisions of section 35E are reproduced as under: (1) Where an assessee, being an Indian company or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ptable. Hence, the additional ground of appeal raised by the appellant is hereby dismissed. 6. During the course of hearing, ld. AR submitted that Assessee Company has a huge mining area allotted by the Government of Rajasthan on lease for a period of 20 years which is renewed as per the laid down procedures. Under the mining lease, assessee company is conferred the liberties and powers to enter upon the entire leased land and to search for, win, work, get, raise, covert and carry away minerals for its own benefit in the most economic, convenient and beneficial manner. The Assessee company, inherently, is also entitled to take up and occupy, within the leased area, such surface lands, as would be necessary for winning, working, getting the minerals, in occupation of anybody on payment of compensation. 7. It was further submitted that the lease area so allotted by the Government, may consist of the following types of land:- i. Forest Land ii. Charagha Land iii. Agriculture Land iv. Bunjer Land v. Niji Khatedari Land 8. In respect of Niji Khatedari Land, for carrying out the mining activities, mining companies pay compensation to the land owner, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om land, as revenue expenditure, ignoring the provisions of section 37(1) of the Act, 1961, and inspite of the fact that the assessee by virtue of said expenditure has acquired benefits of enduring nature and were thus, not allowable as revenue expenditure?... ....In view of the above, the issues are answered in favour of assessee and against the department. It is held that the expenses incurred are revenue expenditure and not capital expenditure... 12. It was further submitted that under identical set of facts, the Hon ble ITAT Jaipur Bench, in the case of Rajasthan State Mines Minerals Ltd (ITA No. 144/JP/2014, vide order dated 12.02.2016) held as under: We find that issue raised by the department in this ground has already been decided by this Bench of ITAT in assessee s own case for assessment year 2002-03 in ITA No. 466/JP/2006 dated 26.06.2009, wherein compensation paid to farmers for using their land was allowed. The finding of the Bench in para 40 of the said order is reproduced as under:- We have carefully heard the rival submissions and find that the payment made by the assessee to farmers is a part of cost of gypsum only and no capital asset is ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... minerals, commences. Whereas, in the case at hand, the assessee company entered into a lease agreement with the Government of Rajasthan for the purpose of mining in the year 2000. The assessee company had already started its commercial production. Thus, section 35E is not applicable on the compensation paid for usage of land for the purpose of mining to the land owner. 14. In the case of Neyveli Lignite Corporation Ltd. (120 TTJ 1096), the assessee had claimed expenditure w.r.t removal of overburden from its lignite mines. The same was allowed by the AO as part of revenue expenditure, following the view taken by the Department for preceding years. CIT, in proceedings under section 263, directed the AO to treat the expenditure as part of capital expenditure and to apply section 35E instead of section 37 and to give benefit to the assessee for the relevant previous year only to the extent of 1/10th of the expenditure incurred. In appeal against the order passed under section 263, following contentions were raised by the assessee before Hon ble ITAT: i Assessee had commenced its business in 1957 and was mainly in the business of excavating lignite. ii Section 35E was appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be outside the purview of the said section in accordance with sub-section (2) of section 35E and thus would automatically get covered under section 37(1). 16. It was submitted that Section 37 is a residuary provision. It provides for the deduction of all expenditure wholly and exclusively laid out or expended for the purposes of the business, where such expenditure is not expressly covered by any other specific provisions of the Act. Thus, whatever expenditure is not covered under section 30 to 36 of the Income Tax Act 1961, would get covered under section 37(1) of the Act. 17. The ld AR also drawn support from the judgement of the Hon ble Supreme Court in the case of Bikaner Gypsums Ltd reported in 187 ITR 39 wherein the Hon ble Supreme Court has laid down the principles of allowability of expenditure which is incurred for removal of restriction which obstructed the carrying on of the business of mining within the leased area. ..12. Whether payments made by an assessee for removal of any restriction or obstacle to its business would be in the nature of capital or revenue expenditure, has been considered by the Courts. In IRC v. Carron Co. [1956- 69 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments for removal of disabilities which confined their business under the out of date Charter of 1773, the expenditure was on revenue account. In Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1, this Court held that expenditure made by an assessee for the purpose of removing the restriction on the number of working hours with a view to increase its profits, was in the nature of revenue expenditure. The Court observed that if the advantage consists merely in facilitating the assessee s trading operations or enabling the management and conduct of the assessee s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account even though the advantage may endure for an indefinite future. We agree with the view taken in the aforesaid two decisions. In our opinion where the assessee has an existing right to carry on a business, any expenditure made by it during the course of business for the purpose of removal of any restriction or obstruction or disability would be on revenue account, provided the expenditure does not acquire any capital asset. Payments made for removal of restriction, obstruction or disab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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-section (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 by way of depreciation is admissible under section 32, shall not be deemed to be expenditure incurred by the assessee for any of the purposes specified in sub-section (2). 21. The provisions of section 35E were brought on the statute books by the Taxation Laws Amendment Act, 1970. Circular No. 56, dated 19-3-1971 issued by the CBDT explains the rationale and salient features of the said provisions and the same reads as under: 48. New section 35E, also inserted by section 8 of the Amending Act, provides for the amortisation of expenditure incurred wholly and exclusively on any oper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 section 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 amortisation will not be allowable against any other income of the assessee. Accordingly, it has been specifically provided that where the instalment of amortisable expenditure relating to a given year cannot be wholly absorbed by the profit against which the amortisation is to be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dition regarding nature of the expenditure as the same would be purely academic in nature. The provisions of section 35E are therefore not applicable in the instant case. Therefore, the applicability of provisions of section 37(1) cannot be excluded merely on account of the fact that the expenditure is covered under section 35E of the Act. The applicability of provisions of section 37(1) have therefore to be tested independently on satisfaction of other conditions specified therein. Applicability of Section 37(1) 23. For applicability of provisions of section 37(1) of the Act, we refer to the legal proposition laid down by the Hon ble Supreme Court in case of Bikaner Gypsum Ltd (supra) as under: Where the assessee has an existing right to carry on a business, any expenditure made by it during the course of business for the purpose of removal of any restriction or obstruction or disability would be on revenue account, provided the expenditure does not acquire any capital asset. Payments made for removal of restriction, obstruction or disability may result in acquiring benefits to the business, but that by itself would not acquire any capital asset. The facts of each c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 ₹ 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. 24. As held by the Hon ble Supreme Court, in considering the cases of mining business as in the instant case, 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. Where the assessee has an existing right to carry on a business, any expenditure made by it during the course of business for the purpose of removal of any restriction or obstruction or disability would be on revenue account, provided the expenditure does not acquire any capital asset. Payments made for removal of restriction, obstruction or disability may result in acquiring benefits to the business, but that by itself would not acquire any capital asset. 25. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the past also made such payments to other persons for getting possession of the land in order to do the mining in the area. The said finding of the ld CIT(A) remain uncontroverted before us. Given that the piece of land falls within the mining area in respect of which assessee has an existing right to carry on its mining operations and the fact that assessee wishes to carry on the mining area in that area, the assessee was required to pay compensation to the land owner so that the latter doesn t obstruct or challenge the carrying of the mining activity underneath the surface of land which belongs to him. The payment is for the purposes of removing the disability or obstruction and to facilitate the carrying on its business. No fresh rights have been acquired by the assessee by virtue of paying the said compensation. The assessee was already having a right to carry on the mining operations. The fact that land stand mutated in the name of the Government of Rajasthan post surrender by Shri Ranga also shows that the land or the surface rights therein have not being acquired by the assessee. In light of above discussions and respectfully following the decision of the Hon ble Supre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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