Income Tax Appellate Tribunal - Jaipur
M/S Associated Soapstone Distributing ... vs Assistant Commissioner Of Income Tax, ... on 1 September, 2017
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IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR
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BEFORE: SHRI KUL BHARAT, JM & SHRI VIKRAM SINGH YADAV, AM
vk;dj vihy la-@ITA No. 572/JP/2017
fu/kZkj.k o"kZ@Assessment Year : 2013-14
M/s Associated Soapstone cuke ACIT,
Distributing Co. Pvt. Ltd., Vs. Circle-5,
Jaipur Jaipur
LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AAGCA2491N
vihykFkhZ@Appellant izR;FkhZ@Respondent
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s Assessee by : Shri Rajeev Sogani (CA)
jktLo dh vksj ls@ Revenue by : Shri S. L. Chandel (Addl. CIT)
lquokbZ dh rkjh[k@ Date of Hearing : 22/08/2017
mn?kks"k.kk dh rkjh[k@ Date of Pronouncement : /08/2017
vkns'k@ ORDER
PER: SHRI VIKRAM SINGH YADAV, A.M. This appeal by the assessee is directed against the order of Ld. CIT(A), Ajmer dated 09.05.2017 pertaining to A.Y. 2013-14 wherein the assessee has raised the following grounds of appeal :-
" 1. (a) In the facts and circumstances of the case and in law the ld. CIT(A) erred, in confirming the action of the ld. AO, in disallowing the depreciation on Intangible Assets (Mining Rights) amounting to Rs. 44,81,811 u/s 32 of Income Tax Act, 1961. The action of the ld. CIT(A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by allowing depreciation of Rs. 44,81,811.
(b) Alternatively, in the facts and circumstances of the case and in law ld. CIT(A) erred in not allowing deduction u/s 37(1) of Income Tax Act, 1961, of the compensation amount of Rs. 35,00,000 paid during the year to the land owner, for using the land for mining. The action of the ld. CIT(A) is illegal, unjustified, arbitrary and against the facts of the 2 ITA No. 572/JP/2017 M/s Associated Soapstone Distributing Co. Pvt. Ltd., vs. ACIT, Circle-5, Jaipur case. Relief may please be granted by allowing deduction of Rs.
35,00,000 u/s 37(1) of Income Tax Act, 1961.
2. In the facts and circumstances of the case and in law ld. CIT(A) erred, in confirming the action of the ld. AO, in making disallowance of Revenue Expenditure of Rs. 18,00,000 u/s 35(2AB) of Income Tax Act, 1961. The action of ld. CIT(A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by allowing deduction of the said expenditure of Rs. 18,00,000."
2. At the outset, ld. AR submitted that he does not wish to press ground No. 1a and 2 of the assessee's appeal. Hence the same are dismissed as not pressed.
3. In ground No. 1b, the assessee has challenged the action of ld. CIT(A) in disallowing compensation amount paid to the land owner for using the land for mining under section 37(1) of the Act.
4. Briefly stated the facts of the case are that the assessee company has shown assets worth Rs. 1,96,77,243/- in its financial statements including addition of Rs. 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 Rs. 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 3 ITA No. 572/JP/2017 M/s Associated Soapstone Distributing Co. Pvt. Ltd., vs. ACIT, Circle-5, Jaipur 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 of allowability of Rs. 35,00,000/- u/s 37(1) of the Act, the ld. CIT(A) referred to the provisions of section 35E of the Act and held that the amount of Rs. 35,00,000/- cannot be allowed as deduction. Accordingly, though the additional ground of appeal was admitted but the same was dismissed after taking into consideration the submissions of the assessee and provisions of section 35E of the Act.
5. Now the assessee is in appeal before us against the order of ld. CIT(A) wherein he has disallowed the claim of deduction of Rs 35,00,000 u/s 37(1) of the Act. Before we refer to the contentions of the ld AR, it would be relevant to refer to the relevant findings of the Ld. CIT(A) which are under challenge before us. The same are reproduced as under:-
"I have gone through the assessment order, statement of facts, grounds of appeal, written submission, remand report and rejoinder carefully. It is seen that the appellant was granted mining lease by Mining Engineer, Pratapgarh which was renewed vide letter dated 11.02.2015 further till 31.03.2020. During the previous year relevant to A.Y 2013-14, the appellant paid Rs. 35 lac to Shri Ranga who was having in his possession, a piece of land (Khasra No. 53, Araji No. 157, Rakba 3 bigha & 8 biswa), as this piece of land was part of the total area allotted by the government to the appellant for mining the soap stone. The appellant had in the past also made such payments to other persons for getting possession of the land in order to do the mining in the area. All the amount paid in earlier years amounting to Rs. 1,61,77,243/- was shown by the appellant as addition to land and no depreciation or any other deduction in respect of such payments were claimed by the appellant. However, in the A.Y 2013-14 (the assessment year under appeal), the 4 ITA No. 572/JP/2017 M/s Associated Soapstone Distributing Co. Pvt. Ltd., vs. ACIT, Circle-5, Jaipur appellant has claimed depreciation of Rs. 44,81,811/- u/s 32 on the ground that the amount paid by the appellant was intangible asset as defined under Clause (b) of Explanation 3 of section 32. For ready reference the explanation 3 is reproduced hereunder:
"(b) intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature."
Thus, it can be seen that intangible asset has been defined in the Act as being, know-how, patents, copyrights, trademarks, licenses, franchises, or any other business or commercial rights of similar nature. I am of the considered view that by making the payment of Rs. 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 Rs. 35 lac to Shri Ranga or any other payment made earlier. Accordingly, the disallowance made by the AO of depreciation of Rs. 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 Rs. 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 a person (other than a company) who is resident in India, is engaged in any operations relating to 5 ITA No. 572/JP/2017 M/s Associated Soapstone Distributing Co. Pvt. Ltd., vs. ACIT, Circle-5, Jaipur prospecting for, or extraction or production of, any mineral and incurs, after the 31st day of March, 1970, any expenditure specified in sub-section (2), the assessee shall, in accordance with and subject to the provisions of this section, be allowed for each one of the relevant previous years a deduction of an amount equal to one-tenth of the amount of such expenditure."
(2) The expenditure referred to in sub-section (1) is that incurred by the assessee after the date specified in that sub-section at any time during the year of commercial production and any one or more of the four years immediately preceding that year, wholly and exclusively on 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 on the development of a mine or other natural deposit of any such mineral or group of associated minerals: Provided that there shall be excluded from such expenditure any portion thereof which is met directly or indirectly by any other person or authority and any sale, salvage, 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, 6 ITA No. 572/JP/2017 M/s Associated Soapstone Distributing Co. Pvt. Ltd., vs. ACIT, Circle-5, Jaipur shall not be deemed to be expenditure incurred by the assessee for any of the purposes specified in sub-section (2)."
A plain reading of clause (i) of Sub-section 3 of section 35E makes it clear that any expenditure on acquisition of the site of source of any mineral or group of associated mineral or of any rights in or over such sight is not admissible as deduction. Therefore, in view of the specific provisions of section 35E, the claim of the appellant that it should be allowed the entire amount of 35 lac as deduction is found to be not acceptable. 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 7 ITA No. 572/JP/2017
M/s Associated Soapstone Distributing Co. Pvt. Ltd., vs. ACIT, Circle-5, Jaipur
8. In respect of Niji Khatedari Land, for carrying out the mining activities, mining companies pay compensation to the land owner, who, in-turn, surrenders the land to the Government of Rajasthan so that the company can carry out mining operations within the allotted lease area. Further, the land becomes exclusive property of Government of Rajasthan and mutated in its name in the revenue records.
9. During the relevant previous year, the assessee company paid an amount of Rs. 35,00,000, as part of the compensation for surrender of land to Mr. Ranga, S/o Mr. Panchiya Meena. In order to effectuate the surrender of land, following documents were executed:-
• Undertaking given by land owner for surrendering the land and also confirmation that the land is situated within the lease area of the assessee company • Surrender Letter or Samarpan Patra executed by the Land owner • Chain of events documented by Tehsildaar • Letter written by Land Owner to Tehsildaar surrendering the land • Report of Tehsildaar for verification of facts • Statement of witness • Evidence that the Land surrendered by Mr. Ranga was mutated in the name of the Government of Rajasthan in the revenue records.
10. It was contended before the ld CIT(A) that the amount of compensation paid by the assessee company during the year amounting to Rs 35,00,000 is to be allowed as revenue expenditure. The relevant clauses of the lease agreement were brought to the notice of ld CIT(A) in accordance with which the compensation was paid by the assessee to Shri Ranga during the year.
8 ITA No. 572/JP/2017M/s Associated Soapstone Distributing Co. Pvt. Ltd., vs. ACIT, Circle-5, Jaipur
11. It was further submitted that the issue is squarely covered in favour of the assessee company by the recent decision of the Hon'ble Jurisdictional High Court. When compensation is paid to land owners for mining on their piece of land, such compensation has been held by the Hon'ble Rajasthan High Court, in the case of Rajasthan State Mines and Minerals Ltd (Appeal No. 651/2009 dated 30.05.2017) to be of revenue in nature. The Hon'ble High Court dismissed the contention of the department that by paying such compensation, assessee acquired benefits of enduring nature and thus should be treated as capital expenditure. In this case, Hon'ble Rajasthan High Court adjudicated the below mentioned question of law, on appeal filed by the department:-
"...whether on the facts and circumstances of the case, the Tribunal was justified in holding the compensation of Rs. 17,72,915 paid to landowners for acquiring mineral from 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:
9 ITA No. 572/JP/2017M/s Associated Soapstone Distributing Co. Pvt. Ltd., vs. ACIT, Circle-5, Jaipur "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 acquired by the assessee by incurring these expenditure. Nature of loss to farmers is immaterial while judging the nature of expense in the hands of the assessee and therefore same cannot be basis for treating the expenditure as capital in nature. The ld. CIT(A) has rightly allowed the expenditure as revenue which does not call for any interference. Thus ground no. 1 of the revenue is dismissed."
"Again for assessment year 2003-04 and 2004-05, such expenditure were allowed by the ITAT in order dated 26.06.2009. The ld. CIT(A) has allowed the claim of the assessee by following the said decisions. We, therefore, do not find any reason to interfere with the order of CIT(A). The same is thus upheld. The ground of the department is thus dismissed."
Therefore this issue is decided against the revenue."
13. It was further submitted that the ld. CIT(A) rejected the claim of the assessee company by referring to sub-section (3) of section 35E, wherein it has been mentioned that any expenditure incurred by the assessee company on the acquisition of the site of the source of any mineral or group of associated minerals or of any rights in or over such site, shall not be deemed 10 ITA No. 572/JP/2017 M/s Associated Soapstone Distributing Co. Pvt. Ltd., vs. ACIT, Circle-5, Jaipur to be an expenditure incurred by the assessee company for the purpose specified in sub-section (2).
It was submitted that the expenditure of Rs. 35,00,000 was incurred by the assessee company on the compensation paid to the land owner for vacating land on which the assessee company already had right of mining by virtue of the lease agreement entered with Government of Rajasthan. Such expenditure did not result into the assessee company acquiring any site for mining nor did it get any additional right to use such site. Assessee company already had the right to extract minerals and to do mining on the said land.
Applicability of Section 35E is driven by sub-section (2) of Section 35, which includes, in its scope, expenditure incurred by any assessee at any time during the year of commercial production and any one or more of the four years immediately preceding that year. Thus, Section 35E is applicable for expenditure incurred during the five year period ending with the year of commencement of commercial production, i.e. the previous year in which, as a result of any operation relating to prospecting commercial production of any one or more of specified minerals or associated 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 11 ITA No. 572/JP/2017 M/s Associated Soapstone Distributing Co. Pvt. Ltd., vs. ACIT, Circle-5, Jaipur 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 applicable only for expenditure incurred for the purpose of identifying and prospecting the mines.
iii Such expenditure did not result into any asset being created for the assessee nor did it result into any benefit of enduring nature.
Hon'ble ITAT, accepting the contentions raised by the Councel of the assessee allowed the claim of such expenditure under section 37(1) and held the provisions of Section 35E not to be applicable in the present case.
Relevant extract of order of Hon'ble ITAT is as under:-
"...13. We are unable to agree with the contention of the learned Departmental Representative that s. 37 of the Act is not attracted to this extent because the same is covered between ss. 30 and 36 of the Act specifically under s. 35E of the Act. As stated above, s. 35E (2) applies to the expenditure which has been incurred for the purpose of prospecting of the mineral and not for the purpose of commercial production of the mineral. We are of the considered view that in this case, s. 37 would be clearly attracted 12 ITA No. 572/JP/2017 M/s Associated Soapstone Distributing Co. Pvt. Ltd., vs. ACIT, Circle-5, Jaipur since the expenditure is not of capital nature and is exclusively incurred for the purpose of business and not of personal nature. Removal of overburden for excavating the mineral i.e., lignite does not bring any benefit of enduring nature or any asset into existence. Once the upper crust of earth known as overburden is removed that would go waste and lignite is excavated. No enduring benefit can be said to have arisen to the assessee by removal of such overburden.
14 In any case, we further find that such expenditure was held to be allowable even during the asset. yr. 1980-81 while giving direction under s. 144B of the Act i.e., after the introduction of provision of s. 35E. Further, the learned counsel for the assessee has produced by way of example the computation for the asst. yr. 1987-88 where similar expenditure was claimed and allowed. In these circumstances, we are of the view that the expenditure for removal of overburden would not fall under s. 35E of the IT Act and thus, we quash the revisionary order passed by the CIT under s. 263 of the IT Act..."
15. It was submitted that the ld. CIT(A) nowhere distinguished any of the judgments relied before his and in a summary manner, rejected the plea of the assessee company. Even if the said expenditure is considered to be included in sub-section (3) of section 35E, the same would 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 13 ITA No. 572/JP/2017 M/s Associated Soapstone Distributing Co. Pvt. Ltd., vs. ACIT, Circle-5, Jaipur 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] 45 Tax Cases 18, the assessee carried on the business of iron founders which was incorporated by a Charter granted to it in 1773. By passage of time many of its features had become archaic and unsuited to modern conditions and the company's commercial performance was suffering a progressive decline. The Charter of the company placed restriction on the company's borrowing powers and it placed restriction on voting rights of certain members. The company decided to petition for a supplementary Charter providing for the vesting of the management in board of directors and for the removal of the limitation on company's borrowing powers and restrictions on the issue and transfer of shares. The company's petition was contested by dissenting shareholders in the Court. The company settled the litigation under which it had to pay the cost of legal action and buy out the holdings of the dissenting shareholders and in pursuance thereof a supplementary Charter was granted. In assessment proceedings, the company claimed deduction of payments made by it towards the cost of obtaining the Charter, the amounts paid to the dissenting shareholders and expenses in the action. The Special Commissioner held that that the company was entitled to the deductions. On 14 ITA No. 572/JP/2017 M/s Associated Soapstone Distributing Co. Pvt. Ltd., vs. ACIT, Circle-5, Jaipur appeal the House of Lords held that since the object of the new Charter was to remove obstacle to profitable trading, and the engagement of a competent manager and the removal of restrictions on borrowing facilitated the day-to- day trading operation of the company, the expenditure was on income account. The House of Lords considered the test laid down by Lord Cave L.C. in British Insulated E Helsby Cables Ltd.'s case (supra) and held that the payments made by the company, were for the purpose of removing of disability of the company trading operation which prejudiced its operation. This was achieved without acquisition of any tangible or intangible asset or without creation of any new branch of trading activity. From a commercial and business point of view nothing in the nature of additional fixed capital was thereby achieved. The Court pointed out that there is a sharp distinction between the removal of a disability on one hand payment for which is a revenue payment, and the bringing into existence of an advantage, payment for which may be a capital payment. Since, in the case before the Court, the company had made payments 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 15 ITA No. 572/JP/2017 M/s Associated Soapstone Distributing Co. Pvt. Ltd., vs. ACIT, Circle-5, Jaipur 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...."
18. The ld DR has vehemently argued the matter and submitted that the ld CIT(A) has rightly invoked the provisions of section 35E and in view of that, the provisions of section 37(1) are not attracted in the instant case. He further relied upon the order of the lower authorities.
19. We have heard rival contentions, perused the material available on record and gone through the orders of the authorities below. The first issue under consideration is whether provisions of section 35E are attracted in the instant case and if the answer to the same is in affirmative, the provisions of section 37(1) would then get excluded as the latter covers expenditure other than expenditure described in section 30 to 36 of the Act. Secondly, where the answer is not in the affirmative, whether the provisions of section 37(1) are satisfied in the instant case and the assessee is eligible to claim the expenditure as revenue expenditure.
Applicability of Section 35E
20. The provisions of section 35E reads as under:
"35E. (1) Where an assessee, being an Indian company or a person (other than a company) who is resident in India, is engaged in any operations relating to prospecting for, or extraction or production of, any mineral and incurs, after the 31st day of March, 1970, any expenditure specified in sub-16 ITA No. 572/JP/2017
M/s Associated Soapstone Distributing Co. Pvt. Ltd., vs. ACIT, Circle-5, Jaipur section (2), the assessee shall, in accordance with and subject to the provisions of this section, be allowed for each one of the relevant previous years a deduction of an amount equal to one-tenth of the amount of such expenditure.
(2) The expenditure referred to in sub-section (1) is that incurred by the assessee after the date specified in that sub-section at any time during the year of commercial production and any one or more of the four years immediately preceding that year, wholly and exclusively on 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 on the development of a mine or other natural deposit of any such mineral or group of associated minerals :
Provided that there shall be excluded from such expenditure any portion thereof which is met directly or indirectly by any other person or authority and any sale, salvage, 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, 17 ITA No. 572/JP/2017 M/s Associated Soapstone Distributing Co. Pvt. Ltd., vs. ACIT, Circle-5, Jaipur 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 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 section 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 will not be available to a foreign company even if such company declares its dividends in India, and regardless of the pattern of its shareholding. It will also not be available to non-resident taxpayers generally.
50. The expenditure to be amortised under section 35E will be the expenditure incurred under the specified heads after 31-3-1970, during a 5- year period ending with the "year of commercial production", i.e., the 18 ITA No. 572/JP/2017 M/s Associated Soapstone Distributing Co. Pvt. Ltd., vs. ACIT, Circle-5, Jaipur previous year in which, as a result of any operation relating to prospecting commercial production of any one or more of the specified minerals or associated minerals commences. The term "operation relating to prospecting"
comprises operation undertaken for the purpose of exploring, locating or proving deposits of any mineral and in particular includes any such operation which turns out to be infructuous or abortive. Where the expenditure on prospecting for, or development of, the specified minerals is wholly or partly met directly or indirectly by any other person or authority, the amortisation will be admissible only in respect of the balance, if any, of such expenditure. Further, where any property or rights are brought into existence as a result of the expenditure and the assessee realises any sale, salvage, compensation or insurance moneys in respect of such property or rights, the amount so realised will be set off against the expenditure and only the balance, if any, will be eligible for amortisation.
51. The following categories of expenditure are specifically excluded from the expenditure eligible for amortisation under section 35E :
1. Expenditure on the acquisition of the site of the source of any of the specified minerals or groups of associated minerals or of any 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 19 ITA No. 572/JP/2017 M/s Associated Soapstone Distributing Co. Pvt. Ltd., vs. ACIT, Circle-5, Jaipur 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 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."
22. The above provisions thus provides for amortisation of expenditure on prospecting for any mineral or group of specified minerals or on the development of a mine or other natural deposit of any such mineral or group of associated minerals. Secondly, certain categories of expenditure have been excluded from the definition of eligible expenditure and the same are provided in sub-section (3) to section 35E. Thirdly, the expenditure to be amortised under section 35E will be the expenditure incurred under the specified heads during a 5-year period ending with the year of commencement of commercial production. For applicability of section 35E, the nature of expenditure and period of incurrence of such expenditure has to be satisfied cumulatively. Both the conditions are essential. In the instant case, the ld CIT(A) has looked at the nature of expenditure and stated that though provisions of 20 ITA No. 572/JP/2017 M/s Associated Soapstone Distributing Co. Pvt. Ltd., vs. ACIT, Circle-5, Jaipur section 35E are applicable, the expenditure doesn't qualify to be eligible expenditure and hence, no deduction is permissible. Per contra, the contention of the ld AR is that the expenditure under consideration has been incurred much after the start of the commercial production and hence, the second condition is not satisfied and in the process, the provisions of section 35E are not applicable in the instant case. As we have stated above, for applicability of section 35E, both the nature and period of incurrence of the expenditure are relevant. In the instant case, it is not in dispute that the year under consideration is not the year when the commercial production has started. The assessee has entered into lease agreement with the Government of Rajasthan way back in the year 2000 and thereafter, it has started commercial production and reported revenues to tax. In view of the same, given that the expenditure under consideration has been incurred much after the start of the commercial production, one of the conditions for invoking section 35E are not satisfied. We therefore need not examine the second condition 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:
21 ITA No. 572/JP/2017M/s Associated Soapstone Distributing Co. Pvt. Ltd., vs. ACIT, Circle-5, Jaipur "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 case have to be borne in mind in considering the question having regard to the nature of business,--its requirement and the nature of the advantage in commercial sense.
In the instant case, the assessee had been granted mining lease in respect of 4.27 square miles at Jamsar under which he had right to sink, dig, drive, quarry and extract mineral, i.e., the gypsum, and in that process he had right to dig the surface of the entire area leased out to him. Clause 3 of the Part III of the lease, however, placed a restriction on his right to mining operations from the Railway Area, but that area could also be operated by it for mining purposes with the permission of the authorities. The assessee had under the lease acquired full right to carry on mining operations in the entire area including the Railway Area. Under clause 3 he could carry on mining operations only after obtaining the permission of the authorities which had been granted by the Railway authorities. The payment of Rs. 3 lakhs was not made by the assessee for the grant of permission to carry on mining operations within the Railway Area, instead the payment was made towards the cost of removing the construction which obstructed the mining operations.
The presence of the railway station and railway track was operating as an obstacle to the assessee's business of mining, the assessee made the payment to remove that obstruction to facilitate the mining operations. On the payment made to the Railway authorities the assessee did not acquire any 22 ITA No. 572/JP/2017 M/s Associated Soapstone Distributing Co. Pvt. Ltd., vs. ACIT, Circle-5, Jaipur fresh right to any mineral nor he acquired any capital asset instead the payment was made by it for shifting the railway station and track which operated as hindrance and obstruction to the business of mining in a profitable manner. The assessee had already paid tender money, licence fee and other charges for securing the right of mining in respect of the entire area of 4.27 square miles including the right to mining under the Railway Area.
In considering the cases of mining business 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. In the instant case, existence of railway station, yard and buildings on the surface of the demised land operated as an obstruction to the assessee's business of mining. The Railway authorities agreed to shift 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 Rs. 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, 23 ITA No. 572/JP/2017 M/s Associated Soapstone Distributing Co. Pvt. Ltd., vs. ACIT, Circle-5, Jaipur obstruction or disability may result in acquiring benefits to the business, but that by itself would not acquire any capital asset.
25. In the instant case, during the relevant previous year, the assessee company paid an amount of Rs. 35,00,000, to Mr. Ranga, S/o Mr. Panchiya Meena. It is the contention of the AR that the amount has been paid as compensation to the land owner. The area for which compensation was paid forms part of the area which has already been leased out by the Government of Rajasthan to the assessee company and for which the assessee company had the right to carry out mining operations. It was contended that as the existence of the landowner on such land had the potential of obstructing the mining operations, the assessee company paid the compensation with a view to carry on its business activities smoothly and without any operational hindrances. It was further submitted that on payment of compensation, the landowner surrendered the land to the Government of Rajasthan and the land becomes exclusive property of Government of Rajasthan and mutated in the name of Government of Rajasthan in the revenue records. It was accordingly submitted that the assessee company didn't acquire the said piece of land by way of any new asset and the amount was spent merely for the purposes of removing the obstruction to facilitate the mining operations. In support of his contentions, the ld AR has submitted various documents such as undertaking for surrender of land by land owner, surrender Letter or Samarpan Patra executed by the Land owner, chain of events documented by Tehsildaar, letter written by Land Owner to Tehsildaar surrendering the land, report of Tehsildaar for verification of facts and evidence that the land surrendered by Mr. Ranga was mutated in the name of the Government of Rajasthan in the revenue records. It has been contended that all these documents were submitted before the ld CIT(A). In our view, these are relevant documents 24 ITA No. 572/JP/2017 M/s Associated Soapstone Distributing Co. Pvt. Ltd., vs. ACIT, Circle-5, Jaipur which have been brought on record by the assessee company to determine the exact nature of transaction and amount paid by the assessee company to the land owner. The ld CIT(A) has recorded a finding that during the previous year relevant to A.Y 2013-14, the appellant paid Rs. 35 lac to Shri Ranga who was having in his possession, a piece of land (Khasra No. 53, Araji No. 157, Rakba 3 bigha & 8 biswa), as this piece of land was part of the total area allotted by the government to the appellant for mining the soap stone. The appellant had in 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 Supreme Court in case of Bikaner Gypsum (supra), the assessee deserve to succeed in the instant case. The AO is therefore directed to allow the claim of deduction of Rs 35,00,000 u/s 37(1) of the Act. In the result, the ground of appeal is allowed.
25 ITA No. 572/JP/2017M/s Associated Soapstone Distributing Co. Pvt. Ltd., vs. ACIT, Circle-5, Jaipur In the result, appeal of the assessee is partly allowed.
Order pronounced in the open court on /08/2017.
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(Kul Bharat) (Vikram Singh Yadav)
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fnukad@Dated:- /08/2017.
Ganesh Kr.
vkns'k dh izfrfyfi vxzfs 'kr@Copy of the order forwarded to:
1. vihykFkhZ@The Appellant- M/s Associated Soapstone Distributing Co. Pvt.
Ltd., Jaipur
2. izR;FkhZ@ The Respondent- ACIT, Circle-05, Jaipur
3. vk;dj vk;qDr@ CIT
4. vk;dj vk;qDr@ CIT(A)
5. foHkkxh; izfrfuf/k] vk;dj vihyh; vf/kdj.k] t;iqj@DR, ITAT, Jaipur
6. xkMZ QkbZy@ Guard File {ITA No. 572/JP/2017} vkns'kkuqlkj@ By order, lgk;d iathdkj@Asst. Registrar