Income Tax Appellate Tribunal - Panji
M/S. Barmer Lignite Mining Co. Ltd., ... vs Deputy Commissioner Of Income Tax, ... on 12 October, 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. 534/JP/2017
fu/kZkj.k o"kZ@Assessment Year : 2012-13.
M/s Barmer Lignite Mining Co. Ltd. cuke Deputy Commissioner of Income
Sardar Patel Marg, C- Scheme, Vs. Tax,
Jaipur Circle-6,
Jaipur.
LFkk;h ys[kk la-@thvkbZvkj la-@PAN No. AADCB 0574 G
vihykFkhZ@Appellant izR;FkhZ@Respondent
vk;dj vihy la-@ITA No. 510/JP/2017
fu/kZkj.k o"kZ@Assessment Year : 2012-13.
Deputy Commissioner of Income cuke M/s Barmer Lignite Mining Corp. Ltd.
Tax, Vs. Sardar Patel Marg, C- Scheme,
Circle-6, Jaipur
Jaipur
LFkk;h ys[kk la-@thvkbZvkj la-@PAN No. AADCB 0574 G
vihykFkhZ@Appellant izR;FkhZ@Respondent
fu/kZkfjrh dh vksj ls@ Assessee by : Shri P.C. Parwal(CA)
jktLo dh vksj ls@ Revenue by : Smt. Rolly Agarwal(CIT)
lquokbZ dh rkjh[k@ Date of Hearing : 23.08.2017.
?kks"k.kk dh rkjh[k@ Date of Pronouncement : 12/10/2017.
vkns'k@ ORDER
PER SHRI KUL BHARAT, JM.
These two cross appeals by the Assessee and the Revenue are directed against the order of the Ld. CIT (Appeals)-2, Jaipur dated 29.03.2017 pertaining to Assessment year 2012-13. Both the appeals were taken up together and are being disposed of by way of consolidated order for the sake of brevity and convenience.
2ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
ITA No. 534/JP/2017 (Assessee)2. First, we take Assessee's appeal in ITA No. 534/JP/2017 pertaining to the A.Y. 2012-13.
The grounds raised by the Assessee are as under:-
"1. In the facts and circumstances of the case and in law, the Ld. CIT(A) erred in confirming the action of Ld. Assessing Officer in taxing interest receipt of R. 12,64,01,627/- credited to Capital Work in Process (CWIP), under the head income from other source as against the claim of assessee that the same should be reduced from expenditure incurred during construction period.
2. Without prejudice to the Ground No. 1, in the facts and circumstances of the case and in law, Ld. CIT(A) erred in confirming the action of Ld. Assessing Officer in not allowing deduction of the interest expenses of Rs. 17.94 crores, debited to the CWIP, against the said interest income assessed by him, though there being a direct nexus of interest paid on borrowed funds with the said interest receipt.
3. In the facts and circumstances of the case and in law, the Ld. CIT(A) erred in confirming the action of Ld. Assessing Officer in disallowing the mandatory CSR expenses of Rs. 95,08,197/- provided as per terms of environment clearance granted by Ministry of Environment & Forests (MoEF) which were incurred wholly and exclusively for purpose of business.
4. On the facts and in circumstances of the case as well as in law, the Ld. CIT(A) erred in confirming the action of Ld. Assessing Officer in disallowing the claim of the appellant for amortization of surface rights amounting to Rs. 8,18,38,172/-.
5. Without prejudice to the Ground No. 4, Ld. CIT(A) erred in not allowing depreciation on the surface rights being intangible rights acquired by the appellant.
6. Without prejudice to the Ground No. 4 & 5 above, Ld. CIT(A) erred in not allowing deduction u/s 35E of the Act in respect of expenses incurred by the appellant.
7. On the facts and in circumstances of the case and in law, the Ld. CIT(A) erred in confirming the action of Ld. Assessing Officer in disallowing depreciation claim of Rs. 42,49,575 in respect of intangible asset in the nature of business rights.3
ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
8. The appellant craves leave to add, amend, alter or modify any ground of appeal.
9. The appropriate cost be awarded to the assessee."
3. Briefly stated the facts of the case are that, the case of the assessee was picked up for scrutiny assessment and the assessment under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the Act) was framed vide order dated 25.02.2015. While framing the assessment, the AO made addition of Rs. 63, 44,181/- on account of disallowance of land tax paid on the ground that the assesee himself had stated that the amount had been deposited under the direction of the court and the matter was sub-judice before the Hon'ble Rajasthan High Court.
Hence, the Assessing Officer made addition on account of disallowance of Mine Closure charges of Rs. 4,70,80,000/-, the Assessing Officer also made addition on account of Interest on Deposits of Rs. 13,40,90,000/-, the Assessing Officer made other disallowance in respect of Corporate Social Responsibility Expenditure of Rs.
9508197/-, disallowance on Legal and Professional Expenses of Rs. 44,81,910/-, Upfront Fees paid of Rs. 52,58,106/-, Legal Expenses Paid to Industrial Development Financial Corporation Limited of Rs. 1,94,94,460/-, Difference in Claim of Depreciation for Rs. 8,18,38,172/-, disallowance on Depreciation on Intangible Assets of Rs. 42,49,575/-, Adjustment u/s 145A of the Act of Rs. 5,33,18,202/-.
Against this, the assessee preferred an appeal before Ld. CIT(A), who after considering the submissions, partly allowed the appeal. While partly allowing the appeal, the Ld. CIT(A) deleted the addition made on account of land tax paid and deleted the addition made on account of mine-closure charges, confirmed the addition made on account of interest credited to the capital work in progress of Rs.
4ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
13,40,90,000/-, confirmed the addition made on account of disallowance of Corporate Social Responsibility Expenditure of Rs. 9508197/-, confirmed the addition of Rs. 8,18,3,172/-, confirmed the depreciation on intangible assets of Rs.
42,49,575/-. However, deleted the addition made on account of adjustment to the closing stock of u/s 145A of Rs. 5,33,18,202/-.
4. Aggrieved by this, both Assessee and Revenue are in separate appeal.
5. The Ground No. 1 and 2 are inter-related and are against the taxing interest receipt.
5.1 Ld. Counsel for the assessee strongly urged that the authorities below were not justified in taxing the interest receipts. Ld. Counsel reiterated the submissions as made in the written submissions. For the sake of clarity and convenience the written submissions of the assessee are reproduced herein below:-
"Submission:-
1. It is a fact on record that almost the entire funds of the assessee are borrowed funds (PB 324). From the Balance Sheet it can be noted that the share capital of the assessee is only Rs.20 crores. Out of this capital, 51% capital (i.e. Rs.10.20 crores) is allotted to RSMML in form of shares issued for consideration other than cash and 49% capital (i.e. Rs.9.80 crores) is allotted to RWPL in cash.
The borrowed funds are Rs.1220.34 crores which is borrowing from the banks or the subordinate loans from RWPL. Thus, the entire project has been funded out of interest bearing funds. The term loan has been obtained from bankers/ financial institutions at an average borrowing cost of 13% and the subordinated loan has been taken at a rate of 10%.
2. It is the above borrowed funds which have been utilised for depositing in Escrow Account for the purpose of acquiring land by RSMML and interest paid on such borrowing has been charged to CWIP. On the amount so deposited in the 5 ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
Escrow Account in the name of RSMML, the interest received is inextricably linked to the cost of the project and therefore, such interest income cannot be charged to tax as income from other sources but needs to be reduced from the cost of the project. Even the Government in its letter dt. 11.07.2011 (PB 193) has stated that expenditure related to LAO and expenditure incurred by RSMML can be adjusted against the interest accrued on the amount deposited by the assessee. Thus, it is a case of borrowed funds advanced to RSMML (the entity authorized to acquire the land for the assessee for its mining project as per Implementation Agreement) yielding interest income till it is utilized towards the project. The case of the assessee is therefore, directly covered by the ratio of decision of Supreme Court in case of CIT Vs. Bokaro Steels Ltd. 236 ITR 315 where at Para 5, it is held as under:-
"The activities of the assessee in connection with all three receipts viz. Rent charged by the assessee to its contractors for housing workers and staff employed by the contractor for the construction work of the assessee including certain amenities granted to the staff by the assessee; secondly, hire charges for plant and machinery which was given to the contractors by the assessee for use in the construction work of the assessee and thirdly, interest from advances made to the contractors by the assessee for the purpose of facilitating the work of construction are directly connected with or are incidental to the work of construction of its plant undertaken by the assessee. Broadly speaking, these pertain to the arrangements made by the assessee with its contractors pertaining to the work of construction. To facilitate the work of the contractor, the assessee permitted the contractor to use the premises of the assessee for housing its staff and workers engaged in the construction activity of the assessee's plant. This was clearly to facilitate the work of construction. Had this facility not been provided by the assessee, the contractors would have had to make their own arrangements and this would have been reflected in the charges of the contractors for the construction work. Instead, the assessee has provided these facilities. The same is true of the hire charges for plant and machinery which was given by the assessee to the contractor for the assessee's construction work. The receipts in this connection also go to compensate the assessee for the wear and tear on the machinery. The advances which the assessee made to the contractor to facilitate the construction activity of putting together a very large project was as much to ensure that the work of the contractors proceeded without any financial hitches as to help the contractors. The arrangements which were made between the assessee-company and the contractors pertaining to these three receipts are arrangements which are intrinsically connected with the construction of its steel plant. The receipts have 6 ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
been adjusted against the charges payable to the contractors and have gone to reduce the cost of construction. They have, therefore, been rightly held as capital receipts and not income of the assessee from any independent source."
3. In the above decision, Hon'ble Supreme Court distinguished the decision in case of Tuticorin Alkali Chemicals & Fertilizers Ltd. Vs. CIT by giving the following findings at Para 7 of his order:-
"The appellant, however, relied upon the decision of this Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT (supra). That case dealt with the question whether investment of borrowed funds prior to commencement of business, resulting in earning of interest by the assessee would amount to the assessee earning any income. This Court held that if a person borrows money for business purposes, but utilizes that money to earn interest, however temporarily, the interest so generated will be his income. This income can be utilized by the assessee whichever way he likes. Merely because he utilised it to repay the interest on the loan taken, will not make the interest income as a capital receipt. The Department relied upon the observations made in that judgment (at p. 179) to the effect that if the company, even before it commences business, invests surplus funds in its hands for purchase of land or house property and later sells it at profit, the gain made by the company will be assessable under the head "capital gains". Similarly, if a company purchases rented house and gets rent, such rent will be assessable to tax under s. 22 as income from house property. Likewise, the company may have income from other sources. The company may also, as in that case, keep the surplus funds in short-term deposits in order to earn interest. Such interest will be chargeable under s. 56 of the IT Act. This Court also emphasised the fact that the company was not bound to utilise the interest so earned to adjust it against the interest paid on borrowed capital. The company was free to use this income in any manner it liked. However, while interest earned by investing borrowed capital in short-term deposits is an independent source of income not connected with the construction activities or business activities of the assessee, the same cannot be said in the present case where the utilisation of various assets of the company and the payments received for such utilisation are directly linked with the activity of setting up the steel plant of the assessee. These receipts are inextricably linked with the setting up of the capital structure of the assessee-company. They must, therefore, be viewed as capital receipts going to reduce the cost of construction. In the case of Challapalli Sugars Ltd. vs. CIT 1974 CTR (SC) 309 : (1975) 98 ITR 167 (SC) :
TC 17R.834, this Court examined the question whether interest paid before the commencement of production by a company on amounts borrowed for the acquisition and installation of plant and machinery would form a part of the actual cost of the asset to the assessee within the meaning of that expression in s. 10(5) of the Indian IT Act, 1922, and whether the assessee will be entitled to depreciation allowances and development rebate with reference to such interest 7 ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
also. The Court held that the accepted accountancy rule for determining cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditure. By the same reasoning if the assessee receives any amounts which are inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. These are receipts of a capital nature and cannot be taxed as income."
4. The AO inspite of the decision of Bokaro Steel Ltd. cited before him has not given any finding as to how the ratio of this decision is not applicable to the facts of the assessee's case. Infact the AO himself has observed that there was no motive of the assessee to invest the funds with an intention to earn the income by way of interest though he has incorrectly mentioned that the escrow account is maintained by RSMML on behalf of the assessee. The Ld. CIT(A) though observed that in case of Bokaro Steel Ltd., interest received from contractors on advances given to him was held to deductible from the project cost because the same was directly relatable to the execution of the contract for the successful completion of the project but still did not place anything on record as to how the amount given to RSMML for acquiring the mining rights in the land on which interest is refunded by RSMML to the assessee is not inextricably linked to the project.
5. Similar issue has been decided by Hon'ble ITAT, Jaipur Bench in case of Road Infrastructure Development Company of Rajasthan Ltd. VS. DCIT in ITA No.628/JP/14 order dt. 11.08.2016 where after considering the various decisions of Supreme Court and High Court on this issue, it was held as under:-
"2.18 From the above, it is evident that there are two sets of judgments of Hon'ble Supreme Court, proceeding on different lines of reasonings. The Hon'ble Delhi High Court in case of Indian Oil Panipat Consortium Ltd (supra) has considered and interpreted the decisions of Hon'ble Supreme Court in case of Tuticorin Alkali Chemicals & Fertilizers (supra) as well as Bokaro Steel L2td 8 ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
(supra). After analyzing both the decisions of Hon'ble Supreme Court, it held that "the test which permeates through the judgment of the Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd.'s case (supra) is that if funds have been borrowed for setting up of a plant and if the funds are 'surplus' and then by virtue of that circumstance they are invested in fixed deposits the income earned in the form of interest will be taxable under the head 'income from other sources'. On the other hand the ratio of the Supreme Court judgment in Bokaro Steel Ltd.'s case (supra) to our mind is that if income is earned, whether by way of interest or in any other manner on funds which are otherwise 'inextricably linked' to the setting up of the plant, such income is required to be capitalized to be set off against pre-operative expenses.
2.19 The facts in the instant case are pari materia with the facts of the Indian Oil Panipat (supra) and the ratio decidendi of Hon'ble Delhi High Court in that case will squarely apply to the facts of the assessee. In the instant case, undisputedly, the funds have been borrowed for the specific purpose of execution of the mega road projects and as per the loan agreement executed between the consortium of bankers and the assessee dated 23.11.2005, all the disbursements shall be deposited in the trust and retention account which shall be subject to strict control and verification by the Senior lenders and all disbursements shall be utilized solely for the purposes of implementation of the project and no other purpose. The funds are thus inextricably linked to the setting up of the mega road projects and interest earned on such borrowed funds infused in the business could not be classified as income from other sources. We also note a distinguishing feature in the instant case that the assessee is not at liberty to use the interest so earned as per its will and discretion unlike the case in Tuticorin Alkali Chemicals & Fertilizers (supra) and the interest has to be used solely for the purposes of implementation of the specified projects only. The impugned interest receipt of Rs. 35,39,479/- on such borrowed funds relates to the mega road projects/stretches which were under construction and the completed road projects/stretches upto the date of commencement of commercial operations. Therefore, the interest received prior to commencement of commercial operations of the specified mega road projects will be in the nature of capital receipt and will be required to be set off against the pre-operative expenditure capitalized under the head "Capital work in progress" and the same cannot be brought to tax under the head "income from other sources."
6. The decisions relied by Ld. CIT(A) reported in 31 taxmann.com 165 (Hyd.), 16 taxmann.com 242 (Bom.), 234 ITR 412 (SC) and 248 ITR 110 (SC) all related to the case of interest earned on surplus fund out of the borrowed capital not required for the project. These cases are therefore, not applicable as in the case of the assessee, it has not invested the funds out of the borrowed capital rather the borrowed capital is provided to RSMML, the contractor, to acquire the mining 9 ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
rights in land and on the funds so provided for the project, interest is received from RSMML as reimbursement which is inextricably linked to the cost of the project. Therefore, subsequent decision of Supreme Court in case of CIT Vs. Karnal Co-operative Sugar Mills Ltd. 243 ITR 2 where it is held that interest earned during construction period on money deposited to open letter of credit for purchase of machinery is incidental to acquisition of assets and has to be capitalised and the 3 judges decision of Supreme Court in case of CIT Vs. Karnataka Power Corporation 247 ITR 268 where it is held that hire charges realised by assessee for plant and machinery given to contractors for use in construction work and interest charged on advances made to them were capital receipts which reduced the capital cost, is applicable.
7. It is submitted that Hon'ble Rajasthan High Court in case of CIT Vs. Bhawal Synthetics India Ltd. reported in 152 DTR 273 at para 6 of the order held that where FD is made for obtaining the letter of credit to purchase machinery, the interest earned on FDR is nothing but income from other sources. However, in this case, nobody appeared from the side of the assessee and the subsequent decision of Supreme Court in case of CIT Vs. Karnal Co-operative Sugar Mills Ltd. where it was held that interest earned by the assessee on deposits against margin money required for obtaining letter of credit or bank guarantee, etc. is not taxable income but a capital receipt and the same be adjusted against the project cost, was not brought to its notice. Thus, this decision of Hon'ble Rajasthan High Court is per incuriam.
8. Without prejudice to above, it is submitted that there is a direct nexus of the borrowed funds having been advanced to RSMML (PB 209, 308 to 317 & 211 to 262) for acquiring the mining right in the land and the refund of interest by it to the assessee on the interest earned by it on such funds. The interest cost incurred by the assessee on such borrowing is Rs.17.94 crores whereas the interest earned is only Rs.12.64 crores. Therefore, if such interest received is taxed as income from other sources, the interest expenditure incurred is 10 ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
allowable u/s 57. The Ld. CIT(A) without appreciating the evidences produced before her has incorrectly held that direct nexus of interest bearing funds to the specific deposits which earned interest has not been proved.
In view of above, the addition of Rs.12,64,01,627/- confirmed by Ld. CIT(A) by holding that interest income is to be taxed as income from other sources be directed to be deleted."
5.2 Ld. D/R opposed the submissions and supported the orders of the authorities below. Ld. D/R submitted that, admittedly, the interest is earned on unutilized amount lying with RSMML. As per the assessee's own sharing this amount is paid to the assessee on the direction of Rajasthan Government.
5.3 We have heard the rival contentions, perused the material available on record and gone through the order of the authorities below. The Assessing Officer made addition on the basis that the assessee earned interest on FDR of sum of Rs.
13,40,90,000/-. This amount was credited by the assessee company as capital work in progress on the ground that it is purely with regard to mining project as corresponding interest cost incurred by the company for earning such interest is also forming part of capital work in progress in short CWIP. Ld. Counsel for the assessee vehemently argued that this act of the authorities below is contrary to the Judgments of the Hon'ble Supreme Court rendered in the case of the CIT vs. Bokaro Steels Ltd. 236 ITR 315. Ld. CIT(A) who confirmed this addition by following the Judgments of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemical & Fertilizers Ltd. Vs. 227 ITR 172. Further, Ld. CIT(A) followed the Judgments of the Hon'ble Supreme Court rendered in the case of CIT vs. Autocast Ltd. 248 ITR 110 11 ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
(SC). There is no dispute with regard to the fact that the amount so credited is interest earned on money which was given by the assessee to Rajasthan State Mines and Minerals Ltd. in short RSMML a Government of Rajasthan Undertaking. We are unable to accept the submissions of the Ld. Counsel for the assessee, in view of the Judgments of the Hon'ble Supreme Court rendered in the case of CIT vs. Tuticorin Alkali Chemicals & Fertilizers Ltd. (Supra), CIT vs. Autocast Ltd. (Supra) Hon'ble Supreme Court in the case of CIT vs. Autocast Ltd. 248 ITR 110 (SC) following the ratio laid in the case of M/s Tuticorin Alkali Chemicals & Fertilizers vs. CIT held as under:-
"The question that was before the High Court (see [1998] 229 ITR 789) read thus (page 790) "Whether, on the fact and in the circumstances of the case, the interest income is not assessable to tax in the hands of the appellant?"
The High Court answered the question against the Revenue. The Revenue is in appeal by special leave.
It is not now in dispute that the appeal must succeed, having regard to the Judgment of this court in Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT [1997] 227 ITR 172.
The civil appeal is accordingly allowed. The Judgment and order under challenge is set aside. The question is answered in the negative and in favour of the Revenue. In other words, the interest income is assessable to tax in the hands of the assessee.
No order as to costs."
5.4 In view of the above Judgment, the submissions of the assessee that interest earned on deposit should not be taxed as the income from other sources is devoid of any merit, hence rejected.
12ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
Another submissions of the assessee as Ground No. 2, it is contended by the assessee that in earning this income the assessee has incurred expenditure that which allowable u/s 57 of the Act. It is contended that the interest cost incurred by the assessee of such borrowing is Rs. 17.94 crores whereas the interest earned is only Rs. 12.64 crores. We have given our thoughtful consideration to this submission of the Ld. Counsel for the assessee has per Section 57 of the Act. As per section 57 of the Act income chargeable under the head "Income from the other sources" shall be computed after making the deductions of expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income.
Therefore, the asessee is required to demonstrate for the purpose of claiming deduction of expenditure that such expenditure was wholly and exclusively incurred or expended for earning such income. The assessee is required to prove nexus between the expenditure and the income so earned. Under these facts, we deem it proper and in the interest of justice to restore this issue to the file of the Assessing officer for verification of the claim of the assessee that it had incurred expenditure for earning income which has been taxed by the AO under the head income from the other sources. Ground no. 2 of the assessee's appeal is allowed for statistical purpose.
6. Ground no. 3, is against confirming the addition of Rs. 95,08,197/- made on account of disallowance of CSR expenses.
6.1 Ld. Counsel for the assesee submitted that Ministry of Environment & Forests vide its letter dated 10.12.2008 while according the environmental clearance for Kapurdi Lignite Mine Project has put certain specific conditions. One of the 13 ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
conditions enumerated was that provisions of at least Rs. 2 crores per annum recurring expenditure shall be made in consultation with local communities towards CSR activities till the end of mine life. This shall include construction of biomass plants, solar heaters etc. for the surrounding villages. In pursuance of the said term a proportionate provision of Rs. 0.95 crores was made during the year under appeal.
Ld. Counsel for the assessee submitted that the Assessing Officer in incorrectly mentioned that assessee has failed to bring any concrete material to prove its contention that the same has been incurred to obtain environment clearance from Pollution Control Board for carrying out the mining activities at various mining sites by ignoring the letter dt. 10.12.2008 of Ministry of Environment and Forests where the environment clearance was making provisions for such expenditure.
6.2 Ld. Counsel placed reliance on the decision of the Co-ordinate Bench rendered in the case of ACIT vs. Jindal Power Ltd. 138 DTR 313, Sri Venkata Satyanarayana Rice Mill Contractor vs. CIT 223 ITR 101 (SC), Judgments of the Hon'ble Supreme Court in the case of ACIT vs. Rajasthan Spinning & Weaving Mills Ltd. 274 ITR 463 (Raj.), CIT vs. Rupsa Rice Mill 104 ITR 249 (Orissa) (SC).
6.3 On the contrary, Ld. Departmental Representatives opposed the submissions, and supported the order of the authorities below.
6.4 We have heard the rival contentions; the issue requires to be adjudicated is whether for provisioning of certain expenses under the contract is allowable expenditure. Law is well settled that deduction is allowable for business expenditure if it is expended wholly and exclusively for business purpose. As per the assessee such provision is required to be made in furtherance of conditions laid down by the 14 ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
Ministry of Environment & Forest. It is stated that expenditure is not in the nature of the CSR expenses as mentioned in the Section 135 of the Companies Act, 2013.
6.5 We have given our thoughtful considerations to the rival contentions, in our view, a provision for expenditure is allowable if the assessee proves that such expenditure is required to be laid down on the basis of past experience and deduced scientifically. There is no dispute with regard to the fact that no expenditure is made during the year under appeal. The assessee has also not stated past history or the past experience. Therefore, there is no basis available for arriving at the figure of expenditure so claimed under these facts; we are unable to accept the contentions of the Ld. Counsel for the assessee. Hence, the finding of the Ld. CIT(A) is hereby affirmed on this issue. This Ground of the assessee's appeal is dismissed.
7. Ground no. 4 & 5 are inter-related, therefore are being disposed of together.
7.1 Ld. Counsel for the assessee reiterated the submissions as made in the written submissions. For the sake of clarity the submissions of the assessee are reproduced herein below:-
" Submission:-
1. It is submitted that all minerals vest in the State. These minerals lie beneath the land. The surface of the land may be in the possession of third party whether as owners or in the capacity of being statutory agricultural tenants/khatedars/khastakars. Therefore, unless the land is possessed by the State, it cannot handover the possession of the land to facilitate mining operations. Accordingly, in terms of IA and JV agreement, RSMML applied to GOR for acquisition of land in possession of third parties who resorted to the provision 15 ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
of the Land Acquisition Act for securing possession of the land. In the process, compensation was paid to the third party occupying the land to extinguish their right and the possession over the land was hand over to RSMML and the mutation in the Government records is made in the favour of RSMML as lessee, Government being the lessor.
2. The GOR vide letter dated 04.09.2012 (PB 265) has clarified that the impugned land will not be transferred to assessee neither it would be allowed to create any charge or mortgage on the said project land mutated in favour of RSMML for any financing purposes. This proves, in no uncertain terms, that assessee does not have any ownership or associated right over the project land and the expenditure incurred by it is only to secure mining activity rights for a limited period of mining lease i.e. upto 28-12-2040. Thus, assessee does not have any right of ownership in the impugned land except conducting mining activities and extraction of lignite, maximum quantity to be extracted which is also specified, for limited purpose of supply of same to designated power plants.
3. Thus, on payment of compensation by the assessee through RSMML, what the assessee acquire is only the surface right for doing mining as a sub-licensee of RSMML. The title in the land is not transferred in favour of RSMML by executing a conveyance and therefore, the question of RSMML transferring it in favour of the assessee do not arise. This basic aspect has been overlooked by both the lower authorities in holding that assessee has ownership right over the land or that RSMML being a majority stakeholder in the assessee, effectively the land is in the possession of the assessee as owner. Thus, it is an erroneous presumption of the lower authorities that assessee is the owner of the land.
4. The AO has observed that the land is not a depreciable asset and therefore, there is no question of allowability of depreciation over the same. In observing so he ignored that assessee has not claimed any depreciation but has claimed amortization so that the expenditure incurred on acquiring the surface right over 16 ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
the land for doing the mining is spread over the period of 30 years for which such right is available to the assessee. It may be noted that the sole purpose of the expenditure incurred by the assessee is for extraction of mineral resources and extraction of such mineral is the only economic use of the right which it acquired over the land. Therefore, the useful life of the right over the land, considering the matching concept of accountancy, has to be charged off over the lease period of such land to arrive at the correct profits for the year. Such amortization of right over the land is an expenditure incurred wholly and exclusively for the purpose of business and therefore, the same is allowable u/s 37(1). The concept of amortization of expenditure is also recognized by the Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. Vs. CIT 225 ITR 802. In this case, company issued debentures at a discount, redeemable at par after 12 years. The Hon'ble Court held that the difference between the issue price and redeemable price is revenue expenditure allowable proportionately over the life of the debentures. Hon'ble Gujarat High Court in the case of DCIT Vs. Sun Pharmaceuticals Ind. Ltd. 329 ITR 479 where lease rent of Rs.48,02,616/- was paid @ Rs. 40 per year to the State Industrial Development Corporation for use of land for 99 years, allowed the same by holding as under:-
"The Tribunal has found that land in question was not acquired by the assessee. Merely because deed was registered, the transaction in question would not assume a different character. The lease rent was very nominal. By obtaining the land on lease the capital structure of the assessee did not undergo any change. The assessee only acquired a facility to carry on business profitably by paying nominal lease rent. In the light of the aforesaid findings of fact and the ratio of the apex court decisions, the court does not find this to be a case which warrants interference. Even the Assessing Officer has recorded that the payment was for use of land. There is no legal infirmity committed by the Tribunal."
5. The Ld. CIT(A) has relied on the decision of ITAT, Jaipur Bench in case of RSMM Ltd. Vs. ACIT in ITA No.144 & 124/JP/2014 dt. 12.02.2016. In this decision also, it 17 ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
is held that expenses laid by the assessee for the purpose of getting the mining land and leasehold land are required to be treated as capital expenditure but the AO is directed to give all benefits as capital expenditure. Though the facts of the assessee's case is different than that in the above case in as much as assessee is only a sub-licensee and neither the leasehold right in the land is transferred in its name nor it has any right to create mortgage of the mining leases, but still even as per the ratio of above decision, if it is held that expenditure is capital in nature, then the benefit of the capital expenditure is to be allowed. Therefore, in view of this direction, the expenses incurred by the assessee for acquiring the right over the land to carry out the mining needs to be allowed over its useful life.
6. It is submitted that as per clause 6.1 & 6.4 of the IA (PB 48), the entire project of the mining is done on build, own, operate & maintain basis. It is permitted to mine the lignite only to the extent it is required for power generation by the power plant. No sale of lignite by the assessee is permitted. Thus, the assessee has only a limited right and that too for a period of 30 years only. The CBDT in Circular No.9/2014 dt. 23.04.2014 with reference to treatment of expenditure incurred for development of roads/highways in BOT agreements has clarified in para 3 to 8 as under:-
"3. In BOT arrangements for development of roads/highways, as a matter of general practice, possession of land is handed over to the assessee by the Government/notified authority for the purposes of construction of the project without any actual transfer of ownership and such assessee has only a right to develop and maintain such asset. It also enjoys the benefits arising from use of asset through collection of Toll for a specified period without having actual ownership over such asset. Therefore, the rights in the land remain vested with the Government or its agencies. Thus, as the assessee does not hold any rights in the project except recovery of toll fee to recoup the expenditure incurred, it cannot therefore be treated as an owner of the property, either wholly or partly, for purposes of allowability of depreciation u/s 32(1)(ii) of the Act. Thus, present 18 ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
provisions of the Act do not allow claim of depreciation on Toll ways due to non- fulfilment of ownership criteria in such cases.
1. There is no doubt where the assessee incurs expenditure on a project for development of roads/highways, he is entitled to recover cost incurred by him towards development of such facility (comprising of construction cost and other pre-operative expenses) during the construction period. Further, expenditure incurred by the assessee on such BOT projects brings to it an enduring benefit in the form of right to collect the toll during the period of the agreement. Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT 225 ITR 802 allowed spreading over of liability over a number of years on the ground that there was continuing benefit to the company over a period. Therefore, analogously, expenditure incurred on an infrastructure project for development of roads/highways under BOT agreement may be treated as having been made/incurred for the purposes of business or profession of the assessee and same may be allowed to be spread during the tenure of concessionaire agreement.
2. In view of above, Central Board of Direct Taxes, in exercise of the powers conferred under section 119 of the Act hereby clarifies that the cost of construction on development of infrastructure facility of roads/highways under BOT projects may be amortized and claimed as allowable business expenditure under the Act.
3. The amortization allowable may be computed at the rate which ensures that the whole of the cost incurred in creation of infrastructural facility of road/highway is amortized evenly over the period of concessionaire agreement after excluding the time taken for creation of such facility.
4. In the case where an assessee has claimed any deduction out of initial cost of development of infrastructure facility of roads/highways under BOT projects in 19 ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
earlier year, the total deduction so claimed for the Assessment Years prior to the Assessment Year under consideration may be deducted from the initial cost of infrastructure facility of roads/highways and the cost 'so reduced' shall be amortized equally over the remaining period of toll concessionaire agreement.
5. It is hereby clarified that this Circular is applicable only to those infrastructure projects for development of road/highways on BOT basis where ownership is not vested with the assessee under the concessionaire agreement."
In view of the ratio laid down in the above circular, the expenditure incurred by the assessee for obtaining surface rights over the land for mining for a period of 30 years is required to be allowed on amortization basis over the said period.
7. It is further submitted that similar issue has arisen in case of Mangalam Cement Ltd. where the AO did not allowed the claim of the assessee in respect of compensation paid to the farmers for acquiring the land for mining over the period of lease. The Ld. CIT(A) allowed the claim of the assessee against which revenue filed before the ITAT. Hon'ble ITAT in ITA No.425/JP/2014 dt. 29.06.2017 for AY 2010-11 at para 10.1 to 10.3 held as under:-
"10. Ground No.1, is against directed the AO to allow expenditure in 20 annual instalments of compensation paid to the farmers.
10.1 Ld. Departmental Representatives supported the Assessment order and submitted that the Ld. CIT(A) was not justified in giving the direction or allowing the expenditure over a period of 20 years.
10.2 On the contrary, the Ld. Counsel for the assessee supported the order of the Ld. CIT(A) and submitted that the AO disallowed the expenditure on the basis that the expenditure was incurred to protect the long-term exploitation right over the huge area of mining land is of capital in nature and as such not be allowed u/s 20 ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
37(1) of the Act. Ld. Counsel placed reliance on the Hon'ble Delhi High Court rendered in the case of Shankar Das Sethi & Sons Vs. CIT 157 ITR 770 (Del.), the reliance in also placed on the decision of the Tribunal rendered in the case of ACIT Vs. Rajasthan State Mines & Minerals Ltd. 144/JP/2014.
10.3 We have heard the rival contentions, perused the material available on record. The Ld. CIT(A) has given a finding on fact by observing as under:-
"In my opinion, the main purpose of acquiring the land was to extract lime stones which is the raw material for assessee. After extraction the land become unusable for any other purpose.
The assessee cannot use this land perpetually as in the case of a normal agriculture or residential land, this land can be used till its deposits (i.e. lime stone) lasts. Therefore, I agree with the findings of the AO in AY 2008-09 wherein he allowed such expenditure in 20 equal instalments.
Considering the above, the AO is directed to allow the expenditure equally in 20 years including the current year. Therefore, addition of Rs.46,56,887/- is confirmed. The AO is directed to allow expenditure of Rs.2,45,099/-."
There is no dispute with regard to the fact the AO himself had allowed expenditure in 20 equal instalments in AY 2008-09. In the year under appeal, the Revenue has not demonstrated the change into the facts and the reason for changing the stand. Therefore, we did not see any reason to interfere into the order of Ld. CIT(A), same is hereby affirmed. This ground is dismissed."
8. Alternatively, the right which the assessee has acquired over the land is only a right to mine lignite for 30 years for use only for power generation in Bhadresh (Barmer Power Plant) as specified in letter dt. 30.03.2011 issued by GOR. Thus, this right is a commercial right in the nature of licence whereby Government has given permission to the assessee to mine the lignite for specific purpose and for the specified period. Such right is an intangible asset as defined in section 2(11) 21 ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
of the IT Act where intangible asset is defined as being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. An intangible asset is eligible for depreciation u/s 32(1)(ii) of the Act. The ITAT Hyderabad Bench in case of NMDC Ltd. Vs. JCIT 43 CCH 491 in similar facts at para 20-22 of its order held as under:-
"20. Before us, the learned AR of the assessee submitted that the accounting policy/method is consistently followed by number of years and, therefore, the same may be allowed as deduction. He relied on the following case laws:
1. East India Minerals Ltd. Vs. JCIT, ITA No. 224/CTK/2012.
2. Mysore Minerals Ltd. Vs. ACIT, ITAT, Bangalore 100% allowed as revenue expenditure.
3. Jitendra Pathiak Vs. DCIT, ITA No. 185/CTK/2010
21. The learned DR has relied on the order of the CIT(A).
22. We have heard the arguments of both the parties and perused the record as well as gone through the orders of the authorities below. Similar came up for consideration before the coordinate bench of ITAT, Cuttack in case East India Minerals Ltd. Vs. JCIT in ITA No. 224/CTK/2012, vide its order dated 25/06/2012, on which reliance placed by the assessee, wherein it has been held as follows:
"7. We have heard the rival contentions of the parties and perused the material available on record. Considering the facts and circumstances of the case, we uphold the contention of the learned Counsel for the assessee for the simple reason that the denial of claim of depreciation has been made on misinterpretation of law and the applicability thereof. Explanation to Section 32(1)(ii) leans in favour of the assessee to the extent that it is the actual action of put to use which entitles the assessee to claim depreciation. A straight line method of claiming the writing off of lease hold rights for the period of lease 22 ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
cannot be denied to the assessee for the simple reason it being intangible asset has been written off which pertains to land being a intangible asset. It is nobody's case that the land either belonged to the lessee or to the Government. This simply indicates that a depletion of the land against the payment of premium it was leased has to be claimed after capitalization thereof by the assessee which is for the purpose of its main business. All expenses are incurred for the purpose of business and are incidental to the holding of rights were claimed u/s.32(1)(ii) being the license to carry out the mining therefore could not be denied insofar as the Government and the lessee are in control of the asset. The definition of depreciation therefore has been misconstrued for the purpose of allowing deduction by the Assessing Officer and the learned CIT(A) in holding a view on the promulgation of Section 32(1)(ii) with effect from the year 1998-99 which has been further amended w.e.f. Assessment Year 2003-04. In this view of the mater, we are inclined to hold that the assessee is entitled to depreciation as charged to the P & L account in accordance with its business exigencies. We direct accordingly. On the claim of deduction/s.80G, the A.O., is directed to verify the receipts and allow the deduction in accordance with the provisions of Income-tax Act, 1961."
22.1 Since the issue under consideration is materially identical to that of the case decide by the Tribunal in the case of East India Minerals Ltd., respectfully following the same, we set aside the order of the CIT(A) and direct the AO to delete the addition made in this regard."
9. The Ld. CIT(A) in this connection relied on the decision of ITAT, Bangalore Bench in case of M/s Cyber Park Development & Construction Ltd. (supra). In this case assessee was engaged in business of development and maintenance of infrastructure facilities for software and related sectors. For this purpose, it had taken land on lease for period of 66 years from Software Technological Park of India (STPI). In consideration of granting leasehold rights, assessee-company developed 42,665 sq.ft. of space for use by STPI in terms of agreement entered into by it with STPI. Cost of development of this space was treated as cost of 23 ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
leasehold rights treating as intangible asset and depreciation was claimed on this. On these facts it was held that term 'intangible assets' had been defined being know-how, patents, copy rights, trade marks, license, franchises or any other business or commercial rights of similar nature. Obviously, leasehold rights on land did not fall in category of above categories. It did not fall even in residuary category of any other business or commercial rights of similar nature. Because term 'rights of similar nature' qualified that even to fall under residuary clause, it should be in nature of above know-how, patents, copy-rights, trade marks license or franchise. Applying rule of ejusdem generis even to fall within residuary category it should be in nature of rights enumerated above. Right of enjoyment to immovable property under lease was immovable property within meaning given in sec.103 of Transfer of Property Act. Therefore, by virtue of lease only, an interest in land is created which does not qualify for allowance of depreciation.
From the above it can be noted that the facts of this case are entirely different. In this case the assessee was allowed the leasehold right for enjoyment of land whereas in the case under consideration, the surface right of land was given for mining the lignite for specific purpose and not for enjoyment of land as such. Therefore, the ratio laid down in the case relied by the Ld. CIT(A) is not applicable to the case of the assessee. As against this, the cases relied by assessee with reference to Ground No.7 are applicable to the facts of the case and be considered.
10. So far as the alternate ground for allowing claim u/s 35E is concerned, the same is not pressed.
In view of above, AO be directed to allow the amortization of expenditure to the assessee or alternatively, to allow depreciation as intangible asset."
24ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
7.2 On the contrary, Ld. D/R opposed the submissions and placed reliance on the decision of the CIT(A). Ld. CIT(A) has decided the issue in para 7.3 of the order as under:-
"7.3 I have considered the facts of the case, assessment order and the written submissions of the appellant. As noted an amount of Rs. 9,56,28,198/- had been claimed as depreciation on fixed assets which included an amount of Rs. 8,18,38,172/- on amortization expenses. The Assessing Officer concluded that the land was not a depreciable asset, the claim could not be allowed under section 32(1)(ii) of the I.T. Act, 1961 and also not under section 35E of the I.T. At, 1961.
The facts of this issue are that under the implementation Agreement between Government of Rajasthan and M/s RWPL, the mining leases were to be transferred to the JV company of M/s RSMML, and M/s RWPL i.e. the appellant and the financial obligation were to be fulfilled by M/s RWPL. The lease for Kapurdi Lignite Mines was granted to M/s RSMML for 30 years and the said mining lease was transferred to the appellant company with the prior approval of Government of Rajasthan. The expenditure incurred by M/s RSMML for the same was transferred by the appellant company. The appellant company commenced mining operation at Kapurdi Mines and amortized Rs. 8.18 crore of the total surface right expenses on proportionate basis of total lignite extracted from the mines during the financial year vis-à- vis the total lignite permitted to be extracted from Kapurdi Mines during the lease period of 30 years.
The appellant has claimed that the deduction for acquisition of business rights has been made on a most rational basis and should be allowed. It was further submitted that the expenditure has been incurred to obtain the rights to conduct mining business and this expenditure amounts to payment for 'any other business or commercial rights' and if the expenditure is treated as 25 ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
capital expenditure, then the same should be considered for 32(1)(ii) of the I.T. Act, 1961. An alternate plea was also taken that the expenditure was also allowable under section 35E of the I.T. Act, 1961. Reliance was placed on the decision of ITAT, Cuttack Bench in the case of East India Minerals Ltd. in ITA No. 224/CTR/2012 order dated 25.06.2012 on similar facts and that this decision was followed by the Hon'ble Hyderabad Bench in the case of M/s NMDC Ltd. in ITA No. 714/Hyd/2012. It has been emphasized and clarified that the ownership of the land acquired for project continued with M/s RSMML, a Government of Rajasthan undertaking and does not form part of assets of appellant company which is a JV between RSMML and a private enterprise with 51% share being held by M/s RSMML. It was stated that M/s Barmer Lignite Mining company Ltd. does not have any ownership or associated right over the project land and expenditure incurred by it is to secure only mining activity rights for a limited period of mining lease.
As discussed above, the land is acquired and transferred to M/s RSMML which is a majority stake holder in the appellant company. Thus effectively the land is in the possession of the appellant company. Further, it exercises the same rights as M/s RSMML, the only difference being that the land has not been transferred in their name.
A lot of emphasis has been placed by the appellant on the fact that the land was transferred by the Government of Rajasthan to M/s RSMML and not to the appellant company and also that the title of land would not vest even with M/s RSMML. It was further stressed that handing over the possession of land is completely distinct and different from transferring the title of land. The facts of this case are identical with the case of M/s Rajasthan State Mines & Minerals Ltd. vs. ACIT, Circle-6, Jaipur in ITA No. 144/JP/2014 and 124/JP/2014 dated 12/02/2016 wherein it was held as follows:26
ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
"20.1 The vexed question before us is the amortization of amount paid for getting the mining land/leasehold land by the assessee. Whether it is required to the treated as revenue expenditure and is required to be allowed u/s 37(1) of the Act or not? For the purpose of allowing and expenditure, it is necessary to look into the nature of expenditure. Section 37 of the Act provides as under:-
"Sec. 37(1): Any expenditure (not being expenditure of the nature described in section 30 to 36 and not being in the nature of capital expenditure or personal expense of the assessee), laid out or expended wholly and exclusively for the purpose of the business or profession shall be allowed in computing the income chargeable under the head "profits and gains of business or profession".
[Explanation: For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.] [(2B) Notwithstanding anything contained in sub-section (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party.] Section 37, therefore, contemplates that if the nature of expenditure is not the capital/personal in nature, and is laid out of expended wholly and exclusively for the purpose of business or profession, then it is required to be allowed by the authority. In our view, the expenditure, which was incurred for getting the mining land on leasehold basis or mining basis, is to be treated as capital expenditure because the lessee will have the enduring benefit for making such in investment. Our view is also fortified by the Judgment of Hon'ble Supreme Court in the matter of Aditya Minerals vs. CIT (1999) 8 SSC 97 and also by the Judgment of Hon'ble Supreme Court in the matter of 27 ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
Enterprising Enterprises Vs. DCIT in the Civil Appeal No. 5656 of 2006 whereby Hon'ble Supreme Court has held that "where the entire amount of lease is paid either at a time or in installment, it would be a capital expenditure". Therefore, we are bound by the judgments passes by the Hon'ble Supreme Court. Thus, the expense laid by the assessee for the purposes of getting the mining land and leasehold land, are required to be treated as capital expenditure. The AO is, therefore, directed to treat the amount paid for getting the mining land and lease hold land as capital expenditure. The AO is further directed to given all benefits as a capital expenditure. The Judgment relied upon by the assessee of Hon'ble Supreme Court in the matter of Madars Industrial Investment Corporation Ltd. Vs. CIT, 225 ITR 802 is not applicable to the facts and circumstances of the case. However, the judgment of Hon'ble Supreme Court in the matter of Enterprising Enterprises (2007) 160 Tax an 188 (SC) is squarely applicable to the facts and circumstances of the case and further the said judgment is of later date and, therefore, is required to be followed by the Bench. The judgment of NMDC Ltd. vs. JCIT (Supra) is not applicable to the facts and circumstances of the case as in the aid judgment the issue was not with respect to applicability of section 37 but was in respect to allowing the depreciation u/s 32 of the Act. The submission of the Ld. A/R for the assessee is that the value of wasting asset will depreciate with the extraction of mineral, in our view, is preposterous. In our view, the passage of guidelines for protecting the environment, now it is the duty of the lesser/assessee to submit and execute the mine closing plan so as to ensure that the land is used subsequent to the closure of the mining operation. Even otherwise, the mining activity is done not on the surface of the earth but on the core towards the lower side of the surface. The surface, can be put to use for beneficial purposes after the term of lease/mining activity is over and it can be exploited for commercial purposes by the owner/appropriate authority. The contention of the assessee is that the assessee will double taxed as the AO has already completed the assessment for the A.Y. 2011-12 on the basis on the written back of the amortization of the assets amounting 28 ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
to Rs. 5,79,10,137/-. In our view the assessee was taxed on the basis of the submission made by it before the AO before the assessment or the A.Y. 2010- 11 is finalized. The mere acceptable of the methodology by the AO for A.Y. 2011-12 will not withhold us to decided the issue on merit and in law for the .... Authority and bound to follow the principle laid down by the Tribunal and not the vice versa. Therefore, the submission of the Ld. A/R for the assessee on this count is also rejected. However, it is made clear that the assessee would be entitled to all benefits as available in law and the assessee will not be subjected to double taxation for the A.Y. 2011-12. The AO is directed to give effect to the above said direction and nullify the effect of the double taxation, if any, as claimed by the assessee. In the light of the above, ground no. 2 of the assessee is dismissed."
The issue of allowability of this expenditure u/s 37(1) and 32 of the IT Act, 1961 have been elaborately discussed. The distinction sought to be created by the appellant in terms of right of usage of the land for mining purposes in the two cases is not acceptable as M/s RSMML also had certain lands on lease hold basis similar facts it has been held Clearly that lease hold rights do not constitute 'tangible assets' for purpose of section 32 of the I.T. Act, 1961. The relevant portion from the case of M/s Cyber Park Development & construction Ltd. Vs. DCIT, Circle 11/(2),Bangalore, in 71 taxmann.com 210 (2016) (Bangalore-Trib.) is reproduced below:
"In this ground of appeal, it is to be adjudicated whether the leasehold rights fall within the term and scope of expression 'intangible asset' as defined under the provisions of section 32(1)(ii). There is no dispute about the cost of acquisition. The only dispute is with regard to nature of the asset acquired whether leasehold rights partake character of land or intangible asset. Intangible asset has been defined u/s 32(1)(ii)being knowhow, patents, copy rights, trade marks, license, franchises or any other business or commercial rights of similar nature. Obviously, leasehold rights on land do not fall in the 29 ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
category of above categories. It does not fall even in residuary category of any other business or commercial rights of similar nature. Because the term 'rights of similar nature' qualifies that even to fall under residuary clause, it should be in the nature of above know-how, patents, copy-rights, trade marks license or franchise. Applying the rule of ejusdem generis even to fall within the residuary category it should be in the nature of rights enumerated above. Further, definition of the term 'immovable property' is given in section3(26) of the General Clauses Act and States that it shall include land, benefits to arise out of land and thing attached to the earth or permanently fastened to anything attached to earth. Right of enjoyment to immovable property under a lease is immovable property within the meaning given in section 103 of the Transfer of Property Act. Under section 105 of the Transfer of Property Act, a lease creates a right or a interest in the enjoyment of the land property.
Having referred to the above legal position, it is to be held that by virtue of lease only an interest in land is created which does not qualify for allowance of depreciation."
Further, section 35E is clearly not applicable to the appellant in view of provisions of section 35E(3)(i) as a right has been acquired over the site of source of the mineral.
In view of the above discussion the judgments relied on, the disallowance of land amortization charges is confirmed. This ground of appeal is dismissed."
7.3 We have heard the rival contentions, perused the material available on record. The issue requires to be adjudicated is whether the assessee has rightly claimed amortization of expenses of Rs. 8,18,38,172/-. The AO has decided the issue as under:-
"I have carefully considered the reply of the assessee but same is not acceptable because of contention of assessee to amortize the land u/s 37 30 ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
over a period of 30 years worked out on the basis of total lignite extracted from the mines during financial year vis-à-vis total lignite permitted to be extracted from Kapurdi mines is not correct. The assessee has the ownership right over the land though it has not been registered in the name of assessee. From the plain reading of the agreement, it is clear that the entire land acquisition would be done by RSMML and the funding would be provided by RWPL. The basic intent of funding by JV partner RXPL is that of buying of land through RSMML and Government of Rajasthan. Assessee Company is special purpose vehicle (SPV) to extract the lignite from mines. It does not make any difference that land is registered in the name of assessee company (SVP) or its JV partner, ownership right of land is vested with Assessee Company and in substance assessee company has purchased the land.
Merely registration of land is in the name of JV partners does not alter the nature of transaction. Since land is not a depreciable asset, hence there is no question of allowability of depreciation over the same.
Another contention of the assessee to allow the depreciation on the basis of intangible right is also not acceptable. Section 32(1)(ii) allows the depreciation on intangible assets which provides depreciation of know how, patents, copy rights, trade marks, licenses, franchisees or any other business of commercial rights of similar nature being intangible assets acquired on or after the April 1, 1998. The payment so made by assesee for acquisition of mining land does not falls within the ambit of section 32(1)(ii) of the Act because the payment is not in the nature of know-how, patents, trademarks, licenses, franchisee. So far as the work 'other business or commercial right' is concerned same is also having limited scope has it refers to 'other business' or commercial right of similar nature', it means other business or commercial right having nature of knowhow, patents, trademarks, licenses, franchise. The intangible asset refers in this provision re of having nature of rights which are granted by government authorities only. Rights acquired in normal course of business are not eligible for depreciation under this provision. Hence, depreciation on the said sum is not allowable under this provision.
31ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
Another contention of assessee to allow deduction u/s 35E is also not acceptable. Sub-section (3) of section 35E specifically restricts the allowance of expenditure on the acquisition of site of the source of any minerals or group of associated minerals. Hence, the said amount is also not eligible for deduction u/s 35E of the Act.
Therefore I disallow the amortization of Rs. 81838172/- and added back to the income of the assessee."
7.4 The Ld. CIT(A) confirmed the above finding of the Assessing Officer. There is no dispute with regard to the fact that the assessee has incurred the expenditure.
The contention of the assessee is that if the expenditure is treated as capital expenditure then it is entitled for claim of depreciation. Further, the expenses are incurred for business purpose, as per assessee the right which is acquired over the land mine lignite for 30 years to be used for power generation as per the letter dated 30.03.2011, Government of Rajasthan. It is stated that the assessee incurred a sum of Rs. 365.85 crores as surface right expenses to obtain business rights for conducting mining business at Kapurdi Mines for lease periods of 30 years without acquiring land or fixed assets.
7.5 Now, the issue requires consideration is whether such expenditure is allowable to amortize as claimed. Admittedly, both the authorities below have disallowed amortization of expenses. We find that, the Co-ordinate Bench held that the expenditure incurred is for enduring benefit is of capital in nature, therefore not allowable u/s 37 of the Act. It is contended by the Ld. Counsel for the assessee that the Bench however allowed the claim of depreciation. He submitted that Circular issued by the CBDT Circular No. 9/2014 dt. 23.04.2014 was not considered by the Tribunal. Ld. CIT(A) confirmed the finding of the Assessing Officer by relying upon 32 ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
the decision of the Co-ordinate Bench in the case of Cyber Park Development & Construction Ltd. vs. DCIT and the case of Rajasthan State Mines & Minerals Ltd. vs. ACIT in ITA No. 144 & 124/JP/2014. The case of the assessee is that it has incurred expenses for acquiring mining rights. The Co-ordinate Bench has allowed the benefit of Section 32 in the case of Rajasthan State Mines & Mineral Ltd. vs. ACIT.
In our view, the Circular of the CBDT related to the development projects issued by the CBDT. The Hon'ble Supreme Court in the case of Assam Bengal Cement Co. Ltd.
Vs. Commissioner of Income-tax [1955] 27 ITR 34 (SC) under the identical facts held as under:-
"These are the principles which have to be applied in order to determine whether in the present case the expenditure incurred by the company was capital expenditure or revenue expenditure. Under clause 4 of the deed the lessors undertook not to grant any lease, permit or prospecting licence regarding limestone to any other party in respect of the group of quarries called the Durgasil area without a condition therein that no limestone shall be used for the manufacture of cement. The consideration of Rs. 5,000 per annum was to be paid by the company to the lessor during the whole period of the lease and this advantage or benefit was to enure for the whole period of the lease. It was an enduring benefit for the benefit of the whole of the business of the company and came well within the test laid down by Viscount Cave. It was not a lump sum payment but was spread over the whole period of the lease and it could be urged that it was a recurring payment. The fact however that it was a recurring payment was immaterial, because one had got to look to the nature of the payment which in its turn was determined by the nature of the asset which the company had acquired. The asset which the company had acquired in consideration of this recurring payment was in the nature of a capital asset, the right to carry on its business unfettered by any competition from outsiders within the area. It was a protection acquired by 33 ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
the company for its business as a whole. It was not a part of the working of the business but went to appreciate the whole of the capital asset and make it more profit yielding. The expenditure made by the company in acquiring this advantage which was certainly an enduring advantage was thus of the nature of capital expenditure and was not an allowable deduction under section 10(2)(xv) of the Income-tax Act.
The further protection fee which was paid by the company to the lessor under clause 5 of the deed was also of a similar nature. It was no doubt spread over a period of 5 years, but the advantage which the company got as a result of the payment was to enure for its benefit for the whole of the period of the lease unless determined in the manner provided in the last part of the clause. It provided protection to the company against all competitors in the whole of the Khasi and Jaintia Hills District and the capital asset which the company acquired under the lease was thereby appreciated to a considerable extent. The sum of Rs. 35,000 agreed to be paid by the company to the lessor for the period of 5 years was not a revenue expenditure which was made by the company for working the capital asset which it had acquired. It was no part of the working or operational expenses of the company. It was an expenditure made for the purpose of acquiring an appreciated capital asset which would no doubt by reason of the undertaking given by the lessor make the capital asset more profit yielding. The period of 5 years over which the payments were spread did not make any difference to the nature of the acquisition. It was none the less an acquisition of an advantage of an enduring nature which enured for the benefit of the whole of the business for the full period of the lease unless terminated by the lessor by notice as prescribed in the last part of the clause. This again was the acquisition of an asset or advantage of an enduring nature for the whole of the business and was of the nature of capital expenditure and thus was not an allowable deduction under section 10 (2) (xv) of the Act."34
ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
Further, the Coordinated-Bench of this Tribunal in the case of ONGC Videsh Ltd. vs. DCIT [2010] 37 SOT 97 (Delhi) held that expenditure incurred on purchase of evaluation of the seismic data of foreign block. As the expenditure incurred for furtherance of the activities undertaken by the assessee in the normal course of its business at therefore allowable as business expenditure. In the case in hand the expenditure is incurred for rights of mining as given by the Government of Rajasthan assigned to RSSML and this lease was assigned to the assessee with the concurrence of the Government of Rajasthan and Government of India. The RSSML had incurred expenditure of Rs. 283.79 crores on acquisition of land which was duly reimbursed by BLMCL in terms of JV Agreement in lieu of transfer of mining lease, surface rights and other associated rights for development, operation and management of mines. Assessee further incurred expenses amounting to Rs. 7.07 crores being administrative and pre operating expenses for acquiring the aforesaid mining rights over Kapurdi lignite mining lease and also incurred net interest and finance cost of Rs. 74.99 crores in respect of funds borrowed for aforesaid expenditure which has been capitalized under the category of "Surface right expenses" representing amount of Rs. 365.85 crores which incurred by assessee to obtain business right for conducting mining business at Kapurdi mines for lease period of 30 years without acquiring any right in the land or other fixed assets.
Accordingly, assessee amortized the cost on the basis of actual production and claimed a sum of Rs. 8,18,38,172 on account of amortization of the cost of surface rights.
There is no dispute with regard to the fact that the assessee neither acquired title over the mines nor the rights into any fixed assets by making expenditure. The 35 ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
assessee has acquired absolute rights for mining lignite this is essentially for 30 years without any impediment. The moot question is whether such expenditure is for acquiring any capital asset or merely some business rights. It is not the case of acquiring fixed assets for enduring benefit but the assessee would have enduring business rights in respect of mining the lignite. Admittedly, the expenditure has been incurred through RSMML it is not clear whether the RSMML has also claimed such expenditure in the absence of same, we deem it proper to restore this issue to the file of the Assessing Officer for decision afresh. The AO would verify whether the RSMML has made any claim on the same expenditure which the assessee has claimed and ascertain the outcome of such claim whether such expenditure has been allowed. Then, the AO would decide in accordance with the law and the case laws as cited by the assessee. Thus, this ground of the assessee's appeal is allowed for statistical purpose.
8. Ground no. 6, at the time of hearing, Ground No. 6 was not pressed.
Therefore, this ground is dismissed as not press.
9. Ground no. 7, is against confirming the action of the AO in disallowing depreciation claim of Rs. 42,49,575/- in respect of intangible asset in the nature of business rights.
9.1 Ld. Counsel for the assessee reiterated the submissions as made in the written submissions. For the sake of clarity the submissions of the assessee are reproduced herein below:-
Submission:-36
ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
1. Section 2(11) of the IT Act defines block of asset to mean intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. Therefore, a business or commercial rights which is similar to the words preceding it, is an intangible asset eligible for depreciation u/s 32(1)(ii).
2. In the present case, assessee has allotted shares of Rs.10.20 crores to RSMML without any financial obligation on it in lieu of it having obtained the mining lease for the mines, transferring such mining lease, surface rights and other rights in relation thereto for the development, operation and management of mines in favour of the assessee and to contribute its local knowledge, technical knowledge and other expertise in relation to the mines as referred in clause 2 and clause 3 (PB 73-75) of JV agreement dt. 27.12.2006. Thus, clearly what the assessee has obtained by way of allotting shares to RSMML free of cost is a valuable asset by way of know-how and license which is a business/commercial right. It is not a simple case of assessee compensating RSMML for services provided as held by the Ld. CIT(A) rather it is a case of assessee obtaining valuable rights by way of know-how to develop the mines and also the license to operate & manage the mines as all the licenses, approvals, consents required for operation of the mines is transferred by RSMML to the assessee as a sub-
licensee. The word 'know-how' has been explained by way of Explanation 4 to section 32(1) which means any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of mine, oil well or other source of mineral deposit. In fact this is specifically provided in clause 3.1(iv) (PB 73) where it is specifically provided that RSMML would ensure that all the licenses, approvals, consent required for operation of the mines and the mining project are valid and continued to be valid, subsisting and shall be renewed if required during the term of this agreement. Clause 3.1 which is relevant to decide the issue has not been reproduced by the Ld. CIT(A) at Pg 34 of the order while reproducing clause 3.2 & 3.3 of this agreement. In view of 37 ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
these clauses of the agreement, it is evident that assessee has obtained an intangible asset on which it is entitled to depreciation.
3. The Supreme Court in case of Techno Shares & Stocks Ltd. & Ors. Vs. CIT 327 ITR 323 held that membership card of BSE is a 'business or commercial right' as it gives a right to access the Exchange and to participate therein to a non-defaulting continuing member and in that sense it is a licence or akin to licence in terms of s. 32(1)(ii) and therefore, depreciation is allowable on the cost of BSE Membership Card. The held part of this judgment is reproduced as under:-
On the analysis of the rules of BSE, it is clear that the right of membership (including right of nomination) gets vested in the Exchange on the demise/default committed by the member; that, on such forfeiture and vesting in the Exchange the same gets disposed of by inviting offers and the consideration received thereof is used to liquidate the dues owed by the former/defaulting member to the Exchange, Clearing House, etc. (see r. 16 and bye-law 400). It is this right of membership which allows the non-defaulting member to participate in the trading session on the floor of the Exchange. Thus, the said membership right is a "business or commercial right" conferred by the rules of BSE on the non-defaulting continuing member.
The membership right could be said to be owned by the assessee and used for the business purpose in terms of s. 32(1)(ii) for the reason that the rules and the bye-laws indicate that the right of membership (including the right of nomination) vests in the Exchange only when a member commits default. Otherwise, he continues to participate in the trading session on the floor of the Exchange; that he continues to deal with other members of the Exchange and even has the right to nominate subject to compliance of the rules. Moreover, by virtue of Expln. 3 to s. 32(1)(ii) the commercial or business right which is similar to a "licence" or "franchise" is declared to be an intangible asset. Moreover, under r. 5 membership is a personal permission from the Exchange which is nothing but a "licence" which enables the member to exercise rights and 38 ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
privileges attached thereto. It is this licence which enables the member to trade on the floor of the Exchange and to participate in the trading session on the floor of the Exchange. It is this licence which enables the member to access the market. Therefore, the right of membership, which includes right of nomination, is a "licence" or "akin to a licence" which is one of the items which falls in s. 32(1)(ii). The right to participate in the market has an economic and money value. It is an expense incurred by the assessee which satisfies the test of being a "licence" or "any other business or commercial right of similar nature" in terms of s. 32(1)(ii). It is clarified that present judgment is strictly confined to the right of membership conferred upon the member under the BSE Membership Card during the relevant assessment years. The said right of membership is a "business or commercial right" which gives a non-defaulting continuing member a right to access the Exchange and to participate therein and in that sense it is a licence or akin to licence in terms of s. 32(1)(ii). Such a right vests in the Exchange only on default/demise in terms of the rules and bye-laws of BSE, as they stood at the relevant time. This judgment should not be understood to mean that every business or commercial right would constitute a "licence" or a "franchise" in terms of s. 32(1)(ii). On the facts and circumstances of these cases the Tribunal was right in holding that depreciation was allowable on the cost of the Membership Card under s. 32(1)(ii).--Vinay Bubna vs. Stock Exchange, Mumbai & Ors. (1999) 155 CTR (SC) 519: (1999) 6 SCC 215 and Stock Exchange, Ahmedabad vs. Asstt. CIT (2001) 166 CTR (SC) 285:
(2001) 248 ITR 209 (SC) relied on; CIT vs. Techno Shares & Stocks Ltd. & Ors. (2009) 225 CTR (Bom) 337: (2009) 28 DTR (Bom) 201 set aside.
The Supreme Court again in case of CIT Vs. SMIFS Securities Ltd. 348 ITR 302 held that stock exchange membership card is an asset eligible for depreciation u/s 32. It further held that goodwill arising on amalgamation would fall under the expression 'any other business or commercial right of similar nature' and is an asset under Explanation 3(b) to section 32(1) of the Act and thus, eligible for depreciation.
39ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
4. Further, reliance is placed on the following cases:-
Areva T & D India Ltd. & Ors. Vs. DCIT & Ors. (2012) 345 ITR 421 (Del.) (HC) The held part of this judgment reads as under:-
Applying the principle of ejusdem generis, as specified for interpreting the expression "business or commercial rights of similar nature" specified in s 32(1)(ii) of the Act, it is seen that such rights need not answer the description of "knowhow, patents, trademarks, licenses or franchises" but must be of similar nature as the specified assets. On a perusal of the meaning of the categories of specific intangible assets referred in s 32(1)(ii) of the Act preceding the term "business or commercial rights of similar nature", it is seen that the aforesaid intangible assets are not of the same kind and are clearly distinct from one another. The fact that after the specified intangible assets the words "business or commercial rights of similar nature" have been additionally used, clearly demonstrates that the Legislature did not intend to provide for depreciation only in respect of specified intangible assets but also to other categories of intangible assets, which were neither feasible nor possible to exhaustively enumerate. In the circumstances, the nature of "business or commercial rights" cannot be restricted to only the aforesaid six categories of assets, viz., knowhow, patents, trademarks, copyrights, licenses or franchises. The nature of "business or commercial rights" can be of the same genus in which all the aforesaid six assets fall. All the above fall in the genus of intangible assets that form part of the tool of trade of an assessee facilitating smooth carrying on of the business. In the circumstances, it is observed that in case of the assessee, intangible assets, viz., business claims; business information; business records; contracts; employees; and knowhow, are all assets, which are invaluable and result in carrying on the transmission and distribution business by the assessee, which was hitherto being carried out by the transferor, without any interruption. The aforesaid intangible assets are, therefore, comparable to a license to carry out the existing transmission and distribution business of the transferor. In the absence of the 40 ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
aforesaid intangible assets, the assessee would have had to commence business from scratch and go through the gestation period whereas by acquiring the aforesaid business rights along with the tangible assets, the assessee got an up and running business. This view is fortified by the ratio of the decision of the Supreme Court in Techno Shares and Stocks Ltd. v. CIT, 327 ITR 323 wherein it was held that intangible assets owned by the assessee and used for the business purpose which enables the assessee to access the market and has an economic and money value is a "license" or "akin to a license" which is one of the items falling in s 32(1)(ii) of the Act. In view of the above discussion, the specified intangible assets acquired under slump sale agreement were in the nature of "business or commercial rights of similar nature" specified in s 32(1)(ii) of the Act and were accordingly eligible for depreciation under that Section. In view of the above, it is not necessary to decide the alternative submission made on behalf of the assessee that goodwill per se is eligible for depreciation under s32(1)(ii) of the Act. The substantial question of law is decided in the affirmative and this appeal is allowed in favour of the assessee and against the Revenue and the impugned order is set aside. - Techno Shares and Stocks Ltd. v.
CIT, 327 ITR 323 (SC), CIT v. Hindustan Coco Cola Beverages (P) Ltd., 331 ITR 192 (Del) relied.
CIT Vs. Ingersoll Rand International Ltd. (2014) 227 Taxman 176 (Kar.) (HC) (Magz.) In this case, the payment of non compete fees was held to be an intangible asset eligible for depreciation. The Para 8 of this judgment read as under:-
"Therefore what is to be seen is, what are the nature of intangible assets which would constitute business or commercial rights to be eligible for depreciation. In this regard, it is necessary to notice that the intangible assets enumerated in Sec.32 of the Act effectively confer a right upon an assessee for carrying on a business more efficiently by utilizing an available knowledge or by carrying on a business to the exclusion of another assessee. A non-compete right 41 ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
encompasses a right under which one person is prohibited from competing in business with another for a stipulated period. It would be the right of the person to carry on a business in competition but for such agreement of non-compete. Therefore the right acquired under a non-compete agreement is a right for which a valuable consideration is paid. This right is acquired so as to ensure that the recipient of the non-compete fee does not compete in any manner with the business in which he was earlier associated.
The object of acquiring a know-how, patents, copyrights, trademarks, licences, franchises is to carry on business against rivals in the same business in a more efficient manner or to put it differently in a best possible manner. The object of entering into a non-compete agreement is also the same i.e., to carry on business in a more efficient manner by avoiding competition, atleast for a limited period of time. On payment of non-compete, the payer acquires a bundle of rights such as restricting receiver directly or indirectly participating in a business which is similar to the business being acquired, from directly or indirectly soliciting or influencing clients or customers of the existing business or any other person either not to do business with the person who has acquired the business and paid the non-compete fee or to do business with the person receiving the non-compete fee to do business with a person who is directly or indirectly in competition with the business which is being acquired. The right is acquired for carrying on the business and therefore it is a business right.
The word 'commercial'' is defined in Black's Law Dictionary as related to or connected with trade and commerce in general', 'commerce' is defined as 'the exchange of goods, productions or property of any kind; the buying, selling and exchanging of articles'. A right by way of non-compete is acquired essentially for trade and commerce and therefore it will also qualify as a commercial right. A right acquired by way of non-compete can be transferred to any other person in the sense that the acquirer gets the right to enforce the performance of the terms of agreement under which a person is restrained from competing. When a 42 ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
businessman pays money to another businessman for restraining the other businessman from competing with the assessee, he gets a vested right which can be enforced under law and without that, the other businessman can compete with the first businessman. When by payment of non-compete fee, the businessman gets his right what he is practically getting is kind of monopoly to run his-business without bothering about the competition. Generally, non-compete fee is paid for a definite period. The idea is that by that time, the business would stand firmly on its own footing and can sustain later on. This clearly shows that the commercial right comes into existence whenever the assessee makes payment for non-compete fee. Therefore that right which the assessee acquires on payment of non-compete fee confers in him a commercial or a business right which is held to be similar in nature to know- how, patents, copyrights, trademarks, licences, franchises. Therefore the commercial right thus acquired by the assessee unambiguously falls in the category of an 'intangible asset'. Their right to carry on business without competition has an economic interest and money value. The term 'or any other business or commercial rights of similar nature' has to be interpreted in such a way that it would have some similarities as other assets mentioned in Cl.(b) of Expln.3. Here the doctrine of ejusdem generis would come into operation and therefore the non-compete fee vests a right in the assessee to carry on business without competition which in turn confers a commercial right to carry on business smoothly.
When once the expenditure incurred for acquiring the said right is held to be capital in nature, consequently the depreciation provided under Sec.32(1)(ii) is attracted and the assessee would be entitled to the deduction as provided in the said provision i.e., precisely what the Tribunal has held."
CIT Vs. MIS Bharti Teletech Ltd. (2015) 119 DTR 139 (Del.) (HC) 43 ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
In this case, the amount paid to acquire network and the facilities was held to be intangible asset eligible for depreciation. The held part of this judgment reads as under:-
"The question as to whether the claim for depreciation confirms to one or the other description under Section 32, especially Explanation 3 has to be examined with reference to what is put forward by the assessee in the given facts of each case. The structure of the definition, or rather expanded definition, which by Explanation 3 spells out what are intangible assets (know-how, patents, copyrights, trademarks, licences, franchises etc.), being of a peculiar nature, the claim which the Court would necessarily have to consider is whether the item claimed to be eligible for depreciation confirms to "other business or commercial rights of similar nature". In the facts of the present case, a reading of the agreement between STL and the assessee clarifies that a specific amount, i.e., Rs.9 Crores was paid by the assessee to the transferor who owned commercial rights towards the network and the facilities. The consideration was a specific value but for which the network would not have been otherwise transferred. In that sense, it constituted business or commercial rights which were similar to the enumerated intangible assets. In so concluding, however, this Court does not lay down the general or particular principle that every such claim has to be necessarily allowed as was apparently understood by the ITAT. The circumstance that the declaration of law in Smifs Securities (supra) envisions inclusion of goodwill as an asset and, therefore, entitled to depreciation, in other words does not necessarily mean that in every case the goodwill claim has to be allowed. In the present case, though termed as goodwill, what was actually parted with by STL was a commercial right, i.e., exclusivity to the network which would not have been otherwise available but for the terms of the arrangement. So viewed, this Court is satisfied that the conclusions arrived at by the CIT (A) and the ITAT cannot be faulted. No substantial question of law arises; the appeal is consequently dismissed."44
ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
In view of the above judgments of Supreme Court and High Court, on allotment of shares to RSMML without cost, assessee obtained valuable commercial and business rights to do mining and therefore, the same is an intangible asset entitled for depreciation."
9.2. We have heard the rival contentions, perused the material available on record. The issue requires to be adjudicated is whether the assessee is entitled for depreciation in respect of intangible asset in the nature of business rights. Ld. Counsel for the assessee has placed reliance on the decision of the Hon'ble Supreme Court rendered in the case of Techno Shares & Stocks Ltd. & Ors. vs. CIT 327 ITR
323. As per the assessee what it has acquired is an intangible asset and therefore is entitled for depreciation. In our considered view, the assessee is required to demonstrate that it has acquired knowhow, patents, copyrights, trademarks, license, franchisee or any other business or commercial rights of similar nature being intangible assets. In the case in hand, it is contended that assessee has allotted shares of Rs. 10.20 crores to RSMML without any financial obligation on it in lieu of it having obtained the mining lease, for the mines, transferred such mining lease, surface rights and other rights in relation thereto for the development, operation and management of mines in favour of the assessee and to contribute its local knowledge, technical knowledge and other expartise in relation to the mines as referred in clause 2 to 3 of the JV Agreement dated 27/12/2006.
The assessee has not demonstrated as what knowledge was transferred to the assessee, in the absence of the same it cannot be inferred with certainty that what the assessee has acquired would fall under the clause 32(1)(ii) and how such knowledge is used for the purpose of business of the assessee. Therefore, in the 45 ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
interest of justice we set aside the order of the authorities below and restore this issue to the file of the AO to decide this issue afresh. After giving opportunity to the assessee the AO would verify the nature of the rights and knowhow acquired by the assessee. In case the AO finds that by virtue of the agreement the assessee has acquired knowhow or any other business of commercial rights or similar nature, he would allowed the depreciation as claimed by the assessee. This ground of assessee's appeal is allowed for statistical purposes.
10. Ground no. 8, is general in nature and needs no separate adjudication.
11. Ground no. 9 is prayer for cost. After considering the submissions of the Ld. Counsel for the assessee we hold that parties bear their own cost.
12. In the result, appeal of the Assessee is partly allowed for statistical purposes.
ITA No. 510/JP/2017. (Revenue)13. Now, we take up Revenue's appeal in ITA No. 510/JP/2017 pertaining to the A.Y. 2012-13.
The Revenue has raised the following grounds of appeal:-
"1. Whether on the facts and circumstances of the case and in law the Ld. CIT(A) was justified in deleting the addition of Rs. 63,44,181/- made by the AO ignoring the fact that the expenditure was not incurred for business activity hence not allowable as revenue expenditure.
2. Whether on the facts and circumstances of the case and in law the Ld. CIT(A) was justified in allowing deduction of Rs. 4,70,80,000/- in respect of mines closure expenses even the expenditure has not been debited in the books of accounts.
3. The appellant craves its rights, to add, amend or alter any of the grounds on or before the hearing."46
ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
14. Ground no. 1 is against deleting the addition of Rs. 63,44,181/- made by the AO.
14.1 The facts related to this ground are that, the Assessing Officer observed that the assessee company has debited and claimed a sum of Rs. 2,11,47,269/- towards land tax. Out of which a sum of Rs. 63,44,181/- has been deposited and balance sum of Rs. 14803747/- has been disallowed by the assessee due to non-payment u/s 43B of the Income Tax Act, 1961. The Assessing Officer disallowed this claim.
On appeal the Ld. CIT(A) allowed this expenditure.
14.2 Ld. D/R vehemently argued that the Ld. CIT(A) was not justified in allowing the deduction.
14.3 Per contra Ld. Counsel for the assessee supported the order of the Assessing Officer and reiterated the submissions as made in the written submissions.
14.4 We have heard the rival contentions, perused the material available on record and gone through the order of the authorities below. We find that Ld. CIT(A) has given a finding on fact by observing as under:- (2.3) "2.3 I have considered the facts of the case, assessment order and the written submissions of the appellant. As noted an amount of Rs. 2,11,47,269/- has been claimed as land tax out of which a sum of Rs. 1,48,03,747/- had been disallowed suo moto by the assessee under Section 43B of the IT Act, 1961 as the same had not been paid and the balance amount of Rs. 63,44,181/- was claimed. The Assessing Officer disallowed the claim as the levy of the same had been disputed by the asessee before the Land Tax Authorities and the matter was sub-judice in the Rajasthan High Court and no documentary evidences had been provided by the assessee, of dismissal of the writ petition filed by the company. It was further held that the assessee had deposited the said sum on the basis of demand raised on 47 ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
M/s Rajasthan State Mine & Minerals Ltd. and not on the assessee for various locations and that the ownership of some of these lands was also under dispute.
The facts of the case on this issue are that the Sub Registrar, Revenue Department, Government of Rajasthan had raised a demand of Rs. 2,11,47,269/- being land tax under Rajasthan Finance Act, 2006 for the financial year 2011-12 for land acquired for Kapurdi Mines in the name of M/s RSMML. As per terms of JV agreement, the obligation to pay land tax being of the company, the same was accounted for and the levy of tax demand was challenged in the Rajasthan High Court. As per direction of the court, 30% of the demand was to be paid and stay was granted for the balance and subsequently the writ petition filed by the company was also dismissed by the court. In the present proceedings, it is submitted that as per the Rajasthan Finance Act, 2006, land tax is to be paid by the mine owner and land tax liability of Rs. 2,11,47,269/- pertaining to financial year 2011-12 is a crystallized statutory business liability. It was further stated that the Assessing Officer's observations that there was dispute of ownership of land is also not correct as the name of the M/s Rajasthan State Mines & Minerals Ltd. is appearing in revenue records, the demand was raised on it but related to the company. Further, the writ petition was filed in the court by the company as the liability pertains to the company in terms of the implementation agreement and Joint Venture agreement.
It is seen that the demand of Rs. 63,44,181/- relating to financial year 2011- 12 has been paid by to the appellant under the direction of the High Court. Further, subsequently the writ petition of the appellant has also been dismissed by the Rajasthan High Court and the liability has been confirmed.
In a recent decision of Jurisdictional ITAT in the case of ACIT, Circle-1, Kota vs. Mangalam Cement Ltd. 78 Taxmann.com 334 (Jaipur-Trib.) (2017) has held as follows:-
48ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
"It was submitted that all these statutory liabilities. A statutory liability is allowable in the year in which it arises notwithstanding the fact that it is disputed by the assesee and no entries are made in the books of account. Hence, these payment are allowable in the year under consideration.[para 18.1] It was further submitted that otherwise also because of specific provision of section 43B, such statutory liability are allowable on payment basis even if expenditure is not booked in books of account.[para 18.2] The service tax and land tax are statutory liability which are paid during the year as per the orders of the CESTAT and Rajasthan High Court. These are statutory liabilities which pertains to the business carried on by the assessee. The assessee cannot be denied a deduction in respect of these payments merely on account of the fact that these are payments in respect of matter which are contested ;before the authorities and no expenditure is book in the profit and loss account. In light of above, order of the Commissioner (Appeals) is to be upheld deletion the disallowance under section 43B made by Assessing Officer. [para 20] In view of the discussion as above, and the decision of the jurisdictional ITAT, the addition made by the Assessing Officer is deleted. The ground of appeal is allowed."
14.5 The above finding on fact is not controverted by the Revenue. Since, the land tax is allowable u/s 43B of the Act. Therefore, we do not see any reason to interfere into the finding of the Ld. CIT(A) same is hereby affirmed. This ground of Revenue's appeal is dismissed.
49ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
15. Ground no. 2, is against allowing deduction of Rs. 4,70,80,000/- in respect of mine closure expenses.
15.1 Ld. D/R supported the order of the authorities below and submitted that Ld. CIT(A) was not justified in deleting the disallowance.
15.2 On the contrary, Ld. Counsel for the assessee supported the order of the Ld. CIT(A) and submitted that this issue is squarely covered in favour of the assessee.
15.3 We have heard the rival contentions, we find that Ld. CIT(A) has decided the issue in para 3.3. of the order read as under:-
"3.3 I have considered the facts of the case, assessment order and the written submissions of the appellant. As noted, a sum of Rs. 4,70,80,000/- was debited toward min closure charges, was not allowed by the Assessing Officer, as the same had not been deposited to the mining department and only a provision had been made. The Assessing Officer, as the same had not been deposited to the mining department and only a provision had been made. the Assessing Officer further held that as per the mine closure plan the amount so deposited in the Escrow account is interest bearing and the interest is realizable after every five years, therefore, the sum is in the nature of a deposit and not expenditure, hence was not allowable. In the present proceeding, it has been stated that as per guidelines issued by Ministry of Coal, Government of India, it is mandatory for all coal mine owners to provide for an annual mine closure cost as per the guidelines. The liability for mine closure is an ascertained on and these expenditures have to be compulsorily incurred and are incidental to the mining activity. It was submitted that in the petition with RERC for determination of transfer price of lignite to M/s RWPL, the component of mine closure charges has been included and hence any disallowance would result in double taxation. It was further submitted that provisions for mine closure expenses and deposited for the amount in the Escrow account as an enforcement measure for financial assurance are two different events. Reliance was placed on the decision of 50 ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
the Jurisdictional High Court in the case of Udaipur Mine Developers Syndicate Pvt. Ltd. vs. DCIT. In the alternate, in ground no. 3, it was stated that since mine closure charges attributable to closing stock of lignite, to the extent of Rs. 72,12,891/- have been included in the value of closing stock, the same should be reduced from the mine closure charges disallowed. Identical issue arose in case of M/s Rajasthan State Mines & Mineral Ltd. Vs. ACIT, Circle-6, Jaipur in ITA No. 144/JP/2014 and 124/JP/2014 dated 12.02.2016 and the relevant portion of the order is as follows:
"30.3 We have heard rival contentions and perused the material on record. In our view, once assessee whether private or government take on lease a mine, its closures is inevitable. A mine cannot be permitted to be exploited infinitely and indefinitely. In our view, one the mine is exploited, its closure and rehabilitation is necessary. In our view, the Ministry of Coal, Government of India had provided structured programmed/guidelines for closure of mines. In our opinion, the view expressed by the AO and Ld. CIT(A) is contrary to law and we disagree with the view of the authorities below that the liability is a contingent liability and is not ascertainable liability. The guidelines laid down by the Coal Ministry, has elaborately given the charge to quantify the liability and the manner in which the amount is required to be spent for closure of the mines and for restoring the ecological balance and environment protection. Therefore, to say that the liability is merely a contingent and has to be arises, in our view is preposterous and without any merit. The provisions are required to be made in the books of account of the assessee. Since the amount is ascertainable and discernable to be spent on the closure of the mines, in view of the formula given by the Ministry of Coal, therefore, in our view the liability is not a contingent liability and is required to be made provision in present and is required to be spent in a future date. The judgment referred by the Ld. A/R for the assessee in the matter of Kedarnath Jute Mfg Co. Ltd. (Supra) and also in the matter of Rotork 51 ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
Controls India Pvt. Ltd. (Supra) are squarely applicable to the facts and circumstances of the case.
30.4 When the above principles are applied to the facts of the present case it can be progressive or contingent mine closure plan and final mine closure plant. The assessee has operating lignite mines at Hiral, Nagor and Sonari. As a result of the mine closure plans issued by the Government of India the asessee has an present obligation to provide for the expenditure which it have to fund on closure of the mines and thus it has a present obligation as a result of the past events, it is certain that an outflow of resources would be required to settle the obligation and a reliable estimate can be made of the amount of the obligation which is mentioned din these guidelines. Therefore, according to the matching concept also when the revenue from the mining activity of these mines has been recognized in income, the co to be incurred to earn such revenue has to be provided for. In these circumstances and the legal position, even if expenditure is nt actually incurred in the year under consideration but there is an obligation on the assessee to incur the expenditure of which a reliable estimate can be made has to be allowed a deduction. In the assessee's case also it is certain that assessee has to incur the expenditure on closure of mine and for which a reliable estimate has been made and therefore the provision made for mine closure expenses is allowable u/s 37(1) of the Act.
30.5 Further, the judgment in the matter of Bharat Earth Movers' Ltd. v. CIT, 112 Taxman 61 (SC) and Calcutta Company Ltd., 37 ITR are applicable. Besides, in the said judgment it was categorically held that the mines closure liability is a ascertained liability notwithstanding principle as well as the mercantile system of accounting, the liability is applicable in principle under section 37 of the Act. In view of the above, the ground of the assessee is allowed and the Assessing Officer 52 ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
is directed to give the benefit of deduction of Rs. 2,94,04,000/- towards mines closures expenses in the A.Y. 2010-11.
In view of the discussion as above, and the finding of the jurisdictional ITAT, on this issue, the addition made under this head is deleted. This ground of appeal is allowed."
15.4 Ld. CIT(A) has followed the decision of the Co-ordinate Bench rendered in the case of M/s Rajasthan Mines and Mineral Ltd. vs. ACIT in ITA No. 144/JP/2014 & 214/JP/2014 dt. 12.02.2016.
15.5 The Revenue has not placed any contrary binding precedents. Therefore, we do not see any reason to interfere into the finding of the Ld. CIT(A), same is hereby affirmed. This Ground of Revenue's appeal is dismissed.
16. Ground no. 3, is general in nature needs no separate adjudication.
17. In the result, appeal of the Revenue in ITA No. 510/JP/2017 is dismissed.
18. In the combined result, appeal of the assessee in ITA No. 534/JP/2017 is partly allowed for statistical purpose and appeal of the Revenue in ITA No. 510/JP/2017 is dismissed.
Order pronounced in the open court on Thursday, the 12th day October 2017.
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(VIKRAM SINGH YADAV) ( KUL BHARAT )
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Jaipur
Dated:- 12/10/2017.
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vkns'k dh izfrfyfi vxzfs "kr@Copy of the order forwarded to:
1. The Appellant- M/s Barmer Lignite Mining Co. Ltd.
2. The Respondent- DCIT, Circle-6, Jaipur.53
ITA No. 534 & 510/JP/2017.
M/s Barmer Lignite Minining Co. Ltd., Jaipur.
3. The CIT,
4. The CIT (A)
5. The DR, ITAT, Jaipur
6. Guard File (ITA No. 534 & 510/JP/2017) vkns'kkuqlkj@ By order, lgk;d iathdkj@ Assistant. Registrar