2011 (8) TMI 1190 - HC - Income Tax

Nature of expenses - pre-project expenses - Allowable business expenditure - Held that - In the present case the expenses related to two projects namely Ayirumthengu Project and Bhimji Project. The said projects had to be abandoned due to stiff resistance from local to carry out exploratory drilling by the foreign company and also on account of environmental problems and presence of of Oliva Ridley turtles a rare specie of turtles around the coastal area. The tribunal has recorded a finding of fact that the nature of the assessee s business is mining of ore and for achieving that object it has to carry out exploration activities. The outcome of such exploration is always contingent. The exploration activities being the regular line of assessee s business expenses incurred on such activities have been allowed as revenue expenditure.

Summary

Issues:
Whether the ITAT was justified in allowing the pre-project expenses as revenue expenditure.

Analysis:
The judgment pertains to the question of whether the Income Tax Appellate Tribunal (ITAT) was correct in allowing pre-project expenses of Rs. 2.42 crore incurred by the assessee as revenue expenditure for the assessment year 2000-01. The assessee, a public sector undertaking engaged in mining, had claimed these expenses as revenue expenditure, which was disallowed by the assessing officer but later allowed by the ITAT.

The expenses in question were related to two projects, the Ayirumthengu Project and the Bhimji Project, both of which had to be abandoned due to various reasons such as local resistance, environmental issues, and the presence of rare species of turtles. The ITAT found that the nature of the assessee's business involved exploration activities necessary for mining operations, and the outcome of such activities was uncertain. Since exploration was a regular part of the assessee's business, the expenses incurred were considered revenue expenditure by the ITAT.

The High Court, comprising J.P. Devadhar and K.K. Tated, JJ., upheld the ITAT's decision, stating that since exploration activities were essential for the assessee's mining business and the expenses were directly related to achieving the business objective, they could be treated as revenue expenditure. The court found no fault in the ITAT's order and dismissed the appeal accordingly.