2017 (12) TMI 1698 - HC - Income Tax

Amortization of cost paid towards the acquisition of wasting asset i.e. mining land/leasehold land u/s 37 - Whether ITAT has not legally erred in not allowing the claim? - HELD THAT - We are in complete agreement with the view taken by the tribunal, therefore, first issue is required to be answered in favour of the department and against the assessee. Depreciation on license to use the land for mining - whether not covered by the definition of intangible asset u/s 2(11) ? - HELD THAT - On a close scrutiny of Sub section 32 (ii) of the Income Tax Act in respect of depreciation of- (ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, In our considered opinion, the rights which are given to the assessee are of commercial rights which are akin to license for mining. Expenditure incurred on computerization of Mines Department of the Government of Rajasthan - whether not qualify to be an expenditure expended wholly and exclusively for the purpose of business allowable u/s 37 ? - HELD THAT - Taking into consideration the expenses which are done in view of decision in SA Builder s case 2006 (12) TMI 82 - SUPREME COURT and other judgments relied on the assessee, the issue is answered in favour of the assessee. Benefit of deduction u/s 80IA - sum received on account of minimum guarantee covenant under the agreement by holding the same to be not derived from the business of power generation undertaking - HELD THAT - regarding liquidated damages which are given are business losses which the undertaking ought to have done, if the machines which were delivered to the assessee would have performed very well, therefore, damages which were given for loss of business which was guaranteed by the supplier, ALPINE SOLVEX LTD. 2004 (11) TMI 58 - MADHYA PRADESH HIGH COURT will not apply in the present case. This is not damages for compensation for business loss. In that view of the matter, this issue is also answered in favour of the assessee and against the department.

Summary

Issues Involved:

1. Amortization of cost paid towards the acquisition of wasting asset under Section 37 of the Income Tax Act.
2. Depreciation allowance on the license to use the land for mining under Section 32(1)(ii) of the Income Tax Act.
3. Qualification of expenditure on computerization of Mines Department as business expenditure under Section 37 of the Income Tax Act.
4. Deduction under Section 80IA for income received on account of minimum guarantee covenant.

Issue-wise Detailed Analysis:

1. Amortization of Cost Paid Towards Acquisition of Wasting Asset:

The appellant argued that the cost paid for acquiring mining land/leasehold land should be amortized under Section 37 of the Income Tax Act. The counsel for the appellant referred to Accounting Standard (AS) 6 and the Supreme Court's decision in M/s. Madras Industrial Investment Corporation Ltd. vs. The Commissioner of Income Tax, Tamil Nadu-I, Madras, which allowed spreading expenditure over several years to avoid distortion in profit representation. However, the court agreed with the tribunal's view that this expenditure is capital in nature and cannot be amortized as a revenue expense under Section 37. Thus, this issue was resolved in favor of the department.

2. Depreciation Allowance on the License to Use the Land for Mining:

The appellant contended that the license to use the land for mining qualifies as an intangible asset under Section 2(11) of the Income Tax Act, making it eligible for depreciation under Section 32(1)(ii). The court scrutinized Section 32(ii) and concluded that the rights granted to the assessee are commercial rights akin to a license for mining, thus qualifying for depreciation. This issue was resolved in favor of the assessee.

3. Qualification of Expenditure on Computerization of Mines Department as Business Expenditure:

The appellant argued that the expenditure incurred on the computerization of the Mines Department should be considered as business expenditure under Section 37 of the Income Tax Act. The court referred to various judgments, including S.A. Builders Ltd. vs. Commissioner of Income Tax (Appeals), Chandigarh and Anr., which emphasized that expenditures incurred for commercial expediency are allowable as business expenses. The court agreed with the appellant's contention, considering the expenditure as facilitating the business operations, and resolved this issue in favor of the assessee.

4. Deduction Under Section 80IA for Income Received on Account of Minimum Guarantee Covenant:

The appellant sought deduction under Section 80IA for income received on account of a minimum guarantee covenant, arguing that it is derived from the business of power generation. The court referred to the Supreme Court's decision in Commissioner of Income Tax vs. Meghalaya Steels Ltd., which emphasized a direct nexus between the profits and the business. The court distinguished this case from the Madhya Pradesh High Court's decision in CIT vs. Alpine Solvex Ltd., noting that the damages received were compensation for business losses due to non-performance of machinery, thus directly related to the business. This issue was resolved in favor of the assessee.

Conclusion:

The appeal was partly allowed. The court ruled in favor of the department on the issue of amortization of cost under Section 37 but sided with the assessee on the issues of depreciation under Section 32(1)(ii), business expenditure under Section 37, and deduction under Section 80IA.