2018 (6) TMI 1789 - HC - Income Tax

Nature of expenditure - payment of the net present value by an assessee engaged in mining for use of forest land for mining purpose - revenue or capital expenditure - AO reasoned that since it was a one-time payment for the assessee to continue its business operations or undertake mining operations in the relevant area for the first time, it had to be regarded as a capital expenditure and could not be deducted from the income as a revenue expenditure - HELD THAT - Both the Commissioner (Appeals) and the Appellate Tribunal have referred to a judgment of Bikaner Gypsums Ltd. 1990 (10) TMI 2 - SUPREME COURT as observed that since the assessee was entitled to carry on mining operations and such payment had been made for the removal of the difficulty in the assessee carrying on its business in accordance with its licence, the expenditure had to be regarded as a revenue expenditure and could not be treated as a capital expense. This is not a case where the assessee, upon payment of the NPV, obtained a fresh right to undertake any business. That right of the assessee was covered by the licence previously granted in its favour by the State of Odisha. The NPV payment is a kind of a compensation for using forest land for non-forest purpose pursuant to an order of the Supreme Court. The payment of the NPV in this case, like in the case of Bikaner Gypsums Ltd. , has to be regarded as a revenue expenditure in accordance with the ratio in the Bikaner Gypsums Ltd. case, since it was a one-time payment made to remove an obstacle from the path of the assessee carrying on its business operations. For the reasons aforesaid, the concurrent findings of the Commissioner (Appeals) and the Appellate Tribunal based on a long-standing judgment of the Supreme Court does not call for any interference. - Decided against revenue.

Summary

Issues:
Determining whether the payment of net present value (NPV) by a mining assessee for using forest land for mining purposes constitutes a capital expenditure or a revenue expenditure.

Analysis:
The legal issue in this case revolves around the classification of the payment of net present value (NPV) by a mining assessee for utilizing forest land for mining activities. The Assessing Officer contended that since the payment was a one-time fee enabling the assessee to conduct mining operations in the relevant area, it should be treated as a capital expenditure, not deductible from income as a revenue expenditure. However, the Commissioner (Appeals) and the Appellate Tribunal disagreed, emphasizing that the payment did not grant the assessee a new right to mining, but rather served as a fee to avoid potential legal consequences or disruptions in mining operations.

A crucial precedent cited in this case is the judgment in Bikaner Gypsums Ltd. v CIT, where a similar issue arose. In that case, the Supreme Court held that an expenditure incurred to resolve a dispute and facilitate the continuation of mining operations under an existing license should be treated as a revenue expenditure, not a capital expense. The court in the present case applied the dictum from Bikaner Gypsums Ltd., highlighting that the NPV payment was akin to compensation for using forest land for non-forest purposes, aligning with the rationale in the cited judgment.

The distinction between the present case and R.B. Seth Moolchand Sugachand v CIT, where a prospecting license fee was deemed a capital expenditure, lies in the nature of the payment. In the latter case, the fee was a prerequisite for conducting business in a specific area, granting the right to prospect or mine. Conversely, in the current scenario, the NPV payment did not expand the area of mining operations but rather facilitated the continuation of operations as per the existing license terms.

Ultimately, the court upheld the decisions of the Commissioner (Appeals) and the Appellate Tribunal, emphasizing the application of established legal principles and the alignment of the NPV payment with revenue expenditure criteria. As a result, the appeals were dismissed, and no costs were awarded in the matter.

In conclusion, the judgment clarifies the treatment of NPV payments in the context of mining activities on forest land, reaffirming the distinction between capital and revenue expenditures based on the purpose and effect of the payments in facilitating existing business operations without conferring new rights.