2010 (1) TMI 39 - HC - Income Tax

Applicability of Section 35E - business of prospecting and exploring ores and minerals AO did not accept the argument on the ground that The apparent reason for change in accounting policy seems to be the provision of Section 35E of the Income Tax Act which allows expenditure of four years prior to the year in which commercial production is started to be claimed in the year of the commercial production and so on AO alleged that it has changed its accounting policy so that the provision of Section 35E is circumvented and the losses are claimed as business losses which are allowed to be carried forward for 8 years held that - the present case the Tribunal has on facts come to the conclusion that the assessee company s objects did not include mining of ores or minerals or commercial production in the sense understood within the meaning of Section 35 E of the said Act. Consequently the Tribunal agreed with the assessee s contention that there would never be commercial production of any mineral or ore as a part of the activities of the assessee in view of the very objects of the assessee company and the FIPB permission given to the assessee company. Consequently the provisions of Section 35 E would not be applicable to the facts and circumstances of the present case as there was no possibility of any commercial production decided in favor of assessee revenue appeal dismissed.

Summary

Issues:
1. Applicability of Section 35E of the Income Tax Act, 1961 to the assessment year 2001-2002.

Detailed Analysis:

1. Applicability of Section 35E:
The primary issue in this case revolved around the applicability of Section 35E of the Income Tax Act, 1961 to the assessment year 2001-2002. The revenue challenged the deletion of an addition made by the Assessing Officer, contending that the Commissioner of Income Tax (Appeals) had erred in not considering the provisions of Section 35E. The Assessing Officer believed that the change in accounting policy by the assessee was a way to circumvent Section 35E and understate income tax liability. However, the Commissioner of Income Tax (Appeals) disagreed, stating that the exploration activity was distinct from commercial production, and the company was not engaged in mining activities. The Tribunal also examined the objects of the company and the permission granted by the Foreign Investment Promotion Board (FIPB), concluding that the company was only involved in prospecting and exploring ores and minerals, not commercial production. As a result, the Tribunal held that Section 35E was not applicable due to the absence of commercial production, a key requirement under the provision. The High Court concurred with this analysis, finding no grounds for further consideration and dismissing the appeal.

In conclusion, the judgment centered on the interpretation and application of Section 35E of the Income Tax Act, 1961, specifically in the context of the company's activities related to prospecting and exploring ores and minerals. The decision highlighted the importance of commercial production as a prerequisite for the operation of Section 35E and emphasized the need for a factual assessment of the company's business objectives and permissions granted to determine the applicability of tax provisions accurately.