2008 (4) TMI 381 - AT - Income Tax

Mine Development Expenditure - Applicability of section 35E - Revenue or Capital Expenditure - Expenditure incurred for removal of overburden for prospecting of minerals - Provisions of section 37(1) would then get excluded as the latter covers expenditure other than expenditure described in sections 30 to 36 of the Act? - HELD THAT - From the facts on record it is clear that these mines were identified long back and even mining operations were started in 1957. Therefore, it cannot be said that expenditure was incurred for the purpose of identifying or prospecting the mines. We find that the Hon'ble Members of the Tribunal while adjudicating an identical issue during the AY's 1958-59 to 1960-61 has visited the mines and recorded the observations of the order of the Tribunal in the case of the same assessee. Thus, it becomes clear that removal of overburden is a continuous process while extracting lignite from the mines and by no stretch of imagination it can be said that the expenditure has been incurred for prospecting the mineral. We are unable to agree with the contention of the ld DR that s. 37 of the Act is not attracted to this extent because the same is covered between ss. 30 and 36 of the Act specifically u/s 35E of the Act. As stated s. 35E(2) applies to the expenditure which has been incurred for the purpose of prospecting of the mineral and not for the purpose of commercial production of the mineral. We are of the considered view that in this case, s. 37 would be clearly attracted since the expenditure is not of capital nature and is exclusively incurred for the purpose of business and not of personal nature. Removal of overburden, for excavating the, mineral i.e., lignite does not bring any benefit of enduring nature or any asset into existence. Once the upper crust of earth known as overburden is removed that would, go waste and lignite is excavated. No enduring benefit can be said to have arisen to the assessee by removal of such overburden. In any case, we further find that such expenditure was held to be allowable even during, the AY 1980-81 while giving direction u/s 144B of the Act i.e., after the introduction of provision of s. 35E. Further, the ld counsel for the assessee has produced by way of example the computation for the AY 1987-88 where similar expenditure was claimed and allowed. In these circumstances, we are of the view, that the expenditure for removal of overburden would not fall u/s 35E of the IT Act and thus, we quash the revisionary order passed by the CIT u/s 263 of the IT Act. In the result, the appeal filed by the assessee is allowed.

Issues Involved:
1. Classification of mine development expenditure as capital or revenue expenditure.
2. Applicability of Section 35E of the Income Tax Act to the mine development expenditure.
3. Validity of the revisionary order passed under Section 263 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Classification of Mine Development Expenditure as Capital or Revenue Expenditure:

The primary issue in this case was whether the mine development expenditure of Rs. 61.92 crores claimed by the assessee should be treated as capital expenditure or revenue expenditure. The assessee argued that the mines were open cast mines, and the removal of overburden was a continuous operation carried out alongside the production of lignite. The CIT, however, believed that this expenditure should be capitalized as it was related to mine development.

The Tribunal noted that the removal of overburden was an ongoing process integral to the extraction of lignite and not a preliminary or preparatory activity. It was observed that this expenditure did not bring into existence any asset of enduring benefit but was part of the corporation's working expenses, recurring every year. The Tribunal concluded that the expenditure was revenue in nature, as it was incurred for acquiring raw material required for the assessee's business and did not result in any enduring benefit or asset.

2. Applicability of Section 35E of the Income Tax Act:

The CIT contended that the expenditure was covered under Section 35E of the IT Act, which allows only 1/10th of the expenditure as a deduction. The assessee argued that Section 35E applied only to expenditure related to prospecting for minerals, not to the removal of overburden during commercial production.

The Tribunal analyzed the provisions of Section 35E and concluded that it applied to expenditure incurred for prospecting minerals, not for commercial production. The Tribunal referred to dictionary definitions of "prospecting" and observed that the expenditure in question was for continuous removal of overburden to extract lignite, not for prospecting. Hence, Section 35E was not applicable to this expenditure.

3. Validity of the Revisionary Order Passed under Section 263 of the Income Tax Act:

The CIT had issued a revisionary order under Section 263, directing the AO to modify the assessment order based on the provisions of Section 35E. The assessee argued that the AO had already made proper inquiries and allowed the expenditure as revenue, and that the CIT's revisionary order was without jurisdiction since two views were possible on the issue.

The Tribunal found that the AO had indeed made detailed inquiries and was satisfied with the assessee's explanation. The Tribunal cited the Supreme Court's decision in Malabar Industrial Co. Ltd. vs. CIT, which held that if two views are possible and the AO adopts one, the order cannot be considered erroneous or prejudicial to the Revenue's interest. The Tribunal also noted that similar expenditure had been allowed in previous years, even after the introduction of Section 35E.

In conclusion, the Tribunal quashed the revisionary order passed by the CIT under Section 263, stating that the expenditure for removal of overburden did not fall under Section 35E and was rightly allowed as revenue expenditure by the AO.

Judgment:

The appeal filed by the assessee was allowed, with the Tribunal ruling in favor of the assessee on all issues.

← Previous Next →