2025 (4) TMI 1420 - AT - Income Tax

Disallowing the claim of amortization of surface rights - as submitted what the assessee acquired by incurring the expenditure was an enduring business right in respect of mining the lignite and not acquisition of any fixed asset - HELD THAT - In the set aside proceedings the assessee brought on record the fact that M/s. RSMML has not claimed any expenditure in relation to acquisition of surface rights of Kapurdi mines on behalf of the assessee for which attention was drawn to Note No.11.6 of Notes to Accounts of M/s. RSMML in its annual report for F.Y. 12-13 where it disclosed that it has not treated the amount received from the assessee for acquiring the mining right for the assessee as its asset or liability in the financial statements but since the title of land at Kapurdi is mutated to M/s. RSMML Ltd. the same is shown at a nominal value of Rs. 1 in its balance sheet. This fact is also confirmed by M/s. RSMML vide letter dt.10.07.2018 (PB 65-68). The AO at para 3.3 of its order for A.Y. 2012-13 has accepted that no benefit has accrued to M/s. RSMML in respect of the said land. Thus when this fact is on record and not disputed by the AO read with the direction of the coordinate bench the claim of amortization of surface rights are allowable. Hence by not following the direction of coordinate bench addition confirmed by both the lower authorities is illegal bad in law and therefore the same be directed to be allowed. Allowability on account of depreciation on intangible asset in the nature of business right acquired on account of issue of equity shares free of cost - Whether mining lease transfer deed does not involve payment of any consideration? - HELD THAT - The assessee is failed to demonstrate any visible benefit accrued to it by virtue of this free allocation of shares to M/s. RSSML. There is no documentary evidence furnished before us which confirms any sort of technical or other support being drawn by the assessee out of this transaction. As an appropriate amortization charge where the benefit to the assessee was visible in the form mining lease charges paid are duly allowed but on this issue we are not convinced with the claim of the assessee that any intangible asset came into existence which benefited the assessee in terms of its business operation. Assessee is not entitled to claim the depreciation on this show called intangible asset. Hence the orders of authorities below are sustained and ground raised by the assessee is dismissed.

Summary

The core legal questions considered in these appeals relate primarily to the allowability of amortization and depreciation claims by the assessee in respect of mining-related expenditures and intangible assets under the Income Tax Act, 1961. Specifically, the issues include:

1. Whether the expenditure incurred by the assessee on acquiring surface rights for lignite mining constitutes capital expenditure eligible for amortization, or whether it should be disallowed as capital expenditure not eligible for amortization.

2. Whether the surface rights acquired by the assessee qualify as intangible assets eligible for depreciation under the Act.

3. Whether the depreciation claim on intangible assets arising from the issue of equity shares free of cost to a joint venture partner (M/s. RSMML) is allowable, considering the nature of consideration and benefit derived.

4. The interpretation and application of relevant provisions of the Income Tax Act, particularly section 35E dealing with deductions for expenditure on prospecting and development of mines, and section 32 relating to depreciation of intangible assets.

Issue 1: Allowability of Amortization of Surface Rights Expenditure

The legal framework involves the Income Tax Act provisions on capital expenditure, amortization, and specifically section 35E, which allows deduction for expenditure incurred on prospecting, development, and extraction of minerals. Section 35E(3) excludes certain capital expenditures, including acquisition of sites or rights over mineral deposits, from the ambit of deductible expenditure under subsection (2).

Precedents considered include the Hon'ble ITAT's earlier order dated 12.10.2017, which held that the expenditure incurred by the assessee was for acquiring an enduring business right to mine lignite rather than acquisition of a fixed asset. The issue was remanded to verify whether the joint venture partner M/s. RSMML had claimed the expenditure, to avoid double claims.

The Court examined the facts that the assessee, a joint venture company, incurred expenditure through M/s. RSMML for acquiring surface rights and mining leases for a 30-year period, without acquiring ownership of the land. The expenditure was capitalized as "Surface Rights" in the balance sheet and amortized over the period.

The Assessing Officer (AO) disallowed amortization, reasoning that land is not depreciable and the acquisition of mining land did not qualify as an intangible asset under section 32(1)(ii), since the rights were not granted by government authorities but acquired in the normal course of business.

The CIT(A) upheld the AO's order, but the Tribunal noted that the expenditure was necessary for mining operations, which generated revenue from sale of power using the mined lignite as raw material. The Tribunal applied the principle of matching revenue with associated costs, emphasizing that disallowing the expenditure would distort the assessee's income and result in undue taxation on notional income.

The Tribunal further analyzed section 35E and observed that while subsection (3) excludes certain capital expenditures from deduction, the principle of matching costs to revenue remains applicable. The Tribunal relied on the Supreme Court decision in Madras Industrial Investment Corporation Ltd. v. CIT, which held that expenditure includes liabilities incurred in praesenti even if payable in future, and that such liabilities may be spread over the period during which the benefit is received.

Applying this reasoning, the Tribunal concluded that the expenditure on surface rights, though capital in nature, conferred an enduring business right to mine lignite and thus amortization over the lease period was justified. The Tribunal also noted that the expenditure was not claimed by M/s. RSMML, as confirmed by documentary evidence, and therefore no double claim arose.

The Tribunal distinguished this from acquisition of fixed assets or land ownership, emphasizing that the assessee had only mining rights, an intangible business right. It also relied on judicial precedents where payments for rights or facilitation on government land were held to be revenue expenditure or eligible for amortization when they facilitated business operations without conferring ownership of assets.

Consequently, the Tribunal allowed the claim for amortization of surface rights for the assessment years under consideration, setting aside the orders of the AO and CIT(A) to the extent they disallowed such amortization.

Issue 2: Eligibility of Surface Rights as Intangible Assets for Depreciation

The assessee alternatively claimed that the surface rights acquired constituted intangible assets eligible for depreciation under section 32(1)(ii) of the Act. The AO and CIT(A) rejected this claim on the ground that the rights were not granted by government authorities but acquired in the normal course of business, and thus did not qualify as intangible assets under the provision.

The Tribunal concurred with the lower authorities, holding that the surface rights, while conferring business rights, did not meet the statutory definition of intangible assets eligible for depreciation. The Tribunal emphasized that the rights were acquired through a joint venture arrangement and did not amount to government-granted rights as contemplated under the Act.

Thus, the claim for depreciation on surface rights as intangible assets was not allowed, but the amortization claim was allowed as discussed under Issue 1.

Issue 3: Depreciation on Intangible Asset Arising from Equity Shares Issued Free of Cost

The assessee claimed depreciation of Rs. 42,49,575/- on an intangible asset described as a business right acquired on account of issue of equity shares free of cost to M/s. RSMML. The contention was that the transfer of equity shares without consideration constituted consideration for acquiring mining rights.

The Tribunal examined the joint venture agreement and related documents and found that the free issuance of shares benefited M/s. RSMML and constituted a cost to the other joint venture partner, M/s. RWPL, rather than the assessee itself. The assessee failed to demonstrate any tangible or intangible benefit accruing to it from this transaction.

The Tribunal noted the absence of documentary evidence showing creation of an intangible asset in the assessee's favor or any technical or managerial support received from M/s. RSMML in return for the shares. It also observed the lack of evidence that M/s. RSMML declared any income from the receipt of shares free of cost.

Accordingly, the Tribunal held that the depreciation claim on this alleged intangible asset was not tenable and upheld the orders of the AO and CIT(A) rejecting the claim.

Significant Holdings

The Tribunal established the following core principles and determinations:

o Expenditure incurred by the assessee for acquiring surface rights and mining leases for lignite extraction, which confer enduring business rights but not ownership of fixed assets or land, is capital expenditure eligible for amortization over the lease period. This is consistent with the principle of matching revenue and related costs and avoids distortion of income.

o Such surface rights do not qualify as intangible assets eligible for depreciation under section 32(1)(ii) of the Income Tax Act, as they are not government-granted rights but acquired in the normal course of business.

o The free issuance of equity shares to a joint venture partner does not create an intangible asset in favor of the assessee unless there is demonstrable benefit or consideration flowing to the assessee. Without documentary evidence of such benefit, depreciation claims on such alleged intangible assets are not allowable.

o The Tribunal emphasized adherence to its earlier directions to verify whether the joint venture partner had claimed the same expenditure, and upon finding no such claim, allowed the amortization.

o Reliance on authoritative judicial precedents clarified that expenditure includes liabilities incurred in praesenti even if payable in future, and that liabilities and costs that confer continuing benefit to the business may be amortized over the relevant period.

o The Tribunal rejected the revenue's contention that the expenditure was not allowable simply because the land was not owned by the assessee, recognizing the commercial reality of mining rights and their contribution to revenue generation.

Verbatim excerpt of crucial legal reasoning includes the Tribunal's observation:

"It is unchallenged facts that to carry on mining operation the assessee company... paid charges to the owners of land so that minerals i.e. lignite can be extracted for a period of 30 years... The minerals extracted by the assessee is to be used in their captive power plant... The assessee earned revenue from the sale of power... how the cost of procuring raw material can be disallowed. Here we are applying the concept of matching revenues with relevant costs to earn the revenue."

And further:

"The Hon'ble ITAT has given a finding that by incurring the expenditure assessee has not acquired any fixed asset for enduring benefit but the assessee got enduring business right for mining the lignite... when this fact is on record and not disputed by the AO... the claim of amortization of surface rights are allowable."

On the issue of depreciation on shares issued free of cost, the Tribunal stated:

"The assessee is failed to demonstrate any visible benefit accrued to it by virtue of this free allocation of shares... no documentary evidence furnished before us which confirms any sort of technical or other support being drawn by the assessee... we are clear opinion that the assessee is not entitled to claim the depreciation... Hence the orders of authorities below are sustained."

In conclusion, the Tribunal partly allowed the appeal relating to amortization of surface rights, fully allowed the appeals concerning other years, but dismissed the claim for depreciation on the intangible asset arising from free equity shares. The orders of the AO and CIT(A) were set aside to the extent inconsistent with these findings.