2017 (9) TMI 718 - AT - Income Tax

Disallowing compensation amount paid to the land owner for using the land for mining under section 37(1) - whether provisions of section 35E are attracted in the instant case? - Held that - For applicability of section 35E, both the nature and period of occurrence of the expenditure are relevant. In the instant case, it is not in dispute that the year under consideration is not the year when the commercial production has started. The assessee has entered into lease agreement with the Government of Rajasthan way back in the year 2000 and thereafter, it has started commercial production and reported revenues to tax. In view of the same, given that the expenditure under consideration has been incurred much after the start of the commercial production, one of the conditions for invoking section 35E are not satisfied. We therefore need not examine the second condition regarding nature of the expenditure as the same would be purely academic in nature. The provisions of section 35E are therefore not applicable in the instant case. Therefore, the applicability of provisions of section 37(1) cannot be excluded merely on account of the fact that the expenditure is covered under section 35E of the Act. The applicability of provisions of section 37(1) have therefore to be tested independently on satisfaction of other conditions specified therein. Given that the piece of land falls within the mining area in respect of which assessee has an existing right to carry on its mining operations and the fact that assessee wishes to carry on the mining area in that area, the assessee was required to pay compensation to the land owner so that the latter doesn t obstruct or challenge the carrying of the mining activity underneath the surface of land which belongs to him. The payment is for the purposes of removing the disability or obstruction and to facilitate the carrying on its business. No fresh rights have been acquired by the assessee by virtue of paying the said compensation. The assessee was already having a right to carry on the mining operations. The fact that land stand mutated in the name of the Government of Rajasthan post surrender by Shri Ranga also shows that the land or the surface rights therein have not being acquired by the assessee. In light of above discussions and respectfully following the decision in case of Bikaner Gypsum (1990 (10) TMI 2 - SUPREME Court), the assessee deserve to succeed in the instant case. The AO is therefore directed to allow the claim of deduction u/s 37(1) of the Act.

Summary

Issues Involved:
1. Disallowance of depreciation on intangible assets (Mining Rights) under Section 32 of the Income Tax Act, 1961.
2. Disallowance of deduction under Section 37(1) of the Income Tax Act, 1961, for compensation paid to the landowner for using the land for mining.
3. Disallowance of revenue expenditure under Section 35(2AB) of the Income Tax Act, 1961.

Detailed Analysis:

1. Disallowance of Depreciation on Intangible Assets (Mining Rights) under Section 32:
The assessee claimed depreciation on mining rights amounting to ?44,81,811 under Section 32 of the Income Tax Act, 1961. The Assessing Officer (AO) disallowed the claim, stating that the expenditure was for acquiring land, not mining rights. The CIT(A) upheld this disallowance, noting that the payment did not result in acquiring any know-how, patents, copyrights, trademarks, licenses, franchises, or any other business or commercial rights of a similar nature. The Tribunal confirmed this view, stating that the assessee did not acquire any intangible asset as defined under Clause (b) of Explanation 3 of Section 32.

2. Disallowance of Deduction under Section 37(1) for Compensation Paid to Landowner:
The assessee alternatively claimed a deduction of ?35,00,000 under Section 37(1) for compensation paid to the landowner for using the land for mining. The CIT(A) referred to Section 35E and held that the amount could not be allowed as a deduction. The Tribunal, however, analyzed the applicability of Section 35E and concluded that it was not applicable since the expenditure was incurred much after the start of commercial production. The Tribunal further examined the applicability of Section 37(1) and referred to the legal proposition laid down by the Hon’ble Supreme Court in the case of Bikaner Gypsum Ltd. It held that the compensation paid was for removing an obstruction to facilitate mining operations and did not result in acquiring any capital asset. Therefore, the Tribunal directed the AO to allow the deduction of ?35,00,000 under Section 37(1).

3. Disallowance of Revenue Expenditure under Section 35(2AB):
The assessee initially contested the disallowance of revenue expenditure amounting to ?18,00,000 under Section 35(2AB). However, during the hearing, the assessee's representative submitted that they did not wish to press this ground. Consequently, this ground was dismissed as not pressed.

Conclusion:
The Tribunal allowed the appeal partly. It upheld the disallowance of depreciation on mining rights under Section 32 but directed the AO to allow the deduction of ?35,00,000 under Section 37(1) for compensation paid to the landowner. The ground regarding the disallowance of revenue expenditure under Section 35(2AB) was dismissed as not pressed.