2020 (12) TMI 715 - AT - Income Tax

Expenditure in respect of Dead Rent paid in respect of mines which are not operational and no manufacturing activity is carried on - Nature of expenses - CIT(A) allowing the claim as revenue expenditure - HELD THAT - CIT-A correctly allowed the claim of assessee by following the CBDT Circular No.1D(V.53) of 1966, wherein it was laid down that dead rent is allowed as deduction irrespective of the fact whether the mines are operational or not. Environment Protection Fees - allowable revenue expenses - assessee paid a sum to the Govt. of Karnataka towards Environmental Protection Fees levied on the mining leases - AO considered that the assessee would get the benefit of the fee paid for 10 years and allowed 1/10th of the expenditure claimed as deduction by the assessee - HELD THAT - Environmental Protection Fees cannot be equated to consideration paid for acquiring mining rights and therefore the decision of ITAT Bangalore in the case of K R Kaviraj 2017 (12) TMI 1784 - ITAT BANGALORE is not applicable to the facts of the present case. We are of the view that the sum paid was a compensation paid by the assessee for damage to the environment and it cannot be said that it gives an enduring benefit to the assessee. We therefore agree with the conclusion of the CIT(Appeals) that expenditure in question is a capital expenditure. Appeal by the revenue is dismissed.

Summary

Issues:
1. Allowability of dead rent as revenue expenditure for non-operational mines.
2. Treatment of Environmental Protection Fees as revenue or capital expenditure.

Issue 1: Allowability of Dead Rent as Revenue Expenditure:

The appeal concerned the deductibility of dead rent paid for non-operational mines as revenue expenditure for the assessment year 2010-11. The Commissioner of Income Tax (Appeals) allowed the claim based on a CBDT Circular, which stated that dead rent is deductible regardless of operational status. The revenue challenged this decision before the Tribunal. The Tribunal considered relevant case law and the CBDT Circular, ultimately dismissing the revenue's appeal. The Tribunal held that the payment of dead rent was revenue expenditure, following the Supreme Court's decision that such payments relate to raw material extraction and do not provide an enduring advantage. The Tribunal emphasized that yearly payments under a mining lease may constitute revenue expenditure based on individual circumstances.

Issue 2: Treatment of Environmental Protection Fees:

The second issue revolved around the treatment of Environmental Protection Fees paid to the Government of Karnataka as revenue or capital expenditure. The Revenue contended that the fees should be treated as capital expenditure due to an enduring benefit. The CIT(Appeals) disagreed and allowed the full deduction, considering it as revenue expenditure. The Tribunal analyzed the nature of the fees and concluded that they were compensation for environmental damage, not providing an enduring benefit. The Tribunal distinguished the case cited by the Revenue, emphasizing that the fees were not akin to lease deposits or lump sum considerations for acquiring rights. Consequently, the Tribunal upheld the CIT(Appeals) decision, dismissing the Revenue's appeal.

In conclusion, the Tribunal upheld the Commissioner's decisions regarding both issues, affirming the deductibility of dead rent as revenue expenditure for non-operational mines and treating Environmental Protection Fees as revenue expenditure rather than capital expenditure. The appeal by the revenue was dismissed, and the Tribunal's decision was pronounced on August 31, 2020.