2021 (7) TMI 107 - AT - Income Tax

Disallowance of loss claimed on the reasoning that the assessee has not set up its business - assessee has not started commercial production, i.e., extraction of minerals during the years under consideration - HELD THAT - It is well settled proposition of law that setting up of business and commencement of production are two different activities. Once the business is set up, the assessee would be entitled for deduction of revenue expenses. In case of business relating to exploration and extraction of minerals, the activity of exploration of minerals itself is a long process. Once a person identifies the area, where minerals are available, then only the activity of extraction of minerals would start, that too, if it is viable to undertake those activities. Hence generation of revenue, as observed by the tax authorities, should not be the criteria for determining the date of setting up of business. The fact that the generation of revenue would take several years is well recognized in sec.35E of the Act, which provides for amortization of expenses incurred in previous four years preceding the year of commercial production. We notice from the financial statements that the assessee has employed personnel and has started exploration activities. The reconnaissance license has been obtained by one of the shareholders of the assessee company. Hence, there appears to be merit in the contention of the assessee that it has set up its business. As observed the provisions of section 35E of the Act is applicable to facts of the present case, as per which the expenditure incurred within four years prior to the year of commencement of production have to be accumulated and should be amortised in succeeding ten years. Thus, the special provisions of section 35E contemplates accumulation of expenses, i.e., they are not treated as business loss as per normal provisions of the Act. Hence the question of setting up of business is not relevant for the provisions of sec.35E of the Act. Admittedly, the A.O. has not examined the case of the assessee in terms of section 35E of the Act. However, the Ld A.R submitted that the assessee has not commenced extraction activities and accordingly contended that normal provisions of the Act should apply for the years preceding the four years period mentioned in sec.35E of the Act. As per the provisions of the Act, the business loss is allowed to be carried forward only for a period of eight years. For both the years under consideration, the prescribed period of eight years has already elapsed. Hence the claim of the assessee becomes academic. In any case, the question whether the provisions of sec.35E should apply for the years beyond the prescribed period of four years or normal provisions of the Act should apply appears to be a debatable one. At the time of hearing of cases, the bench proposed to restore the matter to the file of the AO for examining entire issue afresh in terms of sec.35E of the Act. Both the parties agreed to the same.

Summary

Issues:
Whether the disallowance of loss claimed by the assessee on the grounds of not setting up its business was justified.

Analysis:
The appeals challenged orders passed by Ld. CIT(A)-3, Bengaluru for the assessment years 2012-13 and 2013-14. The main issue in both years was the disallowance of loss claimed by the assessee on the basis that it had not set up its business. The assessee, a joint venture company for mineral exploration, had not commenced commercial production but had incurred various expenses. The AO disallowed the claimed loss, stating the company had not started any activity. The Ld. CIT(A) agreed, citing a Tribunal decision and dismissing the appeals.

The Ld. A.R. argued that the company had set up its business by obtaining a reconnaissance license, and the exploration process was lengthy. The bench noted the provisions of section 35E of the Act, dealing with deduction of mineral prospecting expenses. The Ld. A.R. contended that as the years under consideration fell beyond the 4-year period in sec. 35E, normal provisions should apply.

The Ld. D.R. supported the Ld. CIT(A)'s order, referencing a Bombay High Court decision on the necessity of proving business set up. The bench highlighted the distinction between "setting up of business" and "commencement of production," emphasizing that revenue generation was not the sole criterion for setting up a business in mineral exploration. The bench found merit in the assessee's argument that the business was set up, but questioned the applicability of sec. 35E to the case.

The bench proposed remitting the matter to the AO for reevaluation under sec. 35E, which both parties agreed to. However, considering the expiration of the period for carrying forward losses, the bench deemed it unnecessary to remit the matter. The appeals were dismissed for statistical purposes, leaving the issue open for consideration in a future year if needed.