2023 (1) TMI 274 - HC - Income Tax

Deduction u/s 35E - amount paid to the Commissioner of Geology and Mining department, Government of Gujarat - Assessee is a Government company doing the business of acting as a nodal agency for augmenting power generation in the State of Gujarat - HELD THAT - Expenditure referred to in subsection( 1) has to be incurred by the assessee after the 31st Day of March, 1970 at any time during the year of commercial production and any one or more of the four years immediately preceding that year, wholly and exclusively on any operation relating to prospecting for any mineral or group of associated minerals specified in Part A or Part B, respectively, of the Seventh Schedule or on the development of a mine or other natural deposit of any such mineral or group of associated minerals and therefore, as per sub-section(2) of section 35E when the commercial production of the appellantassessee has started in the year 2018-2019, the appellant is not entitled to deduction under section 35E of the Act, 1961. Clause(a) of subsection( 5) of section 35E defines operation relating to prospecting which means any operation undertaken for the purpose of exploring, locating or providing deposits of any mineral and includes any such operation which proves to be infructuous or abortive. It is not in dispute that the assessee has claimed expenditure in the nature of operation relating to prospecting and as per sub-section(4) of section 35E of the Act, 1961, the assessee has claimed 1/10th of the expenditure specified in sub-section(2). Therefore, in the facts of the case when the assessee has not started any commercial production for the year under consideration or any of the previous four years, the assessee is not entitled to deduction under section 35E of the Act, 1961. Insofar as proposed question no.1 is concerned, we are of the view that concurrent findings of fact arrived at by the CIT(Appeals) and the Tribunal warrants no interference in the impugned orders so as to give rise to any question of law muchless any substantial question of law as proposed or otherwise. Alternative claim of assessee to grant entire expenditure u/s 37 - CIT (Appeals) as well as the Tribunal have rejected the claim of the assessee for deduction under section 37(1) of the Act, 1961 on the ground that when the assessee has claimed expenditure under section 35E of the Act, it purports to be in nature of capital expenditure and therefore, deduction cannot be allowed under section 37(1) - HELD THAT - The alternative claim of the appellant prima facie requires consideration under section 37(1) of the Act, 1961 and therefore, we admit proposed question no.2. Disallowing depreciation claimed in relation to leased assets - CIT(Appeals) as well as Tribunal confirmed the disallowance made by AO of the depreciation on leased assets on the ground that the transaction was considered as financial arrangement between the appellant and the Gujarat Electricity Board - HELD THAT - As in view of concurrent findings of fact arrived at by both the authorities below that the transaction entered into by the assessee with that of GEB is in the nature of financial transaction and lease rent is also not taxed in the hands of the assessee while disallowing the depreciation claimed on the leased assets, the decision of Gujarat Gas Co. Ltd. 2008 (9) TMI 126 - GUJARAT HIGH COURT relied upon by the assessee would not be applicable in the facts of the present case. This Court held that the corresponding lease rental was taxed as business income in the hands of Gujarat Gas Company Limited which was not disturbed by the Assessing Officer despite having initiated action under section 147 of the Act, 1961 for treating the transaction as a non-genuine transaction and as rental income was taxed in the hands of Gujarat Gas Company Ltd., depreciation was also granted by the Tribunal and therefore, it was held that no question of law much-less substantial question of law arises from the order passed by the Tribunal allowing the depreciation on the leased assets to Gujarat Gas Company Ltd. In the present case, facts are converse as both the authorities below on findings of fact as recorded here-in-above have come to the conclusion that the transaction entered into between the assessee and the GEB is in the nature of financial transaction and therefore, neither the rental income is taxed in the hands of the assessee and at the same time, depreciation is also not allowed on the leased assets. Insofar as question no.(3) is concerned, no legal infirmity exists in the order of the Tribunal so as to give rise to any question of law much-less substantial question of law as proposed or otherwise.

Summary

Issues Involved:
1. Disallowance of deduction under Section 35E of the Income Tax Act, 1961.
2. Alternative claim for deduction under Section 37 of the Income Tax Act, 1961.
3. Disallowance of depreciation on leased assets.

Issue-wise Detailed Analysis:

1. Disallowance of Deduction under Section 35E:
The appellant, a government company engaged in power generation, claimed a deduction under Section 35E for expenses paid to the Commissioner of Geology and Mining, Government of Gujarat, for mining rights and exploration charges. The claim was disallowed by the Assessing Officer on the grounds that the appellant did not carry out the prospecting activities itself and had not commenced commercial production, a primary condition under Section 35E(2). The CIT(Appeals) upheld the disallowance, stating that the appellant's intention was not to conduct production but to acquire and sell the mining site. The Tribunal also dismissed the appeal, reiterating that deductions under Section 35E are allowed only in the year of commercial production or the four preceding years, which was not the case for the appellant. The High Court concurred with the Tribunal, noting that the appellant was not entitled to the deduction as commercial production had not started during the relevant assessment years.

2. Alternative Claim for Deduction under Section 37:
The appellant contended that if the deduction under Section 35E was not allowed, the entire expenditure should be deductible under Section 37. The CIT(Appeals) and the Tribunal rejected this claim, arguing that the expenditure was capital in nature and thus not allowable under Section 37(1), which only permits deductions for revenue expenditures. The appellant argued that the Tribunal failed to consider this alternative claim properly. The High Court found prima facie merit in the appellant's alternative claim under Section 37(1) and admitted the question for further consideration.

3. Disallowance of Depreciation on Leased Assets:
The appellant claimed depreciation on leased assets, which was disallowed by the Assessing Officer, CIT(Appeals), and the Tribunal. The authorities concluded that the lease transactions were essentially financial arrangements rather than genuine leases, and thus, the appellant was not entitled to depreciation. The Tribunal noted that the major part of the appellant's revenue came from interest rather than lease rent, and the lease agreement indicated that the assets would remain with the lessee after the lease period. The High Court upheld the Tribunal's decision, distinguishing it from the case of Gujarat Gas Co. Ltd., where the lease transaction was genuine and the lease rent was taxed as business income. In the present case, the transaction was deemed a financial arrangement, and thus, neither the rental income was taxed nor the depreciation allowed.

Conclusion:
The High Court dismissed the appeals regarding the disallowance of deductions under Section 35E and depreciation on leased assets, finding no substantial question of law. However, it admitted the question regarding the alternative claim for deduction under Section 37 for further consideration.