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TMI Blog2011 (9) TMI 588X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 29,52,8453) only to the extent of 30% of the income of Rs. 98,42,810 offered for tax and disallowed the balance expenses (i.e. Rs. 5,10,04,277). He erred in observing that sufficient documentary evidences to substantiate the income and expenses were not produced. (Ground no. 3) 3. Ground nos. 1, 4 and 5, being general in nature, do not call for any specific adjudication by us, and, are, accordingly, dismissed as such. 4. The relevant material facts are like this. The assessee, is engaged in the business of prospecting, exploration and mining activities for diamonds and other minerals, as also in the business of providing consultancy in the field of diamond prospective and other related matters. On 29th October, 2005, the assessee filed its return of income disclosing a total loss of Rs. 4,39,48,222, which was selected for scrutiny assessment. In course of the scrutiny proceedings, which followed, the Assessing Officer noticed that while the assessee has incurred total expenses of Rs. 23,64,44,196 mainly on prospecting for minerals in India, and even as the commercial production of minerals, the assessee has only capitalized Rs. 17,04,80,638. In response to Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd is in further appeal before us. 5. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position. 6. Section 35 E of the Income Tax Act, 1961, which is relevant for the present purposes, is as follows: Section 35E: Deduction for Expenditure on Prospecting, etc., for Certain Minerals. (1) Where an assessee, being an Indian company or a person (other than a company) who is resident in India, is engaged in any operations relating to prospecting for, or extraction or production of, any mineral and incurs, after the 31st day of March, 1970, any expenditure specified in sub-section (2), the assessee shall, in accordance with and subject to the provisions of this section, be allowed for each one of the relevant previous years a deduction of an amount equal to one-tenth of the amount of such expenditure. (2) The expenditure referred to in sub-section (1) is that incurred by the assessee after the date specified in that sub-section 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... koned from the year of commercial production. (5) For the purposes of this section, - (a) "Operation relating to prospecting" means any operation undertaken for the purpose of exploring, locating or proving deposits of any mineral, and includes any such operation which proves to be infructuous or abortive; (b) "Year of commercial production" means the previous year in which as a result of any operation relating to prospecting, commercial production of any mineral or any one or more of the minerals in a group of associated minerals specified in Part A or Part B, respectively, of the Seventh Schedule, commences; (c) "Relevant previous years" means the ten previous years beginning with the year of commercial production. (6) Where the assessee is a person other than a company or a co-operative society, no deduction shall be admissible under sub-section (1) unless the accounts of the assessee for the year or years in which the expenditure specified in sub-section (2) is incurred have been audited by an accountant as defined in the Explanation below sub-section (2) of section 288, and the assessee furnishes, along with his return of income for the first year in which the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the amortization of expenditure wholly and exclusively on any operations relating to prospecting for the specified minerals...". It is thus clear that in order to be eligible for amortization of expenses under section 35E, the expenses must have been incurred wholly and exclusively for "exploring, locating or proving deposits of any minerals, and includes such operations which prove to be infructuous or abortive". 8. It is in this light that the assessee has amortized prospecting, survey and exploration expenses (aggregating to Rs. 9.51 crores and these expenses include tenements fees, equipment rental, aircraft charter, exploration data, exploration drilling, consumables, vehicle operations and maintenance, custom duty and clearance charges, computer software costs, freight charges and professional fees etc), professional fee (Rs. 35.94 lakhs), direct employee costs (Rs. 4.82 crores) and administrative charges (Rs. 2.29 crores). These expenses are directly related to prospecting of diamonds, and have been, therefore, rightly capitalized under section 35D. However, the expenses incurred by the assessee on salaries of employees, who are not working on the prospecting projects (R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e revenue generated in the same period, and that where costs result in benefit over a period beyond one accounting period, the costs should be reasonably spread over the entire period over which benefits accrue. As far as the position under the Income Tax Act is concerned, as long as expenses are incurred for the purposes of business, even if it turns out to wholly unprofitable, the same is to be allowed as deduction in computation of business income. By no stretch of logic, in our considered view, matching principle can restrict the quantum of deduction of expenses by relating the same to the quantum of earnings as a result of incurring these expenses. We have also noted that it is not even in dispute that the assessee has commenced its business inasmuch as there are receipts of consultancy income which have been taxed in the relevant previous year. Once the business has commenced, as is the admitted position on the facts of this case, the deduction of expenses in respect of that business cannot be declined on the ground that the earnings from consultancy income do not justify such high expenses. This kind of a revenue mismatch, which cannot be a ground of disallowing the expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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