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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 ..... d view that the Assessing Officer was indeed in error in capitalizing the expenses which were not directly attributable to the prospecting of diamonds as also in restricting the deductibility of expenses to 30% of the consultancy revenues received by the assessee. Decided in favour of assesee. - ITA NO. 6420 (Mum.) OF 2008 - - - Dated:- 5-9-2011 - SHRI PRAMOD KUMAR, AND SMT. ASHA VIJAYARAGHAVAN, JJ. Represented by: R. Murlidhar for the Appellant. Subhachan Ram for the Respondent. Pramod Kumar, Accountant Member By way of this appeal, the assessee appellant has challenged correctness of CIT(A)'s order dated 24th July, 2008, in the matter of assessment under section 143(3) of the Income Tax Act, 1961. 2. Grievances raised by the assessee, which require our adjudication, are as follows: a. The learned CIT(A) erred in confirming the action of the Assessing Officer in disallowing expenses of Rs. 5,10,04,277 on the basis that the same are related to prospecting activity, and, should, therefore, be accumulated and claimed as deduction under section 35E of the Act, from the year in which commercial production begins. (Ground no. 2) b. The learned CIT(A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecting eligible minerals is to be capitalized under section 35E, and the deduction is to be claimed only when commercial production starts. Since the commercial production admittedly did not start till the end of the relevant previous year, the assessee was not entitled to any deduction in respect of any expenses incurred on prospective for diamonds. Thus, these expenses were required to be disallowed and treated as capital expenses eligible for amortization under section 35E. The Assessing Officer also made to the wordings and scope of Section 35E, to justify the course of action adopted by him. As regards the earning of professional receipts of Rs. 98,42,810, the Assessing Officer observed that "even applying the principle of matching concept, it is not possible to accept that there can be expenditure of Rs. 5,39,57,120 to earn consultancy income of Rs. 98,42,810". He, however, held that since some expenses must have been incurred to earn this income, " a reasonable ratio of 30% of the income can be allowed as deduction for earning the income of Rs. 98,42,810". The remaining expenditure, i.e. Rs. 5,10,04,277 was disallowed and treated as capital expenditure eligible for amortizat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 32, shall not be deemed to be expenditure incurred by the assessee for any of the purposes specified in sub-section (2). (4) The deduction to be allowed under sub-section (1) for any relevant previous year shall be - (a) An amount equal to one-tenth of the expenditure specified in sub-section (2) (such one-tenth being hereafter in this sub-section referred to as the instalment); or (b) Such amount as is sufficient to reduce to nil the income (as computed before making the deduction under this section) of that previous year arising from the commercial exploitation [whether or not such commercial exploitation is as a result of the operations or development referred to in sub-section (2)] of any mine or other natural deposit of the mineral or any one or more of the minerals in a group of associated minerals as aforesaid in respect of which the expenditure was incurred, whichever amount is less : Provided that the amount of the instalment relating to any relevant previous year, to the extent to which it remains unallowed, shall be carried forward and added to the instalment relating to the previous year next following and deemed to be part of that instalment, and so on, for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missible under sub-section (1) in the case of the demerged company for the previous year in which the demerger takes place; and (ii) The provisions of this section shall, as far as may be, apply to the resulting company as they would have applied to the demerged company, if the demerger had not taken place. (8) Where a deduction under this section is claimed and allowed for any assessment year in respect of any expenditure specified in sub-section (2), the expenditure in respect of which is so allowed shall not qualify for deduction under any other provision of this Act for the same or any other assessment year. 7. A plain reading of the above statutory provision shows that the expenses which are covered by the scope of Section 35E are the expenses which are incurred "wholly and exclusively on any operations relating to prospecting" - as is the expression used in Section 35E(2) which, in turn is defined under section 35E (5)(a) as expenses "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". CBDT Circular no. 56 dated 19th March 1971, which explains the rationale behi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able in the hands of the assessee. That is clearly an incorrect approach on the part of the Assessing Officer. The assessee, even when engaged in the business of prospecting minerals, is eligible for amortization of such expenses as are eligible under section 35E(2) 35E(5)(a). All other expenses are eligible for deduction as in the normal course of computation of business income. 9. We have noted that the CIT(A) has upheld restricted the deductibility of expenses on the basis of, what he perceived as, applicability of matching concept. However, the application of 'matching principle', based on the quantum of earnings, is wholly devoid of any merits. One cannot invoke the matching principle to restrict the deductibility of a part of expenses as a result of the expenses being too high in proportion to quantum of expenditure; it can at best be invoked to spread over the costs over entire period in which revenues as a result of those costs are generated, such as in deferred revenue expenditure - but even in such cases the restriction on deductibility of expenses have not been upheld by the coordinate benches as indeed by the Hon'ble Courts above. All that the matching principle state ..... X X X X Extracts X X X X X X X X Extracts X X X X
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