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TMI Blog2011 (12) TMI 409X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed by the Assessing Officer on the reason that the assessee has not commenced the business in the year under consideration. Since the lead order was in Assessment Year 2002-03, the facts and grounds are discussed elaborately in that appeal. ITA 40/M/2006, AY 2002-03 2. The assessee De Beers India Prospecting Pvt. Ltd has raised the following two grounds: "1. The learned CIT (A) erred in confirming the action of the Assessing Officer in disallowing expenses on nonprospecting activities amounting to Rs. 27,88,030/- and depreciation of Rs. 7,13,781/- claimed in the return of income on the ground that the company has not commenced its business of mining during the relevant year. 2. The learned CIT (A)erred in confirming the action of the Assessing Officer in taxing the interest received on short term deposits under the head "income from other sources" instead of "business income" as claimed in the return of income". Ground Nos. 3 and 4 are general in nature. The appeal was originally dismissed for want of prosecution by assessee and was recalled by order in MA No. 713/M/08dt.14-01-09. 3. Briefly stated, the assessee filed return of l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submission that the assessee having been incorporated and obtained permission from the FIPB can be stated to have commenced business operations and since the main activity is exploration and prospecting for diamonds, the assessee has commenced its business. It was submitted that even though the assessee has not started the mining activity, the assessee's business of prospecting has been commenced. The learned Counsel placed on record all the details of expenditure claimed in the PandL account, bifurcation between the prospecting activities capitalized under section 35E and non prospecting activities in respective Assessment Years. It was submitted that the expenditure which was capitalized under section 35E was not in dispute and as the assessee has not claimed any deduction to the extent of capitalization but claim of other expenditure not covered by Section 35E and is eligible under section 37(1) is the issue in appeal. He further submitted that this issue was covered by the decision of the Mumbai Tribunal in its own case De Beers India (P) Ltd vs. DCIT in ITA No.6420/Mum/2008 for the Assessment Year 2005-06. It was submitted that the Hon'ble Tribunal has considered the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is no dispute with reference to the fact that the assessee has undertaken prospecting activities in the year under consideration and has suo moto disallowed the expenditure pertaining to the prospecting activities under section 35E of the Income Tax Act. The Assessing Officer permitted as such as claimed by the assessee. There is also no dispute with reference to the bifurcation of expenditure between the prospecting activities and non prospecting activities as was done by the assessee while filing the revised return withdrawing claim to the extent of capitalized expenditure under section 35E. It is also a fact that the assessee has not yet claimed any deduction under section 35E as no mining activity has commenced yet. The issue is with reference to the claim of non prospecting expenditure stated to be salaries of persons in Head Quarters and other expenditure of the company not related to prospecting activities. As seen from the provisions of Section 35E and particularly the restricted meaning given to sub section 5(a) for 'operation relating to prospecting', one cannot fault the assessee in bifurcating the expenditure directly relating to prospecting activities and othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from commercial production and relying on the permissions received from the FIPB with respect to only exploration activity in various States in India, the CIT(A) allowed the claim of the assessee. The ITAT confirmed the same and held that the provisions of Section 35E are not applicable as assessee was not in engaged in any commercial production. The Hon'ble Delhi High Court upheld the conclusions that the assessee company objectives did not include mining of ore or mineral or commercial production and therefore, the provisions of section 35E would not be applicable to the facts of the case as there was no possibility of any commercial production. In the present case the assessee was permitted to undertake reconnaissance for prospecting activities with reference to diamonds in the State of Andhra Pradesh and accordingly claimed expenditure under section 35E which was directly related to prospecting expenditure. It cannot be stated that the assessee has not commenced the business activities. The assessee's business activities has already started from the time it obtained the permission from the Govt. of A.P. (if not from the time it obtained FIPB permission) and started the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activity came fist in point of time and laid the foundation for the second activity and the second activity, when completed, laid the foundation for the third activity. The business consisted of a continuous process of these three activities and when the first activity was started with a view to embarking upon the second and the third activities, it clearly amounted to commencement of the business. It might be that the whole business was not set up when the activity of quarrying the leased area of land and extracting limestone was started. That would be set up only when the plant and machinery was installed, the manufacture of cement started and an organization for sale of manufacture cement was established. But, the business is nothing more than a continuous course of activities and all the activities which go to make up the business need not be started simultaneously in order that the business may commence. The business would commence when the activity which, is first in point of time and which must necessarily precede the other activities is started. As soon as an activity which is an essential activity in the course of carrying on the business, or which, in other words ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nch in assessee own case in ITA no 6420/Mum/08 dt.05-09- 2011 as under: "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 (Rs.1.93 crores), professional fees not connected with exploration project (Rs.36.80 lakhs), administration charges not connected with prospecting work (Rs.3.10 crores - including rates and taxes, property rentals, property expenses, communication expenses, travelling and conveyance unconnected with prospecting projects, auditors remuneration etc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r respective stands, we are of the opinion that this issue has become academic in nature as the incomes of interest whether assessed under the head 'business' or 'income from other sources', the same is eligible for set off to the other expenditure being claimed under the head 'business'. Consequent to our finding that the assessee has commenced its business and is eligible for claim of deduction under section 37(1) on expenditure of nonprospecting activities and depreciation thereon, the assessee is eligible for set off of the interest income. Since the issue becomes academic in nature, we do not intend to go into the aspect whether income is to be assessed as business income or other sources. There is various case law on the issue, holding if the capital funds are kept in deposits then the income is to be assessed as income from other sources and if the working capital funds are kept then to be treated as business income but, most of the case law was given on respective facts. Most of the issues arose as deductions are being claimed on non-operational incomes also. In that context various decisions were rendered depending on facts and applicable law. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany is also a subsidiary of De Beers Maurities Pvt. Ltd and commenced its operation under approval from FIPB dated 20.11.1997 as amended by a letter dated 16.09.1998 with the following objectives: a) To undertake prospecting the mining activities for diamond in the State of Madhya Pradesh, Andhra Pradesh and Orissa including other States. b) To undertake prospecting for other minerals except coal and iron ore. In both the Assessment Years, the Assessing Officer took similar action consequent to his findings in De Beers India Prospecting (P) Ltd for Assessment Year 2001-02. The assessee has raised similar grounds in both the Assessment Years. As the facts are similar and nature of expenditure and activity being similar for the reasons stated in ITA No.40/Mum/2006, we hold that the assessee has commenced its business operations in the activity of prospecting and accordingly is eligible for claim of deduction under section 37(1) of the expenditure of non prospecting nature. The Assessing Officer is directed to allow the amount and give set off to the interest income earned by the assessee during the year as per the provisions of the Act. In view of the above d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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