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TMI Blog2023 (1) TMI 274X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubstantial question of law as proposed or otherwise. - R/TAX APPEAL NO. 240 of 2022 ,R/TAX APPEAL NO. 241 of 2022 ,R/TAX APPEAL NO. 242 of 2022 R/TAX APPEAL NO. 245 of 2022 - - - Dated:- 13-6-2022 - HONOURABLE MR. JUSTICE A.J.DESAI and HONOURABLE MR. JUSTICE BHARGAV D. KARIA MR B S SOPARKAR(6851) for the Appellant(s) ORAL ORDER (PER : HONOURABLE MR. JUSTICE A.J.DESAI) 1. The appellant-Gujarat Power Corporation Limited has preferred these appeals under section 260-A of the Income Tax Act, 1961 (For short the Act, 1961 ) for the assessment years 2003-2004 to 2006-2007 challenging common judgment and order date 31.7.2019 passed by the Income Tax Appellate Tribunal, B Bench, Ahmedabad (For short the Tribunal ). 2. Following substantial questions of law are proposed by the appellant-assessee: 1) Whether, in the facts and circumstances of the case did the ITAT err in law and on facts in not granting deduction u/s 35E to the appellant in relation to the amount paid to the Commissioner of Geology and Mining department, Government of Gujarat? 2) Whether in the facts and circumstances of the case did the ITAT err in law and on facts in not granting d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 000 hectares of land in Bhavnagar District under prospecting license to establish preferential lignite mining right, and therefore, deduction as claimed should be allowed. The appellant also relied upon the report from the Geology and Mining department, Government of Gujarat stating that the appellant was engaged in the prospecting activities for the minerals. The assessee further citing meaning assigned to operation relating to prospecting under section 35E(5) of the Act, 1961 contended that commercial production is not necessary to claim deduction under the said section. The assessee also contended that without prejudice to the claim under section 35E of the Act, 1961, if it is not allowed, then the deduction under section 37 of the Act, 1961 of the entire expenditure should be allowed to the assessee. 8. CIT(Appeals) however, declined the claim of the assessee on the ground that there was no intention on part of the appellant-assessee to conduct production instead its object appears to acquire and sell the mining site and therefore, it cannot be said that the assessee was in the business of prospecting exploration, extraction and production of minerals. It was further held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear of commercial production and any one or more of the four years immediately preceding that year, wholly and exclusively on any operations 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 : Provided that there shall be excluded from such expenditure any portion thereof which is met directly or indirectly by any other person or authority and any sale, salvage, compensation or insurance moneys realised by the assessee in respect of any property or rights brought into existence as a result of the expenditure. (3) Any expenditure- (i) on the acquisition of the site of the source of any mineral or group of associated minerals referred to in sub-section (2) or of any rights in or over such site; (ii) on the acquisition of the deposits of such mineral or group of associated minerals or of any rights in or over such deposits; or (iii) of a capital nature in respect of any building, machinery, plant or furniture for which allowance by way of depreciation is admissible under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sets on the ground that the transaction was considered as financial arrangement between the appellant and the Gujarat Electricity Board. The Tribunal while rejecting the claim of the appellant held as under : 11. We have heard the rival contentions and perused the materials available on record and noted that this issue gives birth to the following questions. i. Whether the impugned lease back transaction is actually represents the financial transaction between the assessee and GEB in the given facts and circumstances. ii. If yes, then the assessee is not entitled for the depreciation and there is a need to bifurcate the lease premium into principal and interest amount. iii. If no, then the assessee is entitled for the depreciation and there is no need to bifurcate the lease premium into principal and interest amount. 11.1 First of all, we address the first part of the issue and the contention of the assessee that disallowance of the depreciation was not tenable. Depreciation is governed by section 32 of the Act where twin requirement are to be fulfilled in order to claim depreciation 1.e. one being the ownership and the other being usage. The assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced as under: 4. Residual value: The lease is for a fixed period of 5 years. The residual value of the Equipment at the rate of 1% of Rs.08.00 crores i.e. Rs.8,00,000/- shall be made over by GEB to GPCL at the end of the lease period. 11.3. In context to ownership we would like to take aid of the aforementioned schedule wherein it is mentioned that the residual value would be 1% of the cost and the same would be made over by the lessee to the lessor. It means that the entire useful life of the asset would be enjoyed and exhausted by the lessee and after the end of useful life the title would also stand transferred. This evidences that there is no intention of getting the asset back. Moreover given the nature of the asset namely 210MW LMZ design LP Rotor, residual value, cost of removing, cost of transportation, cost of maintenance and probability of locating subsequent buyer; it appears there would not be any commercial viability in removing the asset and selling/leasing to anyone else but lessee. Therefore on this basis it can be safely assumed that the impugned asset would remain in the premises of the lessee. Ownership inter-alia includes that after the conclusi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is the lessee who pays taxes etc, in relation to such asset. (ix) The risks and rewards incidental to the ownership vest with the lessee (9) The features of bailment are absent in such a lease. (xi) The lessor simply holds the title of asset as his security till his investment and interest thereon is recouped. The lessor is only symbolic owner during the period of lease and on the expiry of lease period, even such symbolic ownership also comes to an end. Practically, all the features mentioned above are contained in the case on hand. Therefore in our considered view the ratio laid down in the above case squarely applies in the instant case. 11.6 On reference to the individual clauses of the lease agreement between the assessee and the GEB, these merely create suspicion but when they are combined, it forms a solid ground to place down the conclusions that the assessee has extended the financial assistance to the GEB. Consequently, based on above observations we are of the view that neither ownership nor usage could be substantiated by the Ld. AR for the assessee. Hence we are of the view that the authorities below were justified in their action of disallowi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transferred and there is no intention of getting the asset back to the GEB and considering the nature of the asset namely 210MW LMZ Design LP Rotor, residual value, cost of removing, cost of transportation, cost of maintenance and probability of locating subsequent buyer, it was held that there would not be any commercial viability in removing the asset and selling/leasing to anyone else but the assessee itself. In such facts and circumstances, the Tribunal held that lease agreement is nothing but an extended financial assistance to the GEB. 19. Learned Senior Advocate Mr. Soparkar submitted that issue of granting depreciation on leased assets is squarely covered by the decision of this Court in case of Commissioner of Income-tax v. Gujarat Gas Co. Ltd . reported in (2009) 308 ITR 243. It was submitted that it is not in dispute that the assessee has entered into lease agreement with GEB and the assessee has received lease rent and therefore, the assessee is entitled to depreciation on leased assets as held by this Court in the aforesaid decision. It was submitted that it is true that CIT(Appeals) has also directed not to tax the lease rent as income of the assessee while disal ..... X X X X Extracts X X X X X X X X Extracts X X X X
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