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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 ..... 2) Whether in the facts and circumstances of the case did the ITAT err in law and on facts in not granting deduction u/s 37 to the Appellant in relation to the amount paid to the Commissioner of Geology and Mining department? 3) Whether in the facts and circumstances of the case did the ITAT err in law and on facts in disallowing depreciation claimed by the appellant in relation to leased assets?" 3. The appellant-assessee is a Government company doing the business of acting as a nodal agency for augmenting power generation in the State of Gujarat. 4. Question no.1 pertains to disallowance of claim made by the appellant under section 35E of the Act, 1961. The appellant was granted mining rights by the Government of Gujarat on lease for 30 years for mining of lignite in Bhavnagar District vide letter dated 04.06.1998. The appellant-assessee outsourced the work to the Commissioner of Geology and Mining Department, Government of Gujarat who raised invoices towards exploration charges upon the appellant which were paid by the appellant during the respective previous years. 5. The appellant therefore, claimed deduction of 1/10th of the amount paid during the year to the Commiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness of prospecting exploration, extraction and production of minerals. It was further held by CIT(Appeals) that as per the provisions of section 35E(2) of the Act, 1961 the production is a prime condition to claim deduction under section 35E of the Act, 1961. 9. Being aggrieved by the order of CIT(Appeals), the assessee preferred Tax Appeal being ITA No.2943/Ahd/2016 before the Tribunal reiterating the same submissions which were canvassed before CIT(Appeals). 10. The Tribunal after considering the rival submissions dismissed the appeal of the appellant-assessee on the ground that the deduction of expenditure incurred relating to prospecting activities by the assessee would be allowed as deduction as per sub-section(2) of section 35E of the Act, 1961 in the year of commercial production and admittedly commercial production was not started by the appellantassessee for the years under consideration. It was further held by the Tribunal that expenditure eligible for deduction are those which have been incurred in the year of production or in any one or more of the four years immediately preceding the years of production and as there is no commercial production in the year under co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r furniture for which allowance by way of depreciation is admissible under 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 subsection (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 subsection 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 previ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r under consideration or any of the previous four years, the assessee is not entitled to deduction under section 35E of the Act, 1961. 13. In view of the foregoing reasons, 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. 14. So far as question no.2 with regard to alternative claim of assessee to grant entire expenditure under section 37 of the Act, 1961 is concerned, 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) of the Act, 1961 because as per the provisions of section 37(1), deduction can be allowed if any such expenditure is not of the nature described in sections 30 to 36 and not being in nature of capital expenditure or personal expenses an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g usage. The assessee has contended that the company is engaged in leasing of assets since 1995 and the object clause of MoA is also aligned to such contention. Accordingly, the assessee in his profit and loss account for the year under consideration and two earlier previous years prior to the year under consideration has reflected income from lease under the head business income. Financial report submitted by the assessee for the Financial Years 2000-01, 2001-02, 2002-03 reproduced as under. No. Income RY 2002-03AY 2003-04 FY 2001-02 AY 2002-03 RY 2000-01AY 2001-02 1 Lease Rent Rs.3,91,76.137 Rs.3,91,76,136 Rs.1,00,27,895 2 Interest Rs.23,80,74,750 5,68,03,174 Rs.1,79,43,003 3 Dividend - - Rs.99,54,982 4 Profit on sale OF GPEC - Rs.2,00,92,80,000 - 5 Otherincome Rs.6,000 Rs.31,00,225 Rs.28,43,000 6 Lease Mgt. Fee Rs.8,000 - 7 Lease Finance Rs. 37,31,210 - Income TOTAL 28,17,88,097 Rs.2,04,72,64,570 Rs.1,04,77,890 Net Profit before tax 24,12,78,801 Rs.2,04,72,64,570 Rs.1,04,77,890 11.2 The above statement reflects that interest has been a major part of revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the reliance has been rightly placed on Hon'ble SC's ruling in Asea Brown Boveri Ltd. v. Industrial Finance Corpn of India reported in 154 taxman 512 [2006] for putting together a test for ownership and differentiating a financial arrangement/loan from a lease transaction. The features laid down to identify a financial arrangement in guise of lease from the extracts of the above ruling are under mentioned: (i) Such a lease is non-cancellable and there is a fixed obligation on the lessee for payment of lease money. In case lease is terminated prematurely by the lessee, the lessor is entitled to recover his investment with expected interest. (i) Such a lease is always for a fixed period, which period is decided by taking into consideration the economic life of the asset. (iii) The initial lease period is settled in such a way so as to fully recover the investment of the lessor together with interest thereon. (iv) Lessor is always interested in the recoupment of his investment with interest in the shape of rentals over the period of lease and not the asset or its user. (v) It is the responsibility of the lessee to bear all costs of insurance, repairs and maintenance and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on that the transaction is that of financing therefore, it will be gross injustice to disallow the depreciation and on the other hand tax the entire receipt. In the light of the above observations and doctrine against double jeopardy, we uphold the view of Ld. CIT(A) in deleting the principal part of the receipt from taxable income. Accordingly, the contention of the Revenue is dismissed. In the result, the appeal filed by the assessee is dismissed." 18. The Tribunal confirmed the order passed by the CIT(Appeals) holding that the leased transactions merely represent financial transaction between the assessee and Gujarat Electricity Board in the given facts and circumstances and therefore, the assessee is not entitled for depreciation. The Tribunal after referring to financial reports for the financial years 2000-2001, 2001-2002 and 2002-2003 arrived at findings of fact that interest has been a major part of revenue in all the three financial years in comparison to the income from lease rent and invoice issued by GEB identifies payment of Rs. 8 crores as finance arranged from the appellant. It was further found by the Tribunal that the agreement was only for five years and post th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be applicable in the facts of the present case. In the said decision, this Court considering the facts in the case of Gujarat Gas Company Ltd., the lease rent paid by the Rajasthan State Electricity Board to Gujarat Gas Company Ltd. was allowed as expenditure on the transaction of sale-cum-lease back agreement and in such circumstances, the transaction of leasing out to Rajasthan Electricity Board was found to be genuine and therefore, 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. However, in the present case, facts are converse as both the authorities below on findings of fact as recorded here-in-above have ..... X X X X Extracts X X X X X X X X Extracts X X X X
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