THE COMMISSIONER OF INCOME TAX V. RAJ STATE MINES and MINERALS LTD

ITR/1/2000

AI Insights

The case involves the Income Tax Department of India (petitioner) contesting the classification of certain expenditures by Rajasthan State Mines & Minerals Ltd. (respondent) as revenue expenditures rather than capital expenditures. The specific expenditures in question were prospecting charges amounting to Rs. 2.96 crores for survey reports related to mining operations. The Income Tax Appellate Tribunal had previously allowed these expenditures as revenue expenditures, which the department challenged. The High Court examined whether these expenditures, which provided enduring benefits, should be classified as capital expenditures and thus not deductible in the computation of income for tax purposes.

• Counselvise Citation: [2016] 140 COUNSELVISE.COM (IT) 727904 (HC-RAJASTHAN)
• Appeal Type: Others
• Pronouncement Date: 15-09-2016
• Assessment Year: misc
• Other Referred Cases: Commissioner of Central Excise, Mumbai-III vs. EMCO Ltd., Ravi Yashwant Bhoir vs. District Collector Raigad & ors., Alembic Chemical Works Co. Ltd. vs. CIT, Empire Jute Co. Ltd. vs. CIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: SANJAY JHANWAR
• Assessee Lawyers: ANUROOP SINGHI
• Keywords: Capital expenditure; Land tax; Lease money; Rent; Revenue expenditure; Royalty; Prospecting charges; Deed
• Section: 256(1)

Judgement Text

"1 IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR. D.B. Income Tax Reference No.1/2000 CIT, Jaipur Vs. Rajasthan State Mines & Minerals Ltd. DATE OF ORDER ::: 15.9.2016 HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE BANWARI LAL SHARMA Mr. Anuroop Singhi, for the petitioner. Mr. Sanjay Jhanwar, for the respondent. ***** BY the Court:- (per Hon'ble Jhaveri, J.) 1. By way of this reference, the following questions have been referred by the Income Tax Appellate Tribunal, Jaipur under Section 256(1) of the Income Tax Act, 1961 to this Court: “1. Whether on the facts and in the circumstances of the case, the Appellate Tribunal was justified in allowing the sum of Rs. 6 crores as revenue expenditure notwithstanding the fact that the assessee claimed deduction of Rs. 6 crores as lease money in addition to royalty/deed/rent/land tax and was of capital nature? 2. Whether on facts and in the circumstances of the case, the Appellate Tribunal was justified in allowing the prospecting charges of Rs. 2.96 crores for survey reports for mining operation as revenue expenditure notwithstanding the fact that expenditure resulted in enduring benefits to the assessee and thus was capital expenditure, not related to assessment year 1992-93 as the liability was accepted by the 2 company only on 28.8.1992 relevant to assessment year 1993-94?” 2. Counsel for the Department has contended that in view of the D.B. Income Tax Reference No. 77/1995, which has been answered against the department vide judgment dated 21.4.2016, first issue will not arise in this matter since in the case of the same assessee, the issue has already decided against the department. Therefore, both the counsel has contested on the second issue which reads as under:- “2. Whether on facts and in the circumstances of the case, the Appellate Tribunal was justified in allowing the prospecting charges of Rs. 2.96 crores for survey reports for mining operation as revenue expenditure notwithstanding the fact that expenditure resulted in enduring benefits to the assessee and thus was capital expenditure, not related to assessment year 1992-93 as the liability was accepted by the company only on 28.8.1992 relevant to assessment year 1993-94?” 3. Mr. Anuroop Singhi, learned counsel appearing for the department has taken us to the paragraph no.4 of the order of the Assessing Officer and contended that while considering the claim of the assessee the Assessing Officer gave reasons on page no.5 (a,b,c,d,e). He further contended that CIT (Appeals) has also confirmed the order of the AO. 3 4. The Tribunal while considering the claim of the assessee observed in paragraphs no.13, 14, 15 & 16 as under:- “13. The next ground of appeal is in regard to disallowance of Rs. 2.96 crores paid as prospecting charges to Government of Rajasthan. The assesee-company is mining contractor to the Government of Rajasthan a layer the assessee-company use to receive remuneration for excavating various minerals from the mines. Mines are owned by the mining department of Government of Rajasthan and the assessee-company use to carry out excavation work as per plan/directions of the mining department. With effect from 1-4-1998, the assessee- company started excavating minerals act its own and thereby ceased to work as a contractor to the Government of Rajasthan. Before carrying out actual excavation, a minor must now the spots where excavation should be carried out and for that purpose corresponding or survey must be carried out. In view of these facts, assessee-company requested the Government of Rajasthan to give various survey records to facilitate the mining operation of the appellant. The Government of Rajasthan gave the appellant various survey reports and demanded from it Rs. 2.96 crore as prospecting charges vide demand notice dated 19-3-91. This amount is not allowed as deduction in 91-92 because the liability was not provided in the accounts. By a specific resolution the Board of Directors in a meeting had on 29-8-92 passed resolution. “Resolved that the approval of the Board be and is hereby approached for payment of Rs. 2.96 crores to the Directions of Mines & Geology towards pro-rata prospecting expenses of Jhamarkotra Roak Phosphate deposits.” Since the liability was accepted, sum was provided in the accounts and claimed accordingly. 4 14. The ld. A.R. further argued that this cannot be treated as a capital expenditure because no tangible or intangible asset came into existence on this account. This is clearly a revenue expenditure and should, therefore, be allowed as per the accounting principles./ In this connection, reliance was placed on the decision of the Supreme Court in the case of Alembic Chemical Works Co. Ltd. v. CIT, 177 ITR 377 and the decision of the Bombay High Court in the case of CIT v. Pannalal Narottamdas & Co. 67 ITR 667. It was also argued that this expenditure cannot be considered u/s 35E. Section 35E was introduced for meeting the expenditure incurred before the commercial operations started. Once commercial operations started any expenditure in relation to meeting the expenses on a that account, even on the ground of expansion, the expenditure cannot be disallowed and a reliance on this account is placed on the decision of 58 ITD 332. 15. The ID. D.R., on the other hand, argued that the assessee made provision of this amount and provision of any amount is not allowable expenditure. In this connection, he relies upon the decision of the Kerala High Court cited at 203 ITR 714 and Allahabad High Court cited at 199 ITR 81. 16. We have examined the facts of this case as well as the arguments put-forth by the rival parties and have also examined the case laws relied upon by them and are of the opinion that the contentions raised by the ID. A.R. On behalf of the assessee carries force. Following the decisions of the various courts relief upon by the ID. A.R. And also the decision of the Supreme Court cited at AIR 1955 page 169, we are of the view that the first appellate authority was not reasonable in not allowing the claim of the assessee on this account. This addition is, therefore, deleted. “ 5. Mr. Singhi, learned counsel has relied upon the decision of the Hon'ble Supreme Court in the case of 5 Commissioner of Central Excise, Mumbai-III vs. EMCO Ltd. reported in (2015) 10 SCC 321 wherein in para no.21 it has been held as under:- \"The perfunctory manner in which the appeal of the assessee is allowed, cannot be countenanced. If the Tribunal was confirming the decision of the Authority below, may be detailed discussion was not required as the reasons given in detail could be found in the order appealed against, though even in such a case brief reasons are to be given by the Tribunal, in particular, to meet the arguments which are advanced by the appellant while challenging such an order. However, in the instant case, we find that there is a detailed discussion in the order of the Commissioner on the facts of the case. Those facts are not adverted to or dealt with. The decision of the Commissioner is overruled with single observation that the case is covered by the judgment in Escorts JCB Ltd., without discussing as to how it was so covered. This is notwithstanding the fact that the decision as to which is the 'place of removal' depends upon the facts of each case.\" 6. The other judgment which is relied upon in the case of Ravi Yashwant Bhoir vs. District Collector Raigad & ors. reported in (2012) 4 SCC 407 wherein in para no.46, it has been held as under:- “46. The emphasis on recording reason is that if the decision reveals the `inscrutable face of the sphinx', it can be its silence, render it virtually impossible for the courts to perform their appellate function or exercise the power of judicial review in adjudging the validity of the decision. Right to reason is an indispensable part of a sound judicial system, reasons at least sufficient to indicate an application of mind of the authority before the court. Another rationale is that the 6 affected party can know why the decision has gone against him. One of the salutary requirements of natural justice is spelling out reasons for the order made. In other words, a speaking out, the inscrutable face of the sphinx is ordinarily incongruous with a judicial or quasi-judicial performance.” 7. He further contended that for assessment year 1991-92 in the case of the same assessee, the tribunal in paragraph no.10, has observed as under:- “10. We have examined the facts of this ground of appeal and are of the opinion that issue in question already stands decided by the Tribunal in favour of the assessee and, therefore, following the decision of this Bench AO is directed to allow this claim.” 8. Therefore, he contended that in view of the fact that though notice was given on 19.3.1991 for the assessment year 1991-92 and decided to make payment only on 28.8.1992 i.e. assessment year 1993-94, there were claims which were made in year 1992-93 are not admissible and the tribunal has committed serious error while passing the non speaking order giving decision in favour of the assessee. 9. Counsel for the respondent Mr. Sanjay Jhanwar has relied upon the order of the Assessing Officer for the assessment year 1991-92, more particularly paragraph No.3.1 which reads as under:- “In order to strengthen its case, it is stated that the assessee decided that no liability on this account should be provided in the books 7 of accounts till the disposal of its request. It is also stated that the request has been turned down and the company had already decided to provide for the liability in the accounts for the year 1991-92. It is claimed that the assessee is following mercantile system of accounting and therefore, this liability is admissible as it received the notice of demand during the accounting year under consideration.” 10. The observations of the Assessing Officer while considering non admissible claim in paragraphs 3.5 (i to vi) reads as under:- (i) The assessee's has not, till the year end, accepted this as a liability even of contingent nature, not to speak of as certained liability. It is also admitted by the assessee that the name would be accounted for in the accounts of f.y. 1991-92 which would be relevant for the a.y. 92-93. (ii) Even if it in accepted that the assessee has to pay this amount then also it is not in the nature of revenue expenditure rather it is capital in nature. The benefit which may accrue to the assesse, in of enduring nature ane even according to sec. 35-K prospecting charged are of capital nature. It is a sort of premium to be paid by the assessee to obtain an asset of enduring nature. (iii) Even the assessee is not entitled for an amortization u/s 35E of the I.T. Act because the expenses on prospecting have not been incurred by the assessee the the expenses do not relate to the prospecting for any mineral or group of an Associated Minerals specified in Part-A or Part-B respectively of the Seventh Schedule, that Sub-section 6 of sec. 35E speaks that such amortization is allowable in the case of amalgamation only to the amalgamated companies. In this case, the expenses were incurred by the Mining Deptt. Of Govt. of Rajasthan and not by the company. 8 (iv) The expenses has to pay this amount as premium and pre-condition to the lease agreement and he himself has not incurred any expenditure on the prospecting of the rock phosphate. (v) The expenses were incurred by the Mining Deptt. Before March, 1988 during which the assessee company was only a contractor to the Govt. of Rajasthan and the expenses incurred by the State Govt. were for its own business purposes. Now it is a part of the cost of the project known as Jhamrkotra Integrated Project. (vi) The assessee could not produce any such evidence which could show that there was any contract between the Mining Deptt. And the assessee to this regard that the expenses would be reimbursed by the assessee corporation. Therefore, the claim of Rs.2.96 crores is not admissible. 11. He relied upon the decision of Hon'ble Supreme Court in the case of Alembic Chemical Works Co. Ltd. vs. Commissioner of Income Tax, reported in (1989) 177 ITR 0377 and Empire Jute Co. Ltd. vs. Commissioner of Income Tax, reported in (1980) 124 ITR 0001 and contended that under mercantile system, the expenses were shown in the year 1992-93 and even while assessment order was passed for the year 1991-92, the assessee was made clear that he is accepting the liability and he further contended that he will not make payment which was made by the State Government for the expenditure incurred for the survey which is being done. Therefore, the Corporation had no other option to make payment which has no capital value. 9 12. We have heard the counsel for the petitioner as well as counsel for the respondent. 13. Taking into consideration the fact initially the Corporation has not accepted the liability, therefore, the observations which are made by the Tribunal for the year 1991-92 were in the peculiar facts where the liability was not accepted but subsequently for the year 1992-93, the Corporation has accepted the liability which was shown in the books of account and in view of the matter additions made by the tribunal for the relevant year would not be applicable in the changed circumstances. Since, they accepted the liability, the resolution which is sought to be passed on 28.8.1992 was administrative formality but for the Income-tax purpose it is shown in the books of account mercantile system, therefore, though the point raised by Mr. Singhi is remained an academic issue but facts and law in mercantile system which is debited for the relevant year i.e. 1992-93. 14. On first point, the contentions raised by Mr. Singhi has a doubt but in view of the consideration by us the relevant year debited entry in the books of account for the year 1992-93, therefore, resolution is passed subsequently but since it was mercantile system for the year 1992-93, it will come into force. 10 15. The contention which has been raised by Mr. Singhi is required to be accepted, it can only be one time revenue expenditure and subsequent claim of the assessee will not be acceptable and if his claim is made and accepted, it will be for the department to recover the tax from the assessee. 16. In that view of the matter, the issue is answered in favour of the assessee and against the Department for the revenue expenses (Rs.2,96,000/-) of year 1992-93 only one time. (Banwari Lal Sharma), J. (K.S. Jhaveri), J. Brijesh7. "