DE BEERS INDIA PVT.LTD., MUMBAI V. DY.C.I.T. 3(1), MUMBAI

ITA 6420/MUM/2008

• Counselvise Citation: 642019914 RSA 2008
• Duration Of Justice: 2 year(s) 10 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-09-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 06-06-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 05-11-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: SUBHACHAN RAM
• Keywords: Business income; Depreciation; Scheme of amalgamation; Revenue expenditure; Capital expenditure
• Section: 143(3); 37(1)

Judgement Text

ITA NO. 6420/MUM/08 ASSESSMENT YEAR: 2005-06 PAGE 1 OF 8 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI D BENCH, MUMBAI BEFORE SHRI PRAMOD KUMAR (ACCOUNTANT MEMBER) AND SMT ASHA VIJAYARAGHAVAN (JUDICIAL MEMBER) ITA NO. 6420/MUM/08 ASSESSMENT YEAR: 2005-06 DE BEERS INDIA PRIVATE LIMITED ...APPELLA NT 83, MAKER CHAMBERS VI NARIMAN POINT, MUMBAI 400021 [PAN : AAACP1900D] VS. DEPUTY COMMISSIONER OF INCOME TAX RESPONDE NT CIRCLE 3(1), MUMBAI 400 020 APPEARANCES: R MURLIDHAR, FOR THE APPELLANT SUBHACHAN RAM, FOR THE RESPONDENT DATE OF HEARING : JUNE 09, 2011. DATE OF PRONOUNCEMENT : SEPTEMBER 5 TH , 2011. O R D E R PER PRAMOD KUMAR: 1. BY WAY OF THIS APPEAL, THE ASSESSEE APPELLANT HA S CHALLENGED CORRECTNESS OF CIT(A)S ORDER DATED 24 TH JULY, 2008, IN THE MATTER OF ASSESSMENT UNDER SECT ION 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 ACTIO N OF THE ASSESSING OFFICER IN DISALLOWING EXPENSES OF RS 5,10,04,277 O N THE BASIS THAT THE SAME ARE RELATED TO PROSPECTING ACTIVITY, AND, SHOU LD, THEREFORE, BE ACCUMULATED AND CLAIMED AS DEDUCTION UNDER SECTION 35E OF THE ACT, FROM THE YEAR IN WHICH COMMERCIAL PRODUCTION BEGINS. (GROUND NO. 2) ITA NO. 6420/MUM/08 ASSESSMENT YEAR: 2005-06 PAGE 2 OF 8 B. THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTIO N OF THE ASSESSING OFFICER IN CONFIRMING THE ACTION OF THE ASSESSING O FFICER IN ALLOWING THE EXPENSES (TOTALING RS 29,52,8453) ONLY TO THE EXTEN T OF 30% OF THE INCOME OF RS 98,42,810 OFFERED FOR TAX AND DISALLOW ED THE BALANCE EXPENSES (I.E. RS 5,10,04,277). HE ERRED IN OBSERVI NG THAT SUFFICIENT DOCUMENTARY EVIDENCES TO SUBSTANTIATE THE INCOME AN D EXPENSES WERE NOT PRODUCED. (GROUND NO. 3) 3. GROUND NOS. 1, 4 AND 5, BEING GENERAL IN NATURE, DO NOT CALL FOR ANY SPECIFIC ADJUDICATION BY US, AND, ARE, ACCORDINGLY, DISMISSE D AS SUCH. 4. THE RELEVANT MATERIAL FACTS ARE LIKE THIS. THE A SSESSEE, IS ENGAGED IN THE BUSINESS OF PROSPECTING, EXPLORATION AND MINING AC TIVITIES FOR DIAMONDS AND OTHER MINERALS, AS ALSO IN THE BUSINESS OF PROVIDING CONS ULTANCY IN THE FIELD OF DIAMOND PROSPECTIVE AND OTHER RELATED MATTERS. ON 29 TH OCTOBER, 2005, THE ASSESSEE FILED ITS RETURN OF INCOME DISCLOSING A TOTAL LOSS OF RS 4,39 ,48,222, WHICH WAS SELECTED FOR SCRUTINY ASSESSMENT. IN COURSE OF THE SCRUTINY PROC EEDINGS, WHICH FOLLOWED, THE ASSESSING OFFICER NOTICED THAT WHILE THE ASSESSEE H AS INCURRED TOTAL EXPENSES OF RS 23,64,44,196 MAINLY ON PROSPECTING FOR MINERALS IN INDIA, AND EVEN AS THE COMMERCIAL PRODUCTION OF MINERALS, THE ASSESSEE HAS ONLY CAPITALIZED RS 17,04,80,638. IN RESPONSE TO ASSESSING OFFICERS RE QUISITION TO SHOW CAUSE AS TO WHY THE ENTIRE EXPENSES NOT BE TREATED AS CAPITAL EXPEN DITURE UNDER SECTION 35E, AND ACCORDINGLY NOT BE DISALLOWED, THE ASSESSEES REPLY WAS TWO FOLD (A) THAT OUT OF TOTAL EXPENSES OF RS 23,64,44,196, THE ASSESSEE HAS SUO MOTU DISALLOWED RS 1,20,06,438, AND, TO THIS EXTENT, CAPITALIZATION OF ENTIRE EXPEN SES WILL RESULT IN DOUBLE DISALLOWANCE; AND (B) THAT THE EXPENSES OF RS 5,39,57,120, WHICH HAVE NOT BEEN CAPITALIZED, CONSTITUTE EXPENSES ELIGIBLE FOR DEDUCTION UNDER SE CTION 37(1) AS THESE ARE CONSISTING OF EXPENSES, LIKE PROPERTY EXPENSES, COMMUNICATION EXPENSES, PRINTING AND STATIONERY, TRAVELLING AND CONVEYANCE, MEMBERSHIP A ND SUBSCRIPTIONS ETC, NOT WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF PROSPECTING. I T WAS ALSO POINTED OUT THAT THE ASSESSEE IS ALSO CARRYING OUT CONSULTANCY BUSINESS FROM WHICH, IN THE RELEVANT PREVIOUS YEAR, IT HAD RECEIPTS OF RS 98,42,810. TH E ASSESSING OFFICER WAS NOT SATISFIED WITH THIS EXPLANATION. HE WAS OF THE VIEW THAT ANY EXPENDITURE INCURRED FOR ITA NO. 6420/MUM/08 ASSESSMENT YEAR: 2005-06 PAGE 3 OF 8 THE PURPOSE OF PROSPECTING ELIGIBLE MINERALS IS TO BE CAPITALIZED UNDER SECTION 35 E, AND THE DEDUCTION IS TO BE CLAIMED ONLY WHEN COMMER CIAL 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 DEDUCTIO N IN RESPECT OF ANY EXPENSES INCURRED ON PROSPECTIVE FOR DIAMONDS. THUS, THESE E XPENSES WERE REQUIRED TO BE DISALLOWED AND TREATED AS CAPITAL EXPENSES ELIGIBLE FOR AMORTIZATION UNDER SECTION 35E. THE ASSESSING OFFICER ALSO MADE TO THE WORDIN GS AND SCOPE OF SECTION 35 E, TO JUSTIFY THE COURSE OF ACTION ADOPTED BY HIM. AS REG ARDS THE EARNING OF PROFESSIONAL RECEIPTS OF RS 98,42,810, THE ASSESSING OFFICER OBS ERVED THAT EVEN APPLYING THE PRINCIPLE OF MATCHING CONCEPT, IT IS NOT POSSIBLE T O ACCEPT THAT THERE CAN BE EXPENDITURE OF RS 5,39,57,120 TO EARN CONSULTANCY I NCOME OF RS 98,42,810. HE, HOWEVER, HELD THAT SINCE SOME EXPENSES MUST HAVE BE EN INCURRED TO EARN THIS INCOME, A REASONABLE RATIO OF 30% OF THE INCOME C AN 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 E LIGIBLE FOR AMORTIZATION UNDER SECTION 35 E. AGGRIEVED, ASSESSEE CARRIED THE MATTE R IN APPEAL BEFORE THE CIT(A) BUT WITHOUT ANY SUCCESS. THE ASSESSEE IS NOT SATISFIED AND IS IN FURTHER APPEAL BEFORE US. 5. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTUAL MATRIX OF THE CASE AS ALSO THE A PPLICABLE LEGAL POSITION. 6. SECTION 35 E OF THE INCOME TAX ACT, 1961, WHICH IS RELEVANT FOR THE PRESENT PURPOSES, IS AS FOLLOWS: SECTION 35E: DEDUCTION FOR EXPENDITURE ON PROSPECT ING, ETC., FOR CERTAIN MINERALS. (1) WHERE AN ASSESSEE, BEING AN INDIAN COMPANY OR A PERSON (OTHER THAN A COMPANY) WHO IS RESIDENT IN INDIA, IS ENGAGED IN AN Y OPERATIONS RELATING TO PROSPECTING FOR, OR EXTRACTION OR PRODUCTION OF, AN Y MINERAL AND INCURS, AFTER THE 31ST DAY OF MARCH, 1970, ANY EXPENDITURE SPECIF IED IN SUB-SECTION (2), THE ASSESSEE SHALL, IN ACCORDANCE WITH AND SUBJECT TO T HE PROVISIONS OF THIS SECTION, BE ALLOWED FOR EACH ONE OF THE RELEVANT PREVIOUS YE ARS A DEDUCTION OF AN AMOUNT EQUAL TO ONE-TENTH OF THE AMOUNT OF SUCH EXP ENDITURE. ITA NO. 6420/MUM/08 ASSESSMENT YEAR: 2005-06 PAGE 4 OF 8 (2) THE EXPENDITURE REFERRED TO IN SUB-SECTION (1) IS THAT INCURRED BY THE ASSESSEE AFTER THE DATE SPECIFIED IN THAT SUB-SECTI ON AT ANY TIME DURING THE YEAR OF COMMERCIAL PRODUCTION AND ANY ONE OR MORE O F THE FOUR YEARS IMMEDIATELY PRECEDING THAT YEAR, WHOLLY AND EXCLUSI VELY 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 A NY SUCH MINERAL OR GROUP OF ASSOCIATED MINERALS : PROVIDED THAT THERE SHALL BE EXCLUDED FROM SUCH EXPENDITURE ANY PORTION THEREOF WHICH IS MET DIRECT LY OR INDIRECTLY BY ANY OTHER PERSON OR AUTHORITY AND ANY SALE, SALVAGE, CO MPENSATION OR INSURANCE MONEYS REALISED BY THE ASSESSEE IN RESPECT OF ANY P ROPERTY 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 ACQUI SITION OF THE DEPOSITS OF SUCH MINERAL OR GROUP OF ASSOCIATED MINERALS OR OF ANY R IGHTS IN OR OVER SUCH DEPOSITS; OR (III) OF A CAPITAL NATURE IN RESPECT O F ANY BUILDING, MACHINERY, PLANT OR FURNITURE FOR WHICH ALLOWANCE BY WAY OF DE PRECIATION IS ADMISSIBLE UNDER SECTION 32, SHALL NOT BE DEEMED TO BE EXPENDI TURE INCURRED BY THE ASSESSEE FOR ANY OF THE PURPOSES SPECIFIED IN SUB-S ECTION (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 DEDUC TION UNDER THIS SECTION) OF THAT PREVIOUS YEAR ARISING FROM THE COMMERCIAL E XPLOITATION [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 MI NERALS IN A GROUP OF ASSOCIATED MINERALS AS AFORESAID IN RESPECT OF WHIC H 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 ADD ED TO THE INSTALMENT RELATING TO THE PREVIOUS YEAR NEXT FOLLOWING AND DE EMED TO BE PART OF THAT INSTALMENT, AND SO ON, FOR SUCCEEDING PREVIOUS YEAR S, SO, HOWEVER, THAT NO PART OF ANY INSTALMENT SHALL BE CARRIED FORWARD BEYOND T HE TENTH PREVIOUS YEAR AS RECKONED FROM THE YEAR OF COMMERCIAL PRODUCTION. (5) FOR THE PURPOSES OF THIS SECTION, - (A) 'OPERAT ION RELATING TO PROSPECTING' MEANS ANY OPERATION UNDERTAKEN FOR THE PURPOSE OF E XPLORING, LOCATING OR PROVING DEPOSITS OF ANY MINERAL, AND INCLUDES ANY S UCH OPERATION WHICH PROVES TO BE INFRUCTUOUS OR ABORTIVE; (B) 'YEAR OF COMMERCIAL PRODUCTION' MEANS THE PREVIOUS YEAR IN WHICH AS A RESULT OF ANY OPERATION RELATING TO PROSPECTING, COMMERCIAL PRODUCTION OF ANY MINERAL O R ANY ONE OR MORE OF THE MINERALS IN A GROUP OF ASSOCIATED MINERALS SPECIFIE D IN PART A OR PART B, RESPECTIVELY, OF THE SEVENTH SCHEDULE, COMMENCES; ( C) 'RELEVANT PREVIOUS YEARS' MEANS THE TEN PREVIOUS YEARS BEGINNING WITH THE YEAR OF COMMERCIAL PRODUCTION. ITA NO. 6420/MUM/08 ASSESSMENT YEAR: 2005-06 PAGE 5 OF 8 (6) WHERE THE ASSESSEE IS A PERSON OTHER THAN A COM PANY OR A CO-OPERATIVE SOCIETY, NO DEDUCTION SHALL BE ADMISSIBLE UNDER SUB -SECTION (1) UNLESS THE ACCOUNTS OF THE ASSESSEE FOR THE YEAR OR YEARS IN W HICH THE EXPENDITURE SPECIFIED IN SUB-SECTION (2) IS INCURRED HAVE BEEN AUDITED BY AN ACCOUNTANT AS DEFINED IN THE EXPLANATION BELOW SUB-SECTION (2) OF SECTION 288, AND THE ASSESSEE FURNISHES, ALONG WITH HIS RETURN OF INCOME FOR THE FIRST YEAR IN WHICH THE DEDUCTION UNDER THIS SECTION IS CLAIMED, THE RE PORT OF SUCH AUDIT IN THE PRESCRIBED FORM DULY SIGNED AND VERIFIED BY SUCH AC COUNTANT AND SETTING FORTH SUCH PARTICULARS AS MAY BE PRESCRIBED. (7) WHERE THE UNDERTAKING OF AN INDIAN COMPANY WHIC H IS ENTITLED TO THE DEDUCTION UNDER SUB-SECTION (1) IS TRANSFERRED, BEF ORE THE EXPIRY OF THE PERIOD OF TEN YEARS SPECIFIED IN SUB-SECTION (1), TO ANOTH ER INDIAN COMPANY IN A SCHEME OF AMALGAMATION - (I) NO DEDUCTION SHALL BE ADMISSIBLE UNDER SUB- SECTION (1) IN THE CASE OF THE AMALGAMATING COMPANY FOR THE PREVIOUS YEAR IN WHICH THE AMALGAMATION TAKES PLACE; AND (II) THE P ROVISIONS OF THIS SECTION SHALL, AS FAR AS MAY BE, APPLY TO THE AMALGAMATED C OMPANY AS THEY WOULD HAVE APPLIED TO THE AMALGAMATING COMPANY IF THE AMALGAMA TION HAD NOT TAKEN PLACE. (7A) WHERE THE UNDERTAKING OF AN INDIAN COMPANY WH ICH IS ENTITLED TO THE DEDUCTION UNDER SUB-SECTION (1) IS TRANSFERRED, BEF ORE THE EXPIRY OF THE PERIOD OF TEN YEARS SPECIFIED IN SUB-SECTION (1), TO ANOTH ER INDIAN COMPANY IN A SCHEME OF DEMERGER, - (I) NO DEDUCTION SHALL BE ADM ISSIBLE UNDER SUB-SECTION (1) IN THE CASE OF THE DEMERGED COMPANY FOR THE PRE VIOUS YEAR IN WHICH THE DEMERGER TAKES PLACE; AND (II) THE PROVISIONS OF TH IS SECTION SHALL, AS FAR AS MAY BE, APPLY TO THE RESULTING COMPANY AS THEY WOUL D HAVE APPLIED TO THE DEMERGED COMPANY, IF THE DEMERGER HAD NOT TAKEN PLA CE. (8) WHERE A DEDUCTION UNDER THIS SECTION IS CLAIMED AND ALLOWED FOR ANY ASSESSMENT YEAR IN RESPECT OF ANY EXPENDITURE SPECI FIED 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 35 E ARE THE EXPENSES WHICH ARE INCURRED WHOLLY AND EXCLUSIVELY ON ANY OPERATIONS RELATING T O 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 O R PROVING DEPOSITS OF ANY MINERAL, AND INCLUDES ANY SUCH OPER ATION WHICH PROVES TO BE INFRUCTUOUS OR ABORTIVE. CBDT CIRCULAR NO. 56 DATED 19 TH MARCH 1971, WHICH EXPLAINS THE RATIONALE BEHIND INTRODUCTION OF SECTI ON 35E, STATES THAT NEW SECTION ITA NO. 6420/MUM/08 ASSESSMENT YEAR: 2005-06 PAGE 6 OF 8 35 E, ALSO INSERTED BY SECTION 8 OF THE AMENDING AC T, PROVIDES FOR THE AMORTIZATION OF EXPENDITURE WHOLLY AND EXCLUSIVELY ON ANY OPERATIONS RELATING TO PROSPECTING FOR THE SPECIFIED MINERALS. IT IS THUS CLEAR THAT IN ORDER TO BE ELIGIBLE FOR AMORTIZATION OF EXPENSES UNDER SECTION 35 E, THE EXPENSES MUST HAVE BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR EXPLORIN G, LOCATING OR PROVING DEPOSITS OF ANY MINERALS, AND INCLUDES SUCH OPERATIONS WHICH PR OVE TO BE INFRUCTUOUS OR ABORTIVE. 8. IT IS IN THIS LIGHT THAT THE ASSESSEE HAS AMORTI ZED PROSPECTING, SURVEY AND EXPLORATION EXPENSES ( AGGREGATING TO RS 9.51 CRORE S AND THESE EXPENSES INCLUDE TENEMENTS FEES, EQUIPMENT RENTAL, AIRCRAFT CHARTER, EXPLORATION DATA, EXPLORATION DRILLING, CONSUMABLES, VEHICLE OPERATIONS AND MAINT ENANCE, CUSTOM DUTY AND CLEARANCE CHARGES, COMPUTER SOFTWARE COSTS, FREIGHT CHARGES AND PROFESSIONAL FEES ETC), PROFESSIONAL FEE (RS 35.94 LAKHS), DIRECT EMP LOYEE COSTS (RS 4.82 CRORES) AND ADMINISTRATIVE CHARGES (RS 2.29 CRORES). THESE EXP ENSES ARE DIRECTLY RELATED TO PROSPECTING OF DIAMONDS, AND HAVE BEEN, THEREFORE, RIGHTLY CAPITALIZED UNDER SECTION 35 D. HOWEVER, THE EXPENSES INCURRED BY THE ASSESSE E 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, A UDITORS REMUNERATION ETC), INTEREST AND FINANCIAL CHARGES (RS 19.91 LAKHS), AM ALGAMATION EXPENSES (RS 4.33 LAKHS) AND DEPRECIATION (RS 29.98 LAKHS), HAVE NOT BEEN INCLUDED IN THE SCOPE OF CAPITALIZATION UNDER SECTION 35 E. THESE ARE THE EX PENSES, SUBJECT TO SUO MOTU DISALLOWANCE BY THE ASSESSEE WHICH IS NOT SUBJECT MATTER OF DISPUTE ANYWAY, HAVE BEEN CLAIMED AS A DEDUCTION UNDER SECTION 37(1) OF THE ACT. THE ASSESSING OFFICER HAS, HOWEVER, PROCEEDED ON THE BASIS THAT SINCE ASS ESSEE IS, INTER ALIA, ENGAGED IN THE BUSINESS OF PROSPECTING MINERALS ALL THE EXPENSES INCURRED BY THE ASSESSEE ARE TO BE TREATED AS ELIGIBLE FOR AMORTIZATION UNDER SECTI ON 35E, UNLESS HE CAN DEMONSTRATE THAT THE EXPENSES ARE INCURRED FOR EARNING AN INCOM E WHICH IS TAXABLE IN THE HANDS ITA NO. 6420/MUM/08 ASSESSMENT YEAR: 2005-06 PAGE 7 OF 8 OF THE ASSESSEE. THAT IS CLEARLY AN INCORRECT APPRO ACH ON THE PART OF THE ASSESSING OFFICER. THE ASSESSEE, EVEN WHEN ENGAGED IN THE BUS INESS OF PROSPECTING MINERALS, IS ELIGIBLE FOR AMORTIZATION OF SUCH EXPENSES AS ARE E LIGIBLE UNDER SECTION 35E(2) R.W.S. 35E(5)(A). ALL OTHER EXPENSES ARE ELIGIBLE FOR DEDU CTION AS IN THE NORMAL COURSE OF COMPUTATION OF BUSINESS INCOME. 9. WE HAVE NOTED THAT THE CIT(A) HAS UPHELD RESTRI CTED THE DEDUCTIBILITY OF EXPENSES ON THE BASIS OF, WHAT HE PERCEIVED AS, APP LICABILITY OF MATCHING CONCEPT. HOWEVER, THE APPLICATION OF MATCHING PRINCIPLE, BASED ON THE QUANTUM OF EARNINGS, IS WHOLLY DEVOID OF ANY MERITS. ONE CANNOT INVOKE T HE 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 BES T BE INVOKED TO SPREAD OVER THE COSTS OVER ENTIRE PERIOD IN WHICH REVENUES AS A RES ULT 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 T HE COORDINATE BENCHES AS INDEED BY THE HONBLE COURTS ABOVE. ALL THAT THE MATCHING PRINCIPLE STATES THAT, IN MEASURING NET INCOME FOR AN ACCOUNTING PERIOD, THE COSTS INCURRED IN THAT PERIOD SHOULD BE MATCHED AGAINST THE REVENUE GENERATED IN THE SAME PERIOD, AND THAT WHERE COSTS RESULT IN BENEFIT OVER A PERIOD BEYOND ONE ACCOUNTING PERIOD, THE COSTS SHOULD BE REASONABLY SPREAD OVER THE ENTIRE PERIOD OVER WHICH BENEFITS ACCRUE. AS FAR AS THE POSITION UNDER THE INCOME TAX ACT IS CON CERNED, AS LONG AS EXPENSES ARE INCURRED FOR THE PURPOSES OF BUSINESS, EVEN IF IT T URNS OUT TO WHOLLY UNPROFITABLE, THE SAME IS TO BE ALLOWED AS DEDUCTION IN COMPUTATION O F BUSINESS INCOME. BY NO STRETCH OF LOGIC, IN OUR CONSIDERED VIEW, MATCHING PRINCIPLE CAN RESTRICT THE QUANTUM OF DEDUCTION OF EXPENSES BY RELATING THE SAME TO TH E QUANTUM OF EARNINGS AS A RESULT OF INCURRING THESE EXPENSES. WE HAVE ALSO NOTED THA T IT IS NOT EVEN IN DISPUTE THAT THE ASSESSEE HAS COMMENCED ITS BUSINESS INASMUCH AS THERE ARE RECEIPTS OF CONSULTANCY INCOME WHICH HAVE BEEN TAXED IN THE REL EVANT PREVIOUS YEAR. ONCE THE BUSINESS HAS COMMENCED, AS IS THE ADMITTED POSITION ON THE FACTS OF THIS CASE, THE DEDUCTION OF EXPENSES IN RESPECT OF THAT BUSINESS C ANNOT BE DECLINED ON THE GROUND THAT THE EARNINGS FROM CONSULTANCY INCOME DO NOT JU STIFY SUCH HIGH EXPENSES. THIS ITA NO. 6420/MUM/08 ASSESSMENT YEAR: 2005-06 PAGE 8 OF 8 KIND OF A REVENUE MISMATCH, WHICH CAN NOT BE A GROU ND OF DISALLOWING THE EXPENDITURE ANYWAY, IS A NORMAL COMMERCIAL PRACTICE IN THE BUSINESSES WHICH HAVE LONG TERM PERSPECTIVES AND LARGER BUSINESS INTEREST S IN THEIR CONSIDERATION. 10. FOR THE REASONS SET OUT ABOVE, WE ARE OF THE CO NSIDERED VIEW THAT THE ASSESSING OFFICER WAS INDEED IN ERROR IN CAPITALIZI NG THE EXPENSES WHICH WERE NOT DIRECTLY ATTRIBUTABLE TO THE PROSPECTING OF DIAMON DS AS ALSO IN RESTRICTING THE DEDUCTIBILITY OF EXPENSES TO 30% OF THE CONSULTANCY REVENUES RECEIVED BY THE ASSESSEE. WE, THEREFORE, DIRECT THE ASSESSING OFFIC ER TO DELETE THE IMPUGNED DISALLOWANCE AND NOT TO RESTRICT THE ADMISSIBILITY OF DEDUCTION OF EXPENSES ON THE BASIS OF QUANTUM OF EARNINGS AS CONSULTANCY RECEIPT S. THE ASSESSEE GETS THE RELIEF ACCORDINGLY. 11. IN THE RESULT, THE APPEAL IS ALLOWED IN THE TER MS INDICATED ABOVE. PRONOUNCED IN THE OPEN COURT TODAY ON 5 TH DAY OF SEPTEMBER, 2011. SD/- SD/- (ASHA VIJAYARAGHAVAN ) (P RAMOD KUMAR) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI; 5 TH DAY OF SEPTEMBER , 2011 . COPY FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER , MUMBAI 4. COMMISSIONER (APPEALS) , MUMBAI 5. DEPARTMENTAL REPRESENTATIVE, D BENCH, MUMBAI 6. GUARD FILE TRUE COPY BY ORDER ETC. ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, MUMBAI