ACIT Vs Singareni Colleries Company Ltd. (ITAT Hyderabad)
On careful reading of the Notes submitted by the assessee company it is clear that the assessee is providing interest at certain percentage and credited to the fund account. Further, he observed that it is also a fact that the insurance premium is paid out of interest provided by the company against FBIS members. It is also a fact that every member certainly gets the amount contributed by them in addition to the interest provided by the company. Further, it is also a fact that the assessee company failed to give the bifurcation of interest to be paid to each member relevant to the year under consideration. However, the interest provided by the company towards the fund maintained for the purpose of this scheme, without deducting tax surely attracts the provisions of section 40(a)(ia) rws 194 of the Act. In view of the above observations, the AO disallowed the interest provided to the fund under this scheme of Rs. 1,59,93,000/- in AY 2009-10 and Rs. 1,45,70,000/- in AY 2010-11.
The assessee preferred an appeal before the CIT(A) and submitted during the appeal proceedings that FBIS scheme is that every employee contributes Rs.10/- p.m. which works out to Rs.120 per year. The interest on this amount at 6% works out to Rs.7.20. Hence, the appellant contends that provisions of section 194A are not attracted as the amount of interest per annum is less than Rs.5,000/- per year including the accumulated balance per employee.
After considering the submissions of the assessee, the CIT(A) directed the AO to delete the disallowance by observing as under:
“4.4.4.2. I have gone through the observations of the Assessing Officer and submissions made by the appellant. As the amount of interest per annum provided by the appellant under the said scheme of Family Benefit-cum-Insurance Scheme (FBIS) is below the threshold limit as prescribed in section 194A of the Act, I am of the opinion that the Assessing Officer is not justified in disallowing the SAID expenditure u/s.40(a)(ia) of the Act. Hence, he is directed to delete the disallowance made in this regard.”
Before us, the ld. DR submitted that since the assessee failed to give the bifurcation of interest to be paid to each member and without deducting tax attracts the provisions of section 40(a)(ia) and the AO has properly disallowed the interest paid to members.
The ld. AR on the other hand, relied on the order of CIT(A).
We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. The ld. CIT(A) has examined the issue in detail as per the documents submitted before him and observed that the threshold limit for deducting TDS as per section 194A was below the limits prescribed and therefore, he deleted the disallowance made by the AO on this count. In such cases, there is no obligation upon the payer of interest for deducting TDS as per Section 194A of the Income Tax Act. 1961 We, therefore, do not find any infirmity in the order of the CIT(A) in both the years under consideration and upholding the same, we dismiss the grounds raised by the revenue on this issue in both the years under consideration.
FULL TEXT OF THE ORDER OF ITAT HYDERABAD
All these appeals filed by the assessee as well as revenue are directed against the CIT(A), Vijayawada’s separate orders involving proceedings u/s 143(3) of the Income Tax Act, 1961 ; in short “the Act”. As the facts and grounds raised in all these appeals are identical, the same were clubbed and heard together and therefore a common order is passed for the sake of convenience.
2. In all these appeals the AO completed the assessments u/s 143(3) of the Act and made the following additions/disallowances, which form the common issues in all the appeals under consideration:
1. Disallowance of capital work-in-progress for the all the years
2. Interest accrued on loans to M/s APHMEL for AYs 2005-06 & 2006-07
3. Disallowance of deduction claimed u/s 43B
4. Disallowance of net prior period expenditure for AYs 2005-06 to 2010-11.
5. Prospecting expenditure – section 35E for AY 2007-08 to 2010-11.
6. TDS on interest on land compensation deposited in court as per court order for AY 2009-110 to 2011-12.
7. Loss due exchange fluctuation on interest on capital borrowed in forex for acquisition of machinery after such assets is put to use for AY 2009-10.
8. Restriction of depreciation on mine development to 10% as against 15% claim for AY 2011-12.
9. prior period expenditure – enhancement by CIT(A) for AY 2007-08 and 2009-10.
3. When the assessee preferred appeals before the CIT(A) the CIT(A) confirmed the some of the additions/disallowances and deleted some of the additions/ disallowance made by the AO, against which the assessee and the revenue are in appeals before the ITAT.
4. First we take up the appeals of the assessee.
5. As Regards ground Nos. 1 to 4 regarding capital work in progress raised (in AYs 2005-06 to 2011-12), which has been raised in all the appeals under consideration, the facts as taken from AY 2005-06 are that the assessee had debited a sum of Rs. 4.24 crores towards ‘assets written off’ and the same was included under the head ‘provisions and write off was debited to the P&L A/c. Out of the said amount, the assessee had added back a sum of Rs. 4,09,97,398/- in the income computation statement as the same did not represent an allowable deduction in arriving at the total income as per the provisions of the IT Act. The balance amount of Rs. 14,54,302/- had not been added back by the assessee in the income computation statement. In this regard it was mentioned in Col. 17(a) of the tax audit report enclosed to the return that the said balance amount represents the value of work-in-progress written off and that the same is eligible for deduction.
5.1 The AO after considering the submissions of the assessee and analysed the issue elaborately with case law, inter-alia, observed that the contentions of the assessee in this regard are treated as untenable and held that the deduction claimed for the expenditure represented by mine development work-in-progress written off due to closure of the mine is not in accordance with the and accordingly, disallowed the assessee’s claim of deduction amounting to Rs. 14,54,302/-, which was confirmed by the CIT(A) when the assessee preferred an appeal before him.
5.2 The Authorised Representative ( in short “AR”) reiterated the submissions made before the authorities below. In addition to this before us, the ld. AR of the assessee filed written submissions, which are extracted as under:
“SCCL incurs Mine Development expenditure like digging tunnels, sinking mine shafts installing equipment and infra structure necessary to make coal seams in mining area accessible for extraction. The Mine Development expenditure includes salaries & wages, minor civil works, equipment, stores and spares, proportionate interest, and other allocated overheads. This expenditure is normally capitalized in the year in which a developed area of a mine starts yielding coal and depreciated as plant.
The company has been following this procedure year after year. The company incurs this expenditure in respect of working mines for the purpose of extending their area of operation. This is done on an ongoing basis and this expenditure is parked separately and shown as Capital work in progress while expansion work is in progress and is not subjected to depreciation. This expenditure is capitalized or written off as revenue depending on whether the expansion yields more coal deposits for extraction or not. This expenditure is incurred for the purpose of making the coal deposits accessible and the mines economically viable.
In most of the cases mine were closed and no operations could be carried out, the capital work in progress relating to that mine development expenditure could not be capitalized. Consequently, the capital work in progress relating to the mine development expenditure incurred was written off since no asset could be created. The expenditure was basically of revenue nature and incurred wholly and exclusively for the purpose of business.
This is a continuous and ongoing process necessary to expand the area of operation in the mine. A mine is divided into districts for operational purposes, at each district expansion are envisaged periodically and development expenses stated above are incurred, for the purpose of coal mining. In case a particular mine ceases to yield coal deposits at an economically viable cost or/and needs to be closed for various safety reasons or where a new project fails to commence for any reason, then such expenditure incurred which is accounted as CWIP in the books, the same expenditure was written off as infructuous since no asset was created nor any enduring benefit was derived from that.
This method of accounting was followed since inception of the company and was accepted by the department. This is the first year in which there is a departure by the department. The details of CWIP written off and charged to revenue during various years under appeal is enclosed herewith as Annexure-I in paper book. The ld. AR of the assessee relied on the following case law in support of assessee’s case:
“1. Binani Cements Ltd., vs CIT – 380 ITR 116 (Calcutta HC).
2 CIT vs Praga Tools Ltd. – 157 ITR 282 (AP· HC).
3 Hindustan Zinc Ltd. Vs Add1.CIT -153 ITD 111· (ITAT Jaipur) head note
4 ITO vs Abdul G Nadiadwala 49 taxmann.com 581 (Mumbai Trib).
5 Jay Engineering Works Ltd Vs CIT -311 ITR405 ( Delhi HC).”
Referring to the above submissions, the ld. AR of the assessee requested the Bench to delete the addition on account of CWIP written off.
5.3 The ld. DR on the other hand besides relying on the orders of revenue authorities submitted that the assessee has charged depreciation on capital work in progress. She submitted that the ld. CIT(A) had verified from the books of account that it was a capital in nature and the expenditure was incurred towards the development of mine which could be utilized for extraction of coal and it has also been created as an asset in its balance sheet and it has also claimed depreciation on it. She, therefore, submitted that the authorities below justified to treat it as a capital expenditure and has rightly disallowed.
5.4 We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. We find that substance in the submissions made by the ld. AR. From the orders of the authorities below, it is clear that the assessee has debited to the capital expenditure in the P&L account in respect of those mines which are not in operation or the mines were unsuccessful for coal mines. It is also clear that the breakups were filed before the CIT(A) which has been incorporated by him in his order. We find that in most of the cases mines were closed and no operations could be carried out, the capital work in progress relating to that mine development expenditure could not be capitalized. Therefore, the capital work in progress relating to the mine development expenditure incurred was written off since no asset could be created. Any expenditure which does not bring any additional advantage to the business of the assessee is revenue expenditure. The expenditure was basically of revenue nature and incurred wholly and exclusively for the purpose of business. The assessee had also filed detailed written submissions before the CIT(A) and had relied on number of judgments. Before us, the ld. AR also relied on the judgments as quoted supra. In support of our decision, we rely on the following judgements:
5.4.1 In case of CIT Vs. Binani Cements Ltd., vs CIT – 380 ITR 116 (Calcutta HC). In ITA No. 265 OF 2009, judgment dated 23/03/2015, similar issue was decided by the Hon’ble High Court of Calcutta wherein it has held as under:
“3. Mr. Bajoria, learned senior advocate, appearing for the appellant submitted that the question is partly covered by the decision in CIT v. Graphite India Ltd. [1996) 221 ITR 420 (Cal.). The relevant question referred by the Tribunal to this Court in that case was whether in the facts and circumstances of that case, the Tribunal was justified in holding that the expenditure incurred for the assessee’s proposed petro-chemical project was revenue expenditure and to be allowed as a deduction? This Court in answering the question, held as follows:
“So far as question No. 4 is concerned, the Tribunal recorded the finding that the assessee spent an amount of Rs. 56,665 as project expenditure. The expenditure represented fees paid to Engineering India Ltd. in connection with the petrochemical project report. The amount was paid by the assessee in order to explore the possibility of setting up of a petro-chemical project which could provide a captive plant for manufacture of raw material at the assessee’s own factory which would help the assessee in getting continuous supply of raw material even during periods of acute shortage. In fact, the project did not materialise. The ITO as well as the CIT(A), therefore, held that the expenditure was capital in nature. However, the Tribunal found that the expenditure did not result in bringing into existence any capital asset of enduring in nature. The Tribunal further found that the decision of the Calcutta High Court in the case of Hindustan Aluminium Corporation Ltd. v. CIT (1986) 55 CTR (Cal.) 237: (1986) 159 ITR 673 (Cal) was applicable and following that decision held that the expenditure was allowable as incurred wholly and exclusively for the purpose of the assessee’s business. Therefore, the Tribunal deleted the disallowance. The case relied upon by the Tribunal was subsequently followed in the case of Asiatic Oxygen Ltd. v. CIT (1991) 190 ITR 328 (Cal). This Court in the said case reiterated the view taken in Hindustan Aluminium Corporation Ltd.’s case (supra ).
According to us, question No. 4 in this reference stands concluded by the aforementioned two decisions. We, accordingly, answer question No. 4 in the affirmative and in favour of the assessee and against the Revenue.”
4. Mr. Bajoria further relied on two decisions of the Supreme Court being respectively the decision in CIT v. A. Gajapathy Naidu [1964) 53 ITR 114 and CIT v. Swadeshi Cotton & Flour Mills (P.) Ltd. [1964) 53 ITR 134 (SC). In A. Gajapathy Naidu (supra ) on the question of power of the ITO to relate back an income the apex Court was of the following view:
“When an ITO proceeds to include a particular income in the assessment, he should ask himself, inter alia, two questions, namely : (i) what is the system of accountancy adopted by the assessee, and (ii) if it is the mercantile system, subject to the deeming provisions, when has the right to receive accrued? If he comes to the conclusion that such a right accrued or arose to the assessee in a particular accounting year, he should include the said income in the assessment of the succeeding assessment year. No power is conferred on the ITO under the Act to relate back an income that accrued or arose in a subsequent year to another earlier year, on the ground that that income arose out of an earlier transaction. Nor is the question of reopening of accounts relevant in the matter of ascertaining when a particular income accrued or arose.”
5. In Swadeshi Cotton & Flour Mills (P.) Ltd. (supra ) on a similar question the said Court held :
“The system of reopening of accounts does not fit in with the scheme of the IT Act. As far as receipts are concerned there can be no reopening of accounts, and the position is the same in respect of expenses”.
6. Mr. R.N. Bandopadhyay, learned advocate appearing on behalf of the Revenue relying upon the decision in Delhi Tourism & TDC Ltd. v. CIT [2006] 285 ITR 114/155 Taxman 10 (Delhi) submitted that the expenditure was rightly disallowed by the learned Tribunal as it was made and related to earlier years.
7. We accept Mr. Bajoria’s submission regarding the expenditure made for construction/acquisition of new facility subsequently abandoned at the work-in-progress stage was allowable as incurred wholly or exclusively for the purpose of assessee’s business as covered by the decision in Graphite India Ltd. (supra ). The issue whether such expenditure could be allowed in the relevant assessment year is however yet to be resolved.
8. The CIT(A) in his order had found as follows :
“The company claimed as allowable the expenditure on this abandoned project. While it was found to be unviable, the expenditure on it was for the purpose of business. It was not claimed or allowed earlier as business expenditure because it was of capital nature entitled to depreciation after completion and on commencement of its use for business. But since that stage is not reached-no asset having come into existence-the capital-work-in-progress had to be written off as such.”
9. There was no challenge to such finding on facts before the learned Tribunal or even before us.
10. The decision in Delhi Tourism & TDC Ltd. (supra ) is distinguishable on facts in as much as in that case the Delhi High Court had held that the electricity charges for power consumed was a known expenditure and the assessee, on the basis of average, could make a provision for that expenditure in every year of assessment even if no bill was received in a particular year of assessment.
1. Following the judgment in the case of A. Gajapathi Naidu (supra ) the question to be asked is when did the expenditure claimed by way of deduction arise? There would have been no occasion to claim the deduction if the work-in-progress had completed its course. Because the project was abandoned the work-in-progress did not proceed any further. The decision to abandon the project was the cause for claiming the deduction. The decision was taken in the relevant year. It can therefore be safely concluded that the expenditure arose in the relevant year.
2. Reference in this regard may be made to the decision in the case of CIT v. Indian Mica Supply Co. (P.) Ltd. [1970] 77 ITR 20 (SC) wherein the Supreme Court in considering a claim for deduction on arrear lease rents, ascertained subsequently consequent to a compromise arrived in the suit and paid in the relevant assessment year held, inter alia, as under :
“The Tribunal, in the present case, had clearly found that it was only as a result of the compromise that the respondent became entitled to remain in possession of the demised land. Its liability also became ascertained only at that point of time. It cannot be disputed that the respondent incurring the expenditure had acted in the interest of and for the purpose of its business. The expenditure was not laid out for any purpose other than that of carrying on the business. The deduction was properly admissible under s. 10(2)(xv) of the Act and the matter being self-evident the High Court was fully justified in declining to accede to the prayer made under s. 66(2) of the IT Act, 1922.”
3. Sec. 10(2)(xv) of the old Act corresponds to s. 37(1) of the present Act. Our above conclusion is fortified by the view expressed by the Supreme Court in the said decision. For the aforesaid reasons the question is answered in the affirmative in favour of the assessee. The appeal is thus allowed.
5.4.2 In the case of CIT Vs. Indian Oxyge Ltd., [1996] 218 ITR 337 (SC), the Hon’ble Supreme Court has held as under:
“The Tribunal held that the certain amount paid by the assessee to the English company, in pursuance of the agreement, was a permissible deduction under section 37(1). On reference, the High Court found that the English company did not sell any information, processes and inventions to the Indian company; that under the agreement, the Indian company was not entitled to use them after the termination of this agreement; that the Indian company was prohibited from disclosing these information, processes and inventions during the currency and also after the determination of this agreement and that thought the agreement was for a period of ten years, it could be terminated earlier. The High Court, therefore, held that the Indian company had not incurred the expenditure for the purposes of bringing into existence any asset or advantage of an enduring nature and that this expenditure was not a capital but a revenue expenditure.
On appeal to the Supreme Court, held as under:
The understanding of the agreement was correct. Once it was so, the amount paid by the assessee to the British company could not be treated as capital expenditure. It was nothing but revenue expenditure and had been rightly held so by the High Court.”
Respectfully following the above judgments, we set aside the order of the CIT(A) on this issue and accordingly, allow the grounds raised by the assessee on this issue in the respective AYs.
6. As regards ground Nos. 5 &6 in AYs 2005-06 and 2006-07 regarding interest receivable from APHMEL, the AO observed that in Note No. 19 of the notes forming part of the accounts, in the annual report for the FY 2004-05, it was stated that the interest receivable from M/s APHMEL on advances given against supplies amounting to Rs. 213.60 lakhs upto 31/03/2005 (previous year Rs. 150.79 lakhs) was not transacted in the books pending realization. The AO asked the assessee to explain why the accrued interest on such advances to M/s APHMEL should not be added to the total income of the assessee, in response to the same, it was stated that the assessee company is following the cash basis of accounting in respect of interest on loans and advances to its subsidiary company M/s APHMEL. It was stated that this method of accounting is being consistently followed and the interest receivable from the subsidiary company is being accounted on a cash basis since the receipt of the interest is uncertain consequent to declaration of the subsidiary company as a sick unit by the BIFR. Further, it was stated that it could change its accounting policy from mercantile system to cash system for recognizing the interest receivable from M/s APHMEL due to the loans and advances to it becoming sticky. In this regard, the assessee relied on few case law, which were mentioned by the AO at page 7 of his order.
6.1 After considering the submissions of the assessee, the AO disallowed the assessee’s claim of accrued interest by observing, inter-alia, as under:
“4.10 In the light of drastic improvement in the financial performance and health of the Mis APHMEL and the assessee company’s assessment about its prospect for recovery of loan and interest, it can no longer be said that cash system of accounting of interest receivable from Mis APHMEL would be justified. It is pertinent to note that the subsidiary company M/s APHMEL continues to debit the interest payable to the assessee company on an accrual basis in its books of account. Continuing to persist with the cash system of accounting in respect of such interest even after the change in the assessee’s honest assessment of the prospect of recovery of interest amounts to incorrect computation of true income of the assessee, given the fact that the all other receipts and expenses falling under the scope of income from other sources are being accounted in accordance with the mercantile system of accounting. In view of this, it is held that the interest receivable from Mis APHMEL for the previous year, computed on the basis of accrual system, needs to be included in the total income of the assessee by invoking the provisions of section 145(3) of the IT Act. The amount of such accrued interest, attributable to the instant asst. year, as mentioned in note no.19 in the notes forming part of the accounts is 62.81 lakhs. Accordingly, ‘this accrued interest of Rs. 62.81 lakns (Rs.213.60 lakhs as on 31/03/05 reduced by Rs.150.79 lakhs as on 31/03/04) is added to the income of the assessee.”
6.2 The CIT(A) confirmed the addition made by the AO.
6.3 Before us, the ld. AR of the assessee filed written submissions in this regard, which are extracted as under:
“The Assessing Officer has added interest accrued on Loans and Advances to APHMEL ignoring the fact that Your Appellant was following Cash basis of accounting in respect of interest on loans and advances to its Subsidiary company APHMEL. This method of accounting was consistently followed as Mis. APHMEL was a sick industrial company under BIFR, whose net worth was totally eroded and receipt of interest was uncertain. APHMEL was registered with BIFR as sick industrial company during 1992 (vide no. 627/92) due to its incurring of continuing losses.
MIS. APHMEL was registered with BIFR in the year 1992 and was declared as a sick industrial company in January 1993. BIFR passed an order in the November 2002 for winding up of the company. However, Mis APHMEL preferred an appeal against the order of the BIFR before the AAIFR and vide order dated 05/09105 the matter was remanded back to BIFR by AAIFR.
It is submitted that SCCL had modified its accounting policy to recognize interest from sticky loans and advances on actual realization basis instead of accrual basis.
The CIT (A) as well as the Assessing Officer have ignored the fact that the APHMEL was still a BIFR case and not out of BIFR, the recovery of interest beings still doubtful, ought to have allowed the method of accounting followed in this respect, consistently in the past years on cash basis and therefore the addition of the accrued interest is not warranted. It is submitted all the liabilities of a sick industrial company remain frozen, while it continues to be under scheme of rehabilitation. It is also submitted since SCCL had accounted for the interest income from APHMEL in subsequent years on receipt basis; the addition in this year would result in double taxation, which is not permitted.”
We draw your kind attention to the decision in the case of CIT V s Dalmia Industries Ltd. 180 ITR 167 (Del HC) Paper book pages 56 to 58.”
6.4 The Ld. DR, on the other hand, relied on the orders of revenue authorities. She submitted that the assessee has changed the method of accounting for treatment in the books of account is not correct. The APHMEL has started earning profits. She submitted that the APHMEL is showing profits from FY 2001-02 and onwards, the winding up order passed by the BIFR in the year 2002 has been set aside by the AAIFR. It was also observed that APHMEL is booking the expenditure in its books of account. She submitted that assessee is following mercantile system of accounting in respect of other incomes and only regarding interest income, it is following cash system which is not correct and, therefore, the authorities below were justified in this regard.
6.5 We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. We observe that the subsidiary company APHMEL was a sick company as declared by BIFR during January 1993 whose net worth was totally eroded and the interest receivable was also uncertain. Against the BIFR order, M/s APHMEL preferred an appeal before the AAIFR and vide order dated 05/09/2005, the matter was remanded back to BIFR by AAIFR. The AO observed that the interest should be offered as income by the assessee on the accrual basis is not correct in respect of the interest receivable from sick company if the matter is pending before the BIFR. There is no certainty in regard to the interest receivable from the sick company. We find substance on the case laws relied upon by the ld. AR on this issue. Respectfully following the judgments as quoted by the ld. AR, we delete the addition made on this issue with a rider that the AO is free to make addition when the interest shall be received by the assessee company in the year in which it is received by the assessee. Accordingly, the grounds raised by the assessee on this issue are allowed.
7. As regards ground Nos. 7, 8 & 9 in AYs 2005-06 & 2006-07 and Grounds Nos. 5, 6 & 7 in AYs. 2007-08 to 2010-11 regarding prior period expenditure, the assessee had claimed deduction for net prior period expenditure for an amount of Rs. 2,18,20,357/- in AY 2005-06, against which, the AO computed the eligible amount to the extent of Rs. 69,20,712/- and the excess deduction claimed amounting to Rs. 1,48,99,645/- was disallowed by the AO. The CIT(A) confirmed the disallowance made by the AO on this count.
7.1 The ld. AR of the assessee filed written submissions on this issue which are reproduced as under:
“The Assessing officer disallowed the expenditure referred to as prior period expenditure, relating to power and fuel, welfare expenses, Interest and other miscellaneous expenditure when the same have been crystallized and determined after the cut off date for close of the financial accounts for the previous year. In the earlier years the CIT (A) as well as IT AT has allowed the prior period expenditure as deductible expenses in the subsequent year based on the method of accounting and the volume of transactions and also the fact that these expenditure have been crystallized and determined only after cut off date for the close of the financial year.
In the case of your Appellant the Account are subjected to audit by Statutory Auditors as well as C&AG, who, based on the method of Accounting, Accounting Standards and Accounting Policies consistently followed, have considered certain expenditures as prior period expenses for the purpose of presentation of accounts under the Companies Act, 1956, whereas for the purpose of income tax the same are allowable expenses on the crystallization basis or method of accounting.
A remand report was called for during the Appellate proceedings and the Assessing Officer after verification of expenditure had allowed part of the prior period expenses. The Assessing Officer in his remand report confirmed that the expenditure which was earlier disallowed was in fact crystallized during the year and was to be allowed as current year expenditure. The CIT(A) ignoring these facts, has enhanced the income where she should have allowed the claim as per the remand report.
We draw your kind attention to the decision of Hindustan Zinc Ltd Vs Addl. CIT 153 ITD 111 (Jaipur Trib) Head Note – Paper Book pages 16-20.”
7.2 The Ld. DR, on the other hand, relied on the orders of revenue authorities and she submitted that the AO has examined this issue in detail, which is clear from his order and the same cannot be controverted by the ld. AR and the CIT(A) has upheld the action of the AO.
7.3 We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. We find that the details were filed before the AO during the course of assessment proceedings and rejecting the details, the AO made the addition. In the appellate proceedings before the CIT(A), again the details were provided and the CIT(A) has called for a remand report from the AO. The details were provided to the AO during the remand proceedings were accepted by the AO and he held that the expenditure should be allowed when it is crystalized. Accordingly, the AO was agreed as per his remand report that these prior period expenditures should be allowed in the year in which it is crystalized. Once, in the remand proceedings, the revenue accepts the plea of the assessee, then, there should not be further scope to confirm the additions made by the AO in this regard. We find substance in the submissions of the ld. AR and case laws relied in this regard quoted supra. Accordingly, we allow this ground of appeal of the assessee.
8. As regards the issue of prospecting expenditure u/s 35E raised in AYs 2007-08 to 2010-11 as ground Nos. 8 & 9 in AYs 2007-08, 2009-10 & 2010-11 and 9 & 10 grounds in AY 2008-09, the facts relating to this ground as raised in AY 2007-08 are that during the course of assessment proceedings, the AO noticed that the assessee has claimed a sum of Rs.10,27,35,885/-towards “Exploration (Prospecting) Expenditure” as revenue expenditure and a further sum of Rs.1,24,46,020/- as capital expenditure during the year under consideration. The assessee was asked to furnish mine-wise details of prospecting expenses and why the said expenses should not be dealt in accordance with the provisions of sec. 35E of IT Act, 1961. Under the provisions of sec. 35E. the amount of expenditure spent on prospecting etc. for development of certain minerals can be amortized and deduction can be claimed over a period of 10 years beginning with the year of commercial production. Further, the amount which is eligible for deduction must have been incurred during the year of commercial production and 4 years immediately preceding the year. The expenditure on prospecting, etc. includes aborted and suspended mines also. But, it was noticed that instead of claiming deduction u/s 35E, the assessee had claimed such expenditure on prospecting, etc. as revenue expenditure.
8.1 After examining the details filed by the assessee as well as referring to the provisions of section 35E, the AO computed the disallowance u/s 35E to the tune of Rs. 3,49,19,111/- by observing as under:
“9 2. I have carefully gone through the submissions made by the tax payer. In the instant case, the assessee is engaged in operations relating to prospecting for, or extraction of coal from the mines. The company has incurred the expenditure of KS.11 ,51 ,81 ,916/- on account of drilling done for production support and general exploration expenditure. It is said that the company undertakes operation for the purposes of exploring, locating, or proving deposits of coal mineral. As specified in Section 35E any operation undertaken for the purpose of exploring, locating or proving deposits of any minerals (specified in Part A or Part B, respectively, of the Seventh Schedule) commences including operations of infructuous or abortive nature. Thus, me Act is clear and there is no ambiguity with regard to nature of expenditure to be covered under Section 35E. The definition of expenditure on prospecting operation is inclusive of operation of infructuous or abortive mines. The contention of the assessee that the expenditure incurred Oli mines which yield commercial production shall only be capitalized and expense on operation which proves to be infructuous or abortive shall be treated as revenue is not at all in accordance with the provisions of this section. The assessee company may adopt different accounting method in the books of account for a particular expense, which need not be taken as such for the purpose of Income Tax. Further, it contends that as the expenditure on general prospecting does not result in creation of any capital asset or any enduring benefit and the same is treated as revenue expenditure is also not as per the provisions of this section. The taxpayer has been claiming that there should be direct nexus between the commercial production and prospecting expenses which is not correct, in view of expenses included on infructuous or abortive operations. In fact each mine having a boundary is to be considered as a separate unit of production and all prospecting expenses in respect of new mines ‘respective of commercial production or abandoned or suspended operations will be considered u/s 35E of the Income Tax Act, 1961.
5.3 As discussed above, Section 35E does not restrict only to the successful operations of new mines but also includes expenses on operations resulted in infructuous or abortive new mines. Further, it was mentioned that as per the accounting policy of the assessee, any expenditure incurred towards exploration unless allocable to a project under construction is revenue expenditure is not in accordance with the’ provisions of Section 35E of the Income Tax Act, ‘1961. This is a self-serving statement. Since the company has incurred expenditure for the purpose of exploring, locating or proving deposits on new sites and such expenditure is to be dealt in accordance with the provisions of Section 35E of the Income Tax Act, 1961. Hence, the contention of the assessee to treat the expenditure incurred relating to exploring, locating or proving on infructuous or abortive operations should be treated as revenue is not acceptable. As discussed above, under the provisions of sec. 35E, the amount of expenditure spent on prospecting etc. for development of certain minerals can be amortized and deduction can be claimed over a period of 10 years in equal instalments.
5.4 After careful examination of details submitted by the assessee, the prospecting expenses relating to two new mines viz., Gundala Block -III and KTK LW, BHPL sites, the prospecting expenses relating to exploration will squarely fall under the scope of 35E of IT Act, 1961. In the case of Gundala Block -III, the taxpayer has confirmed that no mine is likely to come and operations are aborted and in the case of KTK LW, BHPL, the mine is stated to be a new one and has commenced production during the year under consideration. As per the provisions of sec. 35E, the amount which is eligible for deduction must have been incurred either during the year of commercial production or 4 years immediately preceding that year and/or the expenditure on suspended/aborted cases. As explained in detail, it is concluded that in both the cases, the prospecting expenses should be dealt in accordance with the provisions of Section 35E.
5.5 The assessee company has furnished the details such as the total meterage drilled ie., 87468.75 meters and the cost involved for prospecting, etc. is Rs. 11,51,81,906 thereby the cost per meterage comes to RS.1316.83 (115181906/ 87468.75). Thus, the total amount works out on two mines is Rs. 3,49,19,206/- after allowing 1/10th of the expenses in the previous year as per section 35E. The working is given hereunder:
