Payment for Acquiring Mining Rights is Capital Expenditure

FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-

These are the appeals filed by the revenue and the cross objections by the assessee directed against different orders of the learned Commissioner of Income-tax (Appeals), Gulbarga, [CIT(A)] dated 29/12/2015 for the assessment years 2008-09 to 2012-13. Since common issues are involved in all these appeals/cross objections, we proceed to dispose of the same by this common order for the sake of convenience.

2. Now, we shall take up the revenue’s appeals. The revenue raised the following grounds of appeal for assessment year 2008-09:

Identical grounds of appeal, except change in figures, are raised by the revenue for assessment years 2009-10 to 2012-13.

3. For the sake of clarity and convenience, facts relevant to assessment year 2008-09 are stated herein: The respondent- assessee is an individual engaged in the business of extraction of Iron ore and trading in Iron ore. The return of income for the assessment year 2008- 09 was filed on 30/09/2008 disclosing taxable income of Rs. 3,17,38,490/-. The said return of income was revised admitting additional income of Rs. 5,84,01,227/- on account of material found during the course of survey operations. Against the said return of income, the assessment was completed by the Addl.CIT, Bellary Range, Bellary [hereinafter referred to as ‘AO’] vide order dated 16/12/2010 passed u/s 143(3) of the Income-tax Act, 1961 [hereinafter referred to as ‘the Act’ for short] at total income of Rs. 10,35,26,771/- after making several additions. One of the additions relates to an amount of Rs. 23,62,578/- debited to P&L Account, it was stated that it represents proportionate lease amount paid for acquiring mining rights. The explanations furnished by the respondent- assessee as well as the finding of the AO is stated by the AO vide para. 12 of the assessment order which is as under:

4. From the above it is clear that this amount represents the amount of amortization of lease premium paid for acquiring mining rights. It also contains compensatory afforestation which is inextricably connected with the mining rights. The AO treated this as a capital expenditure.

5. Being aggrieved by the above addition, an appeal was preferred before the CIT(A) who, vide impugned order, following the decision of the Hon’ble Karnataka High Court in ITA No. 5021/2009 dated 06/01/2012 in the case of ACIT vs M/s.Ram gad Minerals & Minings Pvt. Ltd., held that the same is revenue in nature. However, the CIT(A) upheld the addition on account of advance payment of lease rental debited to P&L Account.

6. Being aggrieved, revenue is in appeal. The assessee is in cross objections contesting the finding of the CIT(A) upholding the addition on account of advance lease rental debited to P&L Account.

7. The ld.CIT(DR) submitted that lease premium paid is capital and therefore, the same cannot be allowed as a deduction. He also placed reliance on the decision of Honorable Supreme Court in the case of B.Seth Molchand Suganchand vs. CIT (86 ITR 647)(SC)

On the other hand, learned counsel for the respondent- assessee submitted that this issue is covered by the decision of the co-ordinate bench of Tribunal in the case of P.Abubakar vs. DCIT in ITA No. 725/Bang/2009 dated 22/01/2010 and the decision of the Honorable jurisdictional High Court in the case of M/s.Ramgad Minerals & Minings Pvt. Ltd.,(supra).

8. We heard rival submissions and perused the material on record. The issue in the present appeal is whether consideration paid for acquiring mining rights is capital or revenue expenditure. It is undisputed fact that the respondent- assessee made lump sum payment for the purpose of acquiring mining rights from the Government of Karnataka. This payment was made for acquiring right to excavate the minerals and not for acquiring minerals. The issue before their Lordships of Honorable Supreme Court in the case of Pingle Industries vs. CIT (1966)(40 ITR 67)(SC) was whether consideration paid for acquiring right to extract stones by taking on lease for a period of 12 years lands from jagirdar can be allowed as revenue expenditure. Their Lordships, by a majority judgment held that the assessee had acquired by his longterm lease, right to win stones. The stones in situ were not stock-in-trade and therefore, neither the rent nor the royalty which was paid was allowable as revenue deduction as by making these payments the assessee had acquired a capital asset of enduring benefit. This decision was subsequently followed by the Honorable Apex court in the case of R.B.Seth Molchand Suganchand vs. CIT (86 ITR 647)(SC) wherein it was held that the amount paid for obtaining mining lease for 20 years was held to be a capital expenditure. The Honorable Supreme Court, in the case of Gotan Lime Syndicate vs. CIT (1966) 59 ITR 718)(SC) held that rent paid for lime excavation was held to be revenue expenditure. Subsequently, the Honorable Apex Court held in the case of Aditya Minerals Pvt. Ltd. vs. CIT (236 ITR 39)(SC) perceived difference of opinion between co-ordinate benches of the Honorable Supreme Court in Pingle Industries (supra) and Gotan Lime Syndicate (supra) and therefore, referred the matter to a larger bench. This controversy was resolved by bench consisting of 5 judges in Aditya Minerals Pvt. Ltd. vs. CIT (239 ITR 817) wherein it was held that there was no conflict of decisions of Honorable Apex Court in Pingle Industries (supra) and Gotan Lime Syndicate (supra) as there was material difference between facts of the case of Pingle Industries (supra) and the facts of the case in Gotan Lime Syndicate (supra) as facts of the case in Gotan Lime Syndicate (supra) annual payment of royalty or dead rent whereas in the case of Pingle Industries (supra) it was a case of lump sum payment for acquiring mining rights. In these circumstances, it was held that there was material difference. However, the Hon’ble Apex Court had proceeded to hold that lease rent paid for acquiring mining rights is capital in nature and cannot be allowed as a deduction. The relevant paragraph is as under:

“4. We find that there is a material difference in the facts of the case of Pingle Industries Ltd. (supra) and the effects of the case of Gotan Lime Syndicate (supra). As the judgment in Gotan Lime Syndicate’s case (supra), relied upon by the assessee, clearly shows, in that case “there is no payment once for all; it is an yearly payment of dead-rent and royalty. It is true that if a capital sum is arrived at and payment is made every year by chalking out the capital amount in various installments, the payment does not lose its character as a capital payment if the sum determined was capital in nature. But it is an important fact in this case that it is a case of an annual payment of royalty or dead-rent”. The judgment adds that the case of Pingle Industries Ltd. (supra) was “distinguishable because, on the facts, it was a lump sum payment in installments for acquiring a capital asset of enduring benefit to his trade”. The Court in Gotan Lime Syndicate’s case (supra) took the view that the royalty payment therein was ‘not a direct payment for securing an enduring advantage; it has relation to the raw material to be obtained.” The Court, thus, accepted the argument on behalf of Gotan Lime Syndicate’s case ((supra) that what it got was a right to get lime for manufacturing and the payment had a direct relation to the amount of lime that was removed.

5. In the case before us, as indicated by the lease deed, what was to be paid by the assessee was rent for the land that was leased. It was payable at the rate of Rs. 35 per acre per month. The assessee was required to pay in advance the rent calculated at this rate for the entire period of the lease, i.e., fifteen years, in the form of a ‘deposit’. The deposit was “by way of a guarantee for the performance of this lease deed for fifteen years”, that is, towards fifteen years’ rent. It was adjustable against the rent of each month and it carried no interest.

6. On the facts, as it appears to us, this case is on a par with Pingle Industries Ltd.’s case (supra) and, accordingly, the civil appeals must fail and are dismissed.”

9. In the light of the judgment of the Honorable Supreme Court in the case of Aditya Minerals Pvt. Ltd. (239 ITR 817) the impugned payment made for acquiring mining rights is capital expenditure and cannot be allowed as revenue expenditure. The reliance placed by the ld.CIT(A) on the coordinate bench decision of Tribunal in the case of P.Abubakar (supra) and the decision of the Hon’ble jurisdictional High Court in the case M/s.Ramgad Minerals & Minings Pvt. Ltd.,(supra) is misplaced in the light of the decision of the larger bench decision of the Honorable Supreme Court in the case of Aditya Minerals Pvt. Ltd.(supra).

9. Then an issue may arise as to whether this expenditure can be allowed on a staggering basis spread over lease period as revenue expenditure in the light of the decision of the Honorable Supreme Court in the case of Madras Industrial Corporation (225 ITR 802). Needless to mention that if the payment is capital in nature, expenditure cannot be allowed on staggered basis. Even for the purpose of spreading over period of lease, it is essential that the expenditure should be in the nature of revenue expenditure. Thus, grounds of appeal of the revenue are allowed.

10. Identical issue is raised by the revenue in the grounds of appeal in ITA Nos. 363 to 366/Bang/2016. Since identical issue is decided by us in favor of revenue in ITA No. 362/Bang/2016, for parity of reasons stated therein the grounds of appeal raised by the revenue for assessment years 2009-10 to 2012-13 in ITA No.363 to 366/Bang/2016 are allowed.

11. In the result, all the appeals filed by the revenue are allowed.

12. In CO Nos. 2 to 6/Bang/2017, grounds of cross objections are filed by the assessee- company challenging the finding of the ld.CIT(A) confirming the addition of advance lease rental debited to P&L Account These grounds of cross objections are not pressed and hence, dismissed as not pressed.

13. However, in C.O.No. 6/Bang/2016 for assessment year 2012-13, another ground of cross objection was raised challenging the dis allowance of Rs. 55,42,369/-. The facts leading to the dis allowance are as under:

It was stated that the assessee took a Keyman Policy from Birla Sun Life Insurance and the premium paid was shown as advance in the year it was paid. However, since the policy lapsed on account of nonpayment of premium in subsequent year, the same was claimed as deduction during the year under consideration. The assessee claimed it to be revenue expenditure placing reliance on the decision of the Honorable Delhi High Court in the case of CIT vs. B.N.Exports (323 ITR 178). The ld.CIT(A) also confirmed the addition as it was shown as an asset in the books of account.

14. Being aggrieved, the assessee is before us in the cross objection.

15. We heard rival submissions and perused the material on record. Premium paid for Key man Insurance is held to be allowable by the decision of the Honorable Delhi High Court in the case of N.Exports (supra) and also by the CBDT circular No. 726 dated 18/2/1998, but the same is allowable only in the year in which premium was paid. In the present case, admittedly, premium was paid in the earlier years and the question of allowing it as deduction in the subsequent year does not arise as the liability of the expenditure had not crystallized during the year under consideration. Therefore, grounds of cross objections of the assessee are dismissed.

16. In the result, all the cross objections filed by the assessee are dismissed.

Order pronounced in the open court on 26^th December, 2017