Neyveli Lignite Corporation Limited v Assistant Commissioner of Income Tax

Income Tax Appellate Tribunal

CHENNAI BENCH

17 April 2008

I. T. A. No. 198/Mds/2008

The Judgment was delivered by : T. R. SOOD (ACCOUNTANT MEMBER)

1. This appeal by the assessee is directed against the order dated November 30, 2006, of the Commissioner of Income-tax-Ill, Chennai, under section 263 of theIncome-tax Act, 1961 .

2. The brief facts of the case are that on examination of the assessment records, the Commissioner of Income-tax observed that mine development expenditure of Rs. 61.92 crores claimed by the assessee has been allowed by the Assessing Officer. It was further noticed that though in the books of account the expenditure was capitalised, as far as the income-tax returns are concerned, the same was claimed as revenue deduction. The Commissioner of Income-tax was of the view that the expenditure is covered by the provisions of section 35E of the Income-tax Act, 1961 and accordingly, the assessee was entitled to only one-tenth of the expenditure as deduction and, therefore, a show-cause notice was issued.

3. It was mainly submitted that the mines owned by the assessee were open cast mines and basically there is no pre-development activity in relation to such mines apart from mining. It was explained that in the case of underground mines like coal mine, the removal of overburden is a separate activity from mining whereas in the case of open cast mines like lignite mines, the overburden of removal was a continuous operation which is carried on side by side with the production of lignite. It was argued that the process of production of lignite and removal of overburden are interdependent and co-exist and were inalienable. Reliance was also placed on the decision of the Tribunal in the case of the same assessee for the assessment years 1958-59 and 1960-61 dated April 20, 1966.

4. After considering the above submissions, the Commissioner of Income-tax observed that section 35E was inserted by the Taxation Laws (Amendment) Act, 1970 , with effect from April 1, 1971, which means that the provision was applicable from the assessment year 1971-72 onwards. According to him, the expenditure incurred by the assessee for removal of overburden was mine development expenditure and accordingly he held the assessment order to be erroneous in so far as it is prejudicial to the interests of the Revenue. Ultimately he directed the Assessing Officer to modify the assessment order in accordance with the provisions of section 35E of the Act.

5. Before us, learned counsel for the assessee submitted that the assessee-company had commenced its business in 1957 and is mainly in the business of excavating lignite. He pointed out that before starting excavating of lignite, the assessee-company had examined and established the lignite mines in the present area. He referred to the order of the Commissioner of Income-tax and pointed out that according to the Commissioner of Income-tax, the expenditure related to removal of overburden was covered under the provisions of section 35E(2) of the Act. He then explained the meaning of removal of overburden. Lignite deposits are generally formed under the layers of earth which have to be removed before lignite can be excavated. Since the assessee has adopted open cast mine which means no digging has to be done by way of development ; what is required to be done was only removal of the upper crust of earth and then lignite is excavated. He then referred to the written submission wherein details regarding the nature of upper crust mining has been mentioned. He further referred to pages 8 to 28 of the paper book which is the copy of the order of the Tribunal for the assessment years 1958-59 to 1960-61. During the hearing of these appeals, the hon’ble Members have visited the mines personally and then made the observation in paragraph 15 of the order regarding the nature of open cast mining operations. He also referred to paragraph 20 of this order and submitted that in earlier years this expenditure was held to be not in the nature of preliminary or preparatory work as is required in the case of coal mining for sinking of a permanent shaft or pumping out of the water.

6. Learned counsel for the assessee again referred to the revisionary order passed under section 263 of the Act where the Commissioner of Income-tax has pointed out that section 35E was introduced by the Taxation Laws (Amendment) Act, 1970 , with effect from April 1, 1971. Therefore, according to the Commissioner of Income-tax the earlier decision rendered by the Tribunal was not applicable. Then he referred to the provisions of sub-section (2) of section 35E and pointed out that the expenditure covered by that provision was only related to operations relating to prospecting for any mineral. He submitted that the expenditure incurred by the assessee-company for removal of overburden cannot be called expenditure incurred for prospecting of minerals. He then referred to pages 2 to 4 of the paper book which is a copy of the order passed by the then Inspecting Assistant Commissioner of Income-tax, Range-IV under section 144B of the Act for the assessment year 1980-81. He submitted that vide paragraph 4 of this order, similar expenditure was held to be allowable despite section 35E of the Act being on the statute book for that year. He argued that similar expenditure has been allowed in almost all the years and as a sample he referred to the copy of computation of business income for the assessment year 1987-88 and invited our attention to page 7 of the paper book, wherein vide item (f), expenditure on development of mines was capitalised but claimed as revenue expenditure and was accordingly allowed by the Department. He emphatically argued that when similar type of expenditure has been allowed in earlier years, the Department could not have disturbed that trend in this year and that too by way of a revisionary order passed under section 263 of the Act.

7. Learned counsel for the assessee further argued that the Assessing Officer has enquired about the nature of this expenditure and in this connection invited our attention to page 3 of the paper book-II where vide item No. 14, the following queries were raised :

(i) details of expenditure incurred for each mine (ii) please show how the expenditure claimed should not be held as capital expenditure.

8. He then invited our attention to the reply of the assessee-company, a copy of which is placed at pages 6 and 7 of the paper book wherein the assessee has clearly submitted the details and pointed out that the expenditure was revenue in nature. This means that the Assessing Officer had made proper enquiries and he was satisfied with the reply of the assessee and keeping the history in view, he has allowed the expenditure. He contended that even assuming without any admission that two views are possible on this issue, the revision order was without any jurisdiction in view of the decision of the Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 wherein it was held that if two views are possible legally and if the Assessing Officer has adopted a particular view then such order cannot be called erroneous in so far as it is prejudicial to the interests of the Revenue.

9 While concluding his argument, he referred to the following decisions :

CIT v. Indian Molasses Co. P. Ltd. [1970] 78 ITR 474 (SC) ; /. K. Cotton Manufacturers Ltd. v. CIT [1975] 101 ITR 221 (SC) ; Sassoon J. David and Co. P. Ltd. v. CIT [1979] 118 ITR 261 (SC) ; Madhav Prasad fatia v. CIT [1979] 118 ITR 200 (SC) ; and CIT v. Panipat Woollen and General Mills Co. Ltd. [1976] 103 ITR 66 (SC).

10 Wherein criteria for allowing revenue expenditure under section 37 of the Act has been elaborately discussed. It has been clearly held that the conditions required to be complied with for allowing the expenditure under section 37 are :

(a) expenditure should be incurred wholly and exclusively for the purpose of business operation ; and

(b) must not be (i) capital expenditure, (ii) personal expenditure or (iii) an expenditure which is covered by the provisions of sections 30 to 36 of the Income-tax Act, 1961 .

11. Since the expenditure in question clearly meets all the conditions, it has to be allowed as revenue expenditure.

12. The learned Departmental representative on the other hand, referred to the provisions of sub-sections (2) and (3) of section 35E and submitted that even an expenditure incurred during the stage of commercial production would be covered by sub-section (2) of section 35E of the Act. Therefore, the expenditure incurred by the assessee on removal of overburden was clearly covered by sub-section (2) of section 35E of the Act. He vehemently argued that earlier decision of the Tribunal cannot be applied because section 35E was introduced only with effect from the assessment year 1971-72 whereas the Tribunal’s decision relates to the assessment years 1958-59 and 1960-61. He further submitted that even if the expenditure was allowed in earlier years without making detailed enquiries, it does not mean that the same mistake should be perpetuated permanently. He submitted that there is no question of application of section 37 because one of the conditions in section 37 is that the expenditure should not be covered by the provisions of sections 30 to 36 of the Act and since the expenditure is covered by section 35E of the Act, it cannot be allowed under section 37 of the Income-tax Act, 1961While strongly supporting the order of the Commissioner of Income-tax (Appeals), he justified the disallowance of expenditure incurred on removal of overburden during the year.

13. We have considered the rival submissions carefully in the light of the material on record. The relevant provisions of section 35E read as under :

“35E.(1) Where an assessee, being an Indian company or a person (other than a company) who is resident in India, is engaged in any operations relating to prospecting for, or extraction or production of, any mineral and incurs, after the 31st day of March, 1970, any expenditure specified in sub-section (2), the assessee shall, in accordance with and subject to the provisions of this section, be allowed for each one of the relevant previous years a deduction of an amount equal to one-tenth of the amount of such expenditure.

(2) The expenditure referred to in sub-section (1) is that incurred by the assessee after the date specified in that sub-section at any time during the year of commercial production and any one or more of the four years immediately preceding that year, wholly and exclusively 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 any such mineral or group of associated minerals :

Provided that there shall be excluded from such expenditure any portion thereof which is met directly or indirectly by any other person or authority and any sale, salvage, compensation or insurance moneys realised by the assessee in respect of any property 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 acquisition of the deposits of such mineral or group of associated minerals or of any rights in or over such deposits ; or

(iii) of a capital nature in respect of any building, machinery, plant or 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). . .”

14. A plain reading of sub-section (2) above clearly shows that the expenditure which is covered by this provision is only the expenditure which relates to exclusively on any operations relating to prospecting for any mineral. That means only expenditure which is covered is the one which is incurred on the operations for prospecting of any mineral. The word ‘prospecting’ is defined in various dictionaries as under :

Concise Oxford Dictionary:

(i) the possibility or likelihood of some future event occurring,

(ii) an extensive view of landscape,

(iii) a place likely to yield mineral deposits.

(iv) search for mineral deposits, especially by means of drilling and excavation.

Cambridge International Dictionary of English :

(i) to search for gold, oil or other valuable substances on or under the surface of the earth.

(ii) to prospect for oil/gold.

The Chambers Dictionary:

(i) a place though likely to yield a valuable mineral (mining)

(ii) the yield of a test of a sample from such place,

(iii) to look around, to make a search, especially for chances of mining.

(iv) to explore, search, survey or test for profitable minerals.

(v) searching a district for minerals with a view to further operations.

15. The above meanings unambiguously show that the word prospect means, efforts or possibility of finding minerals in some particular area. From the facts on record it is clear that these mines were identified long long ago and even mining operations were started in 1957. Therefore, it cannot be said that expenditure was incurred for the purpose of identifying or prospecting the mines. In fact, the expenditure has been incurred on a continuous basis for removal of overburden, which means the upper crust of the earth so as to extract the mineral which can ultimately be excavated after removal of such overburden only. Thus, the expenditure cannot be said to be covered by section 35E(2) of the Act.

16. We further find that the Hon’ble Members of the Tribunal while adjudicating an identical issue during the assessment years 1958-59 to 1960-61 has visited the mines and recorded the following observations vide paragraph 15 of the order of the Tribunal in ITA Nos. 5743 to 5745 of 1964-65 dated April 20, 1966, in the case of the same assessee :

“15. In order to have a first-hand knowledge of the nature of the excavation operations, we made a local inspection of the mines in the presence of representatives of the assessee as well as the Department including their respective counsel. The lignite deposits occur at a depth of about 180 feet from the surface of the land. These lignite deposits are covered by a layer of clay, about 10 feet thick, and in turn, this layer of clay is followed by sandy earth. These layers of earth and clay which cover the lignite deposits are known as the overburden. The total area in which the lignite deposits occur is of the extent of about 100 sq. miles. The mining operations have been started from one end of this area and at that end, excavations have been commenced along a length of 6, 100 feet. The overburden along this entire length is gradually removed at different levels forming benches along the side. This is done in order to avoid the flooding of the mines by the underground water which would otherwise result, if the entire overburden down to the lignite deposits is removed all at once. The earth that is thus removed either with the help of conventional machinery or with the help of the sophisticated bucket-wheel machinery, is deposited by conveyor belts at a distance from the mine and these deposits have now formed a huge bank of earth. When the overburden has been thus removed and the lignite deposits are reached, the lignite is again excavated with the help of the bucket-wheel machinery and it is conveyed by means of the conveyer belt to the thermal station, the briquetting plant and the fertilizer plant. The work of removing the overburden is not, however, stopped when the lignite deposits are reached. In order to win more lignite, the area of operation has to be continuously extended and the pit of the length of 6, 100 ft. which was dug at the initial stage, has to be continuously widened. For this purpose, while on the one hand, the excavation of lignite continues, on the other hand, the excavation of the overburden also continues. Part of the overburden that is thus removed is used to fill up the pit that has been originally dug so that the land might be levelled and no permanent pits be left in the land. We actually found the work of the removal of the overburden going on simultaneously with the work of the removal of the lignite. The removal of the overburden does not stop when the stage of the winning of the lignite is reached. Until the entire area in which the lignite deposits occur is covered, and the entire lignite is won from this area, this process of removal of the overburden will continue simultaneously with the process of the removal of the lignite.”

17. Then, after analysing the whole situation and relevant industry’s letter, it was observed vide paragraph 20 of the above order as under :

“20. Applying these general principles to the facts of the present case, we have no hesitation in coming to the conclusion that the expenditure in question is not a capital expenditure but a revenue expenditure. The expenditure is incurred in removing the overburden and also in pumping out the water from the mine. As already stated, the removal of overburden and the pumping out of water is a part of the work of mining the lignite pumping and it is not in the nature of preliminary or preparatory work. The removal of the overburden is not similar to the sinking of a permanent shaft in the coal mine and the pumping out the water from underneath the lignite belt in order to avoid the mine being overflooded, is not similar to the pumping out of water from a discussed mine with a view to make the mine fit for operation. The expenditure incurred in the removal of overburden or in pumping out the water cannot be equated with the purchase price of the land or of the mining rights. The expenditure incurred did not bring into existence any asset of enduring benefit but it was an expenditure incurred for the purpose of acquiring a raw material required for the assessee’s business. Looked at from the commercial point of view, it was part of the Corporation’s working expenses and it was an expenditure laid out as part of the process of profit earning. It is not an expenditure which was going to be spent once and for all, but was an expenditure which was going to recur every year. We, therefore, hold that the expenditure incurred by the Corporation during the accounting periods relevant to the assessment years under appeal in removing the overburden and in pumping out the water is a revenue expenditure.”

18. From the above it becomes clear that the removal of overburden is a continuous process while extracting lignite from the mines and by no stretch of imagination it can be said that the expenditure has been incurred for prospecting the mineral. The assessee has adopted open cast mining which means overburden has to be removed before lignite can be excavated. It has been observed by the Tribunal in its order that excavations work was commenced along the 6100 feet and such overburden is being removed gradually from the entire length of the identified area which means that the assessee-company has started from particular end and going ahead with the removal of overburden into next batch of land or open cast mine on continuous basis for extraction of mineral.

19. We are unable to agree with the contention of the learned Departmental representative that section 37 of the Act is not attracted to this extent because the same is covered between sections 30 and 36 of the Act specifically under section 35E of the Act. As stated above, section 35E(2) applies to the expenditure which has been incurred for the purpose of prospecting of the mineral and not for the purpose of commercial production of the mineral. We are of the considered view that in this case, section 37 would be clearly attracted since the expenditure is not of capital nature and is exclusively incurred for the purpose of business and not of personal nature. Removal of overburden for excavating the mineral i.e., lignite does not bring into any benefit of enduring nature or any asset into existence. Once the upper crust of earth known as overburden is removed that would go waste and lignite is excavated. No enduring benefit can be said to have arisen to the assessee by removal of such overburden.

20. In any case, we further find that such expenditure was held to be allowable even during the assessment year 1980-81 while giving direction under section 144B of the Act, i.e., after the introduction of the provision of section 35E. Further, learned counsel for the assessee has produced by way of example the computation for the assessment year 1987-88 where similar expenditure was claimed and allowed. In these circumstances, we are of the view that the expenditure for removal of overburden would not fall under section 35E of the Income-tax Act, 1961 and thus, we quash the revision order passed by the Commissioner of Income-tax under section 263 of the Income-tax Act, 1961 .

21. In the result, the appeal filed by the assessee is allowed.