I-T - Whether when assessee obtains FIPB nod for prospecting diamonds, its commercial operation begins with such activities without mining, and it is eligible to claim expenditure - YES: ITAT
MUMBAI, DEC 29, 2011: THE issues before the Bench are - Whether when the assessee obtains permission from FIPB for prospecting diamonds and other minerals, it can be said that its commercial operation began with the prospecting activities even without the mining acitivities; Whether it is not entitled to deduction for non-prospecting expenses like salary paid u/s 37(1) and whether for claiming expenditure it is necessary for the assessee to earn income. And the answers partly go in favour of the assessee.
Facts of the case
The assessee companies in India were all the subsidiaries of De Beers Mauritius Ltd, which had now merged and were known as De Beers India Private Limited. Each of the companies had commenced its operations in India after approval received from the Foreign Investment Promotion Board (FIPB) in October 1996, with reference to prospecting and mining of diamonds and other minerals (except coal and iron ore). The assessee was also granted permission by the Ministry of Industry for diamond prospecting. Consequently, the assessee obtained further permissions from the various state governments including that from the government of Andhra Pradesh for diamond prospecting in various areas of different districts in the state. According to the assessee, as its main activity was exploration and prospecting for diamonds, it had commenced its business operations since being incorporated and having obtained permission from the FIPB. Even though the mining activity had not commenced, its business of prospecting had as the assessee had undertaken prospecting activities during the year. Although there were no receipts during the year from its prospecting activities, they had other incomes from interest on deposits.
The assessee thus filed its return declaring losses. However, this return was subsequently revised, as the assessee had incurred an expenditure on prospecting activities, which was not claimed as per the provisions of section 35E and was capitalized by the assessee. The assessee had thus claimed deduction on this non-prospecting expenditure, including salaries etc, under section 37(1). The assessee had also suo moto disallowed the expenditure pertaining to its prospecting activities under section 35E.
The AO accepted the bifurcation between the prospecting activities and non prospecting activities as done by the assessee while filing the revised return, and withdrawing the claim to the extent of capitalized expenditure under section 35E. The assessee had not claimed any deduction under section 35E as no mining activity had commenced yet. The AO accepted this but disallowed the claim of non-prospecting expenditure incurred by the assessee on salaries of persons and other expenses not related to its prospecting activities, holding that the assessee had not commenced business in the year under consideration. The AO also brought to tax, the interest received by the assessee on short term deposits holding that as the assessee had not commenced its business, the interest income was to be assessee as "income from other sources" instead of "business income" as claimed by the assessee.
In appeal, the CIT(A) confirmed the order disallowing the non-prospecting expenditure claimed by the assessee, holding that under section 35E, only one tenth of the expenditure could be allowed to the assessee but considering that the assessee had not commenced mining activity in the year under consideration, there was no question of allowing the non prospecting expenditure. Similarly, the assessee's claim of depreciation was also disallowed. This had led to the reopening of other assessments in various cases of the assessee.
In appeal before the Tribunal, the assessee submitted that in its own case for a subsequent assessment year, the Tribunal had directed the AO to allow the non-prospecting expenditure under section 37(1). The assessee contended that it had commenced its business activities of prospecting in assessment year 2001-02 itself and this expenditure was allowable under section 37(1). Regarding tax on interest received on short term deposits, the assessee contended that the funds received in the course of its business activity were kept in short term deposit on which the interests were earned. As there were working capital funds, the interest so earned had to be treated as business income.
The Revenue side submitted that the assessee was permitted to do prospecting and mining as per the approvals granted and as the assessee had not started its activity of mining, it could not be said that t had started its business activities. Also, the assessee had not earned any incomes and had only claimed expenditure.
Having heard the parties, the Tribunal held that,
++ commencement of the business activities had various facets. The assessee was initially permitted by the Department of Industrial policy and promotion to undertake prospecting and mining activities for diamonds only which was subsequently modified to include prospecting for other minerals too, with the exception of coal and iron ore. This indicated that the activity of prospecting was a separate business activity. Also, prospecting was an activity prior to the activity of mining and without prospecting, it was not possible to undertake mining activities.
++ following the decision of the Delhi High Court, the assessee in the present case was permitted to undertake reconnaissance for prospecting activities with reference to diamonds in the State of Andhra Pradesh and had accordingly claimed expenditure under section 35E, which was directly related to prospecting expenditure. Thus it could not be said that the assessee had not commenced its business activities. Its business activities had already started from the time it obtained the permission from the state government of Andhra Pradesh, (if not from the time it obtained FIPB permission), and stated its activities of exploration and prospecting as per the permissions granted by the various government agencies. Thus, undertaking prospecting activities being an activity preceding the activity of mining which was a separate activity, it could be said to be an activity by which the assessee has commenced its business. Accordingly, the assessee had commenced its business activities.
++ regarding the AO's reason for not allowing non prospecting expenditure as deduction to the assessee on the ground that there was no income on this activity, just because there was no income, it could not be said that the assessee's expenditure was not allowable. It was an established law that the receipt of income was not a condition precedent for allowing the expenditure. Also, following the decision of the Tribunal in the assessee's own case, the AO was directed to allow the expenses on non-prospecting activities and depreciation claimed during the year.
++ regarding interest on short term deposits, this issue had become academic as incomes of interest, whether assessed under the head `business' or `income from other sources', were eligible for set off to the other expenditure being claimed under the head of "business." Consequent to the finding that the assessee had commenced its business and was eligible for claim of deduction under section 37(1) on non-prospecting expenditure and depreciation, the assessee was eligible for set off of the interest income. Relying on various decisions, holding that interest income was eligible for set off against business loss whether assessed as income from business or income from other sources, the AO was directed to allow the set off of business loss as per the provisions of the Act.
MUMBAI, DEC 29, 2011: THE issues before the Bench are - Whether when the assessee obtains permission from FIPB for prospecting diamonds and other minerals, it can be said that its commercial operation began with the prospecting activities even without the mining acitivities; Whether it is not entitled to deduction for non-prospecting expenses like salary paid u/s 37(1) and whether for claiming expenditure it is necessary for the assessee to earn income. And the answers partly go in favour of the assessee.
Facts of the case
The assessee companies in India were all the subsidiaries of De Beers Mauritius Ltd, which had now merged and were known as De Beers India Private Limited. Each of the companies had commenced its operations in India after approval received from the Foreign Investment Promotion Board (FIPB) in October 1996, with reference to prospecting and mining of diamonds and other minerals (except coal and iron ore). The assessee was also granted permission by the Ministry of Industry for diamond prospecting. Consequently, the assessee obtained further permissions from the various state governments including that from the government of Andhra Pradesh for diamond prospecting in various areas of different districts in the state. According to the assessee, as its main activity was exploration and prospecting for diamonds, it had commenced its business operations since being incorporated and having obtained permission from the FIPB. Even though the mining activity had not commenced, its business of prospecting had as the assessee had undertaken prospecting activities during the year. Although there were no receipts during the year from its prospecting activities, they had other incomes from interest on deposits.
The assessee thus filed its return declaring losses. However, this return was subsequently revised, as the assessee had incurred an expenditure on prospecting activities, which was not claimed as per the provisions of section 35E and was capitalized by the assessee. The assessee had thus claimed deduction on this non-prospecting expenditure, including salaries etc, under section 37(1). The assessee had also suo moto disallowed the expenditure pertaining to its prospecting activities under section 35E.
The AO accepted the bifurcation between the prospecting activities and non prospecting activities as done by the assessee while filing the revised return, and withdrawing the claim to the extent of capitalized expenditure under section 35E. The assessee had not claimed any deduction under section 35E as no mining activity had commenced yet. The AO accepted this but disallowed the claim of non-prospecting expenditure incurred by the assessee on salaries of persons and other expenses not related to its prospecting activities, holding that the assessee had not commenced business in the year under consideration. The AO also brought to tax, the interest received by the assessee on short term deposits holding that as the assessee had not commenced its business, the interest income was to be assessee as "income from other sources" instead of "business income" as claimed by the assessee.
In appeal, the CIT(A) confirmed the order disallowing the non-prospecting expenditure claimed by the assessee, holding that under section 35E, only one tenth of the expenditure could be allowed to the assessee but considering that the assessee had not commenced mining activity in the year under consideration, there was no question of allowing the non prospecting expenditure. Similarly, the assessee's claim of depreciation was also disallowed. This had led to the reopening of other assessments in various cases of the assessee.
In appeal before the Tribunal, the assessee submitted that in its own case for a subsequent assessment year, the Tribunal had directed the AO to allow the non-prospecting expenditure under section 37(1). The assessee contended that it had commenced its business activities of prospecting in assessment year 2001-02 itself and this expenditure was allowable under section 37(1). Regarding tax on interest received on short term deposits, the assessee contended that the funds received in the course of its business activity were kept in short term deposit on which the interests were earned. As there were working capital funds, the interest so earned had to be treated as business income.
The Revenue side submitted that the assessee was permitted to do prospecting and mining as per the approvals granted and as the assessee had not started its activity of mining, it could not be said that t had started its business activities. Also, the assessee had not earned any incomes and had only claimed expenditure.
Having heard the parties, the Tribunal held that,
++ commencement of the business activities had various facets. The assessee was initially permitted by the Department of Industrial policy and promotion to undertake prospecting and mining activities for diamonds only which was subsequently modified to include prospecting for other minerals too, with the exception of coal and iron ore. This indicated that the activity of prospecting was a separate business activity. Also, prospecting was an activity prior to the activity of mining and without prospecting, it was not possible to undertake mining activities.
++ following the decision of the Delhi High Court, the assessee in the present case was permitted to undertake reconnaissance for prospecting activities with reference to diamonds in the State of Andhra Pradesh and had accordingly claimed expenditure under section 35E, which was directly related to prospecting expenditure. Thus it could not be said that the assessee had not commenced its business activities. Its business activities had already started from the time it obtained the permission from the state government of Andhra Pradesh, (if not from the time it obtained FIPB permission), and stated its activities of exploration and prospecting as per the permissions granted by the various government agencies. Thus, undertaking prospecting activities being an activity preceding the activity of mining which was a separate activity, it could be said to be an activity by which the assessee has commenced its business. Accordingly, the assessee had commenced its business activities.
++ regarding the AO's reason for not allowing non prospecting expenditure as deduction to the assessee on the ground that there was no income on this activity, just because there was no income, it could not be said that the assessee's expenditure was not allowable. It was an established law that the receipt of income was not a condition precedent for allowing the expenditure. Also, following the decision of the Tribunal in the assessee's own case, the AO was directed to allow the expenses on non-prospecting activities and depreciation claimed during the year.
++ regarding interest on short term deposits, this issue had become academic as incomes of interest, whether assessed under the head `business' or `income from other sources', were eligible for set off to the other expenditure being claimed under the head of "business." Consequent to the finding that the assessee had commenced its business and was eligible for claim of deduction under section 37(1) on non-prospecting expenditure and depreciation, the assessee was eligible for set off of the interest income. Relying on various decisions, holding that interest income was eligible for set off against business loss whether assessed as income from business or income from other sources, the AO was directed to allow the set off of business loss as per the provisions of the Act.
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