ITAT Allows Mine Development Expenses as Revenue Expenditure Under Section 37

The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) held that mine development expenditure incurred by a mining contractor is allowable as revenue expenditure under Section 37(1) of the Income Tax Act, 1961 and cannot be forced into the amortisation mechanism under Section 35E merely because it relates to mining operations. A Bench comprising Vice-President Prashant Maharishi and Judicial Member Soundararajan K. dismissed the Revenue’s appeal and partly allowed the appeal filed by M/s. Southwest Mining Ltd. for AY 2012-13.

The dispute arose after the Assessing Officer disallowed the assessee’s claim of mine development expenditure and treated it as expenditure governed by Section 35E. The Revenue argued that the assessee itself had capitalised the expenditure in its books and disclosed that it would be amortised over the contract period, indicating that the expenditure was capital in nature. The Assessing Officer accordingly restricted the deduction available under Section 35E.

The assessee contended that it was merely a mining contractor engaged by Barmer Lignite Mining Company Ltd. for lignite excavation and did not own either the mines or the lignite extracted. It is submitted that the expenditure was incurred wholly and exclusively for carrying out contractual mining operations and did not result in the creation of any capital asset or enduring benefit in its hands.

The CIT(A) accepted the claim by following the Tribunal’s decision in the assessee’s own case for the preceding assessment year. Aggrieved by the relief granted, the Revenue carried the matter before the Tribunal. “The assessee, being only a mining contractor and not the owner of the mines or lignite, was entitled to deduction under section 37 for mine development and overburden removal expenditure incurred in its business.”

The Tribunal noted that the assessee’s role was limited to excavation and supply of lignite under a long-term contractual arrangement and that ownership of the mines as well as the mineral always remained with Barmer Lignite Mining Company Ltd. It observed that overburden removal is an ongoing activity intrinsically connected with extraction operations and cannot automatically be treated as capital expenditure.

Relying on its earlier decision in the assessee’s own case, the Bench held that Section 35E is an enabling provision intended to grant amortisation benefits in respect of certain otherwise non-deductible expenditure and cannot be invoked to deny a deduction otherwise allowable under Section 37(1). “Section 35E is a benefit and not a restriction on deductions otherwise available under the Act.”

The Tribunal further rejected the Revenue’s reliance on the accounting treatment adopted by the assessee. It observed that entries in the books of account or accounting policies under the Companies Act do not determine tax deductibility, which has to be examined independently under the provisions of the Income Tax Act.

In its own appeal, the assessee challenged the taxation of Rs 11.09 crore realised during the mine development period. The Tribunal found that while the CIT(A) had allowed only the net mine development expenditure of Rs 5.33 crore, he had separately sustained taxation of the corresponding receipt of Rs 11.09 crore, resulting in a double addition.

The Tribunal also considered the assessee’s claim for deduction of Rs 5.39 crore that had been disallowed in an earlier year under Section 40(a)(ia) for non-deduction of tax at source. Observing that such expenditure becomes allowable in the year in which tax is deducted and deposited, it restored the matter to the Assessing Officer for verification and directed that the deduction be allowed if the claim is found to be in order.

Thus, the Revenue’s appeal was dismissed, while the assessee’s appeal was partly allowed.

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