RIO TINTO ORISSA MINING PVT. LTD.,BHUBANESWAR vs. ACIT, CORPORATE CIRCLE-1(2), BHUBANESWAR

आयकर अपीऱीय अधिकरण, “एस.एम.सी”, न्यायपीठ,कटक IN THE INCOME TAX APPELLATE TRIBUNAL “SMC” BENCH, CUTTACK श्री चन्द्र मोहन गगग, न्द्याययक सदस्य के समऺ । BEFORE SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER आयकर अऩीऱ सं./ITA No.294/CTK/2017 (नििाारण वषा / Assessment Year :2012-2013) Rio Tinto Orissa Mining Private Vs. ACIT, Corporate Circle- Limited, 1(2), Bhubaneswar N-3/356, IRC Village Nayapalli, Bhubaneswar-751015 स्थायी ऱेखा सं./ जीआइआर सं./ PAN/GIR No. : AABCR 5371 H (अऩीऱाथी /Appellant) (प्रत्यथी / Respondent) .. यनधागररती की ओर से /Assessee by : Shri B.K.Mahapatra, AR राजस्व की ओर से /Revenue by : Shri Subhendu Dutta, DR सुनवाई की तारीख / Date of Hearing : 07/03/2019 घोषणा की तारीख/Date of Pronouncement 13/03/2019 आदेश / O R D E R This appeal has been filed by the assessee against the order of Commissioner of Income Tax (Appeals)-1, Bhubaneswar, dated 27.01.2017 passed in First Appeal No.0103/2015-16 for the assessment year 2012-2013. 2. The assessee has raised following grounds of appeal :- 1. That the order dated 27.04.2017 passed by the Learned Commissioner of Income Tax (Appeals) [in short "CIT(Appeals)"], in dismissing the appeal is against principles of natural justice, contrary to facts, arbitrary and erroneous and bad in law. 2. Sustenance of Disallowance of Business expense of Rs,38,27,662/- and depreciation of Rs.50,396/-, totaling to Rs.38,78,058/-. (a) That on the facts and in the circumstances of the case, the confirming of the order of the Learned Assessing Officer in disallowing Business expense of Rs,38,27,662/- and

2 ITA No.294/CTK/2017 depreciation of Rs.50,396/-., totalling to Rs.38,78,058/- by the Learned CIT(Appeals), on mis-appreciation of facts, arbitrary, erroneous and bad, both in the eye of law and on facts. (b) That on the facts and in the circumstances of the case, the learned CIT(Appeals) holding that the assessee has not commenced its business so far and the expense cannot be allowed as Business expense is contrary to facts, incorrect, arbitrary, and bad, both in the eye of law and on facts. (c) That on the facts and in the circumstances of the case, the learned CIT(Appeals) upholding that expenses are in the nature of 'pre-operative expenses' requiring capitalisation is incorrect, arbitrary, erroneous and bad, both in the eye of law and on facts. (d) That the assessee has already set up its business long back (in the year 1997-98) and the learned CIT(Appeals) holding that the there is no evidence in support of assessee's claim is on mis-appreciation/ misconstruing of facts of facts, incorrect, arbitrary, erroneous and bad, both in the eye of law and on facts. (e) That on the facts and in the circumstances of the case, the learned Assessing Officer in disallowing the aforesaid. Rs. 38,78,058/- (expense of Rs,38,27,662/- and depreciation of Rs.50,396/-, totaling to Rs.38,78,058/-) by treating as 'deferred revenue expenses' is arbitrary, erroneous and bad, both in the eye of law and on facts.. (f) That the expenses of Rs, 12,60,570/- has been incurred wholly and exclusively for the purpose of business of the assessee, is fully allowable as deduction under the provisions of the Act, and the lower authorities not allowing the same is arbitrary, erroneous and bad, both in the eye of law and on facts. (g) That the fixed assets having already been put to use, the depreciation of Rs.50,396/- is fully allowable as deduction u/s.32 of the Act and the learned CIT(Appeals) not allowing the same is arbitrary, erroneous and bad, both in the eye of law and on facts. 3. That the appellant craves leave to add, supplement, modify the grounds here-in-above before or at the hearing of the appeal. 3. The effective ground raised by the assessee in the present appeal is against sustenance of disallowance of business expenses and depreciation.

3 ITA No.294/CTK/2017 4. Facts giving rise to the present appeal are that the assessee is engaged in the business of mining and services to mining industries and filed its return of income electronically on 20.09.2012 declaring total income of Rs.Nil. The case of the assessee was selected for scrutiny under CASS and notices u/s.143(2) & 1432(1) of the Act were issued, in response to which ld. AR of the assessee appeared and the case was discussed. During the course of assessment proceedings, the AO observed that since there was no business income as the work project was in progress the expenditure of Rs.38,78,058/- was in the nature of pre-operative expenses. The AO further observed that the above expenses claimed by the assessee are in the nature of deferred revenue expenses for being debited against the income when the same would have arisen and accordingly the AO brought the income from other sources as declared by the assessee to tax and added the same to the total income of the assessee. 5. In appeal before the CIT(A), the assessee reiterated the submissions as were made before the AO and also filed elaborate written submissions stating that since it has already commenced business, the expenses resulting in business loss should be allowed to be set off against income from other sources even though no business receipts are there for the previous year in question. The CIT(A) though accepted the submissions of the assessee with regard to inapplicability of Section 14A of the Act as applied by the AO, however, observed that since the assessee has not commenced its business so far, the expenses in

4 ITA No.294/CTK/2017 question cannot be allowed as business expenses and, therefore, it is not correct on the part of the assessee to claim that it has already started its business operation since there is absolutely no evidence in support of the assessee‟s claim. Accordingly, the CIT(A) confirmed the disallowance made by the AO on account of business expenses. Against which the assessee is in further appeal before the Tribunal. 6. Ld. AR submitted that the expenses claimed by the assessee are as per its profit and loss account are fully supported and has been incurred wholly and exclusively for the purpose of business of the assessee and therefore is fully allowable as deduction u/s.37 of the Act. It was further contention of ld. AR that the assessee has already set up its business long back in the year 1997-98 and the expenses Rs,38,27,662/- as per its Profit and Loss account is not in the nature of pre-operative expenses, however, the AO has failed to appreciate the very important and relevant fact that the assessee has already set up its business in the long past and even if there is no business receipts during the year under consideration, the disallowance cannot be made. Further ld. AR drew the attention of the bench at page 46 of the paper book and submitted that the assessee has also received consultancy income in the past on which TDS also has been made by the customer and in this regard the Ledger account copy of the Customer (Rio Tinto Exploration India Private Limited) for the accounting year 1999-2000 (A.Y.2000-01) wherein the said consultancy income of Rs.91,614/- and TDS of Rs.5039/- has been shown. Thus, the assessee having already set up its business in the year

5 ITA No.294/CTK/2017 1997-98, even if there is no business receipt during the year under consideration, the expense as per its Profit and Loss account and depreciation as per IT Act, is not disallowable. 7. It was also the contention of ld. AR that the AO in the assessment order has mentioned that there is no business income of the assessee during the year under consideration, however, the CIT(A) has stated that there is no business of the assessee during the year under consideration. Ld.AR further submitted that the business of the assessee had been set up in the past and is in existence during the year 2012-13 and the expenses incurred wholly and exclusively for the purpose of business of the assessee and hence fully allowable. It is also submitted that the interest earned of Rs.5,35,137/-. during the Accounting Year 2011-12, is to be considered as "Income from other Sources", and the loss and depreciation for the Asst. Year 2012-13 of Rs.38,78,058/- is to be adjusted against the aforesaid interest income of Rs.5,35,137/- and the balance loss and depreciation of Rs.33,42,421/- ought to be carried forwarded. 8. Opposing to the above submissions of ld. AR of the assessee, ld. DR submitted that the expenses claimed by the assessee are in the nature of deferred revenue expenses and there is no business income of the assessee during the year under consideration, therefore, both the authorities below have taken a condign view in not giving any relief to the assessee in this regard.

6 ITA No.294/CTK/2017 9. I have given my thoughtful consideration to the arguments advanced at the hands of ld. AR of the assessee and ld.DR for revenue. On careful consideration of above rival submissions and from para 2 of the assessment order, I observe that the AO asked the assessee to justify the claim of impugned business expenses of Rs.38,27,662/- and depreciation of Rs.50,396/- in the light of provision of Section 14A of the Income Tax Act, 1961 (for short „the Act‟). However, from para 3.2 of the first appellate order, I also observe that the ld. CIT(A) observed that Section 14A of the Act has no application in the case and AO‟s reference to the same is misplaced. In this situation, I can safely presume that the AO proceeded to disallow the impugned expenses on wrong presumption and wrong application of provisions of the Act. 10. Further, the AO observed that Section 37(1) of the Act puts down certain mandatory conditions to be fulfilled before the allowance of certain expenditure and in conditions 5 & 6, the expenses should be in respect of business carried on by the assessee and other expenses should have been expended wholly and exclusively for the business purpose of the assessee. The AO further observed that no business income is included in total income since the same has been shown as Nil and the facts and circumstances of the case certainly call for disallowance of claimed expenses. The AO lastly observed that there was no business income as the work project was in progress and the impugned expenditure was in the nature of pre-operative expenses which ought to have been capitalized. I may point out that the AO has not doubted regarding

7 ITA No.294/CTK/2017 quantum and purpose of the impugned expenditure but he disallowed the claim mainly on two premises that no business income is included in the total income and the work project was in progress, hence, the impugned expenditures were in the nature of pre-operative expenses, which ought to have been capitalized. 11. From the relevant para 3.2 of the order of ld. CIT(A), I observe that the ld. CIT(A) has upheld and confirmed the basis of disallowance that the impugned expenses are in the nature of pre-operative expenses requires capitalisation and the assessee is not correct in claiming that it has already started its business operation. 12. Keeping in view the observations of the authorities below, I am surprised that the assessee has shown income from service rendered by it during the financial year 1999-2000, which was shown in the return and taxes were also paid thereon during the assessment year 2000-2001, then how it can be said that the assessee did not commence its business operations. This fact has not been controverted by the ld. DR. From careful reading of relevant provisions of Section 37 of the Act, I clearly observe that the provision provides that any expenditure not being expenditure of the nature described under Sections 33 to 36 and not being in the nature of capital expenditure or personal expense sf the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”. There are two explanations to Section 37(1) of the Act, which provide that

8 ITA No.294/CTK/2017 any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession any expenditure incurred by the assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013, shall not be deemed to be an expenditure incurred by the assessee for the purpose of the business or profession. 13. In view of the above provisions, I am of the considered opinion that when the business of the assessee was started long back and it is continuing with the establishment, then merely because there was no business income, the assessee cannot be denied business expenditure and depreciation on the fixed assets as per the provisions of the Act. In my humble understanding of the provisions of Section 37(1) of the Act, there is no requirement of the legislature that there must be business income then only the assessee can claim expenditure which was expended wholly and exclusively for the purpose of business of the assessee. The existence of assessee company is not in dispute and quantum of impugned business expenditure as well as it was expended for the purpose of business of the assessee, are also not in dispute. I am satisfied that the assessee‟s business is continuing since many years, therefore, the impugned expenditure cannot be treated as pre-operative expenditure and does not require capitalization. Similarly, the depreciation which is allowable on the fixed assets of the assessee as per the

9 ITA No.294/CTK/2017 provisions of the Act, cannot be denied merely because there was no business income during the relevant financial year. 14. In the totality of facts and circumstances of the case, as noted above, I am of the considered opinion that the authorities below were not correct in dismissing the claim of the assessee pertaining to the impugned business expenditure and depreciation and it should have been allowed to the assessee. Accordingly, the sole ground No.2 agitated by the assessee is allowed and the AO is directed to allow the claim of the assessee regarding business expenditure and depreciation. 15. In the result, appeal of the assessee is allowed. Order pronounced in the open court on 13/03/2019. Sd/- (CHANDRA MOHAN GARG) न्यानयक सदस्य / JUDICIAL MEMBER कटक Cuttack; ददनांक Dated 13/03/2019 प्र.कु.मम/PKM, Sr.P.S. आदेश की प्रनिलऱपप अग्रेपषि/Copy of the Order forwarded to : 1. अऩीऱाथी / The Appellant- . Rio Tinto Orissa Mining Private Limited, N-3/356, IRC Village Nayapalli, Bhubaneswar-751015 प्रत्यथी / The Respondent- 2. ACIT, Corporate Circle-1(2), Bhubaneswar 3. आयकर आयुक्त(अऩीऱ) / The CIT(A), 4. आयकर आयुक्त / CIT 5. ववभागीय प्रयतयनधध, आयकर अऩीऱीय अधधकरण, कटक / DR, ITAT, Cuttack 6. गार्ग पाईऱ / Guard file. सत्यावऩत प्रयत //True Copy// आदेशािुसार/ BY ORDER,

(Senior Private Secretary) आयकर अपीऱीय अधिकरण, कटक / ITAT, Cuttack