GOLCHA MINERALS PVT. LTD.,JAIPUR vs. ITO, JAIPUR

आयकर अपीलीय अधिकरण] जयपुर न्यायपीठ] जयपुर IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR Jh fot; iky jko] U;kf;d lnL; ,oa Jh Hkkxpan] ys[kk lnL; ds le{k BEFORE: SHRI VIJAY PAL RAO, JM & SHRI BHAGCHAND, AM vk;dj vihy la-@ITA No. 1137/JP/2016 fu/kZkj.k o"kZ@Assessment Year : 2012-13

cuke M/s Golcha Minerals Pvt. Ltd., Income Tax Officer, Vs. Golcha Trade Centre, M.I. Ward 2(2), Road, Jaipur. Jaipur. LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AACCG 6614 R vihykFkhZ@Appellant izR;FkhZ@Respondent fu/kZkfjrh dh vksj ls@ Assessee by : Shri A.B. Dangyach (CA) jktLo dh vksj ls@ Revenue by : Shri P.R. Meena (Addl.CIT) lquokbZ dh rkjh[k@ Date of Hearing : 15/11/2017 mn?kks"k.kk dh rkjh[k@ Date of Pronouncement : 17/11/2017 vkns'k@ ORDER

PER: BHAGCHAND, A.M. This is an appeal filed by the assessee emanates from the order of the ld. CIT(A)-I, Jaipur dated 28/10/2016 for the A.Y. 2012-13.

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assessee is in appeal before the ITAT by taking following grounds of

appeal:

“(i) Ground No.1 On the facts and in circumstances of the case the learned CIT(A) was not justified in sustaining assessment of leasing charges of machinery, under the head income from other sources.

(ii) Ground No.2 On the facts and in circumstances of the case the CIT(A) was not justified in sustaining assessment of lease rent to the extent of Rs. 62,92,739/- as against Rs.60,00,000/- received by appellant company on the basis of TDS certificate. Lease rent of Rs. 2,92,739/- was received in advance for succeeding accounting year.

(iii) Ground No.3 On the facts and in circumstances of the case the CIT(A) was not justified in sustaining disallowance of following expenses:- (i) Dead Rent Rs.4,16,449/- (ii) Environment expenses Rs.2,00,640/- (ii) Salary & wages paid Rs.36,50,617/-

The above disallowance of expenses are bad in law and deserves to be quashed.

Without prejudice to our submission that the disallowance of expenses is bad in law, alternatively the loss incurred by appellant Co. under the above heads should have been allowed from the income assessed.”

sustaining the assessment of leasing charges of machinery and also

enhancing it from 60.00 lacs to 62,92,739/- as income from other

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sources instead of claiming the income from business. The ld. CIT(A)

has dealt the issue by holding as under:

3.1.2 Determination:

(i) The brief facts of the case are that during the year under consideration, the appellant company has not carried out any business activities and it has given its machinery on lease to its group concern M/s Udaipur Development Syndicate Pvt. Ltd. (UMDSPL) and has declared income from lease rent at Rs 60 Lac and treated the same as business income and claimed huge expenses against the said lease income. The AO treated the lease rent as income from other sources’ instead of ‘income from business’ the appellant company by holding that since, no business activities were carried out by the appellant during the year under consideration and the income from letting off of machinery cannot be assessed under the head business income. The AO placed reliance on the decision of the Hon’ble High Court of Delhi in the case of CIT vs. K. Narendra [2000] 246 ITR 579 (Del.).

(ii) During the appellate proceedings, it was stated by the appellant that it has been engaged in mining and manufacturing business since 1982-83 when mining leases were granted to it by the Govt. of Rajasthan and it has been doing mining business thereafter. Under the provisions of Mining Conservation Rules, 1988 and Environment Protection Rules, every lessee of mining lease, have to get approved their mining plans in block of every 5 years and environment clearance has to be obtained before commencement of mining operation in mining lease area. Therefore, although business was commenced by appellant company after grant of mining lease in year 1983-84 but during the accounting year relevant to the assessment year under consideration, mining operation could not be continued for want of statutory and contractual

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requirement j of approval of Mining Plan and Environment Clearance and therefore, the business of appellant company was temporarily discontinued during the accounting year relevant to assessment year under consideration.

(iii) It was further submitted that it applied for the environmental clearance but the environmental clearance could not be obtained from the Regulatory Authority and therefore, the mining operation in financial year 2011-12 could not be commenced. Since the aforesaid approval were taking much time, therefore, pulverizers were given on lease to M/S UMDSPL, a sister concern of the Golcha group and it received lease rent of Rs 60 Lac. The A.O. rejected the claim of the appellant that such lease income is assessable under the head ‘income from business’ and held that such lease income is assessable to tax under the head ‘income from other sources’ and against the declared lease rent of Rs. 60 Lac, the AO assessed it at 62,92,739/-.

(iv) In support of its claim that lease income is to be assessed as business income, the AR relied on clause 7 of the Object clause of the Memorandum of Association of the appellant company, according to which it can lease out whole or any part of the undertaking of the company or any lands, business, property, rights or assets of any kind of the company or any share or interest therein respectively in such manner and for such consideration as the company may think fit and in particular for share, debenture, securities of any other corporation having objects altogether or in part similar to those of the company. It was the contention of the appellant that the AO has completely ignored the aforesaid clause 7 of main object clause in the Memorandum of Association. It was further submitted that such income is rightly assessable as income from business at Rs. 60 Lac as

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against Rs. 62,92,739/- determined by the AO as during the year under consideration, it has received Rs. 60 Lac as lease rent and Rs. 2,92,739/- has been received as advance lease rent to be adjusted in succeeding years.

(v) I have duly considered the submissions of the appellant, assessment order and the material placed on record. It is a matter of fact that during the year under consideration, no mining activities were carried out by the appellant company at its mines at Kishangarh, Bagawasa, Chainpura and Kakrolia as either it could not get the lease of the mines renewed or could not obtain the environment clearance for mining. It is noted from the two lease agreements dated 01.04.2008 executed between the appellant company and M/s UMDSPL, a group concern that the appellant has given grinding machinery namely Pulverizers P-l, P-2 and P-3 on a monthly rent of Rs. 5 Lac and the period of lease was from 01.04.2008 to 31.03.2014 i.e. lease was given for a period of 6 years. It shows that the appellant was not intended to resume its mining operations in the year 2008-09 itself when these lease agreements were executed.

(vi) The appellant relied heavily on clause-7 as stated in its Memorandum of Association, it may be mentioned here that the Memorandum specifies the activities which a company can undertake and specifying a particular activity in the Memorandum does not lead to the conclusion that it is doing business in that particular line and surrounding circumstances have to be seen while deciding whether a company is engaged in any business activities or not.

(vii) It may be mentioned that in the Memorandum of Association of the appellant company, there is no main object and it provided only page 1

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of the MOA. It would be relevant to reproduce here the objects as stated in the MOA as under: “1. To purchase, take on lease, or otherwise acquire any mines, mining rights, and metalliferous land in Rajasthan or elsewhere, and any interest therein, and to explore, work, exercise, develop, and turn to account the same. 2. To crush, win, get, quarry smelt, calcine, refine, dress, amalgamate, manipulate, and prepare for market, ore, metal and mineral substances of all kinds, and to carry on any other metallurgical operations which may seem conductive to any of the objects of the Company. 3. To buy sell, manufacture and deal in minerals, plants, machinery, implements, conveniences, provisions, and things capable of being used in connection with metallurgical operations, or required by workmen and others employed by the Company. 4. To construct, carry out, maintain, improve, manage, work, control and superintend any roadways, tramways, railways, bridges, reservoirs, water-courses, aqueducts, wharves, furnaces, mills, crushing works, factories, warehouses, shops, and other works and conveniences which may seen directly or indirectly conducive to any of the objects of the Company and to contribute to subsidise, or otherwise aid or take part in any such operations. 5. To search for get, work, raise, make merchantable, sell and deal in soapstone (talc, steatite), Dolomite and other minerals and substances and to manufacture and sell fuel and other products. 6. To take on lease, hire, purchase or acquire by license or otherwise any lands, plantations, rights over or connected with lands, plantations, rights over or connected with lands, mills factories, plant, buildings, works, vessels, boats, barges, launches, lorries, carts, wagon, mills, machinery, apparatus, stock-in-trade, patents, inventions, trademarks, rights, privileges, and movable or immovable property of any description which may be deemed necessary or convenient for any business which the Company is authorized to carry on. 7. to lease, let out on hire, mortgage, pledge, sell or otherwise dispose of the whole or any part of the undertaking of the company or any lands, business, property, rights or assets of any kind of the company or any share or interest therein respectively in such manner and for such consideration as the company may think fit and in particular for share, debenture, securities of any other corporation having objects altogether or in part similar to those of the company.”

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Thus, it is evident from the above that the main object as per its MOA are relating to mining activities only. (viii) It may be mentioned that in a recent decision in the case of Chennai Properties & Investments Ltd. Vs CIT[2015] 56 taxmann.com 456 (SC), the Hon’ble Apex Court considered the main objects of the appellant company and held that where in terms of Memorandum of Association, main object of assessee- company was to acquire properties and earn income by letting out same, said income was to be brought to tax as business income and not as income from house property. The Hon’ble Apex Court also referred to Constitution bench decision of Sultan Brothers (P.) Ltd. v. CIT [1964] 51 ITR 353 (SC) and noted as under: ‘‘10. No doubt in Sultan Brothers (P.) Ltd.'s case (supra), Constitution Bench judgment of this Court has clarified that merely an entry in the object clause showing a particular object would not be the determinative factor to arrive at an conclusion whether the income is to be treated as income from business and such a question would depend upon the circumstances of each case, viz., whether a particular business is letting or not. This is so stated in the following words: —

"We think each case has to be looked at from a businessman's point of view to find out whether the letting was the doing of a business or the exploitation of his property by an owner. We do not further think that a thing can by its very nature be a commercial asset. A commercial asset is only an asset used in a business and nothing else, and business may be carried on with practically all things. Therefore, it is not possible to say that a particular activity is business because it is concerned with an asset with which trade is commonly carried on. We find nothing in the cases referred, to support the proposition that certain assets are commercial assets in their very nature.”

Thus, by stating the leasing as an object no. 7 in MOA, it did not mean that the appellant company was engaged in the leasing business.

(ix) During the appellate proceedings, the appellant was required to intimate the last financial year in which the mining activities were

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carried out by the appellant at its mines. Vide order sheet entry dated 20.10.2016, it was submitted by the AR that at least since FINANCIAL YEAR 2008-09, no mining activities were carried out as environment clearance were not obtained. Even, as on date, the mining activities on the mines leased to the appellant company were not started. Thus, the contention of the appellant that the mining activities were temporarily discontinued during the year under consideration is not correct as at least for the last 7-8 years, no mining activities were carried out by the appellant. During the appellate proceedings, the A.R was required to submit the details of mining leases of the appellant company in respect of which mining plans/environment clearance could not be obtained and it was submitted that in respect of: * Chainpura North mining plan have been approved upto 31.3.2010 but environment clearance has not yet been granted.

* Bhagwasa North mining plan has not yet been approved and environment clearance has not been obtained.

* Bhagwasa South mining plan has been approved upto 31.3.2018 but environment clearance has not been obtained.

* Kankrolia, mining plan has been approved upto 31.3.2018 but environment clearance has not yet been obtained.

It was further submitted that since the environment clearance has not yet been obtained, therefore, the appellant company could not commence mining activities in the mining lease area.

(x) Thus, it is evident that during the year under consideration, the appellant company was still not able to obtain statutory and contractual approvals which are required for doing the mining activities. It may be mentioned that as per Rule 58 of Mineral Conservation and Development Rules, 1988, the contraventions of any

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of the provisions of these Rules shall be punishable with imprisonment or fine or both. It would be appropriate to reproduce Rule 58 as under: “58. Penalty Whoever contravenes any of the provisions of these rules shall be punishable with imprisonment for a term which may extend up to two years, or with fine extending to fifty thousand rupees or with both, and in the case of continuing contravention with an additional fine which may extend up to five thousand rupees for every day during which such contravention continues, after conviction for the first such contravention:

Provided that for repeated contravention the punishment should be in the form of imprisonment only:

Provided further that any offence punishable under these rules may either before or after the institution of the prosecution, be compounded by the authorized officer to make a complaint to the court with respect to that offence, on payment to that officer for credit to the Government, of such sum that officer may specify:

Provided also that in case of an offence punishable with fine only, such sum shall not exceed the maximum amount of fine which may be imposed for that offence:

Provided further that where an offence is compounded under these rules, no proceeding or further proceeding, as the case may be, shall be taken against the offender in respect of the offence so compounded, and the offender, if in custody shall be released forthwith.”

(xi) Thus, since the appellant was not having the statutory approval to do the mining activities for the last 7-8 years, it cannot be said that it temporarily discontinued the mining activities. It may be mentioned that in the case of Royal Beverages Pvt. Ltd. vs. DCIT [2016] 70 taxmann.com 86 (Chandigarh Trib.)(Third Member), it has been held by the Hon’ble ITAT that: • A temporary discontinuance of business may lead to the interference that there is some lean economic period of recession and that the business can be revived when proper circumstances exist but then it is not a conscious or deliberate act on the part of the assessee which would

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lead to the abandonment of business. It is the peculiar facts of the case which would determine as to whether the assessee has ceased to carry on its business or it was a temporary discontinuance.

* In CIT v. Integrated Technologies Ltd., the High Court of Delhi in ITA 530/2011 doted 16-12-2011, holds that the only condition to claim depreciation etc., as expenditure is that it is not necessary that plant & machinery owned by the assessee should be actually put to use in the relevant accounting year to justify the claim of depreciation and even if such plant & machinery or other assets are kept ready for use in assessee's business, the assessee would be entitled to claim depreciation. The only condition added is that the business should not be closed down once and for all and that the assessee should demonstrate that the hopes of the business being revived are alive and real. It is however not a matter that can turn entirely on the assessee's hopes alone but then there should be evidence on record to show that the assessee took efforts to keep the business alive in the hope of reviving it. [Para 6]

* It is not disputed by both the sides that section 60 of the Uttar Pradesh Excise Act, which was attracted to the facts of the present case, outlawed any business activity in Liquor without license, making it punishable with imprisonment. [Para 10]

* In the circumstances, it is held that because of the statutory prohibition under the Uttar Pradesh Excise Act, it could not be said that there was a temporary lull in the business of the assessee but that there was a legal bar. (emphasis supplied)

* In the result, it is held that assessee is not entitled to deduction on account of depreciation and other expenses as claimed when no business of wholesale liquor trade was carried on by the assessee in assessment year in appeal. [Para 12]

(xii) The facts of the instant case under consideration are similar the facts of the above referred case of Royal Beverages Pvt. Ltd. Vs. DCIT (Supra) and are squarely covered by the said decision as in both the cases, the assessee could not do any business as there was a legal bar to do the liquor/mining business without the statutory license/approval and, if business activities were carried out without a license or

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approval, the defaulter is liable for punishment under the respective laws.

(xiii) During the appellate proceedings, the AR relied upon the order of the Ld. CIT(A), Aligarh at Jaipur (Camp office) dated 25.01.2016 in its own case in ITA No. 110/2013-14 for AY 2010-11 wherein the Ld. CIT(A) allowed this ground of appeal. I have duly considered the order of Ld. CIT(A) and I do not concur with the findings of Ld. CIT(A) as it appears that the Ld. CIT(A) has not considered the fact that mining activities were not carried out by the appellant for the last 7-8 years and it was prohibited by the operation of law to do mining activities as statutory clearances have not been received and it had given its pulverizers on lease to M/s UMDSPL since 01.04.2008.

(xiv) Therefore, in view of the above discussion and the recent decision of Hon’ble HAT, Third Member, it is held that the AO was justified in treating the lease rent income as income from other sources.

(xv) The appellant has shown the lease rent at Rs. 60 Lac whereas as per Form 26AS and the TDS certificate, the lease rent was shown at Rs. 62,92,739/- and during assessment proceedings, it was submitted before the AO that amount of Rs. 2,92,000/- was paid as advance lease rent by UMDSPL and TDS was deducted thereof and in support of its claim, it filed copy of account of UMDSPL as appearing in its books of accounts. Since, no satisfactory explanation was furnished before the AO, the AO treated the amount of Rs. 62,92,739/- as lease rent against Rs. 60 Lac declared by the appellant company.

(xvi) During the appellate proceedings, nothing has been stated by the appellant on this issue. It is noted from the assessment record that though the appellant has filed a copy of account of UMDSPL as

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appearing in its books of accounts but the discrepancy was not reconciled and moreover, the appellant has claimed the credit of TDS on the amount of Rs. 2,72,739/-. Therefore, if is held that the AO was justified in taking the lease rent income at Rs. 62,92,739/- instead of Rs. 60 Lac as declared by the appellant.

similar issue was also decided by the ITAT while deciding the ITA No.

436/JP/2016 for the A.Y. 2010-11 order dated 19/10/2016 and in that

case, the matter has been restored to the file of the ld. CIT(A). The

relevant para of the ITAT’s order is as under:

“6. After hearing the revenue and from perusal of the records available, it is noticed that there is nothing on the record, which suggests that the business was closed due to temporary lull. Since the pulverizer was leased out to M/s U.M.D.S.P. Ltd. for the same purpose, which the assessee was doing from the same machinery. Therefore, it is not established that there was a temporary lull in the business. Further, it is also not clear from the record for what period this pulverizer was leased out to M/s U.M.D.S.P. Ltd. Whether the lease was only for the year under consideration or for a longer period. Further, what was status in the subsequent years. The crucial facts regarding temporary lull in the business are not available on record. The period of lease is also not known from the records available. Considering all these facts, I find it appropriate that in the interest of justice and equity to restore the issue to the file of the ld. CIT(A). Accordingly, this ground of appeal is allowed for statistical purposes only.”

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We have also considered the decision of the SMC Bench of ITAT Jaipur

in assessee’s own case for the A.Y. 2010-11 dated 19/10/2016, in which

the issue was restored to the file of ld. CIT(A). However, in this year, we

find that the period of lease was for six years w.e.f. 01/4/2008 to

31/3/2014. It is also noticed that the assessee was having four sites of

mining. (1) Chainpura North mining for which the plan was approved

only up to 31/3/2010. It has never received environmental clearance.

(2) Bhagwasa North mining plan never received approval. No

environmental clearance was obtained for this plan. (3) Bhagwasa South

mining plan and Kankrolia mining plan are approved only up to

31/3/2018. No environmental clearance has been received for these

plans till the date of hearing of this appeal. All these facts suggest that

the letting out of the machinery was not on account of temporary lull in

the business of assessee. The facts on record suggest that the

assessee’s mining business is almost permanently closed. In view of

these factual matrix, we hold that the income from leasing out of the

machinery to the sister concerns shall be assessed as income from other

source. In view of this, we uphold the order of the ld. CIT(A) on this

issue. However, the assessee had made an alternate submissions that

the loss incurred by the assessee company under the various heads of

expenses should be allowed from the income assessed under other

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heads of income. From the records we observe that the genuineness of

these expenses debited in P&L account have not been verified by the

authorities below. Prior to considering the allowability of these

expenses. The genuineness and business requirement of the assessee

needs verification. Therefore, for the verification of the genuineness of

the expenses and also the justification of the expenses for business

requirement of the assessee, the issue is restored back to the file of the

Assessing Officer.

the disallowance of various expenses under the head (i) dead rent of Rs.

4,16,449/-, (ii) Environment expenses of Rs. 2,00,640/- and (iii) salary

and wages paid of Rs. 36,50,617/-. The ld. CIT(A) had decided the issue

by holding as under:

3.2.2 Determination:

(i) The brief facts are that the appellant has shown income on account of various heads including lease rent and claimed expenses in its profit and loss account. The income and expenses claimed are summarized as under:

Employees Rs. 44,00,617/- Leasing rent Rs. 60,00,000/- benefits expenses Finance Cost Rs. 3,373/- Dividend Rs. 7,508/- Administrative Rs. 10,89,783/- Interest from IT Rs. 2,055/-

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expenses refund Depreciation Rs. 5,64,546 Bank interest Rs. 87,260/- - - Interest from Rs.37,554/- others Sundry balances Rs. 5,788/- written off Total Rs. 60,58,3191- Total Rs. 61,40,165/-

(ii) The appellant have claimed a sum of Rs. 2„00,640/- and Rs. 4,16,449/- on account of ‘environment expenses' and ‘dead rent’ under the head administrative expenses. Since, it was held by the AO that the appellant has not conducted any business during the year under consideration and has treated the lease rent as ‘income from other sources’, and it was also observed that these expenses are not related to the earning of lease rental income, consequently, the AO has disallowed these expenses.

(iii) During the appellate proceedings, it was submitted by the appellant that ‘environment expenses’ were incurred for getting prepared the schemes of mining and approval and for environment clearance work and such expenditure has been incurred with a view to restart the mining and manufacturing activities. Regarding ‘dead rent’, it was submitted that it has been paid to the mining department, Govt. of Rajasthan and these have not been incurred for obtaining mining leases and these expenses are to be incurred annually whether there is production or not.

(iv) I have duly considered the assessment order, submissions of the appellant and the material placed on record. It has been held in ground of appeal No. 2 that the appellant has not done any business during the year under consideration and the lease rental income was held to be rightly treated by the AO as income from other sources’ and since these expenses are not related with the earning of lease rental income,

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it is therefore, held that the AO was justified in disallowing the ‘environment expenses' and ‘dead rent’ and thus the addition of Rs, 2,00,640/- and 4,16,449/- made by the AO is hereby sustained.

3.3.2 Determination:

(i) The appellant has debited a sum of Rs. 44,00,617/- on account of salary payments and it was observed by the AO that these expenses have no nexus with the earning of the rental income. However, by considering that the appellant may have incurred some salary expenses for essential administrative staff for day to day office affairs, the AO has allowed a sum of Rs. 7,50,000/- thereof and consequently, has made an addition of Rs. 36,50,617/- to the income of the appellant.

(ii) During the appellate proceedings, it was submitted by the appellant that the said expenditure has been incurred wholly for the purposes of the business and it is neither personal expenditure nor capital expenditure. It was further submitted that it is not open to the Department to prescribe what expenditure should be incurred and under what circumstances, it should incur such expenditure. The payments to those employees have been made as a prudent trader because their valuable services will be required soon after obtaining approval of mining plan and environment continuation and their continuation in the service with the appellant company has saves substantial money.

(iii) I have duly considered the submissions of the appellant, assessment order and the material placed on record. It is true that the AO cannot enter into the shoes of the assessee, however, at the same time, only those expenses could be allowed which are incurred wholly and

ITA 1137/JP/2016_ 17 M/s Golcha Minerals Pvt. Ltd. Vs ITO exclusively for the purposes of the business of the appellant. It has been held earlier that earning of lease rental income is not a business activity and no business was carried out by the appellant during the year under consideration and thus there is no question of allowing huge amount of salary claimed by the appellant against rental income which is held to be rightly assessed by the AO under the head ‘income from other sources’. It may be mentioned that the AO has allowed salary expenses of Rs. 7.5 Lac required for looking after the day to day affairs of the appellant company. In view of the above discussion, it is held that the AO was justified in making disallowance of Rs. 36,50,617/- and hence the same is hereby sustained.” 7. With regard to the claim of these expenses, we have already

decided that the issue that these requires verification at the level of the

Assessing Officer with regard to the genuineness and justification of the

expenses for business of assessee, therefore, this ground of appeal is

also restored back to the file of the Assessing Officer.

purposes only.

Order pronounced in the open court on 17/11/2017.

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