INCOME-TAX OFFICER, WARD-1 , BELLARY vs. M/S. SOUTH WEST MINING LIMITED, BELLARY

 Copy of return filed with Coal Controller, Kolkata and RSSML.  Financial statements prepared for AY 2011-12 prepared prior to assessment proceedings. These evidences were filed in support of assessee's claim that extraction of Coal from said mines had indeed commenced during the FY 2010-11. 3.1 In the order passed u/s. 143(3) of Act served on 24.04.2014 the AO disallowed the claim of deduction u/s 37 of the Act being the "Mine Development Expenditure" hereinafter called MDE to extent of ` CO No.4/Bang/2023 M/s. South West Mining Limited, Bellary Page 3 of 42 Rs.2,87,72,03,599/-. After adjusting prepaid tax, the ld. AO raised demand of Rs.2,91,88,430/- after charging interest u/s. 234B and 234D of the Act.

3.2 Assessee received letter of intent on 31.12.2008 for its appointment as "Mine Operator" from Barmer Lignite Mining Company Ltd (in short “BLMCL”) which is a Govt. of Rajasthan Undertaking. This arrangement was formalized by way of agreement dated 28.12.2010. Assessee neither owned the mines nor did assessee own the mineral that was excavated. Assessee was merely a "Mining Contractor" for excavation of lignite. 3.3 During the AY 2011-12, assessee incurred expenditure of Rs.2,94,58,47,713/- on removing/clearing the over burden. Assessee also excavated lignite to the extent of 139740 metric tons. No invoice in respect of this lignite excavated could be raised on M/s. BLMCL as RERC had not approved the Lignite Transfer Price. Due to this fact, the dispatches from the mine could not happen. Approval from RERC in respect of Lignite Transfer Price at Rs.832.31 per metric ton was received by assessee in October, 2011. Therefore, the invoices were raised in respect of said lignite excavated during FY 2010-11 after that date i.e. October 2011. Both the expenses on mining operations and revenues on account of lignite excavated till completion of initial mine cut (as per the approved mine plan by Ministry of Coal, GOI) have been capitalized in books of accounts of assessee to be amortized over the period of contract as per accounting policy of assessee.

3.4 Assessee claimed the expenses of Rs.2,94,58,47,713/- as Revenue Expenses incurred wholly and exclusively for purpose of business as Mining Contractor u/s. 37 of the Act. Out of said expenses, a sum of Rs.6,86,44,114/- was disallowed in computation u/s. 40A(ii) and 43B of the Act for non-deduction of TDS and non-

` CO No.4/Bang/2023 M/s. South West Mining Limited, Bellary Page 4 of 42 payment of statutory dues during the year. A sum of Rs.2,87,72,03,599/- was claimed as deduction. As per assessee’s accounting policy, these mining development expenses of Rs.2,94,58,47,713/- was amortized over a period of contract commencing from subsequent year ended on 31.03.2012 when RERC approval was received and invoices were raised towards excavation charges. Assessee stated that for purpose of Income Tax, there is no provision for Amortization of expenses, therefore, the whole amount was claimed as expenses u/s. 37 of the Act. Mining operations commenced during FY 2010-11. Assessee offered receipts on accrual basis of Rs. 11,09,96,181/- related to excavation charges on 139740 metric tons of lignite mined till 31.03.2011 but not billed as approval of RERC was not received till that date.

` CO No.4/Bang/2023 M/s. South West Mining Limited, Bellary Page 5 of 42 4.1 AO observed that no commercial production has commenced in FY 2010-11 and benefit of Section 35E of the Act cannot be allowed in AY 2011-12. Ld. AO did not consider the evidences furnished regarding extraction of 139740 metric tons of lignite during the FY 2010-11. AO ignored the evidences furnished by assessee, which are third party Govt. agencies evidences supported by Audited entries in books of account of assessee for next FY, which were prepared before the present assessment proceedings had even commenced. The ld. AO did not tax the receipts of Rs.11,09,96,181/- for excavation charges of 139740 metric tons of lignite excavated during FY 2010-11 offered voluntarily by assessee.

4.2 The findings of AO as per assessment order are briefly as under:-

 Assessee company was incorporated on 25.06.2001 with income from extraction an0d sale of Dolomite and Limestone from owns mines at Dhone (AP) and Bagalkot (Karnataka) in AY 2011-12. Assessee has shown Sale of minerals and fluxes... extracted from mines and sale of MSD from outlet at Bellary district.  In computation of Income, assessee claimed deduction u/s. 37 for "Mine Development Expenses" i.e. MDE of Rs.2,87,72,03,599/-. It was not routed through P & L account but parked in balance sheet as Asset under "Mine Development Expenses".  M/s. Rajasthan State Mines & Minerals Ltd and M/s. Rajasthan West Power Ltd (RWPL) entered into a JV in 2006 to develop and operate mines for supply of lignite to RWPL Power Plant. M/s. BLMCL was incorporated to carry out said activities and perform obligation as per JV agreement. Later BLMCL entered into agreement with assessee during FY 2010-11 to carry out mining operations for mining of lignite from Jalipa and Kapurdi lignite

` CO No.4/Bang/2023 M/s. South West Mining Limited, Bellary Page 6 of 42 mines in Rajasthan for period of 30 years starting from 01.04.2010. Before entering the agreement, assessee engaged a German agency i.e. M/s. Vattenfall Europe Mining AG for vetting report of Geological Survey of India regarding reserves of lignite at specified sites. Fees of Rs.2,61,67,491/- was paid to agency. After receipt of report from agency, the said agreement was signed by assessee with BLMCL.  As per agreement, assessee was entitled to carry out the mining operations and deliver at the delivery point as per schedule a certain quantity of lignite of specific calorie content as per agreement. Rate of lignite was to be determined by RERC. Amount receivable by assessee is determined as per quantity and quality of lignite supplied to BLMCL In pursuance, the assessee started excavation work at given sites (Jalipa and Kapurdi in Rajasthan) and entered into agreement with two concerns i.e. M/s. PC Patel & Co. and M/s. MD Enterprises to carry out excavation work.  AO asked the assessee to justify the claim that was not debited to P & L account but made in computation of income. Assessee contended that this expenditure for excavation is in pursuance of. contract with BLMCL and is allowable u/s. 37 of Act.  AO held that provisions of section 35E are squarely applicable to assessee's claim of expenditure. Assessee objected to applicability of Section 35E due to following reasons:-  Assessee is not owner of mines but a mine contractor  Assessee is not in business of prospecting of minerals.  Section 35E of the Act is applicable on mine owners engaged in prospecting of minerals.

` CO No.4/Bang/2023 M/s. South West Mining Limited, Bellary Page 7 of 42

 As per termination clause of agreement, the contract can be terminated any time and assessee will not be able to claim mine development expenses.  Expenditure is allowable u/s. 37 of Act.  AO held that contention of assessee is not acceptable due to following reasons:-  Assessee's contention is misplaced as per provisions of section 35E.  Section 35E speaks of expenses incurred connected with prospecting for or extraction or production of mineral or development of mine.  Ownership of mine is not mandatory for section 35E.  Assessee engaged a German agency for vetting report of GSI (given to original owner of mine). Payment of Rs.2.62 Cr was made to this agency to examine the availability and feasibility of lignite. Assessee is involved in prospecting of minerals.  Had the contract been only for excavation then charges would be paid on volume of excavation. Actually, payment made based on Quantity and Quality of lignite excavated. Agreement with BLMCL is named as "Mine Development and Operation agreement". Assessee has to fulfill various obligations to ensure supply of lignite to BLMCL. It is not merely excavation as claimed by assessee.  Provisions of Section 194C of the Act should have been applicable if it was mere work contract but payments received from BLMCL are not subjected to IDS. BLMCL engaged assessee for mine development. Assessee in turn engaged two concerns as work contractors for excavation.  Assessee admitted that this expenditure is "Mine Development Expenditure.

` CO No.4/Bang/2023 M/s. South West Mining Limited, Bellary Page 8 of 42

 These expenses will be amortized on commencement of commercial production as per notes to accounts.  Agreement with mine owner is for 30 years. As per Section 35E this expenditure can be claimed for 10 years.  No explanation of assessee for not debiting these expenses in P & L account.  For expenses u/s. 37 of the Act the expenses should be "Wholly and Exclusively for purpose of business" and it should not be covered u/s. 30 to 36 of the Act.  In view of these facts, the AO held that these expenses cannot be allowed u/s 37 of the Act and has to be dealt with u/s. 35E of the Act. Hence, the expenses claimed of Rs.2,87,72,03,599/- was disallowed by ld. AO. 4.3 Assessee informed the ld. AO vide letter dated 25.03.2014 that it commenced commercial production of lignite in FY 2010-11. Since price of lignite was not finalized by RERC at the time of 31.03.2011 and lignite was not delivered and no invoice was raised, therefore, value of lignite was not properly accounted for value of 139740 metric ton of lignite excavation was Rs. 11,09,96,181/- as determined by RERC in October 2011. In support, the return filed with Dy, Director, O/o Coal Controller, Ministry of Coal, Kolkata was submitted informing production of lignite in FY 2010-11. Since the Commercial Production started in FY 2010-11, the revenue w.r.t. lignite extracted and lying as stock as on 31.03.2011 should be accounted in FY 2010-11 following accrual system of accounting.

4.4 A sum of Rs.11,09,96,181/- relating to lignite extraction during FY 2010-11 though determined in AY 2012-13 pertains to AY 2011-12. The corresponding income w.r.t. said production of Rs.11,09,96,181/- was not considered while finalizing accounts and ITR for reasons beyond

` CO No.4/Bang/2023 M/s. South West Mining Limited, Bellary Page 9 of 42 control of assessee as the value of lignite had to be determined by RERC which determined it in October 2011. Due to this, the said amount was offered for taxation in AY 2011-12 during the course of assessment proceedings. 4.5 The ld. AO examined this plea of assessee and observed as under:-

 This strange plea needs to be seen in light of disallowing of MDE of Rs.2,87,72,03,599/- which will result in converting total loss admitted in ITR at Rs.2,69,00,84,200/- to total income of Rs.18,71,19,399/-, which will render assessee subject to tax as per normal provisions instead u/s. 115JB of Act.  Documentary evidence is only copy of forwarding letter to return filed with O/o Coal Controller in Kolkata. It does not contain quantitative details of lignite produced.  This lignite was neither dispatched / delivered to BMLCL nor invoice was raised. It cannot be said that commercial production has started.  RERC had not approved the transfer price till year end i.e. 31.03.2011. Assessee should have taken the price / rate prescribed in agreement to determine value of production to account in relevant AY on accrual basis.  Assessee was free to account the alleged production as closing stock or work in progress etc. on accrual basis. Assessee has not routed the transaction through P & L account.  Alleged production of lignite was ignored till assessment proceedings reached final stage.  In AY 2012-13 the assessee has not accounted commercial production but reduced the said amount from sale of lignite proceeds of Rs.11,09,96,181/- from expenses incurred for mine development without routing it through P & L account.

` CO No.4/Bang/2023 M/s. South West Mining Limited, Bellary Page 10 of 42

 Dispatch of lignite and raising of invoice took place in FY.2011-12. It cannot be said that commercial production commenced from FY. 2010-11.

4.6 In view of above observations the ld. AO held as under: o Assessee has not commenced commercial production during the AY. 2011-12. o Amount of Rs.11,09,96,181/- claimed by Assessee to be taken as income from supply of lignite during 2010-11 cannot be reckoned as such. o Allowance of 1/10th of Mining Expenditure u/s 35E cannot be entertained. o Assessee can carry forward the entire MDE disallowed in current year for claiming it in future years as specified in Section 35E of Act. As a result, total income of Assessee was calculated as Rs.18,71,19,400/-.

Aggrieved by the said order passed u/s 143(3) of Act by the ld. AO, this appeal was filed.

5. The ld. CIT(A) observed that the main receipt of Assessee is excavation charges received on excavation of Lignite from mines owned by BLMCL  As against the same Assessee has debited the Mining Development Expenses for removal/clearing of Over burden.  There is clear nexus between receipt and expenses.  Expenditure is incidental to carrying on its business in view of the wider expression "for the purpose of business" which is wider in meaning than the expression "for the purpose of earning profits". There is compelling necessity to incur the expenses as without the ` CO No.4/Bang/2023 M/s. South West Mining Limited, Bellary Page 11 of 42

removal/clearing of over burden the Lignite mining cannot be started.  Thus, the MDE is wholly and exclusively for the purpose of Assessee’s business and all the facts in knowledge of Assessee were explained before the AO during the assessment proceedings. Hence, he observed that these "Mining Development Expenses" are wholly and exclusively for the purpose of assessee’s business as per Section 37 of the Act. 5.1 Further the ld. CIT(A) observed that it is clear that Assessee has satisfied the conditions prescribed u/s 37 of Act and claimed the expenditure related to removal of overburden u/s 37 of Act. Assessee is a regular mining contractor and not the Owner of these Lignite mines. As per terms of contract the mines and the Lignite mined belongs to the Owner of mines i.e. BLMCL. Assessee is entitled to excavation charges fixed by RERC who approves the Transfer Price of Lignite. These expenses do not bring into existence a new capital asset of enduring benefit to Assessee therefore, these expenses cannot be termed as Capital in nature. These expenses are purely Revenue in nature.

5.2 He observed that the Hon'ble Calcutta High Court in the case of CIT vs Amalgamated Jambad Syndicate (P) Ltd in 117 ITR 698 (Cai) held that expenses incurred in removal of overburden in the course of mining is a Revenue Expenditure. Similarly, the Hon'ble High Court in the case of CIT vs Katras Jharia Coal Co Ltd. (1979) in 118 ITR 6 has clearly held that expenses incurred in removal of overburden in the course of mining is a Revenue expenditure. In both these judgments, it has been held that expenses incurred on removal of overburden is revenue expenditure allowable u/s 37(i) of Act. 5.3 He further observed that the ld. AO held that assessee’s case is covered u/s. 35E, it is pertinent to point out that provisions of Section 35E are enabling provisions to allow deduction in respect of Capital

` CO No.4/Bang/2023 M/s. South West Mining Limited, Bellary Page 12 of 42 Expenditure which is otherwise not deductible. The Hon'ble Jabalpur ITAT in Northern Coal Fields vs ACIT (2015) in 59 Taxmann.com 394 held that as long as the expenditure was admissible as deduction u/s. 37 of Act, there could not be any occasion to invoke Section 35E of the Act so as to force the amortization of such expenditure over a period of 10 years rather than allow it as deduction in the year of incurring the expenditure. As per CBDT Circular No. 56 dated 19.03.1971, the provision of Section 35E is meant to be 'Benefit' and not a 'restriction on the deduction already available to assessee'.

5.4 The moot question is whether the expenses incurred by Assessee qualify u/s 35E or u/s 37 of the Act. These expenses are not on account of development of mine but for work of assessee as a Mine Contractor. The nature of expenses for removal of overburden is no way connected to ownership or development of mine. The claim of expenditure in "Computation of Income" no way bars the claim while filing the ITR when the same is allowable as an expense in hands of Assessee as held by the Hon’ble Supreme Court in case of Taparia Tools Ltd Vs. JCIT (372 ITR 605) (SC) that entry in books of account is not conclusive.

5.5 In view of the facts discussed above, the ld. CIT(A) observed that the expenditure incurred by Assessee on removal of overburden is held to be a Revenue expenditure and not capital expenditure. This overburden removal expenditure and Mining Development Expanses is an allowable expense u/s 37(1) of Act.

` CO No.4/Bang/2023 M/s. South West Mining Limited, Bellary Page 13 of 42 (ii) On verification of P&L A/c for the FY 2010-11, it is noticed that the assessee did not claim this expenditure. Instead, said expenditure has been categorized as a capital in nature and made a part of its balance sheet which is evident from financial statements of the assessee. (iii) On perusal of audit report of the Chartered Accountant in Form 3CD schedules vide point No. 1.17, the auditor has commented in respect of Mine Development expenses as under: "The expenses incurred on Development of Mines, where the company is working on long term contract in the capacity of Contractor are classified as Mine Development Expenses. These expenses will be amortized upon commencement of commercial operations and resultant billing therefrom in the proportion of quantity of material excavated vis a vis quantity of Total Commercial Mineable Reserves during the contract period."

6.1 She stated that the above comments clearly establish that this expenditure is Capital in nature. Based on these remarks, the financial statements are framed and as such the company did not route this expenditure through P&L A/c.

6.2 She stated that the assessee did not bring on record during the course of assessment proceedings, as to why such expenses were not debited to P & L A/c instead of claiming it in the computation of total income of the ITR (V). Further, in order to claim allowance u/s 37, it needs to be noted that any expenditure incurred wholly and exclusively for the purpose of the business can be allowed u/s 37 of the Act only when the said expenditure fulfils the condition, inter alia, that it is not covered by any other section from 30 to 36 of the Act. Hence, such expenses do not qualify for the allowance u/s 37 of the Act. 6.3 She submitted that in the notes of the accounts, the assessee on its own has stated that the said expenses of the Mine Development will

` CO No.4/Bang/2023 M/s. South West Mining Limited, Bellary Page 14 of 42 be amortized 'upon commencement of commercial production which clearly indicates the assessee company's own understanding of applicability of provisions of section 35E of the Act and as such the said expenditure does not qualify for allowance u/s 37 of the Act.

6.4 Further, she submitted that Mine development expenditure has been capitalized in the balance sheet and it has not claimed as revenue expenditure and she drew our attention to the significant accounting policies of the assessee in para 1.17, which reads as follows: Mine development expenditure The Expenses incurred on Development of Mines, where the Company is working on long term contract in the capacity of Contractor are classified as Mine Development Expenses. These expenses will be amortized upon- commencement of commercial operations and resultant billing there from in the proportion of quantity of material excavated vis a vis, quantity of Total Commercial Mineable Reserves during the contract period. 6.5 Significant Further, she drew our attention to the Accounting Policies which reads as follows: “The company has entered into Mine Development & Operation Agreement under a Long Term Contract at Barmer (Rajasthan) with Barmer Lignite Mining Company Limited (BLMCL) for Excavation of Lignite from their Mines. In the year 2010-11, the Company has commenced the activity for Development of Kapurdi Mines (an open cast mine) and has incurred Direct Expenses of Rs.29458.48 lacs on Mines Development & Overburden Removal, up to the year end. The above amount is shown under Mine Development Expenses in ` CO No.4/Bang/2023 M/s. South West Mining Limited, Bellary Page 15 of 42

Balance Sheet. These expenses will be written off as per the accounting policy disclosed, once the company starts accounting revenues on this account upon commencement of regular excavation of Lignite.

6.6 Thus, she submitted that the assessee made contrary statements one before the shareholders and one before the income tax authorities, which cannot be given any importance.

` CO No.4/Bang/2023 M/s. South West Mining Limited, Bellary Page 16 of 42 7.2 He further submitted that the Learned Assessing Officer gone out of the way to bring the Assessee Company's case under section 35E. What the Learned Assessing Officer has failed to understand is that section 35E has been introduced to provide a deduction in respect of expenditure which may otherwise be disallowable on the ground that it is of capital in nature. Thus, the provisions of section 35E of the Act are enabling provisions to allow a deduction in respect of a capital expenditure which is not otherwise deductible and the provisions cannot be put to use to restrict the deductibility of expenses which are anyway deductible. This principle has been upheld in the case of Northern Coalfields Vs. ACIT [2015] 59 taxman 394 (Jabalpur ITAT). It has been further held that as long as the expenditure was admissible for deduction under section 37, there could not be any occasion to invoke section 35E of the Act so as to force amortization of such expenditure over ten years rather than allow it in the year of incurring the expenditure. What was meant to be a concession and what was intended to confer a benefit to the assessee, if such an approach is adopted, will end up becoming a disincentive and burden to the assessee. Section 35E, as can be seen in the stand taken by the Central Board of Direct Taxes vide Circular no. 56, dated 19-3-1971, was meant to be a ‘benefit’ and not a 'restriction on the deductions available to the assessee'. In view of the above submissions, he submitted that the expenditure relating to over burden removal is not a capital expenditure. Once the said expenditure is not a capital expenditure, it does not fall under the ambit of Section 35E and therefore the said section is inapplicable in the case of the assessee.

7.3 He further submitted that the Learned Assessing Officer in his endeavour to bring the Assessee Company's case under section 35E of the Act states that the Assessee Company is into prospecting of lignite ore.

` CO No.4/Bang/2023 M/s. South West Mining Limited, Bellary Page 17 of 42 Here again, the Ld Assessing Officer failed to understand that the Assessee Company is a mere contractor and has no mandate to prospect the lignite ore. Nowhere in the contract between the Assessee Company and BLMCL has it been mentioned that there is an obligation on the part of the Assessee Company to conduct the activity of prospecting of any ore.

7.4 He further submitted that the Learned Assessing Officer has failed to understand that prospecting has been done by Geological Survey of India (GS1) the premier surveying and prospecting agency of the Government of India. The contract between the assessee company and BLMCL has been entered into after the above said prospecting activity and for the purpose of excavation of the lignite ore. This fact has been conveniently ignored to suit his aim to bring the assessee's case under section 35E. The Ld. Assessing Officer strived to strengthen his case by assuming that the Assessee Company has engaged a German agency, Vattenfall Europe Mining AG to vet the report of GSI thereby alleging that the Assessee Company is indirectly engaged in the activity of prospecting. Perusing the scope of work assigned to the German consultant Vattenfall Europe Mining AG, the contract is mainly to suggest the Method of mining to be adopted, Selection of equipment, Services facilities, Infrastructure facilities and provide capital cost estimates, operating cost estimates and financial analysis of the project. Thus, he submitted that the said contract is only to support and enable the Assessee Company in conducting the mining operation and excavation of lignite and not for vetting the report of GSI as assumed by the ld. Assessing Officer. Assuming but not accepting the ld. Assessing Officer's contention that the Assessee Company is in to the activity of prospecting, even in that case, section 35E is not applicable as Assessee Company is not into the commercial production of lignite as envisaged in sub-section 2 of ` CO No.4/Bang/2023 M/s. South West Mining Limited, Bellary Page 18 of 42 section 35E. He reproduced the relevant part of the said sub section as follows: "The expenditure referred to in sub-section (1) is that incurred by the assesses after the date specified in that sub-section at am/ time during the near of commercial production and any one Of 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 E, 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”. 7.5 The ld. A.R. submitted that from the above sub-section, it is evident that the legislature intends to give the benefit of section 35E only to assessees who are into commercial production. Commercial production envisages freedom to deal with the products produced in the open market. In the Assessee Company's case, attention is sought to Clause No.3.4, wherein the Assessee Company has no right to sell or deliver the lignite excavated to any person of its choice but on the other hand, has a sole obligation to deliver (not sell) the lignite mined only to parties as instructed by BLMCL. Thus, the Assessee Company does not have the right to commercially deal/sell the lignite excavated in the open market and therefore any production/excavation activity carried on the Assessee Company cannot be regarded as commercial production whatsoever. The extract of the Clause 3.4 is reproduced below: “The Mine Operator hereby acknowledges and accepts that the Mines shall be and shall at all times remain the exclusive and absolute property of the Owner and neither the Mine Operator nor any other person claiming through or under the Mine Operator shall, subject to clause 3.4.4 and Clause 10.3, have or shall at any time claim any property, right, title or interest in such Mines. The Mine Operator Acknowledges that the entire Lignite mined from the Mines belongs to the Owner shall, subject to Clause 3.4.4 and Clause 10.3, also be the property of the owner. However, title to all movable or immovable assets constructed at or bought into the site by the mine operator for the performance of the works shall remain with the Mine Operator. The Mine Operator shall deliver to the buyer all the Lignite from the Mines in accordance with the instructions of the Owner, which the Mine Operator

` CO No.4/Bang/2023 M/s. South West Mining Limited, Bellary Page 19 of 42 shall mine, and the Mine Operator shall not, subject to Clause 3.4.4 and Clause 10.3, have any right to sell or deliver such Lignite to any other person OF otherwise utilize such Lignite for any other purpose.” 7.6 Further, he submitted that the commercial production also envisages the ownership of the products produced. However, in the Assessee's case as per clause 3.4 reproduced above clearly states that the ownership of the mine as well as the lignite excavated rests with BLMCL alone. Therefore, he submitted that the ld. Assessing Officer ought to have appreciated that the Assessee Company is not engaged in the commercial production of lignite. The concept of commercial production is crucial to the applicability of section 35E inasmuch as in the cases in which there cannot be commercial production, this section has no application as the relevant provisions of Section 35E become unworkable as held in the case of CIT Vs. Ace Rio Tinto Explorations Ltd. [2010] 321ITR 426 (Delhi HC). The ld. A.R. submitted that the ld. Assessing Officer has countered the Assessee Company's claim of inapplicability of section 35E of the Act in the following manner:

 The Learned Assessing Officer counters that the contract price is fixed on the quantum and quality of the lignite mined by the Assessee and therefore the assessee is responsible for the quality of the lignite mined and hence it is not a mere contract for excavation but a mine development contract.  The Revenue is not in the capacity to dictate terms of the agreement entered into between the parties. The contracting parties are free to agree to the terms which are commercially viable. The Learned Assessing Officer cannot use this argument to say that the contract is not just a mere contract for excavation and consider the activity of the assessee as mining development and bring under the ambit of Section 35E.

` CO No.4/Bang/2023 M/s. South West Mining Limited, Bellary Page 20 of 42  The nomenclature of the Agreement that says "Mining Development and Operation Agreement is itself a sufficient proof that the assessee is into Mining Development and hence section 35 E is clearly applicable.  The Learned Assessing Officer cannot be so naive as to say that the nomenclature of the agreement decides the nature of the agreement. As stated above, as per the relevant Clause no. 3.4 of the agreement, the contract is only for excavation of the lignite mined and nothing more.  No explanation with regard to no TDS under section 194C on payment made by BLMCL in itself means that it is not a mere contract for excavation,  The Learned Assessing Officer has completely ignored the TDS made by BLMCL and has observed that no TDS has been made by BLMCL.  The treatment of the said expenditure in the accounts of the Assessee Company and the expenditure not being routed through the profit and loss account in itself indicates the Assessee company's understanding of Section 35E of the Act.  As stated above in the submissions, it is the company's policy to write off the overburden removal expenditure in proportion of the lignite mined to the total lignite reserves. The Learned Assessing officer ought to have appreciated that the accounting policy and the treatment thereof has no relevance to the allowability of the said expenditure under the Act.  The Learned Assessing Officer observed that the closing stock has not been accounted in financial year 2010-11. The learned assessing officer failed to appreciate that the stock of lignite excavated does not belong to the assessee (as clearly elaborated

` CO No.4/Bang/2023 M/s. South West Mining Limited, Bellary Page 21 of 42 in Clause 3.4 of the agreement) and therefore the question of accounting the same as closing stock does not arise. 7.7 Further, the ld. A.R. for the assessee relied on the judgement of the ITAT- Raipur in the case of ACIT vs Jindal Power Limited in ITA No. 99/BLPR/2012. In the said order, it has been held that the overburden removal in the case of open cast mines is a continuous process and not a onetime process. Therefore, the expenditure incurred on removal of Overburden in open-cast mines is a revenue expenditure. The assessee company is also engaged in open cast mining. He submitted that the Tribunal in it's order has followed the following judgements of Hon’ble Supreme Court: (i) CIT, Bihar & Orissa Vs Kirkend Coal Co. 77 ITR 530 (SC), wherein it has been held as follows: “The finding of the Appellate Tribunal that stowing was an operation carried out in the process of extraction of coal and unless it was carried out, extraction of coal was not possible irrespective of the fact whether depillaring had been done or not, was a finding of fact. In view of that finding, the High Court was justified in holding that the expenditure in dispute was a revenue expenditure.”

(ii) Bikaner Gypsum Ltd. Vs CIT 187 ITR 39 (SC,) wherein it has been held as follows: “In considering the cases of mining business the nature of the lease, the purpose for which expenditure is made, its relation to the carrying on of the business in a profitable manner should be considered. In the instant case, existence of railway station, yard aftd buildings on the surface of the demised land operated as an obstruction to the assessee's business of mining. Tf-ie Railway authorities agreed to shift the Railway establishment to facilitate the assessee to carry on his business in a profitable manner and for that purpose the assessee paid a sum of Rs. 3 lakhs towards the cost of shifting the Railway construction. The payment made by the assessee was for removal of disability and obstacle and it did not bring into existence any advantage of an enduring nature, The Tribunal rightly allowed the expenditure on revenue account.

` CO No.4/Bang/2023 M/s. South West Mining Limited, Bellary Page 22 of 42 Accordingly, the order of the High Court was to be set aside and that of the Tribunal was to be restored.”

7.8 The ld. A.R. for the assessee submitted that from the above, it is clear that the sum and substance of the above judgements is that whatever may be the expenditure that will facilitate the commercial activity should be treated as the revenue expenditure. Accordingly, the ld. A.R. for the assessee prayed to allow the expenditure on Over Burden removal claimed under the head Mine Development Expenditure to be allowed as a revenue expenditure u/s 37 of the Act. Further, he has also referred various Tribunal Judgements, wherein it is held that the expenditure incurred on overburden removal are treated as revenue expenditure. In view of the above, the ld. A.R. for the assessee prayed before us to allow the claim of the assessee company with respect to overburden removal as allowable u/s 37 of the Act.

“Sec. 35E : Deduction for expenditure on prospecting, etc., for certain minerals. (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 March, 1970, any expenditure specified in sub-s. (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.

` CO No.4/Bang/2023 M/s. South West Mining Limited, Bellary Page 23 of 42 (2) The expenditure referred to in sub-s. (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-s. (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 t>y way of depreciation is admissible under s. 32, shall not be deemed to be expenditure incurred by the assessee for any of the purposes specified in sub-s. (2). (4) The deduction to be allowed under sub-s. (1) for any relevant previous year shall be—(a) An amount equal to one-tenth of the expenditure specified in sub- s. (2) (such one-tenth being hereafter in this sub-section referred to as the instalment); or (b) Such amount as is sufficient to reduce to nil the income as computed before making the deduction under this section) of that previous year arising from the commercial exploitation whether or not such commercial exploitation is as a result of the operations or development referred to in sub-s. (2) of any mine or other natural deposit of the mineral or any one or more of the minerals in a group of associated minerals as aforesaid in respect of which the expenditure was incurred, whichever amount is less : Provided that the amount of the instalment relating to any relevant previous year, to the extent to which it remains unallowed, shall be carried forward and added to the instalment relating to the previous year next following and deemed to be part of that instalment, and so on, for succeeding previous years, so, however, that no part of any instalment shall be carried forward beyond the tenth previous year as reckoned from the year of commercial production.

(5) For the purposes of this section,—(a) "Operation relating to prospecting" means any operation undertaken for the purpose of exploring, locating or proving deposits of any mineral, and includes any such operation which proves to be infructuous or abortive; (b) "Year of commercial production" means the previous year in which as a result of any operation relating to prospecting, commercial production of any mineral or any one or more of the minerals in a group of associated minerals

` CO No.4/Bang/2023 M/s. South West Mining Limited, Bellary Page 24 of 42 specified in part A or part B, respectively, of the Seventh Schedule, commences; (c) "Relevant previous /ears" means the ten previous years beginning with the year of commercial production. (6) Where the assessee is a person other than a company or a co-operative society, no deduction shall be admissible under sub-s. (1) unless the accounts of the assessee for the year or years in which the expenditure specified in sub-s. (2) is incurred have been audited by an accountant as defined in the Explanation below sub-s. (2) of s. 288, and the assessee furnishes, along with his return of income for the first year in which the deduction under this section is claimed, the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed.

(7) Where the undertaking of an Indian company which is entitled to the deduction under sub-s. (1) is transferred, before the expiry of the period of ten years specified in sub-s. (1), to another Indian company in a scheme of amalgamation—(i) No deduction shall be admissible under sub-s. (1) in the case of the amalgamating company for the previous year in which the amalgamation takes place; and (ii) The provisions of this section shall, as far as may be, apply to the amalgamated company as they would have applied to the amalgamating company if the amalgamation had not taken place. (7A) Where the undertaking of an Indian company which is entitled to the deduction under sub-s. (1) is transferred, before the expiry of the period of ten years specified-, in sub-s. (1), to another Indian company in a scheme of demerger,—(i) No deduction shall be admissible under sub-s. (1) in the case of the demerged company for the previous year in which the demerger takes place; and (ii) The provisions of this section shall, as far as may be, apply to the resulting company as they would have applied to the demerged company, if the demerger had not taken place. (8) Where a deduction under this section is claimed and allowed for any assessment year in respect of any expenditure specified in sub-s, (2), the expenditure in respect of which is so allowed shall not qualify for deduction under any other provision of this Act for the same or any other assessment year. - - ' . , ' ; 8.1 A plain reading of the above statutory provision shows that the expenses which are covered by the scope of s. 35E are the expenses which are incurred "wholly and exclusively on any operations relating to prospecting"—as is the expression used in s. 35E(2) which, in turn is defined under s. 35E(5)(a) as expenses "undertaken for the purpose of exploring, locating or proving deposits

` CO No.4/Bang/2023 M/s. South West Mining Limited, Bellary Page 25 of 42 of any mineral, and includes any such operation which proves to be infructuous or abortive". CBDT Circular No. 56 dt. 19th March, 1971, which explains the rationale behind introduction of sec. 35E of the Act, states that "New section 35E, also inserted by sec. 8 of the Amending Act, provides for the amortization of expenditure wholly and exclusively on any operations relating to prospecting for the specified minerals". It is thus clear that in order to be eligible for amortization of expenses under s. 35E, the expenses must have been incurred wholly and exclusively for "exploring, locating or proving deposits of any minerals, and includes such operations which prove to be infructuous or abortive". 8.2 The ld. AO disallowed the claim of the assessee u/s 37 of the Act on the following reasons: 1) A plain reading of section 35E makes it amply clear that the section speaks of allowability of expenses incurred in connection with prospecting for or extraction or production of mineral or development of a mine. Thus, the contention that the provisions of section 35E are applicable to expenditure incurred in connection with only prospecting activity, ignoring the second limb of the section that speaks of expenditure related to development of a mine or production/extraction of mineral, is clearly untenable. Further, as required by subsection 2 of section 35E, lignite is one of the minerals specified in Part A of the Seventh Schedule. 2) Ownership of mine is not mandatory for applicability of the provisions of section 35E when the expenditure claimed is clearly of the nature specified in the section, as section 35E does not speak of ownership of mine for claim of expenditure under it.

3) Assuming but not conceding that provision of section 35E are applicable only to the assessees prospecting for minerals, the hollowness of the claim of the assessee that it has not involved in any prospecting activity is exposed by its own admittance of engaging a German agency 'Vattenfall Europe Mining AG' for vetting the report given by the premier Govt agency (GSI) to the original mine owner regarding mineral reserves and commercial viability of mining at the given sites. It needs to be noted that, prior to entering into the agreement with BLMCL for carrying out mining, the assessee has paid a whopping sum of Rs.2.62 crores to the said German agency for examining the availability and feasibility of commercial production of lignite at the given

` CO No.4/Bang/2023 M/s. South West Mining Limited, Bellary Page 26 of 42 sites. Thus, the claim of the assessee not involving in any prospecting is not entirely true.

4) Had the agreement been a mere contract for excavation, as being claimed by the assessee, the charges should have been paid to the assessee on the basis of volume of excavation. However, actually, the payments are made to-the assessee based on not only the quantum but also the quality of lignite mined and delivered as per the schedule agreed upon in the agreement. Therefore, the claim that the assessee is a mere work contractor, having nothing to do with successful mining of lignite at the specified sites, is totally unfounded. It needs to be noted that the agreement with BLMCL itself is titled as "Mine Development & Operation Agreement'. Further, as admitted by the assessee itself in its letter dated 19-3-2014, 'as per the terms of agreement the assessee company has to fulfill various obligations ensuring the supply of lignite to the Barmer Lignite Mining Company Limited ', but not merely carrying out excavation.

5) If the agreement were a mere work contract as claimed, the assessee should have had explanation for not applying provision of section 194C to the payments receivable/received from BLMCL for execution of the contract. As vouched by the facts, the payments relieved/receivable by the assessee from BLMCL were not subjected to any TDS, whereas the assessee subjected to TDS the payments made by it to the two concerns (M/s PC Patel & Company and M/s HD Enterprises} that were engaged by the assessee for execution of excavation contract. Thus, it emerges that the assessee engaged the above mentioned two concerns as mere work contractors for excavation while BLMCL engaged the assessee for mine development and extraction of lignite as per the agreement. 6) Conspicuously the assessee itself has admitted the expenditure as ‘Mine Development Expenditure' while its agreement with BLMCL is titled as 'Mine Development St Operation Agreement'. Obviously and undoubtedly, such expenditure is squarely covered by the provisions of section 35E. 7) In the Notes to the Accounts, the assessee on its own has stated that the said expenses of Mine Development will be amortised upon commencement of commercial production which clearly indicates the assessee company's own understanding of applicability of provisions of section 35E to the expenditure in question.

8) It needs to be noted that the assessee's agreement with the *nine owner for mining is for a period of thirty years, while the period over which the mine development expenditure can be claimed as per section 35E is only ten

` CO No.4/Bang/2023 M/s. South West Mining Limited, Bellary Page 27 of 42 years. In this context, the assessee's reference to termination clause in the agreement with the mine owner, in isolation, is unjustified for the simple reason that the agreement contains other clauses that deal with such termination and the assessee has other legal options for redressal. Further, as stated by the AR of the assessee (vide submission dated 24-3-2014), such termination is possible only on default of the assessee and failure to cure such event of default within thirty days after the other party to the agreement issues notice to the assessee, provided the breach is remediable. The agreement contains clauses which enable termination of agreement by the assessee as well, which the assessee is conveniently silent about. Thus, the termination clauses in the agreement*are general in nature as a feature of any agreement. In this context, it needs to be underscored that allowability of an expenditure is governed by the provisions of Income Tax Act, 1961 but not the contingent exigencies of each agreement which are to be necessarily dealt with as per the provisions in the agreement concerned. 9) The assessee has no explanation for not debiting the said expenditure to the P & L A/c instead of claiming it in the statement of computation, had it been really believed to be allowable expenditure as claimed by the assessee itself. 10) As far as allowance u/s 37 is concerned, it needs to be noted that any expenditure incurred wholly and exclusively for the purpose of the business can be allowed u/s 37 only when the said expenditure fulfils the condition, inter alia, that it is not covered by any other section from 30 to 36. Obviously the expenditure in question which is admitted by the assessee itself as 'Mine Development Expenditure' is covered by the provisions of section 35E and therefore, it fails to qualify for allowance u/s 37(1).”

8.3 On the other hand, ld. CIT(A) has allowed the claim of the assessee u/s 37 of the Act and observed that removal of overburden is revenue expenditure and not the capital expenditure and the over burden removal expenditure and mining development expenses are allowable expenses u/s 37(1) of the Act.

8.4 Now we proceed to examine the provisions of section 37 of the Act. The following conditions have to be fulfilled to claim the expenditure u/s 37 of the Act:

` CO No.4/Bang/2023 M/s. South West Mining Limited, Bellary Page 28 of 42

3. It should be in respect of a business which was carried on by the assessee and should be incurred after the business is set up, 4. It should not be in the nature of personal expenses of the assessee. 5. It should have been laid out or expended wholly and exclusively for the purpose of such business. 6. It should not be in the nature of capital expenditure.

8.5 The contention of the ld. A.R. is that the assessee is a regular mining contractor and not a owner of any mines situated in Kapurdi or Jalipa Lignite Mines, so as to call it as a mining company not engaged in any operations relating to prospecting for, or extraction or production of, any minerals. As such, section 35E of the Act is not applicable to the assessee’s case.

8.6 Thus, the main question before us whether the expenditure incurred with regard to removal of overburden of mines is an expenditure u/s 35E of the Act or revenue expenditure u/s 37 of the Act. What is very crucial, however, is to appreciate the fact that overburden removal process is not a onetime process in one Lignite/Minerals/Ores site because even in between the Lignite/Minerals/Ores seams below the surface levels, there could be unrelated layers of soil or rocks which are required to be removed before one can reach the second or third coal seam, and because the same seam may be at different levels below the surface as it need not be parallel to the surface level all along.

8.7 In the present case, originally, M/s Rajasthan State Mines and Minerals Ltd and M/s Rajasthan West Power Ltd (RWPL), after entering into a Joint Venture Agreement in 2006 to develop and ` CO No.4/Bang/2023 M/s. South West Mining Limited, Bellary Page 29 of 42 operate mines for supply of lignite to RWPL power plant, have incorporated M/s. Barmer Lignite Mining Company Limited (BLMCL) to carry out the said activities and perform the obligations as per the Joint Venture Agreement. Later, BLMCL, in turn entered into an agreement (hereinafter referred to as 'the agreement') with the assessee company, during the year under consideration, for carrying out mining operations for mining of lignite from Jalipa and Kapurdi Lignite Mines in Rajasthan for a period of thirty years with effect from 1-4-2010. Notably, before entering in to the agreement, unsatisfied with the report of the Geological Survey of India (GSI) given to BLMCL regarding reserves of lignite at the specified sites, the assessee engaged a private German agency M/s. Vattenfall Europe Mining AG, for the purpose of vetting the report of the GSI. After receipt of such a report to its satisfaction from the said agency which was paid a fee of Rs.2,61,67,491/- signed the agreement with BLMCL. As per the agreement the assessee is entitled to carry out mining operations and deliver, at the delivery point as per schedule, certain quantity of lignite of certain calorific value as given in the agreement. The rate of the lignite supplied will be determined by the Rajasthan Electricity Regulatory Commission (RERC) and thus, the amount receivable by the assessee will be determined on the quantity as well as quality of the lignite supplied to BLMCL. Like any other agreement, this agreement also had clauses of termination and remedies for resultant exigencies. In pursuance of the agreement, the assessee went ahead with excavation work at the given sites (i.e., Jalipa and Kapurdi in Rajasthan), entering into agreements with two concerns, viz., M/s. PC Patel & Company and M/s HD Enterprises for carrying out excavation work. 8.8 Thus, the assessee claimed the expenditure incurred in the process of excavation of a contract with BLMCL to the tune of ` CO No.4/Bang/2023 M/s. South West Mining Limited, Bellary Page 30 of 42 Rs.2,87,72,03,599/- as a revenue expenditure u/s 37 of the Act. The same was disallowed by ld. AO as discussed in earlier para. 8.9 Now let us appreciate the fact that overburden removal process is not one time process in any mining site. Because Minerals or Ores always located below the surface level. There could be unrelated layers or soils or rocks, which are required to be removed before one can reach the mines and it need not be parallel to the surface level all along. According to assessee, it is not engaged in mining activities but as an excavation contractor of the mines to do the activities as stipulated in the agreement with BLMCL and assessee is not engaged in extraction and production of minerals or development of a mine for itself, as such, provision of 35(E) of the Act is not applicable. However, the ld. AO proceeds on this assumption that removal of overburden is an activity which take place prior to and only prior to extraction of lignite/minerals and ores and for this reason it is a capital expenditure to be written off over a period of 10 years u/s 35E of the Act.

8.10 However, this fundamental factual assumption seems to be incorrect because, as the preceding discussions show, there are layers of material such as rocks and soil, between the two or more lignite/minerals/ores seams at the same place, which are required to be removed before lignite/minerals/ores can be extracted from the next lignite/minerals/ores seam level, and also because even to reach other segments of the same lignite/minerals/ores seam, which need not always be parallel to the surface, overburden is required to be removed. Overburden removal process does not, therefore, come to a halt upon reaching the lignite/minerals/ores level. Of course, there is a difference in the character of overburden removal expenses till the regular, lignite/minerals/ores extraction process starts vis-a-vis the overburden removal expenses after the ` CO No.4/Bang/2023 M/s. South West Mining Limited, Bellary Page 31 of 42 regular lignite/minerals/ores extraction starts, and this approach is implicit in the accounting policy which treats the overburden removal expenses, till the point of time a mine is a development mine and the regular lignite/minerals/ores extraction on commercial basis has not yet started, as a capital expenditure.

8.11 In other words, entire expenses incurred on the overburden removal by excavation contractor, no matter what be the stage of lignite/minerals/ores extraction levels in that mine, are cannot be treated as capital expenditure. That would essentially lead to a situation that even when overburden removal is a part of the process of extracting the lignite/minerals/ores from the lower seams, such expenditure will still be treated as revenue expenditure. In the case of Kirkend Coal Co (77 ITR 530), Hon'ble Supreme Court had an occasion to adjudicate on the question as to whether or not the expenses incurred on stowing operations are capital expenses or revenue expenses and their observation is as under:

“There is a factual finding that this expenditure has been treated as revenue expenditure as "stowing is an operation carried out in the process of extraction of coal and unless it is carried out extraction of coal is not possible irrespective of the fact whether depillaring has been done or not in this year", and, on that basis, concluded that it has been rightly treated as revenue expenditure. It is, therefore, clear that when overburden removal is carried out in the process of extraction of coal and the extraction of coal is not possible without doing so, such overburden expenses is required to be treated as revenue expenses. Reverting to the facts of this case in this light, we find that once a mine has been treated as a revenue mine, the coal mining is clearly in progress because at least one of the three criterions has been met, i.e. reaching the coal seam over two years ago, production having reached 25% of the rated capacity or the coal extraction revenue exceeding the expenses incurred, including the overburden removal expenses. In such circumstances, clearly that coal extraction is taking place and yet further overburden is required to be removed for continuing with lignite/minerals/ores extraction. Such overburden removal can only be in the process of extraction of coal and further coal protection is not possible unless that overburden is removed. Given the nature of expenses, in the light of the foregoing discussions, such an inference is clearly incorrect and unsustainable in law.”

` CO No.4/Bang/2023 M/s. South West Mining Limited, Bellary Page 32 of 42 8.12 In the present case in hand, the ld. CIT(A) has stated that Section 35E of the Act was introduced to deal with amortisation of expenditure on prospecting and developing of certain minerals and the very purpose of this section was to address the treatment to be given for expenses relatable to development of a mine. In the instant, the A.O. has invoked the provisions of this section considering the prevailing facts of the case. While the Assessing Officer observed that the overburden removal expenses to be considered in connection with Section 35E of the Act. However, the ld. CIT(A) proceeded on the basis that Section 35E governs treatment of any expenses which are relatable to development of a mine and the present assessee is not engaged in Development of mine as it is not owned by it and the assessee is only an excavation contractor only engaged in extraction of lignite ores from the mines owned by third party.

8.13 A plain reading of this section 35E of the Act reveals that this section applies to an assessee who is engaged in any operations relating to prospecting for, or extraction or production of, any mineral" but it applies only with respect to the expenditure specified in Section 35E (2). While the assessee fulfils the criterion so far as activity of the assessee is concerned, the question is whether overburden removal expenses on revenue mines can meet the criterion set out in Section 35E (2). Let us examine that aspect of the matter.

8.14 Section 35E (2), so far as relevant for our adjudication, provides that (a) the expenses should be incurred, after 31st March 1970, during the year of commercial production and any one or more of the four years immediately preceding that year; and (b)

` CO No.4/Bang/2023 M/s. South West Mining Limited, Bellary Page 33 of 42 the expenses should be incurred wholly and exclusively on (i) 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 (ii) on the development of a mine or other natural deposit of any such mineral or group of associated minerals. There are certain exclusion clauses but those exclusions are not relevant for the present purposes.

8.15 As regards the limitation placed in Section 35E (8), in our humble understanding, this limitation does not come into play unless the assessee, on his own, claims the deduction under section 35E and the deduction is granted to the assessee. It cannot, therefore, be open to the Assessing Officer to first thrust the deduction under section 35 E even though he does not seek the same, and then deny deduction in respect of qualifying expenditure under any other section, such as section 37(1), on the ground that the assessee has been granted a deduction under section 35 E and the limitation under section 35E (8) has thus come into play. In any event, section 35E (8) is clearly intended to avoid a double deduction rather than restrict an otherwise admissible deduction. It is only elementary that expenditure incurred by an assessee before commencement of his business is normally not deductible, and that, in the case of units engaged in production or extraction of any minerals etc., the business cannot ordinarily be deemed to have commenced unless the commercial production starts. It is in this backdrop that the scheme of Section 35 E needs to be understood. In our humble understanding, the provisions of Section 35 E are enabling provisions to allow deduction in respect of capital expenditure which is not otherwise deductible and these provisions cannot be put to use to restrict the deductibility of expenses which are anyway deductible. While explaining the scope of Section 35E (8),

` CO No.4/Bang/2023 M/s. South West Mining Limited, Bellary Page 34 of 42 the CBDT circular no. 76 dated 19th March 1971, in paragraph 55, draws parity with Section 35D. Section 35D, as a plain reading of the section would show, comes into play in respect of eligible expenditure incurred by the assessee "(i) before the commencement of his business, or (ii) after the commencement of his business in connection with the extension of his undertaking or in connection with his setting up a new unit" which, as is the settled legal position, inadmissible for deduction as revenue expenses. This also indicates that Section 35 E belongs to the same genus as Section 35 D which allows deduction, though spread over a ten year period, in respect of expenses which are not otherwise admissible for deduction.

8.16 The same principle, in our considered view, is equally applicable in the context of Section 35E as well. Therefore, as long as an expenditure is admissible for deduction under section 37, there cannot be any occasion to invoke Section 35E so as to force amortization of such an expenditure over ten years rather than allow it in the year of incurring the expenditure. What was meant to be a concession and what was intended to confer a benefit to the assessee, if such an approach is adopted, will end up becoming a disincentive and burden to the assessee. Section 35 E, as can be seen in the stand taken by the Central Board of Direct Taxes vide Circular no. 76 dated 19th March 1971, was meant to be a "benefit" and not a "restriction on the deductions available to the assessee". While introducing this Section, the Central Board Direct Taxes had this to say: “48. New s. 35E, also inserted by s. 8 of the Amending Act, provides for the amortisation of expenditure incurred wholly and exclusively on any operations relating to prospecting for the specified minerals or groups of associated minerals or on the development of a mine or other natural deposit of any such mineral or group of associated minerals. The minerals and the groups of associated minerals for the purposes of this provision have been specified in a new Seventh Schedule inserted by s. 58 of the Amending Act.

` CO No.4/Bang/2023 M/s. South West Mining Limited, Bellary Page 35 of 42

(3) Expenditure of a capital nature in respect of any building, machinery, plant or furniture for which allowance by way of depreciation is admissible under s. 32. 52. The amortisation of the qualifying expenditure will be allowed in equal instalments over a 10-year period against the profits arising from ` CO No.4/Bang/2023 M/s. South West Mining Limited, Bellary Page 36 of 42 the commercial exploitation of any mine or other natural deposit of any of the specified minerals or associated minerals in respect of which the expenditure was incurred, not only where such commercial exploitation resulted from the operations of prospecting or development in question but also where commercial production had been established as a result of operations undertaken earlier. However, the amortisation will not be allowable against any other income of the assessee. Accordingly, it has been specifically provided that where the installment of amortizable expenditure relating to a given year cannot be wholly absorbed by the profit against which the amortisation is to be allowed, the unabsorbed amount shall be carried over to the subsequent year and added to that year's instalments and so on for succeeding previous years. Such carry over will be allowed only up to and including the 10th previous year as reckoned from the year of commercial production. If there is any unabsorbed amount at the end of the 10th year, it will lapse.

` CO No.4/Bang/2023 M/s. South West Mining Limited, Bellary Page 37 of 42 8.17 For the reasons set out above, in our considered view, deduction under section 37(1) could not be declined on the ground that the expenditure in question was eligible for deduction under section 35E. The deduction under section 35E is normally available in respect of the expenditure which is not eligible for deduction under section 37 (1) and just because the deduction under section 35E may be available in respect of an expenditure, even if that be so, cannot be reason enough to decline the deduction under section 37 (1). Of course, it is besides the fact that once the commercial production had commenced in the respective mines, there was no occasion to invoke the provisions of Section 35E in respect of any expenditure incurred in the years after the year of commercial production.

8.18 On the contrary to this, the ld. D.R. submitted that assessee in its annual accounts disclosing its accounting policies stated that mine development expenses as a deferred revenue expenditure and this will be written off as per the accounting policies disclosed once the company starts accounting revenue on this account of commencement of regular excavation of lignite.

8.19 In the present case, we have gone through the letter of intent and also various agreements entered by the assessee with Barmer Lignite Mining Company Ltd. The Assessee Company had received a letter of intent on 30/12/2008 for the appointment as Mine operator, for Kapurdi and Jalipa Mines, from Banner Lignite Mining Company Limited (hereinafter referred to as BLMCL). One of the terms of letter of intent is that the contract rates are subject to approval of the lignite transfer price by the Rajasthan Electricity Regulatory Commission (hereinafter referred to as RERC). To formalize the above said arrangement, the Assessee Company entered into agreement on ` CO No.4/Bang/2023 M/s. South West Mining Limited, Bellary Page 38 of 42 28/12/2010 with Barmer Lignite Mining Company Limited. The contract is for 30 years from the effective date 01/04/2010 subject however to the cancellation of the Contract by Barmer Lignite Mining Company Limited under certain circumstances. As per the terms of agreement, the Assessee Company has to fulfil various obligations ensuring the supply of lignite to the Banner Lignite Mining Company Limited. Further, as per the Clause No 3.4 of the said agreement it is very clear that the mines shall always be the exclusive and absolute property of the mine owner i.e Banner Lignite Mining Company Limited. Under the same clause, it is also clear that the lignite mined from the above said mines shall belong to owner namely Barmer Lignite Mining Company Limited. As per clause 5.2 of the said agreement, the contract price for each metric ton of lignite mined and dispatched having gross calorific value of 2693 kcal/kg is Rs.l.055/metric ton subject to revision depending upon the lignite transfer price fixed by the Rajasthan Electricity Regulatory Commission (RERC). During the previous year ending on 31.3.2011 Assessee Company excavated 1,39,740 tons of lignite equivalent to excavation-charges of Rs. 11.09 crores However, the Assessee Company was not able to raise any invoice on BLMCL as RERC had not approved the transfer price of the lignite till the year end. The ad-hoc approval of the lignite transfer price from RERC was received only in October 2011. Only thereafter, the Assessee Company could begin its invoicing. Ultimately, the excavation charges was on an ad-hoc basis fixed at Rs 832.81/metric ton. During the relevant previous year, the Assessee Company had incurred an expenditure relating to removing/clearing the overburden amounting to Rs.294,58,47,713/-. Out of the said expenditure, a sum of Rs 6,86,44,114/- was disallowed in the computation of income u/s 40A(ii) and 43B for non-deduction of TDS and non-payment of statuary dues during the year and a net sum of Rs 287,72,03,599/- was claimed as deduction being revenue

` CO No.4/Bang/2023 M/s. South West Mining Limited, Bellary Page 39 of 42 expenditure incurred wholly and exclusively for the purpose of its business as mining contractor u/s 37 of the Act. As per the accounting policy of the company vide Note no 1.17 of notes to accounts the Assessee Company amortizes the Mining development expenditure in proportion of quantity of lignite mined vis-a-vis the total minable reserves. However, such amortization is not permissible under the Income Tax Act, 1961. It is now well settled that revenue expenditure is allowable in entirety in the year in which it is incurred though it is written off in the books over a period of years. Further, it is also well settled law that the treatment of any particular expenditure/income in the accounts has no bearing on the allowance or otherwise under the Act. Accordingly, the Assessee Company has claimed the said expenditure in the current year in which such expenditure is incurred u/s 37 of the Act. 8.20 Being so, in our opinion, assessee company cannot be called as a Mining Company as stipulated u/s 35E of the Act. As such, the impugned expenditure incurred by assessee cannot fall u/s 35E of the Act and it should be allowed u/s 37 of the Act. The accounts and accounting policies disclosed by assessee is under Company Act and for the purpose of computation of income of the assessee, which should be governed by Income Tax Act not under Company Act. As such, the ld. AO is not justified in holding that since the assessee has disclosed the accounting policies and its income to be recognized as per accounting policies disclosed in the financial statements is not justified. In other words, the accounting of the assessee is governed by Section 145 of the Act. If there is deviation from the method of accounting as per section 145 of the Act, the ld. AO should tinker the same. On the other hand, the ld. AO cannot rest upon the computing the income of the assessee under Company Act. In view of this, we uphold the order of ld. CIT(A) on this issue and dismiss the revenue’s appeal.

` CO No.4/Bang/2023 M/s. South West Mining Limited, Bellary Page 40 of 42