D.C.I.T., CIRCLE-5, KOLKATA, KOLKATA vs. M/S HINDUSTAN COPPER LTD., KOLKATA

आदेश /O R D E R

PER Waseem Ahmed, Accountant Member:-

This appeal by the Revenue is against the order of Commissioner of Income Tax (Appeals)-VI, Kolkata dated 17.04.2013. Assessment was framed by DCIT, Circle-5, Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 22.03.2013 for assessment year 2007-08. Shri G. Mallikarjuna, Ld. Departmental Representative appeared on behalf of Revenue and Shri Sanjay Bhattacharya, Ld. Authorized Representative appeared on behalf of assessee.

ITA No.2583/Kol/2013 A.Y.2007-08 DCIT Cir-5 Kol. Vs. M/s Hindustan Copper Ltd. Page 2 2. First issue raised by Revenue in this appeal is that Ld. CIT(A) erred in deleting the addition made by Assessing Officer for Rs.3,90,13,000/- ignoring the provision as specified u/s 35DDA of the Act. 3. The assessee, for the year under consideration has claimed expenditure of R.3,90,13,000/- under Volunteer Retirement Scheme (VRS for short). The assessee also received grant-in-aid from the Government for the same amount which was accordingly adjusted with the VRS expenses. The AO during the course of assessment proceedings observed that assessee is entitled to claim 1/5th of the VRS expense as per the provision of Sec. 35DDA of the Act. Accordingly, AO disallowed a sum of Rs. 3,12,10,400/- and added to the total income of assessee. 4. Aggrieved, assessee preferred an appeal before Ld. CIT(A) whereas assessee submitted that the grant-in-aid was received from the Central Government with the specific direction to utilize for VRS compensation. Therefore, the grant received was utilized in making the payment of VRS to the employees. As such, assessee on one hand claimed expenses in the name of VRS and on the other hand assessee has shown the income of the same amount in the name of grant-in-aid from the Central Govt. Therefore, there was no effect on the profit of the assessee. The assessee further submitted that in case only 1/5 VRS is allowed as deduction then the amount of grant-in-aid should also be recognized as income corresponding to VRS expenses claimed in the year under consideration. After considering the facts and circumstances of the case, Ld. CIT(A) deleted the addition made by AO by observing as under:- “6.2 It is seen, that this issue is also of recurring nature and was involved in earlier as well as subsequent assessment years. My predecessor has considered this issue in his order in appeal No.212/CIT(A)-VI/R-5/2010-11/Kol for A.Y 2008-09 passed on 14.2.2012. In this, he has, following the orders for AY 2002-03, 2004-03 and 2005-06, held that:- ‘The same issue was involved in the assessment year 002-03 and 2005-06 in issue in the favour of the appellant. I have followed the said judgment of the Ld. CIT-V,Kolkata in the case of the appellant for assessment year 2004-05 in appeal no.

ITA No.2583/Kol/2013 A.Y.2007-08 DCIT Cir-5 Kol. Vs. M/s Hindustan Copper Ltd. Page 3 1485/CIT(A)-VI/Circle-5/09-10/Kol/ dated 16.1.2012 by observing as under:- ‘I have gone through the observations of the Assessing Officer in the assessment order and the submissions of the appellant, it is noted that the Central Government had given Grant to the appellant for the specific purpose of disbursement of VRS compensation. Following the Accounting Standard AS-2 issued by the Institute of Chartered Accountants of India (ICAI) the appellant recognized the Govt. Grant on a systematic basis in it P&L A/c to match the said Grant with the related cot which the said Grant was intended to compensate. So the sum of Rs.123,78,96,000/- being the utilized Govt. Grant, was on one hand credited to the appellant’s P&L A/c and on the other hand debited to the P&L A/c, the resulting effect being Nil. It has been already held by the ld. CIT(A)-V, Kolkata that the Govt. Grant received by the appellant for the specific purpose of disbursement of VRS compensation, should be considered by it as it income on the basis of matching concept as directed by ICI trough its Accounting Standard AS-12. The appellant submitted that as it was a case of disbursement of the Govt. Grant thee should neither be any income nor any expense, on this account. The Authorised Representative also submitted that if the utilization of the Govt. Grant would be considered as a capital expenditure then the Govt. Grant itself should be considered as a capital receipt and again the resulting effect will be nil. I am inclined to accept the submissions of the Authorised Representative that the sum of Rs.123,78,96,000- having been utilized towards Disbursement of Govt. Grant for VRS expenses out of the Govt. Grant credited to the P&L A/c, there should neither be any income nor any expenditure on this account. Accordingly, there should not arise any question of treating the disbursement of VRS compensation as any capital expenditure and thus there should not be any applicability of section 35DDA. Following the judgement of the Ld. CIT(A)-V, Kolkata in the appellate order for the Assessment Year 2002-03 & 2005- 06 and on the basis of my above observations, I hold that the entire grant of Rs.123,78,96,000/- should be allowed. The appeal is allowed on these grounds.’

Therefore, following the reasoning given by the undersigned in the assessment year 2004-05, the appellant is allowed deduction of

ITA No.2583/Kol/2013 A.Y.2007-08 DCIT Cir-5 Kol. Vs. M/s Hindustan Copper Ltd. Page 4 Rs.1,76,92,000/- as VRS expenses. The addition of rs.1,41,53,600/- is hereby “ deleted. These grounds of appeal are allowed.

The facts during the year under appeal are similar. I find no reason to differ from the view taken by my ld. predecessors. The addition of Rs.3,12,1,400/- is accordingly deleted.”

Aggrieved by this, Revenue has come up an appeal before us. 5. Before us Ld. DR for the Revenue vehemently relied on the order of Assessing Officer whereas Ld. AR for the assessee relied on the order of Ld. CIT(A) and he filed paper book which is running pages from 1 to 68. He further drew our attention on page 45 of the paper book where the VRS expenses claimed by assessee were adjusted with the amount of grant-in-aid in its financial statement. 6. We have heard the rival contentions of both the parties and perused the materials available on record. At the outset, we find that assessee has not claimed any expenses in its profit and loss account in the name of VRS expense. Therefore, the question of disallowing VRS expense in terms of the provision of Sec.35DDA does not arise. We also find that the assessee has claimed VRS expense in earlier year which was also adjusted with the amount of grant-in-aid received from the Central Govt. and no disallowance was warranted. In the light of above reasoning, we hold that the order of the Ld. CIT(A) is correct and in accordance with law and no interference is called for. We uphold the same. This ground of Revenue’s appeal is dismissed.

ITA No.2583/Kol/2013 A.Y.2007-08 DCIT Cir-5 Kol. Vs. M/s Hindustan Copper Ltd. Page 5 Accordingly, AO disallowed the excess deduction as claimed by assessee for Rs.19,00,87,300/- and added to the total income of assessee. 9. Aggrieved, assessee preferred an appeal before Ld. CIT(A) whereas assessee submitted that the expenses aggregating to Rs.62,26,60,000/- is normal course of business expenditure which are allowable u/s. 37(1) of the Act. The assessee further submitted that expense claimed in the name of mine development expenses are not in the nature of prospective of minerals or commencing of any commercial production as envisaged u/s. 35E of the Act. The assessee further submitted that in the earlier assessment year (2001-02), 2004-05 and succeeding AY 2008-09 the relief was granted by Ld. CIT(A) in assessee’s own case. The Revenue has not preferred any appeal against the order of Ld. CIT(A) as the COD was not permitted for filing the appeal. Accordingly, Ld. CIT(A) deleted the addition made by AO by observing as under:- “5.2 It is seen that the issue under consideration is of recurring nature and was involved in the assessment years 2001-02, 2004-05 and 208- 09 also. The appeal No.212/CIT(A)-VI/R-5/2010-11/Kol, for AY 2008-09 was disposed off by my predecessor vide his order dated 14.2.2012. In this order, he has, following the appellate order of CIT(A)-V for assessment year 2001-02 and assessment year 2004-05, held as under:- ‘The same issue was involved an assessment year 2001-02 and the Ld. CIT(A), Kolkata in Appeal No. CIT-V/Kol/148/Circle- 5/200607 dated 15.4.2008 had decided the issue in favor of the appellant. I have followed the said judgment in the case of the appellant in Appeal No. 1485/CIT(A)-IV/Circle-5/09-10/Kol dated 16.1.2002 observing as follows:

‘In the Assessment Year 2001-02 the Ld. CIT(A)-V, Kolkata has already held that the expenses booked by the appellant were not covered u/s 35E and should be treated as revenue expenditure deductible u/s. 37. Further, it is seen that the appellant has both underground as well as opencast mines as per his submissions Section 35E covers expenses on operations undertaken for the purposes of exploring, locating or proving deposits of any mineral and includes any such operation which proves to be infructuous or abortive. In the case of the appellant the expense in relating to underground mine are found to be directly

ITA No.2583/Kol/2013 A.Y.2007-08 DCIT Cir-5 Kol. Vs. M/s Hindustan Copper Ltd. Page 6 related to the ore production and not in any way connected with prospecting. In regard to the open cast mind the expenses on waste development which is carried out simultaneously both in ore and waste, are booked under the head Mine Development Expenditure. Hence in both the cases i.e. underground mine and opencast mine, the expenses related to the ore production are booked under the head Mine development Expenditure and the same are of revenue nature.

Respectfully, following the Appellate Order of the CIT(A)-V, Kolkata for the Assessment Year 2001-02 and in the facts and circumstances it is held that the Assessing Officer’s action of allowing only Rs.4,13,49,500 out of Rs.41,34,95,000 by applying section 35E, was wrong and accordingly the Assessing Officer is directed not to apply section 35E and allow Rs.41,34,95,000/- towards the appellant’s Mine Development Expenditure. These grounds of appeal are allowed.’

Further, as per the submissions of the appellant the Income-tax Departments appeal filed before the ITAT for the Assessment Year 2001-02, was declined permission for being pursued by the High Powered Committee on Disputes (COD). Following the Appellate Order of the CIT(A)-V, Kolkata for the Assessment Year 2001-02 as well as the Appellate Order for the Assessment Year 2004-05, and in the facts and circumstances of the case, it is held that the Assessing Officer’s action of making an Addition of Rs.1931,53,000 by applying section 35E was wrong and accordingly the Assessing Officer is directed not to apply section 35E and allow Rs.66,04,93,000 towards the appellant’s Mine Development Expenditure. These grounds of appeal are allowed.”

The fact during the year under appeal being similar, I find no reason to differ from the view taken by my ld. predecessors. Following the appellate orders for AY 2001-02, 2004-05 and 2008-09, I direct the assessing officer to allow the ‘mine development expenditure’ claimed without applying the section 35E.”

Aggrieved by this, Revenue has come up an appeal before us.

ITA No.2583/Kol/2013 A.Y.2007-08 DCIT Cir-5 Kol. Vs. M/s Hindustan Copper Ltd. Page 7 11. We have considered the rival submissions and perused the materials on record. From the perusal of the facts of the case we find that the AO has treated Mine Development expenditure as covered under section 35E of the Act and accordingly allowed one tenth of such expenditure and disallowed the remaining expenditure as claimed by the assessee in the year under consideration. The facts of the case have already been discussed aforesaid. However the ld. CIT(A) found the same as not connected directly with the prospecting of minerals but are directly related to ore productions. Accordingly the ld. CIT(A) reversed the order of the AO relying in the orders of ld. CIT(A) in assessee’s own case in the earlier and succeeding assessment years. Now the crux of the controversy before us arises so to whether the expenditure are connected with the prospecting of minerals as envisaged under section 35E of the Act. At this juncture it is important to reproduce the provisions of section 35E of the Act which reads as under:- “[Deduction for expenditure on prospecting, etc., for certain minerals. 35E.(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 day of March, 1970, any expenditure specified in sub-section (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 mount of such expenditure. (2) The expenditure referred to in sub-section (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 realized by the assessee in respect of any property or rights brought into existence as a result of the expenditure. (3) Any expenditure-

ITA No.2583/Kol/2013 A.Y.2007-08 DCIT Cir-5 Kol. Vs. M/s Hindustan Copper Ltd. Page 8 (i) on the acquisition of the site of the source of any mineral or group of associated minerals referred to in sub-section (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 by way of depreciation is admissible under section 32,

shall not be deemed to be expenditure incurred by the assessee for any of the purposes specified in sub-section (2).”

From a bare reading of the above provisions, we find that prospecting is an activity prior to activity of mining. Without prospecting and examining whether particular precious stones/minerals were available in a particular area, it is not possible to undertake mining activities. Prospecting activities precede the activity of mining. The expenditure related to non-prospecting is allowable expenditure under Section 37(1) of the Act. In the case on hand the Mine Development Expenditure claimed by the assessee are not related to prospecting therefore the same are allowable as business expenditure. We also find that on perusal of the records which clearly shows that COD has rather supported the case of the assessee as against the finding of the ld. CIT(A) in the earlier assessment years. In the background of the above discussions and precedent we do not find any infirmity in the order of ld. CIT(A) and accordingly we uphold the same. Hence, this ground of Revenue’s appeal is dismissed.

Sd/- Sd/- (�या�यक सद�य) (लेखा सद�य) (N.V.Vasudevan) (Waseem Ahmed) (Judicial Member) (Accountant Member) Kolkata,

*Dkp, Sr.P.S �दनांकः- 09/12/2016 कोलकाता ।

ITA No.2583/Kol/2013 A.Y.2007-08 DCIT Cir-5 Kol. Vs. M/s Hindustan Copper Ltd. Page 9 आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. अपीलाथ�/Appellant-DCIT, Circle-5, P-7, Chowringhee Square, Kolkata-700 069 2. ��यथ�/Respondent-M/s Hindustan Copper Ltd., Tamra Bhawan, 1, Asutosh Choudhury Avenue, Kolkata-700 019 3. संबं�धत आयकर आयु�त / Concerned CIT Kolkata 4. आयकर आयु�त- अपील / CIT (A) Kolkata 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, कोलकाता / DR, ITAT, Kolkata 6. गाड� फाइल / Guard file. By order/आदेश से, /True Copy/ उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, कोलकाता ।