M/S R. S. SHETYE & BROS,PANAJI vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE -1(1), PANAJI

We have heard the rival submissions and perused the material on record. The crux of the disputed issue envisaged by the Ld.AR that the CIT(A) has erred in sustaining the disallowances overlooking the facts and material evidences. The assesse has filed the details before the lower authorities and the CIT(A) has not considered the documents and information supporting the claim of the assesse. On the first disputed issue of community development and village welfare expenses by way of supply of water to villages and transport arrangement for school children from the villages. The Ld.AR emphasized that the assessee is a partnership firm, hence the provisions of section135 of the companies Act 2013 pertaining to CSR are not applicable. Prima facie the expenditure is incurred towards the welfare activities which is not disputed and the revenue authorities has erred in invoking the explanation 2 to section 37 of the Act which is applicable to the CSR in the case of the companies. Further the assessing officer has not doubted the genuineness of the expenditure but treated the same as not incidental to the business and made disallowance. The Ld.AR highlighted the ledger account copies of expenditure and TDS was deducted on the contractor payments and is not disputed by the revenue. Hence considering the facts, submissions and judicial decisions relied, we set aside the order of the CIT(A) on this disputed issue and direct the assessing officer to delete the disallowance of community development and village welfare

We note that, the appellant predominantly engaged in business of mining iron-ore minerals in the state of Goa over two categories of lands [‘MINE AREA’] viz; (a) pieces of land owned by appellant etc., and (b) pieces of land owned by other private parties which are taken on long-term lease by the appellant. Admittedly, the Central or State Government leased no piece of land to the appellant for the purpose of mining/winning of iron-ore minerals. Though former twin types of lands were in complete possession & at the disposal of appellant, the prospecting of minerals or / and mining of minerals therefrom required a licence/permit which is regulated under the provisions of MMRDA. The mining licence was granted by entering into mining-lease agreement between the GoG and the appellant. The first renewal of mining licence granted to the appellant as solidified that it was expired in the year 2007.

The GoG allowed the appellant to continue mining operations that is winning of iron-ore minerals from mining area even after the expiry of mining licence in 2007 without their renewal till 2013. Subsequently, for post facto renewal of mining licence the GoG vide its office order dt. 21/02/2013 called upon the appellant to pay a sum equal to 15% of royalty to be payable on iron-ore minerals permitted to be extracted/winned over a period of term of renewal, subject to maximum ceiling of ten times of iron-ore minerals permitted to be extracted/winned over a period of term of renewal. The permissible extraction or winning of iron-ore minerals in the appellant case for the purpose of renewal was determined at 8Lakh Tonne Per Annam [‘T/p.a.’] for a period of 20 years commencing from 22/11/2007 to 21/11/2027. Accordingly, on 06/03/2013 appellant paid sum of ₹16Crs being the maximum amount of consideration payable for renewal as contemplated in rule 3A of Indian Stamp Act [‘ISA’]. The said payment was discharged/paid by the appellant in the form of ‘franking/stamp duty’ to the GoG ex-chequer. Vide letter dt. 05/01/2015 second renewal of mining- lease was ordered post facto and was registered on 08/06/2015 wherefore a further sum of ₹80,00,413/- was incurred towards its registration. It is imperious to also note that in addition to aforestated considerations paid & expenditure incurred respectively for renewal of mining licence/lease & its registration, a periodic payment of royalty computed based on prescribed ad- valorem rate with reference to grade (quality) and actual quantity of extraction or winning of iron- ore minerals from the mining area, were also paid/discharged by the appellant in the respective years of extractions/winning of iron-ore minerals to the state ex-chequer.

Coming to climax, we note that, the appellant contended former three payments as revenue in nature & character and claimed them respectively in the year of payments u/s 37(1) r.w.s. 43B of the Act by debiting the Profit & Loss A/c prepared for the respective years which were also subjected to audit under both the provisions of Companies Act, 1956/2013 and u/s 44AB of the Act as well. Out of these three payments, later sequential two payments pertaining to; (a) expenses/charges etc., paid for registration of second mining-lease renewal, & (b) periodic royalty payments etc., paid on the basis of actual extraction/winning of iron-ore minerals, present both the parties have no disagreement about their nature & character as ‘revenue expenditure’ and their consequential deductibility as general revenue expenditure in the year of payment u/s 37(1) r.w.s. 43B of the Act.

The dispute solely relates to former first payment of ₹16Crs made to the GoG by the appellant for renewal of mining lease. The appellant claims it as revenue in nature and thus deductible u/s 37(1) of the Act. Per contra, the Revenue refutes the appellant’s claim contending it to be a capital expenditure, therefore not allowable u/s 37(1) of the Act. The appellant’s claim for deductibility is founded on threefold premises viz; (1) the payment is for lease and is recurring in nature (2) the payment is made in the form of ‘stamp duty’ akin to legal expenditure and (3) renewal of lease did bring no new capital asset into existence for appellant, that is to say renewal of mining lease cannot be equated with acquisition of capital asset. Without prejudice to above claim, the appellant in its solitary ground of appeals, tendered an alternate claim for consequential depreciation u/s 32 of the Act, if same is held to be capital expenditure.

This bolstered up clearly that, mining operations i.e., winning of minerals is a lawful right created under the provisions of MA & MMDRA which endows an enduring benefit over a certain period and conveys various rights including right to transfer. Such right is not a commodity to be traded as inventory but an asset capable of generating commodity or stock to be traded for generating regular revenue in the ordinary course of mining business. Therefore this mining/winning right whether granted originally (first time) or by way of renewal subsequently, at all given point of time in our considered view since possessed all the essential attributes of an capital asset including transferability, capable of generating circulating capital i.e., minerals-stock which in turn generated regular revenue for the mining business is uprightly a capital asset within the meaning of section 2(14) of the Act .

As to whether mining lease granted for a period of ten years is a capital asset and give rise to a capital gain came for consideration before the Hon’ble Patna High Court in a landmark case of R.S.Shetye and Bros. ‘Traders And Mines Ltd. Vs CIT’ [1955, 27 ITR 341 (Pat)] where assessee company after purchasing various pieces of land, leased them for a period of 99 years to surface right together with certain mica mines located therein. The indenture by which such land was leased with surface right held to be transfer of capital asset giving rise to gain tax. The former ratio subsequently found affirmed & followed by the Hon’ble Supreme Court in ‘RK Palshikar (HUF) Vs CIT’ [1988 38 Taxman 166 / 56 CCH 217 ISCC]. On a similar line the Hon’ble Apex Court in the case of ‘AR Krishnamurthy & Anrs Vs CIT’ [1989 176 ITR 417 / 57 CCH 170 ISCC], while holding grant of mining lease/licence as capital asset and thus surplus on transfer is exigible to taxation laid out a ratio that, ‘transfer’ in context of provisions of the Act not only include permanent transfer but also a temporary transfer of title to the property in question and lease of mine for any period would fall within the ambit thereof. A lease of land is transfer of interest in the land and creates a right in rem. Therefore, is a capital asset capable of transfer, in consequence sum arising on such of right in rem chargeable to gain tax.

In context of renewal giving rise to capital asset, we note that, considering former judicial precedents their Hon’ble lordships in ‘Rajendra Mining Syndicate Vs CIT’ [1961, 43 ITR 460 (AP)] have also echoed that, renewal of mining-lease endows enduring benefit for a term and confers various rights hence is not a commodity but an asset capable of generating commodity to be sold in mining business.

A similar ratio also laid down by the Hon’ble Apex Court in the landmark case of ‘Aditya Minerals (P) Ltd. Vs CIT’ [1999, 67 CCH 542] wherein their Hon’ble lordships while dealing with the issue of onetime advance payment for acquiring lease for fifteen years to use land for excavation & other allied purpose have reaffirmed the well settled principle that, any expenditure incurred in acquiring mining-lease right over land to win minerals is by very nature & character capital and not revenue. Reiterating the ratio laid in ‘Gotan Lime Syndicate Vs CIT’ [1966, 59 ITR 718) their Hon’ble Lordships have also categorically held that, the payment does not lose its character as capital payment if the sum was determined to pay was capital in nature. Thus, the nature of sum continues to be character of sum payable/paid irrespective of mode and frequency of payment.

In view of aforestated discussion and respectfully following the judicial precedents (supra), we have no hesitation to hold the mining-lease acquired by the appellant through renewal for a period of 20 years effective from 2007 is and continues to be a capital asset in substance in terms of s/s (14) of section 2 of the Act. In result we find no error in actions of both the tax authorities below in construing the renewal of mining-lease in substance as a capital asset as defined by section 2(14) of the Act.

Having decided the nature & character of mininglease including renewal of such mining lease granted by GoG to the appellant under MMDRA as capital asset, next arises as to whether the consideration paid by the appellant for such renewal in the form of ‘stamp duty’ by any chance alters the aforestated adjudication?

It is an ambler accounting law that, a consideration paid for acquisition of asset not meant for sale as ‘inventory’ but meant for generating commodity/inventory is to recognised & accounted as capital asset in books and carried as such over the period of its enduring benefit. In doing so, the form, of consideration could hardly influence determination of such transaction, but the substance of such consideration could. That is to say in determining a transaction to be capital or not; (a) a form & nature of consideration or (b) mode its discharged or (c) term or frequency of such payment (onetime, lumpsum or instalments) etc., in such capital transaction would not alter the determination of transaction as ‘capital’. The capital transaction, irrespective of form & nature of consideration, is recognised & treated in books as ‘capital asset’ (fixed asset or non-current asset as the case may be) and is must in accounting & fiscal law.

In the present case, the consideration in acquiring mining-lease, a capital asset was discharged by the appellant in the form of ‘frankingstamp duty’. Banging upon the ‘form’ of discharge, the Ld. Jr Deshpande claimed that such payment constitutes a legal expenditure hence deductible as ‘revenue expenditure’ in view of the decision rendered in ‘CIT Vs Cinceita (P) Ltd.’ (supra).

Acceptedly, there is no duality over the deductibility of stamp duty as legal expenditure in general, because such expenditure is incurred in executing a contract or an agreement so as to provide a legal authentication to such executed document which may be used/admissible as evidence in the court of law and thus making legally binding to the parties for settling their respective rights & liabilities.

In the present case, impugned stamp duty was paid not for executing registration of mining-lease but paid as a consideration for granting mining-lease licence as precondition for grant & its registration. Thus, in substance stamp duty was a consideration for acquiring capital asset (mining- lease right), which in turn permitted the appellant to carry out mining operations (winning of minerals) in terms of applicable provisions of MMDRA & MA.

A reference can be made to ‘Super Poly Fabrics Ltd. Vs CCE, [2008, 217 CTR (SC)] wherein the Hon’ble Supreme Court held that a contract or an agreement has to be read as a whole to understand the purpose and object of the parties agreeing to the laid down terms and conditions. Moreover, if the terms used in the agreement are not conclusive one has to look at the substance of the transaction over form such that it is not always possible that the name given to a transaction would depict the real nature of the transaction to ascertain valid fiscal impact.

In view of our former discussion and judicial precedents (supra) and applying the doctrine of ‘substance over form’, we are of the considered & firm opinion that the appellant’s claim that impugned ‘stamp duty’ is legal expenditure is factually incorrect and without substance, therefore stands rejected.

We have given a thoughtful consideration to catena of judicial precedents relied upon by the appellant company and found them distinguishable greatly hence inapplicable to the facts & circumstances of the present case. We say so because, in ‘CIT Vs Cinceita (P) Ltd.’ (supra) the case was that the assessee leased entire floor of a standalone building and the expenditure was incurred in drawing up & registration of valid lease deed. The expenditure so incurred was treated as legal expenditure thus held as ‘revenue’. Similarly is the case of ‘CIT Vs Bank of India’ (supra) wherein the Hon’ble Court placing reliance on ‘CIT Vs Cinceita (P) Ltd.’ (supra) reiterated that, legal expenditure incurred on renewal of lease on year-to-year basis being recurring in nature, therefore revenue in character. Further the stamp duty paid/incurred in executing lease deed for two consecutive periods of ten years each on same terms came for ‘Richardson Hindustan Ltd. Vs CIT’ (supra), wherein their lordship first held that, taking of premises for a period ranging from five to twenty years did not amount to acquisition of a capital assets nor an advantage of enduring nature, therefore the legal expenditure incurred in executing a lease cannot partake the character of capital but ‘revenue’ for the purpose of deduction under the provisions of the Act. Insofar as the decision rendered in ‘Plantation Corporation of Kerala Ltd. Vs CAIT’ is concerned, we note that, State Government of Kerala leased a piece of rubber plantation land to assessee for twenty years which was meant exclusively for rubber plantation. Therein their lordships following the catena of judicial precedents

Insofar as the impact of frequency of payment is concerned, we note an interesting issue of annual protection fees paid for undertaking not to grant any lease, permit or prospecting licence regarding limestone to any other party without a condition that no limestone should be used for manufacturing of cement, came for consideration in ‘Assam Bengal Cement Co. Ltd. Vs CIT’ [1955, 27 ITR 34 (SC)], wherein their Hon’ble Lordship vide para 6 held that, consideration had an advantage or benefit for such whole period of lease was an enduring benefit for the benefit of whole of business. The annual recurring payment is immaterial because one had got to look to nature of payment which in its turn was determined by the nature of the asset which assessee acquired.

In view of former judicial precedents, it is abundantly clear that the nature & substance of transaction determines the substance of expenditure incurred in conducting such transaction. Inversely, it shall be pertinent to note that in deciding the substance, nature and character of expenditure and its consequential deductibility under the provisions of the Act, neither the form, nor the mode and further nor the frequency (lump-sum or instalment) of such payment is a material factor but the nature and substance alone.

The appellant drew our attention to no such decision which could dismantle the Revenue’s case and inversely hardly could support the case of the appellant in claiming the consideration paid in acquiring licence/lease to excavation iron-ore as revenue in nature & character.

On the contrary, with the support of judicial precedents(supra), the respondent Revenue has satisfactorily established on record that; (a) the impugned mining-lease is not a lease as defined u/s 105 of the Transfer of Property Act and also not a lease that is otherwise understood in common parlance, but is an indenture by which right to extract/win iron-ore minerals was granted to the appellant, (b) such right to extract since not a commodity or inventory to be traded but an asset of enduring benefit which in turn used to generate circulating commodity/inventory therefore brought in existence an asset falling within the ambarella of ‘capital asset’ of s/s 14 of section 2 of the Act and (c) the impugned sum of ₹16Crs paid by the appellant in the form of ‘stamp duty’ is in nature &

Capital asset under the provisions of the Act could be classified into twin type, depreciable and non-depreciable. Though the Act defined no term as 'depreciable asset' however, the terminology is associated to assessee’s engagement with business or profession. The inherent meaning is that the capital asset is exploited by assessee in pursuit of business objectives or professional service. The normal wear and tear of such capital assets over a period of time, known as ‘useful life ’, a depreciable asset would reach the status of being a scrap. The capital asset may further fall into two class by their very attributes in term of section 2(11) of the Act which defines the term 'block of assets' means a fixed assets classified into (a) tangible and (b) intangible assets. The intangible assets are know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. Perhaps as a safeguard measure Explanation 3 to section 32(1) is pari-materia of section 2(11) to cover both tangible and intangible assets for depreciation.

Section 32 of the Act on the other hand, allows a deduction for depreciation on tangible (buildings, furniture & fixture and Plant & machinery) as well as on intangible assets (know-how, patents, copyrights, licenses, franchises) owned and used for business or professional purposes.

In the present case, the impugned ‘stamp duty’ payment disallowed is already decided and attained finality as a consideration paid for acquisition of licence to extract iron-ore minerals. The consideration so paid in law represents cost of acquisition of capital asset, consequently, qualifies for depreciation u/s 32 of the Act r.w.r. 5 of Income Tax Rules, 1962[‘the rules’]. The said licence being an intangible asset therefore to fall in the later class of block of assets eligible for depreciation @ prescribed in part B of Appendix to section 32 of the Act r.w.r. 5 (supra).

While pushing for alternate claim the Ld. AR requested for allowing entire balance in the same year on the premise that, the Hon’ble Supreme Court by an order suspended the mining operations. In this context we note that, the deductibility of expenditure incurred towards acquisition of mining lease or sub lease thereof does not depend upon the operations, therefore claim of the appellant is R.S.Shetye and Bros. meritless, thus rejected. This our view finds fortified in ‘Salgaonkar Mining Industries Vs CIT’. [1997, 228 ITR 183(Bom)]. The solitary ground thus stands partly allowed.

In result, the appeal of the assessee is PARTLY ALLOWED in a forestated terms. “ 8.Therefore, considering the facts, circumstances, submissions and the ratio of the judicial decisions dealt in the above issue and also follow the judicial precedence. Accordingly, we concurred with the findings of the CIT(A) that the stamp duty is a cost incurred to acquire a capital asset and direct the assessing officer (i) to allow the deduction of claim of fees paid under the Indian registration Act 1908 of Rs.46,25,310/- and (ii) similarly to allow depreciation u/sec 32 of the Act on the licence fee paid i.e. stamp duty for acquisition of licence to extract iron-ore minerals on similar directions as discussed in the above mentioned paragraphs 36 to 40 of the order. Accordingly the grounds of appeal