Translate
Text Highlighter

Bookmark

PDF

Share

Report a problem
AMICUS AI
Citation Codes
Equivalent Citations
citation codes
Case Number
Attorney(S)
Acts
Are you a practicing lawyer?
Enhance your digital presence and reach by creating a Casemine profile.
Upload pleading to use the new AI search
Click here to upload
Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Attorney(S)
Acts
See more information ...
Smart Summary

Concise Analytical Summary of the Order — ITA No.224/CTK/2012

Factual and Procedural Background

The appellant is East India Minerals Limited. The appeal arose from an assessment scrutiny in which the Assessing Officer ("A.O.") disallowed two principal items: (a) depreciation claimed of Rs. 14,05,500 on leasehold rights (land taken on lease from OMDC) and (b) a donation claim amounting to Rs. 17,57,464. The assessee had disclosed an income of Rs. 47,62,66,703 and paid tax of Rs. 16,52,66,459.

The assessee paid lease consideration of Rs. 2.81 crores under an agreement dated 1993; actual exploration and operations began in 1999–2000. The assessee began claiming depreciation from Assessment Year 2003–04, treating the leasehold/right as an intangible asset amortizable over lease period. The A.O. held that the rate of depreciation claimed was lower than the statutory provision under Section 32(1)(ii) and treated the claim as short; the A.O. therefore disallowed the depreciation amount in the impugned assessment year. The A.O. also questioned the donation claim.

The assessee appealed to the CIT(A). The CIT(A) confirmed the disallowance of depreciation, citing that the leasehold rights were acquired by agreement in 1993 (prior to commercial production) and that relevant decisions supported his conclusion. The assessee then appealed to the Tribunal.

The appeal to the Tribunal was filed 12 days late; a condonation petition supported by an affidavit explaining the delay (professional indisposition) was placed on record and the delay was condoned. The Tribunal heard arguments and reserved its decision, issuing its order dated 25.06.2012.

Legal Issues Presented

  1. Whether the disallowance of depreciation of Rs. 14,05,500 on leasehold/intangible rights was justified, having regard to Section 32(1)(ii) of the Income-tax Act and the fact that the lease premium was paid in 1993 but the asset was put to use from 1999–2000?
  2. Whether the addition/deduction denial in respect of donation of Rs. 17,57,464 (deduction under Section 80G) was properly made by the Assessing Officer?

Arguments of the Parties

Appellant's Arguments (Assessee)

  • The leasehold/lease rights (paid Rs. 2.81 crores in 1993) relate to intangible rights to explore land owned by the Government and leased through OMDC; actual exploration operations began in 1999–2000.
  • Depreciation/amortization should be allowed from the year the asset was put to use (after 1999–2000); the Explanation to Section 32(1)(ii) supports this position.
  • The assessee followed a straight-line amortization of the leasehold/intangible right; writing off depletion in value is an allowable charge to the profit & loss account and depends on capitalization and putting the asset to use.
  • The Assessing Officer and the CIT(A) misconstrued the law by treating the 1993 agreement as barring depreciation from the year operations commenced; the impugned disallowance was therefore arbitrary and based on misinterpretation.
  • With respect to Section 80G deduction (donation), the assessee produced receipts and requested the A.O. verify the receipts and allow the deduction in accordance with the Act.

Respondent's Arguments (Revenue / Departmental Representative)

  • The Department supported the A.O. and CIT(A) decisions. It argued that intangible assets must be recognized properly and substantiated before depreciation can be allowed.
  • The A.O. maintained that depletion of land cannot be allowed as depreciation under Section 32(1)(ii) and that the assessee had not substantiated its claim satisfactorily.
  • The Department contended that leasehold rights for prospecting might be treated as preliminary expenses under Section 35D or Section 35E, which the assessee had not claimed on the facts presented.
  • The Department supported the denial of depreciation of Rs. 14,05,500 and supported the CIT(A)'s direction to verify the Section 80G claims (i.e., supported the process of verification and the CIT(A)'s order on that matter).

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The Tribunal considered the rival contentions and the materials on record. It concluded that the denial of the depreciation claim by the lower authorities resulted from a misinterpretation of the statutory provisions and their applicability to the facts.

The Tribunal relied on the Explanation to Section 32(1)(ii) (as referred to in the order) to emphasize that entitlement to depreciation depends on when the asset is actually put to use. The Tribunal held that a straight-line method of writing off leasehold rights (an intangible asset) over the period of the lease is permissible where the asset has been capitalized and put to use in the business.

The Tribunal reasoned that: (a) the lease premium paid in 1993 and the agreement's date did not preclude depreciation beginning from the date the asset was actually used (from 1999–2000); (b) the nature of the asset as leasehold/intangible rights to excavate/explore land leased from Government/OMDC supported amortization written off during the lease; (c) allowing such depreciation is consistent with treating the expenditure as incurred for business and incidental to holding the rights used in mining operations; and (d) the A.O. and CIT(A) had misconstrued the definition/operation of Section 32(1)(ii) as it had effect from Assessment Year 1998–99 and was amended thereafter (reference made to its later amendment w.e.f. AY 2003–04 in the order).

On the donation claim (Section 80G), the Tribunal did not decide the substantive allowability itself but directed the Assessing Officer to verify the receipts produced by the assessee and allow the deduction in accordance with the provisions of the Income-tax Act, 1961.

Holding and Implications

FINAL HOLDING: The Tribunal allowed the appeal of the assessee. In its operative directions the Tribunal directed that the depreciation claimed and charged to the profit & loss account be allowed in accordance with the business exigencies and the statutory provision (Explanation to Section 32(1)(ii)) as applied to the facts.

The Tribunal also directed the Assessing Officer to verify the receipts for donations and allow the deduction under Section 80G in accordance with the Income-tax Act, 1961.

Implications for the parties: The direct consequence is that the disallowance of depreciation of Rs. 14,05,500 is set aside and the assessee's method of amortizing its leasehold/intangible rights is accepted by the Tribunal for the relevant periods. The A.O. must verify and allow any Section 80G claim supported by receipts per statutory provisions.

Broader legal implication: The opinion does not state that it is laying down any new precedent beyond its application of Section 32(1)(ii) to the facts; the order addresses the parties' tax treatment and directs relief to the assessee on the specific factual matrix presented.

Show full summary ...
To access the original judgment, please Sign In or Subscribe.

    East India Minerals Ltd, Keonjhar v. JCIT, Sambalpur

    Shri K.K.Gupta, AM : The assessee is in appeal on the order of the learned CIT(A) on the following grounds which read as under :

    1. For that the Ld. C1T(A) erred in confirming the disallowance of depreciation on wrongful assumption of law, as well as not considering the fact that there is no bar for an assessee to claim a lower rate of depreciation as it is not prejudicial to the revenue.

    2. For that the Ld. CIT(A) erred in not deleting the addition on account of donation to the tune of 17,57,464 as the said addition has been done by the Ld. AO whimsically without assigning any reasons for the same and the fact that the assessment order has to be a reasoned order.

    2. Registry has informed that the assessee has filed this appeal belatedly by 12 days for which delay a condonation petition has been placed on record. The delay was due to indisposition of the professional handling the assessees case as per the Affidavit brought on record. The delay is therefore condoned and the appeal is admitted for hearing. ITA No.224/CTK/2012

    3. The brief facts as have been brought on record are that the assessee carried on the activity of mining and processing of Iron Ores etc. and had disclosed an income of 47,62,66,703 and had paid tax to the tune of 16,52,66,459. That in course of scrutiny Assessment, the A.O disallowed the claim of depreciation of 14,05,500, claimed on fixed assets Land, taken on lease from OMC on the ground that the rate of depreciation so claimed is lower than the provision under Sec.32(1)(ii) of the I T Act. That the percentage so fixed for claim of Depreciation under the provision which is at the border, and Act does not permit to cross the same, and in such case the A.O have power to disallow the extra claim, but in case of the assessee, depreciation claimed at a lower side which would have no impact on Govt. revenue and the A.O is biased on the matter.

    4. Aggrieved, the assessee appealed before the CIT(A) and the learned CIT(A) on the assessees contention that the lease hold rights which have been acquired on payment of 2.81 Crores related to an intangible assets u/s.32(1)(ii) of the I.T.Act was acquired by way of an agreement in 1993 being prior to the commencement of the commercial production therefore did not entitle the assessee to claim depreciation at a lower rate. He cited certain decisions not having relevance to the issue in hand insofar as he confirmed the disallowance of the claim of depreciation amounting to 14,05,500.

    5. The learned Counsel for the assessee initiating his argument submitted that the facts have been misconstrued by the authorities below insofar as the assessee was holdingn license to explore a plot of land leased out to the OMDC being a Government undertaking the land belonging to the Government. The leased amount was agreed to be paid in 1993 amounting to ITA No.224/CTK/2012 2.81 Crores when actual operation of exploring the land began in 1999- 2000. The actual claim of depreciation began from Assessment Year 2003-04 when the period of lease was considered for claiming depletion in the form of depreciation @ 14,05,000. The Assessing Officer computed the same up to the impugned Assessment Year holding that a sum of 1.44 Crores remain short claimed when the assessee has chosen to spread the amount as amortized being the lease hold rights against equity held by OMDC. He tried to consider the provisions of Section 32(1)(ii) in the light of the fact whether it ought to have been amortized either u/s.35D or Section 35E which was not the case of the assessee. The agreement entered into in 1993 was as per the Government Notification handed over to the assessee in 1999 therefore could not affect the provision which explanation rather clarifies the stand taken by the assessee that the depreciation could be charged after 1999-2000 when the actual shortage of claiming of depreciation u/s.32(1)(ii) has been computed by the Assessing Officer when he held that it has been short claimed in the impugned Assessment Year. This reasoning has been taken as assessees inability to substantiate the claim which was not the case of the assessee in the first place. Depreciation is a charge to the P & L account and it has to be in accordance with the provisions of the I.T.Act when the WDV has to be considered and the depreciation has to be considered for the purpose of allowance when the asset has been put to use. The learned CIT(A) therefore erred in giving a finding that the asset acquired prior to the year 1999 could not entitle it for allowing depreciation from Assessment Year 2004-05 indicating the assessee was not entitled for claiming depreciation. He submitted that the Assessing Officer having agreed to the proposition that there was a short claim of depreciation was in a misnomer when he himself agreed that the law provided for depreciation of intangible assets beginning ITA No.224/CTK/2012 Assessment Year 1998-99. As pointed out earlier, writing off of depletion in the value of the asset is the sole prerogative of the assessee which depreciation, a name given, has to be allowed could only be charged in the P & L account could not be subjected to scrutiny for the purpose of increasing the rate of depreciation or disallowing the WDV. There is no controversy in respect to the asset being a leased hold right to excavate and explore the land which the Government owns and the land leased out to OMDC who in its turn have allowed the lessee to lease it out, by no stretch of imagination can be held to be the asset in the hands of the assessee. The lease hold rights being intangible assets were to be written off during the period of lease has been denied to the assessee unjustifiably and surmises and conjectures. This depreciation as claimed by the assessee may kindly be directed to be allowed. On the issue of direction by the learned CIT(A) totheA.O.to verify the claim of deduction/s.80G,heproduced the receipts for acknowledging donation allowable u/s.80G, which maybe allowed accordingly.

    6. The learned DR supported the order of the authorities below. He submitted that intangible assets have to be recognized with the tangible assets for the purpose of claiming depreciation which has not been established or substantiated by the learned Counsel for the assessee as of now. The Assessing Officer was apprised of the fact that the depletion in the land cannot be allowed as depreciation u/s.32(1)(ii). The learned CIT(A) therefore was justified in holding a view that the claim of depreciation has not been substantiated when he cited certain ruling. The lease hold rights for prospecting are allowable as preliminary expenses u/s.35D or Section 35E which is not the case of the assessee on the facts and circumstances as brought on record. Therefore, he submitted that the action of the authorities ITA No.224/CTK/2012 below are justified in denying the claim of depreciation of 14,05,500. On the claim of deduction u/s.80G, he supported the order of the learned CIT(A).

    7. We have heard the rival contentions of the parties and perused the material available on record. Considering the facts and circumstances of the case, we uphold the contention of the learned Counsel for the assessee for the simple reason that the denial of claim of depreciation has been made on misinterpretation of law and the applicability thereof. Explanation to Section 32(1)(ii) leans in favour of the assessee to the extent that it is the actual action of put to use which entitles the assessee to claim depreciation. A straight line method of claiming the writing off of lease hold rights for the period of lease cannot be denied to the assessee for the simple reason it being intangible asset has been written off which pertains to land being a intangible asset. It is nobodys case that the land either belonged to the lessee or to the Government. This simply indicates that a depletion of the land against the payment of premium it was leased has to be claimed after capitalization thereof by the assessee which is for the purpose of its main business. All expenses are incurred for the purpose of business and are incidental to the holding of rights were claimed u/s.32(1)(ii) being the license to carry out the mining therefore could not be denied insofar as the Government and the lessee are in control of the asset. The definition of depreciation therefore has been misconstrued for the purpose of allowing deduction by the Assessing Officer and the learned CIT(A) in holding a view on the promulgation of Section 32(1)(ii) with effect from the year 1998-99 which has been further amended w.e.f. Assessment Year 2003-04. In this view of the mater, we are inclined to hold that the assessee is entitled to depreciation as charged to the P & L account in accordance with its business exigencies. We direct accordingly. On the claim of deduction/s.80G, the A.O., ITA No.224/CTK/2012 is directed to verify the receipts and allow the deduction in accordance with the provisions of Income-tax Act,1961.,

    8. In the result, the appeal of the assessee is allowed. Sd/- Sd/- (K.S.S.Prasad Rao) Judicial Member (K.K.Gupta) Accountant Member Date: 25.06.2012 H.K.Padhee, Senior Private Secretary. Copy of the order forwarded to :

    1. The Appellant: East India Minerals Limited, Barbil Trade Centre, 3rd Floor, Main Road, Barbil 758 035 Keonjhar

    2. The Respondent: Joint Commissioner of Income-tax, Range 1, Sambalpur.

    3. The CIT,

    4. The CIT(A),

    5. The DR, Cuttack

    6. Guard File (in duplicate) True Copy, By order, Senior Private Secretary. APPENDIX XVII SEAL TO BE AFFIXED ON THE ORDER SHEET BY THE SR. P.S./P.S. AFTER DICTATION IS GIVEN

    1. Date of dictation 20.6.2012..

    2. Date on which the typed draft is placed before the Dictating Member 25.06.2012Other Member .

    3. Date on which the approved draft comes to the Sr. P.S./P.S.

    4. Date on which the fair order is placed before the Dictating Member for pronouncement....

    5. Date on which the fair order comes back to the Sr. P.S./P.S .

    6. Date on which the file goes to the Bench Clerk

    7. Date on which the file goes to the Head Clerk ..

    8. The date on which the file goes to the Assistant Registrar for signature on the order ................

    9. Date of Despatch of the Order ..

    Use AI to get other relevant cases.
    Try AI Pro free for 7 days Upgrade to AI Pro

    Comments

    East India Minerals Ltd, Keonjhar v. JCIT, Sambalpur
    (Jun 25, 2012)