Madhya Pradesh High Court
Pr. Commissioner Of Income Tax Ii vs Northern Coal Fields Ltd. Singrauli on 15 April, 2025
1
IN THE HIGH COURT OF MADHYA PRADESH
AT JABALPUR
BEFORE
HON'BLE SHRI JUSTICE SURESH KUMAR KAIT,
CHIEF JUSTICE
&
HON'BLE SHRI JUSTICE VIVEK JAIN
MISC. APPEAL (I.T.) No. 79 of 2004
COMMISSIONER OF INCOME TAX,JABALPUR
Versus
NORTHERN COAL FILEDS LTD.
WITH
MISC. APPEAL (I.T.) No. 80 of 2004
COMMISSIONER OF INCOME TAX, JBP.
Versus
NORTHERN COAL FIELDSS LTD.
INCOME TAX APPEAL No. 71 of 2014
COMMISSIONER OF INCOME TAX II
Versus
NORTHERN COALFIELDS LTD
INCOME TAX APPEAL No. 72 of 2014
COMMISSIONER OF INCOME TAX II
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
2
Versus
NORTHERN COALFIELDS LTD.
INCOME TAX APPEAL No. 70 of 2015
PR. COMMISSIONER OF INCOME TAX II JABALPUR
Versus
NORTHERN COAL FIELDS LIMITED
INCOME TAX APPEAL No. 74 of 2015
PR. INCOMISSIONER OF INCOME TAX II
Versus
NORTHERN COAL FIELDS LIMITED
INCOME TAX APPEAL No. 75 of 2015
PR. COMMISSIONER OF INCOME TAX II
Versus
NORTHERN COAL FIELDS LTD. SINGRAULI
INCOME TAX APPEAL No. 76 of 2015
PR. COMMISSIONER OF INCOME TAX II
Versus
NORTHERN COAL FIELDS LTD.
INCOME TAX APPEAL No. 77 of 2015
PR. COMMISSIONER OF INCOME TAX II
Versus
NORTHERN COAL FIELDS LTD
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
3
INCOME TAX APPEAL No. 78 of 2015
PR. COMMISSIONER OF INCOME TAX II
Versus
NORTHERN COAL FIELDS LTD.
INCOME TAX APPEAL No. 79 of 2015
PR. COMMISSIONER OF INCOME TAX II
Versus
NORTHERN COAL FIELDS LTD
INCOME TAX APPEAL No. 32 of 2017
PRINCIPAL COMMISSIONER OF INCOME TAX II
Versus
NORTHERN COALFIELDS LTD.
WRIT PETITION No. 5424 of 2020
NORTHERN COAL FIELDS LTD.
Versus
DEPUTY COMMISSIONER OF INCOMES
........................................................................................................
Appearance:
Shri Siddharth Sharma – Advocate with Shri Harpreet Singh Gupta –
Advocate, Shri Shantanu Sharma – Advocate, Shri Shubhashish Shrivastava –
Advocate, Shri Shubham Manchani, Shri Devendra Prajapati – Advocate and
Shri Satyam Shukla – Advocate for the Income Tax Department – Appellant.
Shri C.S. Agrawal – Sr. Advocate with Shri Abhijeet Shrivastava and Shri
Amit Shrivastava – Advocate for the respondent-Northern Coal Fields.
…………………………………………………………………………………………….
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
4
J U D G M E NT
(Reserved on : 20.02.2025)
(Pronounced on : 15.04.2025)
Per: Hon’ble Shri Justice Vivek Jain.
The present batch of appeals is under Section 260(A) of Income Tax
Act 1961. The appeals have been filed on different grounds and different
substantial questions law arise in these matters. However, there are certain
substantial questions of law which arise commonly in many of the appeals
and some other substantial questions of law arise in different appeals on
different issues.
2. MAIT No. 79/2004 has been admitted on 13.04.2005 and substantial
questions of law have been framed on that date which were thereafter
reframed on 18.01.2016. By the same common order substantial questions
of law were framed in ITA No. 71/2014. The operative part of the order
dated 18.01.2016 is as under :-
MAIT No.79/2004:
This appeal is already admitted. Must proceed for
final hearing under appropriate category as per its turn.
MAIT No.80/2004:
Counsel for the appellant submits that this appeal
be heard along with MAIT No.79/2004.
Ordered accordingly.
ITA No.71/2014:
As the question posed in this appeal, for which the
appeal deserves to be admitted, is overlapping with the
question already formulated in MAIT No.79/2004 and
MAIT No.80/2004 which have been ordered to be heard
analogously, accordingly, the appeal deserves to beSignature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
5admitted on the question formulated at serial no.1, which
reads thus :-
“1. Whether on the facts and in the circumstances of the
case, the Tribunal was justified in law in holding the
OBR expenses of Rs.202996.86 lakhs as revenue in
nature whereas the removable matter are further used for
that purposes?”
As this question will have to be analogously heard
along with other two appeals, the other substantial
questions of law, which have been raised in this appeal,
can also be considered, which read thus:-
“2. Whether on the facts and in the circumstances of the
case, the Tribunal was justified in law in holding that the
expenses of Rs.722.67 lakhs towards education wholly as
business expenditure?
3. Whether on the facts and in the circumstances of the
case, the Tribunal was justified in law in treating the
community development expenditure of Rs.441.33 lakhs
as business expenditure and thereby deleting the addition
made by the AO?
4 Whether on the facts and in the circumstances of the
case, the Tribunal was justified in law in holding the
expenses of Rs.138.94 lakhs towards social overhead and
other miscellaneous welfare as business expenditure?
5. Whether on the facts and in the circumstances of the
case, the Tribunal was justified in law in treating the
expenses of Rs.5148.57 lakhs being other Development
expenditure of expansion/continuation of existing
business development mines as revenue expenditure?”
Accordingly, this appeal is admitted.
To be heard along with MAIT No.79/2004 and
MAIT No.80/2004.
ITA Nos.72/2014, 70/2015, 74/2015, 75/2015, 76/2015,
77/2015, 78/2015, 79/2015:
Counsel for the assessee submits that there are
other eight appeals which are pending in this CourtSignature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
6being ITA Nos.72/2014, 70/2015, 74/2015, 75/2015,
76/2015, 77/2015, 78/2015 & 79/2015.
Post those appeals for admission on 22nd
February, 2016. Pendency of these appeals, however,
will not delay hearing of other appeals which are
pending since more than 10 years and are directed to
proceed for final hearing under that priority category as
well.”
3. So far as ITA No.72/2014 is concerned, the following substantial
question of law has been framed on 14.01.2015:
“1. Whether on the facts and in the circumstances of
the case, the ITAT was justified in law in confirming the order
of C.I.T(A) holding that the assessee is entitled to additional
depreciation in respect of machineries used in mining
activities at Nigahi Project, ignoring that the assessee is
engaged in extraction of coal, not amounting to
manufacturing as stipulated in the Act for allowance of
additional depreciation?”
4. In ITA No. 32/2017 the following substantial questions of law have
been framed on 31.10.2017 :-
“a. Whether on the facts and in the circumstances of the case,
the Hon’ble Tribunal was justified in law in deleting the
addition of Rs.2466.34/- Cr. On account of disallowance of
Overburden Removal Expenses with placed reliance on the
observation of the Hon’ble Supreme Court in the case of
Radhasoami Satsang Vs. CIT[1992] 193 ITR 321 (SC) in
support of its view that there is not good reason to disturb
the well settled factual aspect which permeates from year
and year without appreciating the fact that resjudicata does
not apply to income tax proceedings?
b. Whether on the facts and in the circumstances of the case,
the Hon’ble Tribunal was justified in law in holding that
Section 35E would not have any application on the facts of
the case for the reasons that commercial production has
begun in all the mines and deduction under Section 37(1)Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
7could not be declined without giving cognizance to the
decision of Hon’ble Supreme Court in the case of Pioneer
Minerals Vs. CIT (313 ITR 366-SC). The Hon’ble Supreme
Court in para-7 of the said order held that if any expense falls
within both section 37 and 35E then the latter will apply and
not Section 37. The Hon’ble ITAT has ruled the reverse in the
relevant year ?
c. Whether the Hon’ble Tribunal was justified in law in
deleting the disallowance of overburden removal expenses
without appreciating the fact that the accounting policies are
violative of notified accounting policies?”
5. MAIT 80/2004 was admitted on the following substantial questions
of law, way back on 13.4.2005 by passing the order in following terms :-
“Petition is admitted for hearing as the following substantial questions of
law arise for consideration :-
1. Whether on the facts and in the circumstances of the case the
learned Tribunal was right in law in holding thatOver Burden
Removal is a revenue expenditure ?
2. Whether on the facts and in the circumstances of the case the
learned Tribunal was right in law in holding that education
expenses are an allowable deduction ?
3. Whether on the facts and in the circumstances of the case the
learned Tribunal was right in law in allowing education expenses
in absence of details of the expenses either before the Assessing
Officer or before the CIT.
4. Whether on the facts and in the circumstances of the case the
learned Tribunal was right in law in holding that Community
Development Expenditure was allowable business expenditure” ?
5. Whether on the facts and in the circumstances of the case the
learned Tribunal was right in law in holding that a sum of Rs.2.44
lakhs out of the expenditure of 3.13 Lakhs stands disallowed on the
part of Assessing Officer then any direction given by the
Commissioner of Income Tax on this amount would be of no avail
and the learned Tribunal, therefore left it on that”.
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
8
6. Whether on the facts and in the circumstances of the case the
learned Tribunal was right in law in giving their finding on transit
camp expenses without even considering the judgment in the case
of CIT Vs. Panna Knitting Industries reported in 253 ITR 656″.
Shri Shrivastava, Advocate takes notice for the Respondent.”
6. So far as remaining appeals i.e. ITA Nos.70/2015, 74/2015, 75/2015,
76/2015, 77/2015, 78/2015 and 79/2015 are concerned, substantial
questions of law have not been framed specifically in the aforesaid appeals.
However, these appeals involve the questions of law which are already
involved in the connected appeals wherein questions of law have been
framed.
7. A preliminary objection has been raised by the learned counsel for
the assessee at the outset that in many of the appeals substantial questions
of law have not been framed and therefore, this Court should not entertain
the said appeals in absence of framing of substantial questions of law and it
has to be inferred that once substantial questions of law have not been
framed, therefore the appeals do not involve any substantial question of law
and therefore, these appeals should be dismissed at the threshold.
8. By order dated 22.2.2016 passed in these cases, it was ordered by
this Court that questions of law have been framed and the appeals are to be
heard finally. The questions of law actually have been framed in five
appeals as noted above. However, in all these appeals, it was agreed by
counsel for the rival parties that the appeals involve common question of
law and therefore, they may be heard together. The following common
order was passed in MAIT No. 79/2004, I.T.A. No. 71/2014, I.T.A. No.
72/2014, I.T.A. No. 70/2015, I.T.A. No. 74/2015, I.T.A. No. 75/2015,
I.T.A. No. 76/2015, I.T.A. No. 77/2015, I.T.A. No. 78/2015 and I.T.A. No.
79/2015 :-
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
9
“MAIT No. 79/04, I.T.A. No. 71/14, I.T.A. No. 72/14, I.T.A. No. 70/15,
I.T.A. No. 74/15, I.T.A. No. 75/15, I.T.A. No. 76/15, I.T.A. No. 77/15,
I.T.A. No. 78/15and I.T.A. No. 79/15 –
22/02/16
All these appeals have been admitted for hearing and questions of law
have been framed. There is already an order on 18/01/16 wherein a Bench
of this Court has already directed that the appeal must proceed for final
hearing under the appropriate category as per its turn. In view of the
aforesaid, office to take steps for listing the appeals for final hearing in
accordance with the order passed in MAIT No. 79/04 on 18/01/16.”
9. We note that looking to the various previous orders passed by this
Court at the interlocutory stage while hearing the appeals, it was not in
dispute between the parties and the parties were ad idem that substantial
questions of law have already been framed and therefore, the matter be
posted for hearing. Importantly the orders quoted above are relevant here
and from perusal of these orders, it is evident that this Court had come to a
conclusion that common questions of law are involved in the present
matters and therefore, this Court ordered the cases to be posted for hearing.
Non-formulation of separate questions of law in some of the matters in the
bunch of connected cases wherein admittedly and undisputedly common
questions are arising and the questions as arising in the MAIT
Nos.79/2004, 80/2004, ITA No.71/2014, ITA No. 72/2014 and ITA No.
32/2017 in which specific substantial questions of law have been framed,
arise in all these matters and only difference is that some of the questions
arise in some of the matters and some other questions arise in some of the
matters but none of the matters in which questions of law have not been
specifically framed involve any such issue which is not involved in the
other matters in which substantial questions of law have already been
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
10
framed. In view of this position, reliance on the judgement of the Hon’ble
Supreme Court in the case of Bikram Singh Vs. Principal Commissioner
of Income Tax, reported in 2023 SCC Online SC 1320, is utterly
misplaced. In the said case, substantial questions of law were framed and at
the time of preparation of judgement, the High Court had framed such
questions. Therefore, it was the case of the assessee before the Supreme
Court that there was no notice to him with regard to the question of law
raised in the appeal. In these circumstances, it was held that the substantial
questions of law have not been framed and the matter was remitted to the
High Court.
10. However, in these cases, this Court at interlocutory stage time and
again has noted that substantial questions of law have been framed and the
appeals be set out of for hearing and these orders were passed in presence
of learned counsel for the assessee. Therefore, at this stage, the assessee
cannot take benefit or leverage of the mere fact that separately substantial
questions of law have not been framed in each of the appeals when none of
the appeals in which substantial questions of law have not been framed
involves any issue or question which is not already covered in the
substantial questions of law already framed in connected appeals in which
such substantial questions have already been framed. Therefore, the
contention of learned counsel for the assessee is hyper technical in nature
and is hereby discarded. This Court will now proceed to answer the
substantial questions of law which are involved in this batch of matters and
the fate of the appeals will be governed by the answers which will be given
by this Court in this order.
11. Learned counsel for the assessee had further argued that in terms of
Section 260-A (4), the respondent of the appeal can argue at the time of
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
11
hearing of the appeal that the case does not involve such substantial
questions of law which has been framed and also that the said question is
not a substantial question of law. We are afraid that this objection cannot be
considered as a preliminary objection and it will be considered at the time
of taking up the said questions for adjudication that whether the case
involves such question or not, or whether the said question is a (substantial)
question of law, or is it a question of facts. Therefore, this Court proceeds
to adjudicate the appeals on the questions involved in the appeals.
12. All these appeals are filed by Revenue / Income Tax Department
against a single assessee i.e. Northern Coal Fields Ltd. which is running
open-cast coal mines in District Singrauli (M.P.). The said assessee has
been taking benefits of different expenditures from its balance-sheets by
deducting the said expenses from its profits and the disputes in the different
appeals relate to different assessment years on account of various
deductions claimed by the assessee/Northern Coal Fields Ltd. which is a
Mini Ratna Enterprise of Government of India towards various
expenditures incurred by them in the matter of development of mines,
extraction of coal and other expenses and overheads involved in the said
process of extraction of coal. In some of the matters, consequent to
decision by the Tribunal which has given rise to MAIT No.79/2004, the
assessee had filed a rectification application and the rectification was
allowed by the Tribunal on the basis of the decision made in the appeal
which had given rise to MAIT No.79/2004. The facts in these cases are on
slightly different footings from each other but since the assessee is common
and the issues of law involved in each of the assessment years revolve on
identical facts and the difference only being there in the matter of
assessment year, therefore, these appeals are being decided by this common
order.
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
12
13. From a perusal of the substantial questions of law framed in the five
appeals where the same are specifically framed, questions arise in the
matter of claiming deductions on account of machinery upgradation, social
development, community development expenses incurred, education
expenses, transit camp, overburden removal, etc.
14. As per Section 10(2)(xv) of the Income Tax Act 1922, the assessee
was entitled to certain deductions from its assessed income which are in the
nature of revenue expenses and the questions that arise in these matters are
as to permissibility of deductions claimed under Section 37 of the Income
Tax Act 1961, that corresponds to Section 10 (2)(xv) of Income Tax Act
1961 ( for short hereinafter referred to as “Act of 1961”).
15. The questions that arise for consideration of deductions claimable
under Section 35-E or under Section 37 of Act of 1961 are in the matter of
deductions towards the following heads on which the substantial questions
of law have been framed in these appeals and quoted above. The
deductions claimed, therefore, can be broadly categorized into following:-
(a) Overburden removal expenses which is the main
thrust of argument of the rival parties.
(b) Expenses incurred towards education.
(c) Expenses towards community development.
(d) Expenses towards transit camp.
(e) Depreciation in respect of machinery.
The appeals in which substantial questions of law have not been
framed separately do involve these issues in the following manner:-
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
13
ITA No.70/2015-permissibility of overburden removal expenses in
terms of Section under Section 35-E /37 of Act of 1961.
In ITA No.74/2015 the issues involve education expenses and
welfare expenses.
In ITA No.75/2018 the issues involve overburden removal expenses
in terms of Section 35-E and Section 37 of Act of 1961.
In ITA No.76/2015 the issues involve overburden removal expenses
and deductions towards expenditure incurred on lease rent.
In ITA No.77/2015 the issues of education expenses, welfare
expenses and other development expenses are involved.
In ITA No.78/2015 the issues involved are overburden removal
expenses being claimable for deduction under Section 35-E /37 of Act of
1961.
In ITA No.79/2015 the question of overburden removal expenses is
involved.
We will deal with the deductions claimed item-wise, so that these
answers would cover all the questions framed and arising in these appeals,
in the following manner :-
Education Expenses:-
16. In the matter of deduction of education expenses it has been held by
the learned Tribunal that there were certain institutions within the coal
mines area which were providing education facilities to the children of
employees of assessee and running expenses of these institutions were
incurred by the assessee and the expenditure therefore, was in the nature of
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
14
welfare expenses of the employees and allowable under Section 37(1) of
the Act of 1961. The Commissioner held that the assessing officer accepted
the version of assessee without applying his mind and without caring to
obtain particulars of institutions and also particulars of the students who
were receiving such education and also whether the expenditure claimed
was capital in nature or amounted to charity / donation etc.
17. The case of the assessee was that there were three schools namely
Kendriya Vidyalaya, Delhi Public School and DAV Public School
operational during the relevant period and are run by societies operating
pan-India, and as the mining operations were being carried out in remote
areas, the children of mine workers did not have access to proper education
facilities and the assessee was therefore, obliged to make arrangements
with various educational institutions in the interest of its own business.
Since it was not in a position to maintain and run its own institutions,
therefore, it had made arrangements with the said authorities running the
aforesaid three institutions who set up the institutions / schools with
arrangements that part of expenditure was to be incurred by the assessee in
return of which the children of employees of assessee got the educational
facilities and such arrangement was in furtherance of agreements entered
into by the assessee with the Unions.
18. The Tribunal noted that the assessee had been incurring expenditure
on running of the institutions by three bodies which are running pan India
schools i.e. Kendriya Vidyalaya Sangathan, DAV School Society and DPS
Society and also that the liability to discharge the obligation towards
education fell on the assessee in terms of National Coal Wage Agreement
entered into with the employee union and the assessee which was
enforceable under law both under the Indian Contract Act as well as
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
15
Industrial Disputes Act and also that it was not a voluntary expenditure
incurred by the assessee but was incurred to discharge its obligation in
terms with National Coal Wage Agreement which bound the assessee
statutorily to honour the said agreement arrived at with the union and
therefore, the expenses incurred towards Education amounted to revenue
expenses in running of the business of the assessee.
19. We find that the aforesaid logic and justification given by the
Tribunal does not suffer from any infirmity or illegality in view of the
obligations upon the assessee in terms of National Coal Wage Agreements,
and therefore, the expenses are in the nature of business expenses.
Therefore, this issue is answered in favour of the assessee and against the
Revenue and the order of the Tribunal is upheld whereby deduction
towards education expenses has been allowed to the assessee.
Community Development Expenses :-
20. Before the Assessing Officer the case of the assessee was that the
expenditure had been incurred in the villages surrounding coal mine area
on education and welfare activities like construction of link road, repair of
roads, primary schools, health dispensaries, water supply arrangement,
repair of tubewells, electricity supply arrangements, etc. The assessee
claimed the expenditure on the aforesaid items to be in nature of staff
welfare expenses and therefore, allowable as deductions from its gross
income. The Commissioner while deciding the appeal had disallowed 5%
of the total claims with finding that entire expenditure has not been laid
down or expended wholly and exclusively for the purpose of business.
21. It was further the case of the assessee before the Commissioner that
some of the assessee’s staff was residing in some of the villages and further
that working in coal mines was affecting the health of inhabitants of these
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
16
villages and was creating a lot of resentment among local population that
could have hampered smooth mining operations, which was required to be
dealt with by indulging in welfare activities and it was indented to nullify
the resentment against working of coal mines in the area and was,
therefore, allowable as business expenditure, because ultimate aim was to
maintain peace or harmony so as to permit the coal mines to work without
resistance of the local people.
22. The Commissioner disallowed the expenditure on the ground that the
expenses incurred to eliminate resentment into maintain peace and
harmony are not acceptable, because such expenditure cannot be treated as
having been incurred for business purpose.
23. The Tribunal by noting the rival submissions held that the expenses
are allowed as a deduction, because the same have been incurred wholly
and exclusively for the purpose of business of assessee and on
considerations of commercial expediency. The Tribunal gave two reasons
for the same. Firstly was that once some of the employees of the assessee
were residing in the rural areas in which welfare and community
development activities were carried out, therefore, it was not possible to
carry out such activities in a piece-meal manner by including the
employees of the assessee and excluding others, because such work like
street lighting, drinking water facilities, road widening, etc. would benefit
the community as a whole and cannot be done in a piecemeal manner. The
Tribunal also gave the reason that once the assessee came with a plea that
to maintain peace and harmony in the community and to reduce resentment
and resistance towards coal mining activity being carried out by the
assessee in the area, it was expedient to carry out community development
works, the said expenditure on this ground also amounted to commercial
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
17
expediency. The Tribunal in principle allowed the deduction on such
expenditure, but granted liberty to the assessing officer to examine relevant
details and compare those with the items on which expenditure has been
allowed in case of other coal mines run by other subsidiaries of Coal India
Limited like South Eastern Coalfield Ltd. and if there is any such item on
which expenditure has been incurred and falls outside the items allowed in
that case, then such individual items can be examined by the assessing
officer on merits.
24. The twin grounds considered by the Tribunal in the present case on
the present question, i.e. commercial expediency to carryout welfare
activities to reduce resentment and resistance to its coal mining activity and
also that the welfare activities could not be carried out in piecemeal manner
when some of the staff of the assessee was residing in these villages, in our
considered opinion for both these reasons the expenditure incurred on the
Committee development would lead to an expenditure incurred solely as
business expenditure and is allowable as such. We are fortified in our
conclusion by the judgement of the Hon’ble Supreme Court in the case of
K. Ravindranathan Nair Vs. CIT, reported in 2001 (1) SCC 135 = (2001)
247 ITR 178 wherein while upholding the decision of the Tribunal, it was
held as under :-
5. As we read the judgment of the Tribunal, it extensively analysed the
documents placed before it and came to the conclusion that ten units run by the
assessee constituted a single business, that the four units in Kerala did not
constitute a separate business and that, therefore, the payment that was made
was not on account of closure of business, which would not be allowable under
Section 37. The Tribunal found, on the basis of the accounts placed before it,
that only one set of accounts were maintained for all the ten units. It found that
there was one central financing system, that all the units were financed by banks
and that these accounts were operated from the head office and that the cashew
was purchased for processing by the head office for all the units together. It was
also found that there was unity of management and control. Accordingly, the
Tribunal said that it was satisfied that all the units were fully interlinked and
interlaced so that the inevitable inference was that all these units were oneSignature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
18business alone. The Tribunal went on to hold that the facts were sufficient to
establish a nexus between the payment of Rs 4,18,107 and the business. Because
a part of the business had been affected by labour disputes, for the industrial
health of the business as a whole, it was thought just and necessary that the
industrial dispute in that one part of the business be stopped. This was the
purpose for which the payment was made and it was, therefore, incurred for the
purposes of the business. The Tribunal noted, correctly, that it was for the
assessee to decide how he would conduct his business. For the purposes of
continuing his business, he had to reduce the number of units from ten to six.
Any incidental expense in reducing those units was an expenditure incurred in
the course of conducting the business and allowable under Section 37.
The liberty already granted by the Tribunal in the present case, to
examine each item on case to case basis also saves the rights of the revenue
because the assessing officer can verify each claim raised by the assessee
on item to item and case to case basis subject to general principle that the
expenses incurred to reduce resentment and resistance to the project by
carrying out welfare activities and also that some of the staff for residing in
the said villages, the deduction of expenditure cannot be faulted with.
Therefore, this question is also answered in favour of the assessee and
against the revenue.
Sports and Recreation Expenses :-
25. So far as the expenses incurred in relation to sports and recreation of
employees are concerned, it was the case of assessee that since its coal
mines are located in a remote area, therefore, it was obliged to incur
expenses on sports and allied activities for the welfare of its employees and
annual sports were organized in which the employees of the company
participated which resulted in maintenance of good physical and mental
health of the employees.
26. The Commissioner held that even if the expenditure was for purpose
of maintaining mental and physical health of the employees, this cannot
said to be sufficient to hold that expenditure was laid out wholly andSignature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
19exclusively for the purpose of business and the Commissioner held that
there was no direct nexus between the two.
27. The Tribunal held that the expenditure was necessitated by the
National Coal Wage Agreement entered into between the management and
the Union of employees. And further that so far as the incurring of the
expenditure is concerned, that has already been accepted at the time of
audit by statutory auditors including Comptroller and Auditor General of
India (CAG). The Tribunal held that such expenditure incurred on indoor
and outdoor games, sport kits, shoes, prizes, awards to participants,
participation charges, hiring charges, tents, lightings, fitments, etc. are in
accordance with para 10.8.0 of National Coal Wage Agreement and the
assessee was under obligation to spend towards sports and recreation
facilities to its employees and thus, the Tribunal held that upon principle
such expenses is allowable as deduction from the gross income of the
assessee. It was held that expenses are having nexus with assessee’s
business, because good physical health and mental condition of employees
would improve business output and a happy employee would do a better
job than another employee and therefore, there was commercial expediency
in incurring the said expenses. However, the Tribunal held that it would be
open for the assessing officer to consider the exact expenses incurred and
summon details for the said expenses.
28. We do not see any error or perversity in the aforesaid reasoning of
the Tribunal looking to the reasons mentioned by the Tribunal as narrated
above. Therefore, this question is also answered in favour of the assessee
and against the revenue.
Environmental Expenses:-
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
20
29. The assessee had claimed expenses towards social afforestation, part
of community development expenditure, by stating that huge waste dump
created environmental problems and also proved hazardous in working of
the mine due to erosional effect of soil during rainy season and therefore,
expenses had to be incurred in covering the same by a thick forest and the
expenditure including development of several forest nurseries to provide
sapling for afforestation work, which were maintained by a designated
departments of Government of Madhya Pradesh and Uttar Pradesh and
costs were being borne by the assessee. The Commissioner held that
development of green belt was not a small activity, but an activity which
brought about benefit of enduring nature and as a matter of fact, huge
amounts were spent in planting lakhs of trees and such nurseries and trees
were permanent providers of saplings and disallowed the claim.
30. The Tribunal held that the land on which afforestation was carried
out and nurseries were established did not belong to the assessee and it was
required to return the land back to the lesser in the same condition and
where the expenditure was incurred on leased land, such expenses were
necessitated by the nature of business, which was being carried out by the
assessee, which required to bring the environment back to its original state
and that activity required pre-plantation etc. The Tribunal held that such
expenditure cannot be treated to be capital expenditure with closed eyes
because a tax authority must appreciate the manner and circumstances
under which such expenditure is required to be incurred. So long as the
expenditure has nexus with assessee’s business, then the next step is to test
the expenditure on the touch-stone of capital or revenue expenditure.
31. The Tribunal held that since the Commissioner has not given any
reasoning while disallowing the said expenditure as deduction, therefore,Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
21the matter was remitted by the Tribunal to the Assessing Officer to take a
decision on merits. We do not find any error or perversity in the said
approach adopted by the Tribunal. No substantial question of law arises in
the matter as the Tribunal has not given any conclusive findings on this
issue.
Social Welfare Expenses of Employees
32. The Commissioner held that so far as expenses towards welfare of
employees like canteen, hostels, etc. and other welfare expenses are
concerned, the expenditures had not been properly explained and that up
keep can be capital expenditure and assessee had not explained as to
whether the facilities were provided free of cost and whether every item of
expenditure specific to canteen or hostel had not been provided. The
expenditure was held to be disallowable because the Commissioner found
that the assessee had not proved the genuineness of the expenditure.
33. The Tribunal held that the expenditure had been necessitated by
National Coal Wage Agreement and the expenditure had been audited by
the statutory auditors as well as by CAG. Therefore, the Tribunal allowed
the expenditure for which the details and evidence were placed before the
Assessing Officer and disallowed that part for which no evidence was
placed before the Assessing Officer nor before the Tribunal. The said
allowance of expenditure in-principle does not suffer from any illegality or
perversity and so far as allowing of part expenditure is concerned, it is
purely in the realm of facts and does not amount to any substantial question
of law. Therefore, we answer this question in favour of the assessee and
against the revenue.
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
22
Expenditure Towards providing LPG, Medical Camp, Transit Camp,
etc.: –
34. The Tribunal held that the expenditure incurred in providing LPG to
the employees in lieu of coal, medical camp, transit camp expenses etc.
have been incurred on account of obligations as per National Coal Wage
Agreement. The Tribunal held that the finding of the Commissioner that
such expenditure had no direct nexus with the business of assessee cannot
be sustained. The Tribunal held that the expenditure of medical facilities to
the employees in the form of camps and other expenses as claimed were
connected with the assessee’s business, because such expenditure had been
necessitated by obligations fastened on the assessee by National Coal Wage
Agreement and therefore, as a matter of principle, the deductions were
allowed. However, the order of the Commissioner was modified to the
extent that the directions are to be complied in a reasonable manner and
since the onus is on the assessee to prove the claim for reduction it must
place on record whatever possible details it can in support of its claims for
deductions.
35. The Tribunal also held that the expenses towards transit camp being
revenue or capital nature and whether these are business expenses or these
are the expenses, which can be said to be incurred on acquiring the lease or
acquiring the rights on land so as would amount to capital expenditure need
to be re-examined by the Assessing Officer to take a decision de-novo on
merits after examining all the relevant material. As there is no mandatory
order against the revenue or in favour of assessee at this stage and the
matter has only been remanded to the Assessing Officer to re-examine the
claims whether the amount to capital or revenue expenditure, after hearing
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
23
learned counsel for the parties. Therefore, we find that no substantial
question of law arises in the matter on this issue.
Additional Depreciation for Machineries:-
36. The Tribunal has held that the assessee was entitled to additional
depreciation, because the Nigahi Project of assessee was a separate
industrial undertaking engaged in production of article or thing, i.e. Coal
and such production during the year had increased for more than 20% and
therefore, the assessee was entitled for additional depreciation, which was
found to be as per the decision of the Hon’ble Supreme Court in the case of
Sesa Goa Ltd. (2004) 271 ITR 331 and (1997) 107 ITR 195 (Textile
Machinery Corporation Ltd. vs. C.I.T.). The Tribunal held that there is no
infirmity in the order of Assessing Officer to allow claim of additional
depreciation. Looking to the aforesaid reasoning adopted by the Tribunal,
there is no infirmity in allowing deductions towards additional depreciation
of machineries. The issue decided by the Tribunal is in conformity with
settled principles of the Act, 1961 and no error is found in the aforesaid
reasoning adopted by the Tribunal. Therefore, this question is also
answered in favour of the assessee and against the revenue.
Overburden Removal:-
37. This is the main issue, which was the main thrust of arguments of the
rival parties, i.e. the expenditure incurred towards over-burden removal,
and this was the issue which was vehemently argued by the rival parties
and this issue arises in most of the matters. The assessee has incurred
expenditure on removal of over burden, which it has been claiming to be
revenue expenditure in terms of Section 37 after claiming some part of it as
capital expenditure in terms of Section 35-E till the stage the mine was
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
24
deemed to be a development mine and once the mine has reached 25% of
its annual rated production capacity of coal, then the said mine has been
treated to be a revenue mine and the entire expenditure towards over
burden removal has been treated to be a revenue expenditure and claimed
as deduction by the assessee.
38. The case of the assessee is that upto the stage of the mine reaching
25% of its annual production capacity, the mine would be a development
mine and the expenditure on overburden removal would be capital
expenditure and allowable as per Section 35-E but after reaching the said
stage the expenditure would be allowable as a revenue expenditure,
because the mine would be converted into a revenue mine.
39. It is also the case of assessee that overburden removal at the stage
when the overburden is removed from surface to reach first seam of coal
amounts to a development activity and the expenditure can be said to be
capital activity leading to development of mine whereas once the first seam
of coal has been exhausted and to reach the successive seams of coal the
layers of overburden between the different seams have to be removed and
for removal of those successive seams of overburden to expose successive
seams of coal, it would be an activity in the matter of working of mine and
it would amount to be an expenditure incurred for extraction of coal and
not for development of the mine. Therefore, it is the contention of the
assessee that the said removal of overburden should be deemed to be a
revenue expenditure.
40. The Tribunal has accepted the accounting practice being adopted by
the assessee in treating the expenditure incurred towards overburden
removal till the stage mine reaches 25% of its annual production capacity
as capital expenditure, because that stage is deemed to be a stage of
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
25
development of mine and to treat the mine as revenue mine after the said
25% annual production capacity has been reached and treat the expenditure
on over-burden removal after that stage to be revenue expenditure and
claimable as deduction from revenue/income generated from the mine as
business expenditure.
41. To understand the dispute relating to over burden removal, it is first
necessary to discuss the nature of open-cast mining of coal and the manner
in which over burden is created or rather, encountered by the miner of coal
and has to be removed. There is no question of any over burden in the case
of underground coal mines because in underground coal mines deep pits
are dug in the ground to reach the coal and then coal is extracted from such
mines. However, where the coal is found in different layers or seams in the
ground then the mining operation takes place by open cast method. In such
cases underground mining of the coal is not possible. Over burden exists at
the surface, which is loose soil, rocks, etc. and after removal of over burden
first layer or seam of coal is exposed. After exhaustion of first layer of coal,
again a layer/seam of loose soil, rocks, etc. is encountered, which are the
material that are normally found in soil or ground apart from coal. This
material like soil, rock and tree debris etc. have to be again removed from
to access the next seam of coal and once the next seam of coal is reached, it
is extracted by the mining company. In this manner, after exhausting each
seam of coal again a layer of soil, rock etc. is found, is again must be
removed to reach next seam of coal. In this manner successively,
successive seams have to be reached and the open mining pit keeps on
getting deeper and deeper as the mining progresses after removal of each
seam of overburden to access the next seam of coal after exhausting one
seam of coal. After each seam/layer of coal, again seam of over burden has
to be removed to access the next seam of coal.
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
26
42. In nutshell, the case of the revenue that when over burden is
removed, it amounts to development of mine because without removal of
over burden, the seam of coal cannot be reached and at every stage of
removal of over burden, i.e. whether it is the first time removal of surface
over burden to reach the first seam of coal or whether it is the 10th or 20th
seam of over burden, it does not make any difference because while
removing the over burden to reach the next seam of coal, it would always
remain a activity of development of mine and therefore it would always be
a capital expenditure because it shall amount to reviving or developing the
mine rather than operating the mine so that it could be covered as an
expenditure for the purpose of business or profession of the assessee. By
placing reliance on Section 37 (1) of the Income Tax Act 1961, the learned
counsel for the revenue argues that the said provision is corresponding to
Section 10 (2) (xv) of the Income Tax 1922 and it categorically mentions
that any expenditure which is not expenditure of the nature described in
Section 30 to 36 and not in the nature of capital expenditure or personal
expenditure of the assessee and spent wholly and exclusively for the
purpose of business or profession of the assessee would be allowed in
computing the income chargeable under the head of profit and gains of
business. It is therefore, argued that once the stage under Section 35 (E)(2)
is over, then also the successive expenditure incurred on removing
successive seam of over burden shall be capital expenditure and shall not
be revenue expenditure so as to seek deduction under Section 37(1) of
Income Tax Act.
43. It is vehemently argued by Mr. Siddharth Sharma learned counsel for
revenue that after removal of initial over burden at the surface, first seam of
coal is reached and such process has to be repeated again and again to
access the successive seams of coal and therefore, it does not really make a
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
27
difference that whether first seam of over burden is removed or a
successive seam of over burden is removed because after the seam of coal
available below a particular seam of over burden is exhausted, then the
mine is exhausted. Therefore, removal of next seam of over burden to
access the next seam of coal would amount to reviving or developing the
mines rather than operating the mines. Therefore, it is argued that
substantial question of law has arisen in the matter and the said question of
law must be answered in favour of the revenue.
44. Per contra, Shri C.S. Agrawal, learned senior counsel for the
assessee has vehemently argued that no substantial question of law really
arises in the matter and by placing reliance on judgment of Supreme Court
in the case of Management of Fertilizer Corporation of India Vs. The
workmen 1970 (3) SCC 867, it is vehemently argued that in case of
corresponding procedure of stowing which is adopted during the process of
underground mining of coal, the same has been held to be revenue
expenditure by the Hon’ble Supreme Court. It is further submitted that the
Income Tax Appellate Tribunal (ITAT) has properly considered all the
aspects of the matter and the ITAT while passing the impugned order has
rightly considered the judgment of Calcatta High Court in the matter of
removal of over burden and the said expenditures have been found to be
revenue expenditure and therefore, the ITAT has rightly allowed deduction
of the said expenditure as revenue expenditure and there are no ingredients
of capital expenditure in the said process.
45. Learned senior counsel for the assessee further argued that the
revenue mines are those mines that have reached 25% of their rated
capacity and until that stage they are considered as development mines. It is
argued that stage upto reaching 25% of annual rated coal production
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
28
capacity has been rightly treated by the assessee as capital activity and
expenditure upto that stage of over burden removal has been claimed as
capital expenditure and the expenditure incurred after that stage has been
rightly claimed as revenue expenditure It is argued that it is the consistent
practice going on since many assessment years and was earlier accepted by
the assessing officer but now the Commissioner has taken a totally contrary
view and held that even after the mine which crosses 25% of its rated
annual capacity, the expenses for removal of over burden should continue
to be capital expenses which is not valid as per law.
46. Learned counsel for the assessee further argued that the method of
mining of the assessee is mechanized open cast mining method and coal
seams are reached and worked in phases. The entire over burden cannot be
removed at once and it must be removed in phases meaning the process of
over burden removal is continuous and on-going process. The removal of
over burden looking to the nature of mine being worked and in the manner
it is being worked is a continuous expenditure to be incurred from time to
time in phases depending on the extent to which the mining work is being
carried out. It is contended that such finding of ITAT is a pure finding of
fact and cannot be interfered by this Court in limited jurisdiction of appeal
which has to be exercised only on occurrence of substantial question of law
whereas in the present case the questions raised are questions of fact and
not of law.
47. It is further argued that there are layer of material like rock and soil
between two or more coal seams at the same place which are required to be
removed before extraction of coal takes place and such removal of over
burden when taking place after the mine reaches the stage of revenue mine
i.e. 25% of its annual rated capacity, then the expenses of over burden
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
29
removal should be treated to be revenue expenditure and not capital
expenditure because the mine has crossed the stage of development mine
and has reached the stage of revenue mine and all such expenditure after
reaching the stage of revenue mine has to be treated as revenue expenditure
not capital expenditure. It is argued that without removal of over burden the
next seam of coal cannot be accessed and therefore, it is a necessary step
for mining and extraction of coal and it is not a step for development of
mine or making of mine and therefore, the ITAT has correctly held that the
assessee is entitled to get benefit of over burden removal expenses as
revenue expenses and deducted from its profits and loss account as
business expenditure.
48. It is further argued that as per Section 35(E) (2) of the Act of 1961,
the deduction claimed cannot be disallowed since expenditure has been
incurred. Claim is made after commencement of commercial production
which is carried out since the year 1967-68 and the present matter arises
from assessment year 1997-98 which is way beyond the time-line of 10
years. Learned senior counsel for the assessee has relied upon various
judgments to buttress his submission to defend the order of the ITAT on the
issue of over burden removal expenditure being revenue expenditure and
not capital expenditure.
49. Upon going through the rival submissions of the parties, on the issue
of over burden removal expense, we find that the concept of over burden
removal is not at all disputed between the parties. It is not disputed that
over burden is a belt or layer of soil and rock and other organic or inorganic
material between two coal seams/layers. This position is not at all in
dispute and therefore, it is not a factual dispute at all, but it is purely a
dispute of law whether over burden removal expenses amount to expenses
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
30
in the nature of capital expenditure or in the nature of revenue expenditure
so as to claim deduction under Section 37(1) of the Act of 1961.
50. Therefore, the contention of learned senior counsel for the assessee
that the issue or question involved in the matter of over burden removal
expenses is a pure question of fact and is not a question of law, much less a
substantial question of law, holds no ground and deserves to be and is
hereby rejected. It is held that the said question is a pure question of law
rather a substantial question of law whether removal of layer of useless
material called over burden between two coal seams in case of open cast
mining would be a step in operating the mines so as to deem it as an
revenue or business expenditure or a step towards reviving or developing
the mines so as to constitute a capital expenditure.
51. As per Section 35-E certain deductions for expenditure or
prospecting for minerals or extraction or production of minerals are
allowed deduction to extent of an amount equal to 1/10th of amount of such
expenditure. As per Section 35-E (2) the said expenditure is 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 the year of commercial production or on
development of a mine and other natural deposits of any such mineral. As
per proviso to Section 35-E (2) it is provided that from such expenditure
any portion which is met directly or indirectly for sale, salvage,
compensation or insurance money shall be excluded. It is further provided
by Section 35-E (3) that expenditure on acquisition of mine or source of
mineral or acquisition of deposits of minerals or of any right over such
deposit or of capital nature in respect of building, machinery, plant and
furniture (that are depreciable ion nature) shall not be deemed to be
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
31
expenditure incurred by the assessee for the purposes prescribed in Section
35-E (2).
52. What is allowable as per Section 35-E is deduction equal to 1/10
amount of such expenditure and further expenditure of capital nature which
are depreciable, are excluded from the operation of section 35-E (2).
53. By Section 37 of the Act of 1961, it is provided that once an
expenditure does not fall within the nature described in Section 30 to 36
and not being capital expenditure or personal expenditure of the assessee
shall be allowed in computing the income chargeable from profit and gain
account, if spent wholly or exclusively for the purpose of business or
profession. Therefore, the question has arisen in the present case whether
the expenditure incurred in over burden removal is a revenue expenditure
or a capital expenditure to be claimed under Section 37 of Act of 1961.
54. The Tribunal has relied on the judgment of High Court of Calcutta
reported in the case of Amalgamated Jambad Syndicate Pvt. Ltd. [1978]
117 ITR 698 (Cal) and in Commissioner of Income Tax Vs. Katras Jharia
Coal Co. Ltd., (1979) 118 ITR 6 (Cal). In the aforesaid cases it has been
held by the High Court of Calcutta that removal of over burden and wining
of coals are both continuous processes and work being carried out
simultaneously from year to year and removal of over burden cannot be
compared to opening of new pit because once a pit is already open the
same confers a permanent benefits on the mine and can be used for wining
coal at different seams and for the purpose of reaching new seam. The over
burden resting on the surface of a particular area if removed would enable
the company only to reach coals under that and not any further. The
Calcutta High Court in the aforesaid case has made a distinction between
removal of over burden in the already existing pit of open cost coal mines
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
32
and opening of new pit of open cost coal mine and has held that once a new
pit has not been dugout then mere removal of successive layer of over
burden in an existing pit would amount to expenses arising in course of
working of mines and would not amount to the capital expenditure rather it
would be a revenue expenditure because it does not bring into existence a
new asset bringing any enduring profit or benefit to the assessee but is
simpliciter working of existing assets therefore, the Calcutta High Court
has held that the removal of successive layer of over burden from existing
pit of open cost mine would be revenue expenditure and not capital
expenditure.
55. In the first case decided by Calcutta High Court in the case of
Amalgamated Jambad (supra), the Calcutta High Court did not consider
the earlier case decided by Hon’ble Supreme Court in the case of Pingle
Industries Vs. CIT, reported in 1960 SCC Online SC 127. When the said
judgement was brought to notice of the subsequent Division Bench in the
case of Katras Jharia (supra), the same was distinguished in view of the
judgement of the Supreme Court in CIT v. Kirkend Coal Co. [1970] 77
ITR 530, that related to stowing operations, and the earlier view in
Amalgamated Jambad (supra) was again followed. Therefore, we find that
a substantial question of law does arise in the matter because the judgement
of the Calcutta High Court on which the Tribunal based its decision, was on
stowing operations, and stowing has been taken to be akin to over-burden
removal by the Calcutta High Court. Therefore, a substantial question of
law arises that requires an answer from this Court.
56. The learned Tribunal while deciding the issued in favour of the
assessee has mentioned in its order that it went through the slides and video
of coal mining process and first understood that what is open cast
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
33
mechanized mining method of coal and how coal seams are reached and
worked in phases. It considered that the coal mines are divided into units
and it may be that in one unit commercial production is in full swing and
coal seams are reached in phases in different directions by removing over
burden over one area and thereafter obtaining the coal and selling it and
then moving to other area of mine to carryout identical activities.
57. The Tribunal held that the judgment of Calcutta High Court holding
removal of over burden expenses to be expenses arising in course of
working of mine has to be followed and accordingly followed the said view
and held that the expenses for removal of over burden are required to be
treated as revenue expenditure.
58. The Tribunal also upheld the accounting methodology adopted by
the assessee in which the assessee treats the over burden removal expenses
upto the stage the mining reaches 25% of its annual rated capacity as
capital expenses but from the next financial year the mines are treated as
revenue mines and all expenditure incurred upto that date is capitalized and
grouped under fixed assets while the successive expenses are treated as
revenue expenditure on over burden removal expenditure and the mine is
treated as revenue mine.
59. We note that the aforesaid methodology of treating a mine reaching
25% of its annual rated capacity is only a accounting methodology adopted
by assessee and is nowhere to be found either in the Income Tax Act or any
other enactment in force which declares that a mine when reaches 25% of
its commercial production capacity becomes a revenue mine and ceases to
be a development mine and that the stage of revenue mine is achieved on
achieving 25% production. The cut off of revenue mine or a development
mine is not backed by any statutory provision and it is only an accounting
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
34
practice and tradition and nothing else. The Commissioner while holding
the issue against the assessee held that this principle has been adopted by
the assessee for its own convenience without any sanctity of law and held
that if the expenditure is capital in nature then it has to be capital till the
coal seam is reached and once the coal seam is reached then there does not
remain any question of over burden removal and it would arise only after
exhausting the existing coal seam. Therefore, the tribunal adopted the logic
that once over burden is removed and coal seam is reached then the
expenditure incurred in extracting the coal from the coal field would be
revenue expenditure but once the coal field is exhausted and again a layer
of over burden is encountered by the mining company then again over
burden removal would be capital expenditure.
60. In our opinion once a layer of over burden is removed and coal seam
is reached then the entire expenditure incurred in exhausting the coal seam
would be a revenue expenditure because it would be a expenditure in the
nature of working of mines or producing the product of the mine which is
the mineral (Coal). However, once the seam is exhausted then the mine
comes to an end either in that pit or in that unit, but the fact is that no
further mining of coal is possible unless the next seam of over burden is
removed. Therefore, to reach the next seam of coal it would be a
development activity of mine whereby the mine would be revived and
restored, and not an activity of working the mine. The activity of working
the mine would be extraction of coal only when the coal is exposed. When
the coal is not exposed and a surface of over burden is encountered by the
mining company, then the removal of that surface or seam of over burden
would amount to a capital activity because it will create asset for the
company and increase the value of the mine because otherwise the mine
has been exhausted.
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
35
61. In our opinion the logic adopted by the Commissioner of Income Tax
that treating a mine before reaching 25% of its rated capacity amounts to be
a capital mine or development mine and thereafter being a revenue mine is
an artificial distinction being projected by the assessee without any sanctity
of law. Therefore, in our opinion, the view of the Tribunal does not seem to
be correct that the expenses incurred in removal of overburden after the
mine reaches the stage of 25% of its rated annual capacity would amount to
revenue expenditure and not capital expenditure.
62. We may also take analogy from Mineral Conservation and
Development Rules, 1988 and succeeded by the Rules of 2017 framed by
drawing authority from Mines and Minerals Development and Regulation
Act, 1957. Though the said rules do not apply to coal mines by virtue of
Clause-2 (ii) of the said Rules, but the definition of “development” as laid
down in Clause 3(k) of the said Rules can be looked upon to draw an
analogy. As per said provision, the activity of development of mine is as
under :-
(k) “development” means the driving of an opening to or in an ore-body or seam
or removing overburden or unproductive or waste materials as preparatory to
mining or stoping;
The aforesaid definition in Rule 3 (k) of 2017 Rules corresponds to Rule 3
(i) of 1988 Rules.
63. The aforesaid definition duly establishes that the activity of removal
of overburden or unproductive waste material is preparatory to mining and
is a development activity. Thus, the said Rules duly lay down that removal
of overburden is an activity preparatory to mining and not is an activity of
mining. Even independent of this provision of Rule 3(i) we have held
above that activity of removal of overburden is a development activity or
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
36
activity of capital nature and even Rule 3(i) leads to the same conclusion,
though the said Rules are not applicable as such to coal mines.
64. The learned counsel for the assessee had heavily relied on judgment
in the case of Kirkend Coal Company (supra) wherein it has been held that
the activity of stowing is allowable as revenue expenditure. However, the
activity of stowing takes place in underground coal mine and not in open
cast coal mines. By activity of stowing, when reaching the further
underground coal in underground mining then the hollows created by
extraction of coal in the mine just below the surface and successive thereto
have to be filled up by non-combustible material which is for twin purpose.
First purpose is that once the mine has been opened up then filling of non-
combustible material in hollows created by mining avoids fire accidents
and wastage of coal by fire. Secondly it is also required to prevent the mine
from caving in so that heavy machinery can operate over the ground and
ground does not subside as hollows are created underground due to
extraction of coal. The said activity of stowing in a contiguous coal belt
which is being exploited in underground coal mine is certainly an activity
for winning the coal and not for making the mine or an activity preparatory
to extraction. The extractable value of mineral in mine and capital value of
mine would be the same whether the hollows are filled up or not and filling
up of hollows by non-combustible material would only enable the mining
companies to lift the coal from a further underground portion of the mine
and is therefore a part and parcel of mining activity and is obviously and
undoubtedly a revenue expenditure activity because it only enables the
mining companies to lift the coal and is an activity in the course of working
of mine. Whereas, as already noted by us above, removal of overburden
once the coal seam has been exhausted amounts to creation of capital asset
in as much as the next seam of coal is exposed by removal of the
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
37
overburden. Unless the overburden is removed, then the mine stands
exhausted and cannot work till the next layer of overburden is removed
which is lying above the coal layer or seam. Therefore, there is no real
difference whether the overburden removal is in initial stages of coal seams
or is in later stages of exploiting the coal seams because after exhaustion of
every coal seam mine comes to an end and it is to be developed and revived
again to create a capital asset by exposing the coal seam. It cannot be
equated with the activity of removal of waste material or impurities in the
ore which have to be removed or set aside while extracting the ore because
overburden is not mixed with the coal. Rather, it exists in layers alternating
with the coal layers. After exhausting every layer of coal unless overburden
is removed mine stands closed and exhausted which is not in the case
where impurities are mixed with the ore.
65. In the case of R.B. Seth Moolchand Suganchand Vs. Commissioner
of Income Tax, reported in 1973 (3) SCC 257 the Hon’ble Supreme Court
has held that in case of mining of minerals the empirical test could be that
where minerals have to be won, extracted and brought to surface by mining
operations, the expenditure incurred for acquiring such a right would be of
capital nature but where the mineral has already been gotten and is on the
surface then the expenditure incurred for obtaining the right to acquire the
raw material i.e. the mineral would be a revenue expenditure. The Supreme
Court was dealing with the case of mica mines and it held that mica pillars
which have been exposed by mining operations of other private companies
have no doubt enhanced the value of the right though the appellant therein
still had to carry out mining operations to extract the pillars from the
minerals which were embedded in the land. The Supreme Court therefore
held that exposing the mineral for further exploitation amounts to
enhancing the value of asset of mine and therefore, it would amount to
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
38
expenditure of capital nature and not revenue nature. The Hon’ble Supreme
Court held as under:-
“5. This Court in Pingle Industries Ltd. v. CIT [40 ITR 67 : (1960) 3 SCR 681 :
AIR 1960 SC 1034] had occasion to examine exhaustively the relevant Indian
and English cases for determining what is a capital expenditure and what is a
revenue expenditure. That was also a case of mining where the assessor
obtained leases for excavating Shahabad stones for a period of twelve years for
which an annual payment of Rs 28,000 was agreed upon. The majority of
judges, Kapur, J., and Hidayatullah, J., (as he then was) (S. K. Das, J.,
dissenting) held that the assessee acquired by his long-term lease the right to
win stones, that the stones in situ were not its stock-in-trade in a business sense
but a capital asset from which after extraction it converted the stones into its
stock-in-trade It was also held that the payment was neither rent nor royalty but
a lump payment in instalments for acquiring a capital asset of enduring benefit
to its trade; the amounts being outgoings on capital account, were therefore not
allowable deductions. The proposition as qualified by Lord Cave
in Atherton v. British Insulated and Halsby Cables Ltd. [(1926) AC 205, 213 :
10 TC 155 (HL)] that, in the absence of any special-circumstances leading to
the opposite conclusion, when an expenditure is made, not only once and for all,
but with a view to bringing into existence an asset or advantage for the enduring
benefit of a trade, has been applied, explained and varied from time to time as
the circumstances of the particular case required. The application of these
principles to the various cases and the conclusions reached by courts in those
cases often lead to irreconcilable results. It is because the topic itself is a
troublesome one and is not rendered any the less difficult by resorting to
principles. “It is not always easy”, observed Romer L.J. in Golden Horse
Shoe (New) Ltd. v. Thurgood [18 TC 280, 300] “to determine whether a
particular asset belongs to the one category or the other” nor does it depend in
any way “on what may be the nature of the asset in fact or any law”. In our own
court this difficulty has been put very tersely, if we may say so with respect, by
Hidayatullah, J. (as he then was) in Abdul Kayoom v. Commissioner of Income
Tax, [64 ITR at 703 : 1962 Supp 1 SCR 518] when he said:
“… none of the tests is either exhaustive or universal. Each case depends
on its own facts, and a close similarity between one case and another is
not enough, because even a single significant detail may alter the entire
aspect. In deciding such cases, one should avoid the temptation to decideSignature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
39cases (as said by Cordozo [ The Nature of the Judicial Process, page 20]
) by matching the colour of one case against the colour of another. To
decide, therefore, on which side of the line a case falls, its broad
resemblance to another case is not at all decisive. What is decisive is the
nature of the business, the nature of the expenditure, the nature of the
right acquired, and their relation, inter se, and this is the only key to
resolve the issue in the light of the general principles, which are followed
in such cases.”
6. The determining factor will depend largely on the nature of the trade in which the
asset is employed. The several cases which do not deal with the mining leases but
are concerned with different assets are of little help in the same way as in Mohanlal
Hargovind v. CIT [17 ITR 473] cases relating to the purchase or leasing of mining
quarries or deposits of brick earth were considered not to be of assistance by the
Privy Council in the case of a contract for collecting and removing tendu leaves.
The principles enunciated for determining the nature of the expenditure have been
sought to be applied to different situations arising on the facts of each case, but the
difficulty in matching them with the seeming irreconcilability are perhaps explicable
only on the ground that the determination in any particular case is dependent on the
character of the lease or agreement, the nature of the asset, the purpose for which
the expenditure was incurred and such other factors as in the facts and
circumstances of that case would indicate. If we confine our attention to the mining
leases, what appears to us to be an empirical test is that where minerals have to be
won, extracted and brought to surface by mining operations, the expenditure
incurred for acquiring such a right would be of a capital nature. But, where the
mineral has already been gotten and is on the surface, then the expenditure incurred
for obtaining the right to acquire the raw material, that is, the mineral, would be a
revenue expenditure laid out for the acquisition of stock-in-trade. An expenditure
incurred for acquiring a right to take away sand from the surface of river beds has
been treated as if the sand was stock-in-trade — M. A. Jabbar v. CIT [68 ITR 493 :
(1968) 2 SCR 413 : AIR 1968 SC 745] in the same way as tendu leaves have been
treated by the Privy Council in Mohanlal Hargovind case [17 ITR 473] . In the
former case, Bhargava, J., indicated a number of factors which led to the conclusion
that the expenditure incurred by the assessee in obtaining the lease was revenue
expenditure for the purpose of obtaining stock-in-trade and not capital expenditure
which were: (1) that the lease was for a very short period of eleven months only; (2)
that the sole right which was acquired by the assessee under the lease deed was to
take away the sand lying on the surface of the leased land where no question ofSignature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
40raising, digging or excavating for the sand before obtaining it was involved. In
other words, no operations had to be performed on the land itself and “is not a case
where the gravel in any true sense” as pointed out in Golden Horse Shoe (New) Ltd.
case, “was won from the soil … it is merely shovelled up where it lies”. In the latter
case the Privy Council said that the leases for the right to collect and remove; tendu
leaves under which a certain sum was payable by instalments as a consideration for
the grant of that right was a revenue expenditure. It pointed out that the contracts
were short-term contracts, that the picking of the leaves had to start at once or
practically at once and to proceed continuously and that under the contract it is
tendu leaves and nothing but tendu leaves that are acquired. At p. 478, while
comparing that case with the case of Kauri Timber Co. Ltd. v. CIT, [1913 AC 771]
where the company’s business consisted in cutting and disposing of timber and it
had in some cases acquired timber-bearing lands and in other cases it purchased
the standing timber, the lease itself being for ninety-nine years, the Privy Council
observed:
“In the present case the trees were not acquired: nor were the leaves
acquired until the appellants had reduced them into their own possession
and ownership by picking them. The two cases can, in Their Lordships’
opinion, in no sense be regarded as comparable. If the tendu leaves had
been stored in a merchant’s godown and the appellants had bought the right
to go and fetch them and so reduce them into their possession and ownership
it could scarcely have been suggested that the purchase price was capital
expenditure. Their Lordships see no ground in principle or reason for
differentiating the present case from that supposed.”
14. In our view the principles which have been applied in the Pingle
Industries‘ case [40 ITR 67 : (1960) 3 SCR 681 : AIR 1960 SC 1034] are equally
applicable to the facts and circumstances of this case. The test for ascertaining
whether the amount spent is of a capital nature is, whether it was spent for
obtaining a right of an enduring character which in the case of mining leases is to
acquire rights over land for winning the mineral. In other words, where the mineral
is part of the land and some mining operations have to be performed to extract it
from the earth, the amount paid to acquire a right over or in the land to win that
mineral is of an enduring character and, hence, a capital expenditure. In this case
the mica pillars which have been exposed by the mining operation of other private
companies had no doubt enhanced the value of the right which was leased to the
appellant but nonetheless the appellant still had to carry out some mining
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
41
operations to extract the mineral from the pillars which was embedded in the land.
If the private companies before the mica was exposed had taken the lease, they
would have paid a much lesser amount which nonetheless would have been a capital
expenditure. It is the labour and expense which the private companies expended that
has enured for the benefit of the Government and enhanced the capital value of the
lease. This is not a case, as is contended, of mica having been gotten so as to form
part of the stock-in-trade of the assessee as in the case of Golden Horse
Shoe (New) Ltd. v. Thurgood [18 TC 280, 300] . In that case the company had
acquired rights in certain dumps of “tailings” or residuals that remained after the
extraction of gold from ore taken from certain gold mines. It was contended on
behalf of the revenue that the company’s rights in tailings and dumps were part of
the undertaking which the company was formed to acquire and any sum paid
therefor was capital expenditure, and that the company’s rights in the dump was the
purchase of the wasting asset. This contention was negatived and it was held that
the purchase price of the tailings was an admissible deduction in computing the
company’s profits for income tax purposes. Lord Hanworth, M.R., at p. 298,
observed:
“After careful consideration of the present case, in the course of which my
mind has fluctuated on either side, I think it is to be decided upon its own
facts — that none of the tests suggested affords a strict rule of guidance. It
seems, then, that the company bought these dumps — which were no longer
in a natural but in an artificial condition; which were in such a state that
they would not have passed under a lease of ‘beds opened, or unopened, or
minerals’, see Boileau v. Heath [(1898) 2 Ch D 301] for the purpose of
treating them as their stock-in-trade, lying stored and ready to their hand, at
a fair price of £, 1,22,750, and their intention was to use them up and make
what they could of them by and after treatment. They had not to win them
from the soil; they had been gotten already. If the metaphor of working a
mine be applied, it might be said that the purchase of the dumps was a
capital outlay. If the metaphor of making gas or coke from coal, or of a
miller making flour from wheat, be applied, it may be said that it was an
outlay to be placed in the profit and loss account. But, metaphors do not
provide exact definitions and are often misleading. It is safer to give an
interpretation to the facts of this case as found in the case stated, and upon
the law relevant to them.”
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
42
66. The Hon’ble Supreme Court earlier had the occasion to consider the
difference between capital and revenue expenditure in relation to mining
activity. In the case of Pingle Industries (supra) reported in 1960 SCC
OnLine SC 127 = (1960) 40 ITR 67, the Supreme Court in its majority
view held that the question whether in expenditure is capital or revenue in
character is one of the common occurrence. The Supreme Court held that
there are already three tests in the matter first of which may be capital
expenditure is a thing which is going to be spent once and for all and
revenue expenditure is a thing which is going to recur every year. The
proposition of enduring benefit of a trade was considered by the Hon’ble
Supreme Court. Another test considered by the Supreme Court was that
difference between fixed capital and circulating capital i.e. where the
character of expenses shows that what has resulted in something which is
to be used in the way of business. Third test which was considered by the
Supreme Court was that if expenditure is part of working expenses in
ordinary commercial trading it is revenue expenditure and not commercial
expenditure. In addition to the aforesaid three tests, it was considered that
there are some supplementary tests like outlay made for initiation of
business, extension of business, for substantial replacement of equipment
etc. which are necessary to resume the business and such expenses were
held to be capital expenditure. The said was held in para-28 of the aforesaid
judgment which is as under:-
28. In addition to these three tests, the last of which was applied again by the
Judicial Committee in Mohanlal Hargovind case [(1949) 17 ITR 473 (PC)]
there are some supplementary tests, which have frequently been alluded to. Lord
Sands in Commissioners of Inland Revenue v. Granite City Steamship Co.,
Ltd. [(1927) 13 TC 1, 14] characterised as capital an outlay made for the
initiation of a business, for extension of a business, or for a substantial
replacement of equipment. In that case, there was extensive damage to a ship,
and repairs were necessary to resume trading, such expense being held to be
capital expenditure. The questions which Lord Clyde posed in Robert Addie &Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
43Sons Collieries Ltd. v. Commissioners of Inland Revenue [(1921) 8 TC 671,
676], namely:
“Is it part of the Company’s working expenses, is it expenditure laid out
as part of the process of profit earning? — or, on the other hand, is it
capital outlay, is it expenditure necessary for the acquisition of property
or of rights of a permanent character, the possession of which is a
condition of carrying on its trade at all?”
influenced the Privy Council in Tata Hydro-Electric Agencies, Ltd.,
Bombay v. CIT [(1937) 64 IA 215 : 5 ITR 202] (at p. 209), and the latter part of
the question is the test laid down by Lord Sands, to which we have referred.
In the present case, as we have already held above, though Coal may
be available in the Coal mine, but once a seam/layer of Coal has been
extracted, then the mine stands exhausted and it has to be revived by
removing the overburden, therefore, for the resumption of actual mining
work. Therefore, it is a preparatory activity to resume mining, and not
mining, per se.
67. The Hon’ble Supreme Court took into consideration various other
tests in the matter and held that the aim and objective of expenditure to
determine the character of expenditure; whether it is capital expenditure or
revenue expenditure. The source or manner of payment would be
inconsequential and if the expenditure is part of fixed capital of business it
would be nature of capital expenditure and if it is part of circulating capital
it would be in the nature of revenue expenditure and also held that the tests
have to be applied to the facts of each particular case. Ultimately the
Supreme Court in the aforesaid case held that in that particular case the
assessee acquired by long term lease a right to win stones and the lease
conveyed to him a part of the land. The stones were not his stock of trade
but a capital asset from which after extraction he converted the stones into
his stock of trade and therefore, it was held that it was for acquiring a
capital asset of enduring benefit to his trade and upheld the order of High
Court in treating the expenditure against the capital account.
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
44
68. Recently the Hon’ble Supreme Court in the case of Commissioner of
Income Tax Delhi Vs. Bharti Hexacom Limited, reported in (2024) 7
SCC 621 has considered in detail the difference between capital and
revenue expenditures. In para-84 of the aforesaid judgment the Hon’ble
Supreme Court while considering the judgment of the Madras High Court
in the case of CIT Vs. Sarada Binding Works reported in 1973 SCC
OnLine Madras 288 has ultimately held in para 107 of the aforesaid
judgment that capital expenditure is one with a view to bring into existence
an asset for enduring benefit of trade though it cannot be applied in every
case and the nature of advantage acquired has to be considered in
commercial sense. It is further held that when expenditure is made for
extension of business then it is a capital expenditure. It is further held that
when the expenditure is to bring into hands of assessee a necessary
ingredient of their existing business then the expenditure is to be debited to
the revenue account. It is further held that where expenditure relates to
operation or working of the existing apparatus the expenditure would be
revenue one. It is further held that the question has to be judged in every
case in the context of business necessity and expediency and whether the
expenditure is a part of assessee’s working expenditure or part of profit
earning and further enquiry is required that whether the expenditure was
necessary to acquire a right of permanent character the possession of which
is a condition precedent for carrying on a particular trade in the event the
answer to the first question is in negative and the second question is in the
positive then the expenditure is capital in nature. The Supreme Court has
held as under:-
107. It may be useful at this juncture, to attempt to cull out the broad
principles/tests that have been forged and adopted by this Court from time toSignature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
45time, while determining whether a given expenditure is capital or revenue in
nature:
107.1. Capital expenditure is one met with a view to bring into existence an
asset for the enduring benefit of the trade. However, this rule is not applicable
in every case. The nature of the advantage acquired has to be considered in the
commercial sense and only when the advantage is in the capital field, deduction
on the said expenditure could be disallowed by applying the enduring benefit
test. If the advantage consists merely of facilitating trading operations or
enabling the management or conduct of business more effectively or profitably,
while leaving the fixed capital untouched, the said expenditure would be on
revenue account, though the advantage may endure for an indefinite period,
vide Empire Jute Co. [Empire Jute Co. Ltd. v. CIT, (1980) 4 SCC 25 : (1980)
124 ITR 1] Therefore, the enduring benefit test is not conclusive and cannot be
mechanically applied without considering the commercial aspect of the
transaction involving the expenditure in question.
107.2. Where the expenditure is made for the initial outlay or for extension of a
business, or a substantial replacement of the equipment, it is capital
expenditure. If the expenditure is for running the business or working it with a
view to produce profits, it is revenue expenditure, vide Assam Bengal Cement
Co. [Assam Bengal Cement Co. Ltd. v. CIT, (1954) 2 SCC 672 : (1955) 27 ITR
34] What also follows from this test is that expenditure which relates to the very
framework or structure or edifice of the taxpayer’s business is capital
expenditure.
107.3. The fixed and circulating capital test provides that where the expenditure
is to bring into the hands of the assessee a necessary ingredient of their existing
business, which is important but still ancillary to the business, the expenditure is
to be debited to the circulating capital (revenue account) rather than to the fixed
capital (capital account).
107.4. Where there is no enlargement of the permanent structure or of capital
assets and the expenditure essentially relates to the operation or working of the
existing apparatus, such an expenditure would be on revenue account,
vide Empire Jute Co. [Empire Jute Co. Ltd. v. CIT, (1980) 4 SCC 25 : (1980)
124 ITR 1]107.5. The question as to whether an expenditure is capital or revenue in nature
is to be judged in every case in the context of business necessity or expediency.
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
46
The first aspect to be considered is whether, the expenditure is a part of the
assessee’s working expenditure or a part of profit earning. Further, an inquiry
must be made as to, whether, the expenditure was necessary to acquire a right of
permanent character, the possession of which is a condition precedent for
carrying on a particular trade. In the event that the answer to the first question
is in the negative and the second question is in the affirmative, the expenditure is
inarguably capital in nature. In this context, we are of the view that the decision
of this Court in Alembic Chemical Works Co. [Alembic Chemical Works Co.
Ltd. v. CIT, (1989) 3 SCC 329] must turn on its own peculiar facts.
107.6. Thus, the aspect to be considered is whether the expenditure is incurred
for the purpose of the existing day-to-day business of the assessee, or with a
view to commence an entirely new venture. Where the expenditure incurred is
merely to enhance the productivity or profitability of an existing business,
without making significant changes to the structure of the assessee’s profit-
making apparatus, the same is revenue in nature. Alembic Chemical Works
Co. [Alembic Chemical Works Co. Ltd. v. CIT, (1989) 3 SCC 329] was decided
on the above premise.
107.7. It is not necessary that in all cases, once and for all payment would result
in an enduring benefit, nor it is a firm rule that periodical payment would not
carry with it an enduring benefit.
107.8. Mere payment of an amount in instalments does not convert or change a
capital payment into a revenue payment. Similarly, lump sum payment can
represent revenue expenditure if it is incurred for acquiring circulating capital
though payment is made once and for all. Likewise, payment made in
instalments can be for acquiring a capital asset, the price of which is paid over
a period of time. Therefore, what is relevant is the nature of the original
obligation and whether the subsequent payment made in instalments relates to
or has a nexus with such original obligation or not. Where the subsequent
payments, are towards a purpose which is identifiably distinct from the original
obligation of the assessee, the same would constitute revenue expenditure.
However, where each of the successive instalments relate to the same obligation
or purpose, the cumulative expenditure would be capital in nature.
107.9. The general principle that expenditure on the creation of a capital asset
is on capital account applies only where the capital asset belongs to the
assessee. An amount spent by the assessee may be deductible on revenue
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
47
account even if it results in the acquisition of a capital asset by a third party,
vide L.B. Sugar Factory & Oil Mills (P) Ltd. v. CIT [L.B. Sugar Factory & Oil
Mills (P) Ltd. v. CIT, (1981) 1 SCC 44 : (1980) 125 ITR 293] .
107.10. Another pertinent question to consider is, whether, the expenditure is
incurred towards purchase of an asset, or merely of the right to use the asset for
a given period of time on payment of a certain consideration for the period of
intended use, vide Devidas Vithaldas & Co. [Devidas Vithaldas & Co. v. CIT,
(1972) 3 SCC 457 : (1972) 184 ITR 277] Where the asset is not purchased or is
not vested with the assessee, but the assessee has simply acquired a right to use
the asset, the payment would be of revenue nature, vide CIT v. Modi Revlon (P)
Ltd. [CIT v. Modi Revlon (P) Ltd., 2012 SCC OnLine Del 4463] (“Modi
Revlon”).
69. Therefore, as already considered by us above, removal of layer of
overburden to expose the next coal seam after the mine has closed upon
exhausting earlier coal seam amounts to revival and extension of business
because otherwise the business has to be closed down. It is not an
expenditure in the nature of extraction of coal or working of mine but it is
an expenditure in the nature of further development of mine or extension
and revival of mine.
70. The judgment in the case Empire Jute Company Vs. CIT reported
in (1980) 4 SCC 25 was vehemently relied by the rival parties in favour of
their respective cases. It has been held therein that the tests have evolved
from time to time to distinguish between capital and revenue expenditure
but no test is conclusive and there is no formula which can provide a quick
fix solution in each case and each case has to be decided on its own facts
keeping in mind the broad picture of whole operation in respect of which
the expenditure has been incurred. It has been held that the benefit must
have no endurance at all to be a revenue expenditure even though the test
of enduring profit is not conclusive but it is one of the tests. In the present
case before us, the removal of over-burden layer between two Coal seams
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
48
undoubtedly brings into picture and exposes the next coal seam which can
be exploited by extraction of coal and is therefore a benefit which has some
endurance benefit to the business of coal mine because now the miner
would be able to exploit the next coal seam which may be thin layer or
thick layer which is immaterial because it will now open up the mine for
further exploitation which otherwise got closed due to encountering the
layer of overburden.
71. The reliance placed by the Tribunal on the judgments of the High
Court of Calcutta as referred above, in our opinion, was not legally
sustainable because the High Court of Calcutta in aforesaid cases though
considered judgment of Supreme Court in the case of Empire Jute
Company (supra) but held that mine development would mean only when
a new pit is opened up but removing successive layers of overburden would
not amount to development of mine but would only amount to running the
business and nor for bringing into existence any new asset or advantage.
The said judgement of Calcutta High Court has persuasive value to us.
However, we are unable to agree with the aforesaid proposition of the High
Court of Calcutta. In the first case decided by Calcutta High Court in the
case of Amalgamated Jambad (supra), the Calcutta High Court did not
consider the earlier case decided by Hon’ble Supreme Court in the case of
Pingle Industries Vs. CIT, reported in 1960 SCC Online SC 127. When
the said judgement was brought to notice of the subsequent Division Bench
of Calcutta High Court in the case of Katras Jharia (supra), the same was
distinguished in view of the judgement of the Supreme Court in CIT v.
Kirkend Coal Co. [1970] 77 ITR 530, that related to stowing operations,
and the earlier view in Amalgamated Jambad (supra) was again followed.
However, as already discussed by us above, stowing in case of underground
coal mining is totally different from Over-burden removal in case of open-
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
49
cast Coal mining. The purpose and nature of the two is totally different and
as discussed in detail above. Stowing would be an activity in working of
mine, whereas over-burden removal is not. The difference between stowing
carried out in case of underground coal mining and overburden removal
carried out in the case of open cast coal mining has already been discussed
by us above and it has already been discussed that stowing of hollows
created by underground coal mining is in the nature of working of mine
because it prevents fire incidents in the underground mine and secondly it
saves the ground from collapsing so that heavy machinery can be installed
and operated, otherwise Coal was available for exploitation but by stowing,
safety is ensured and collapse is prevented, that keeps the mine workable.
Therefore, there is a fundamental difference between the said operations
because in case of underground mine there is no concept of mine being
exhausted and then to be re-exposed for the purpose of further mining
which would undisputedly enhance the capital value of the mine.
72. In view of the judgment of the Supreme Court in the case of Pingle
Industries (supra), wherein in the case of Mica Mining it has been held
that exposure of mica pillars by some previous mining operators has
enhanced the capital value of the mine. Applying the same analogy
exposing the next coal seam enhances the capital value of the mine by
exposing the mine for further exploitation which otherwise was not
possible as the layer of overburden which had been encountered had led to
closure of mine.
73. Therefore, in our opinion, the distinction accepted by the Tribunal in
treating overburden expenses incurred till the stage of mine reaching 25%
of its annual rated capacity, has no sanctity in law and is an artificial
distinction only based on accounting practice of the respondent assessee
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
50
and nothing else. Therefore, we answer this substantial question of law in
favour of the revenue and against the assessee and hold that expenses for
removal of overburden at any stage of mine after it has been allotted to the
mining company would amount to an expenditure in the nature of capital
expenditure and not an expenditure in the nature of revenue expenditure
and therefore, it would be allowed only as a capital expenditure.
74. Consequently, these appeals are disposed of in the above terms and
the questions arising in the aforesaid appeals are answered in the above
terms. The question as to nature of over-burden removal expenses is
answered in favour of the Revenue by holding it to be an expenditure of
capital nature irrespective of the stage of mining, while all other questions
are answered in favour of the assessee.
75. The matters would now go back to the assessing officer to carryout
assessment in terms of the answers to the questions of law given by us.
76. WP No. 5424/2020 which is pending for adjudication along with this
bunch of income tax appeals is filed by the assessee for quashing the
demand notices. The demand notices impugned in the said petition are also
formally set aside and the matter would now go back to the assessing
officer to re-determine the assessment as per the questions answered by us
in this judgment, by following the laid down procedure.
77. Let the assessment proceedings be carried out and completed within
a period of two months from the date of production of certified copy of this
order. Appeals and writ petition are accordingly disposed of.
(SURESH KUMAR KAIT) (VIVEK JAIN)
CHIEF JUSTICE JUDGE
Nks/rj/MISHRA
Signature Not Verified
Signed by: NAVEEN KUMAR
SARATHE
Signing time: 16-04-2025
18:08:08
[ad_1]
Source link