Accumulation of Expenses cannot be treated as 'Business Loss': ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT), Bangalore Bench held that the accumulation of expenses cannot be treated as “business loss”.

The assessee, Indo Gold Mines Pvt. Ltd. is a joint venture company formed with the purpose of undertaking the business of exploration of minerals. The assessee submitted that the assessee company was incorporated in the year 2006. The company was jointly formed by M/s. Indo-Gold Limited, Australia and M/s Metal mining India Pvt. Ltd. The former one is a foreign company and the latter one is a domestic company.

The assessee has not started commercial production, i.e., extraction of minerals during the years under consideration. However, the assessee had incurred expenditure on employee cost, exploration cost, depreciation, and other expenses. The assessee claimed entire expenses as its business loss in both the years under consideration and accordingly sought to carry forward of losses. Since the assessee did not generate any revenue and the A.O. took the view that the assessee has not started any activity. The Indian Shareholder of the assessee company, viz., M/s Metal mining India P. Ltd had obtained a reconnaissance license from the Government, and the same was not recognized by the AO. Hence, the A.O. took the view that the loss claimed by the assessee cannot be considered as “business loss” and hence it is not eligible to be carried forward. Accordingly, he disallowed the business loss claimed in both the years and accordingly determined the total income as Nil in both the years under consideration.

The CIT(A) agreed with the view with the AO that the assessee has not acquired any mining rights and hence, it cannot be said that the company set up its business in these two years.

The assessee contended that the tax authorities are not correct in law in holding that the assessee has not set up its business. He submitted that the tax authorities have taken the view that the assessee should have commenced commercial production in order to hold that it has set up its business. He submitted that setting up of business and actual commencement of commercial production are two different things and for the purpose of allowing revenue expenditure as a deduction, it is enough that the business is set up. He submitted that the activity of exploration and extraction of minerals is a long process and hence the moment the assessee sets up the office and applies for a license for undertaking exploration activities, the business should be treated as having been set up.

The two-member bench of Judicial Member, Beena Pillai, and Accountant Member B.R. Baskaran clarified that “setting up of business” and “commencement of production” are two different activities. Once the business is set up, the assessee would be entitled to a deduction of revenue expenses. In the case of business relating to “exploration and extraction” of minerals, the activity of exploration of minerals itself is a long process. Once a person identifies the area, where minerals are available, then only the activity of extraction of minerals would start, that too, if it is viable to undertake those activities. Hence generation of revenue, as observed by the tax authorities, should not be the criteria for determining the date of setting up of business. The fact that the generation of revenue would take several years is well recognized in sec.35E of the Act, which provides for the amortization of expenses incurred in the previous four years preceding the year of commercial production.

To Read the full text of the Order CLICK HERE

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