The Jaipur Bench of the Income Tax Appellate Tribunal (ITAT) has held that the amortisation of surface rights for mining can be allowed under Section 35E of the Income Tax Act, 1961 and that the mining lease qualifies as a business right eligible for depreciation under Section 32(1)(ii).
Barmer Lignite Mining Company, the assessee, is a joint venture between a state-owned mining corporation and a private power company that extracts lignite for captive use in a thermal power plant. The company had obtained surface rights over mining land, allowing it to extract lignite for 30 years without owning the land. The Government of Rajasthan (GOR) had initially granted the mining lease to the state mining corporation, which later transferred the rights to extract lignite to the joint venture company.
To fulfil its obligations under the joint venture agreement, the company reimbursed the government entity for land compensation paid to landowners and other expenses related to obtaining regulatory approvals. The company capitalised these costs as “Surface Rights” on its balance sheet and amortised them annually, claiming deductions accordingly.
Understanding Common Mode of Tax Evasion with Practical Scenarios, Click Here
The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disallowed the company’s claim for amortisation, arguing that the land is not a depreciable asset under Section 32 of the Income Tax Act. Since the mining lease did not involve the purchase of a tangible asset, depreciation could not be claimed. The tax authorities asserted that surface rights do not qualify as intangible assets under Section 32(1)(ii) of the Income Tax Act since the rights acquired were not granted directly by a government authority but were acquired through a state-owned mining entity.
The AO and the CIT(A) thought that the expenses incurred were capital and not eligible for amortisation under Section 35E of the Income Tax Act, which deals with deductions for mining exploration and development costs.
Aggrieved by the orders of AO and CIT(A), the assessee moved an appeal to the ITAT where it overturned the disallowance, holding that the surface rights acquired were like a business right and should be treated as an intangible asset under Section 32(1)(ii)of the Income Tax Act. The ITAT further observed that the company did not acquire ownership of the land; it only acquired the right to extract lignite for 30 years. Since this was not an outright land purchase but a right to conduct business operations, it qualified as an intangible asset under Section 32(1)(ii) of the Act and was eligible for depreciation.
Understanding Common Mode of Tax Evasion with Practical Scenarios, Click Here
The ITAT observed that expenses incurred to secure mining rights, including payments to the state entity for obtaining approvals, compensation to landowners, and other costs, fall within the ambit of Section 35E of the Income Tax Act. Under this section, one-tenth of the total expenditure can be deducted annually for ten years, recognising that mining development expenses are necessary business costs.
The tribunal, consisting of Dr S. Seethalakshmi (Judicial Member) and Gagan Goyal (Accountant Member), also pointed out that a similar issue had been ruled in favour of the company in earlier assessment years, 2016-17 and 2020-21. As a result, the ITAT partly allowed the appeal for one assessment year and fully allowed the appeals for the other two years.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
