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IN THE SUPREME COURT OF INDIA

CIVIL   APPELLATE JURISDICTION

CIVIIL APPEAL NO. 5327   OF 2008                  (Arising out of SLP(C)No.3192 OF 2008)

RAJASTHAN STATE MINES AND MINERALS LTD. ... APPELLANT(S)

:VERSUS:

COMMISSIONER OF INCOME TAX, JAIPUR ... RESPONDENT(S)

WITH

CIVIIL APPEAL NO. 5328  OF 2008                  (Arising out of SLP(C)No.4509 OF 2008)

O R D E R

Leave granted.

These appeals are directed against the judgment and order dated 3.8.2007

passed by the  High  Court  of  Judicature at  Rajasthan,  Jaipur  Bench,  Jaipur  in

Income Tax Appeal No.270 of 2005 whereby and whereunder the appeal preferred

by the appellant herein has been dismissed holding that no substantial question of

law arose for its consideration.

Indisputably,  the  appellant  is  a  Public  Sector  Undertaking  of  the

Government of Rajasthan.  In the assessment orders in question, which are for the

assessment years 1998-99 and 1999-2000 respectively, the Assessing Officer noticed

the status of the appellant and proceeded to assess the returns filed by it, treating

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the  expenditure towards development and prospecting charges amounting to Rs.

14,60,729/- and Rs. 16,14,445/-, as against the expenditure of Rs. 33,58,241/- and

Rs.53,84,505/- respectively in the preceding year, as capital expenditures.   

The Assessing Officer opined:

“The submissions  of  the  assessee  have been considered.  However, from the past records of the assessee it is seen that this expenditure is held to be purely as capital expenditure and disallowed. Therefore, in  view  of  the  past  history  of  the  case,  the  expenditure  towards development and prospecting charges amounting to Rs. 1460729/- is treated as of capital nature and disallowed.”

Although no provision of the Income Tax Act has been referred to by the

Assessing Officer in his order, the Commissioner of Income Tax (Appeals) by its

order dated 20.8.2003 opined as under:

“From the above discussion it can be noted that the development and prospecting charges are incurred for prospecting and development of  the  mining  area,  sub-section  (2)  of  section   35E  specifically provides  that  any expenditure incurred wholly  and exclusively  on any  operation  relating  to  prospecting  for  any  mineral  or  on development of a mine in the year of commercial production and any one or more of the 4 years immediately preceding that year shall be allowed  as  deduction  equal  to  one  tenth  of  the  amount  of expenditure stating from the year of assessee is specifically covered u/s 35E(2). In fact, assessee has claimed write off  over a period of time as against 10 years provided in the Act and therefore the claim of  the  asseesee  should  be  more.  So  far  as  the  observation  of  the assessing officers that in past, such expenditure is disallowed, ld. AR has mentioned that in earlier years no such disallowance was made except  in  A.Y.  1995-96  &  A.Y.  1996-97  claim  of  development expenses  was disallowed on the ground that assessee has not been able to prove that the expenses on development falls in the category of exploring, locating or providing deposits of any mineral so as to quality for deduction u/s 35E.”  

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The  Income  Tax  Appellate  Tribunal  also  took  into  consideration  the

application of the provisions of Section  35E(2) of the Income Tax Act, opining:

“We have heard  the  rival  submissions  and perused the  materials available on record. This issue has been discussed by the ld. CIT(A) at page 5 in para 4.4 of his order for the assessment year 1998-99 wherein  he  observed  that  prospecting  expenses  were  included  on expenditure of corporate plan which does not pertain to prospecting expenses  and,  therefore,  he  upheld  the  disallowance.  The  ld.  AR contended that this expenditure was incurred for orientation of the administrative set up and this was in the nature of revenue receipt whereas  the  ld.  DR  contended  that  this  expenditure  was  of  the capital  nature  because  the  corporate  plan  expenditure  was  of enduring benefit to the assessee company.“     

The High Court, however, by reason of the impugned judgment proceeded

to invoke the provisions of Section 37(1) of the Income Tax Act.  It is not in dispute

that had the High Court considered the claim of the appellant in the light of Section

35E(2), it might have arrived at a different conclusion. We, therefore, set aside the

impugned  judgment  and  order  and  remit  the  matter  to  the  High  Court  for

considering the appellant's appeal afresh on merit.     

The appeals are disposed of accordingly.

..........................J (S.B. SINHA)

..........................J   (CYRIAC JOSEPH)    NEW DELHI,

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AUGUST 25, 2008.