M/S. DE BEERS INDIA MINERALS PVT. LTD ( NOW KNOWN AS DE BEERS INDIA PVT. LTD), MUMBAI v. THE ITO 3(1)(2), MUMBAI

ITA 6562/MUM/2007 | 2003-2004
Pronouncement Date: 16-12-2011 | Result: Partly Allowed

Appeal Details

RSA Number 656219914 RSA 2007
Assessee PAN AAACD3728R
Bench Mumbai
Appeal Number ITA 6562/MUM/2007
Duration Of Justice 4 year(s) 1 month(s) 17 day(s)
Appellant M/S. DE BEERS INDIA MINERALS PVT. LTD ( NOW KNOWN AS DE BEERS INDIA PVT. LTD), MUMBAI
Respondent THE ITO 3(1)(2), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 16-12-2011
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted J
Tribunal Order Date 16-12-2011
Date Of Final Hearing 29-11-2011
Next Hearing Date 29-11-2011
Assessment Year 2003-2004
Appeal Filed On 29-10-2007
Judgment Text
ITA NOS.6193 40 & 86 AND 6560 TO 6562 DE BEERS INDIA PROSPECTING P LTD MUMBAI PAGE 1 OF 16 IN THE INCOME TAX APPELLATE TRIBUNAL 'J' BENCH MUMBAI BEFORE SHRI D.K. AGARWAL JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH ACCOUNTANT MEMBER ITA NO. 40/MUM/2006 AND ITA NOS.6193 & 86/MUM/2007 (ASSESSMENT YEARS: 2001-02 TO 2003-04) DE BEERS INDIA PROSPECTING PVT.LTD VS. INCOME TAX OFFICER (NOW KNOWN AS DE BEERS INDIA 3(1)(2) PVT.LTD) 83 ADVANCED BUSINESS CENTRE CHAMBER VI MUMBAI 400021 PAN AAACD 3728 R AAYAKAR BHAVAN MUMBAI 400 020 APPELLANT RESPONDENT ITA NOS. 6560 & 6561/MUM/2007 ( ASSESSMENT YEARS 2001-02 & 2003-04 ) DE BEERS INDIA SURVEYS PVT.LTD VS. INCOME TAX OFFICER (NOW KNOWN AS DE BEERS INDIA 3(1)(2) PVT.LTD) 83 ADVANCED BUSINESS CENTRE CHAMBER VI MUMBAI 400021 PAN AAACA 9235 G AAYAKAR BHAVAN MUMBAI 400 020 APPELLANT RESPONDE NT ITA NO 6562/MUM/2007 ( ASSESSMENT YEAR 2003-04) DE BEERS INDIA MINERALS PVT.LTD VS. INCOME TAX OFFICER (NOW KNOWN AS DE BEERS INDIA 3(1)(2) PVT.LTD) 83 ADVANCED BUSINESS CENTRE CHAMBER VI MUMBAI 400021 PAN AAACD 3728 R AAYAKAR BHAVAN MUMBAI 400 020 APPELLANT RESPONDENT APPELLANTS BY: SHRI R. MURALIDHAR RESPONDENT BY: SHRI D.S. SUNDER SINGH DR DATE OF HEARING: 29/11/11 DATE OF PRONOUNCEMENT: 16/12/11 O R D E R PER B. RAMAKOTAIAH A.M. ALL THESE APPEALS ARE FILED BY ASSESSEES IN RESPECT IVE ASSESSMENT YEARS FROM 2001-02 TO 2003-04. THESE COM PANIES ARE ITA NOS.6193 40 & 86 AND 6560 TO 6562 DE BEERS INDIA PROSPECTING P LTD MUMBAI PAGE 2 OF 16 THE SUBSIDIARY COMPANIES OF DE BEERS MAURITIUS LTD WHICH COMMENCED ITS OPERATIONS AFTER GETTING APPROVAL FRO M THE FOREIGN INVESTMENT PROMOTION BOARD (FIPB) WITH REFERENCE TO PROSPECTING AND MINING OF DIAMONDS AND OTHER MINERALS (EXCEPT C OAL AND IRON ORE). NOW ALL THESE COMPANIES HAVE MERGED AND KNOWN AS DE BEERS INDIA PRIVATE LIMITED. THE LEAD ORDER WAS PASSED IN ASSESSMENT YEAR 2002-03 IN ITA NO.40/M/2006 THE FINDINGS OF W HICH ARE THE BASIS FOR REOPENING THE OTHER ASSESSMENTS IN VARIOU S ASSESSEES CASES. THE MAIN ISSUE IS WITH REFERENCE TO ALLOWANC E OF EXPENDITURE CLAIMED BY THE ASSESSEE DISALLOWED BY THE ASSESSIN G OFFICER ON THE REASON THAT THE ASSESSEE HAS NOT COMMENCED THE BUSI NESS IN THE YEAR UNDER CONSIDERATION. SINCE THE LEAD ORDER WAS IN ASSESSMENT YEAR 2002-03 THE FACTS AND GROUNDS ARE DISCUSSED E LABORATELY IN THAT APPEAL. ITA 40/M/2006 AY 2002-03 2. THE ASSESSEE DE BEERS INDIA PROSPECTING PVT. LTD H AS RAISED THE FOLLOWING TWO GROUNDS: 1. THE LEARNED CIT (A) ERRED IN CONFIRMING THE ACT ION OF THE ASSESSING OFFICER IN DISALLOWING EXPENSES ON NO N- PROSPECTING ACTIVITIES AMOUNTING TO ` 27 88 030/- AND DEPRECIATION OF ` 7 13 781/- CLAIMED IN THE RETURN OF INCOME ON THE GROUND THAT THE COMPANY HAS NOT COMMENCED ITS BUSINESS OF MINING DURING THE RELEVAN T YEAR. 2. THE LEARNED CIT (A)ERRED IN CONFIRMING THE ACTIO N OF THE ASSESSING OFFICER IN TAXING THE INTEREST RECEIV ED ON SHORT TERM DEPOSITS UNDER THE HEAD INCOME FROM OTH ER SOURCES INSTEAD OF BUSINESS INCOME AS CLAIMED IN THE RETURN OF INCOME. GROUND NOS. 3 & 4 ARE GENERAL IN NATURE . THE APPEAL WAS ORIGINALLY DISMISSED FOR WANT OF PROSECUTION BY ASSESSEE AND W AS RECALLED BY ORDER IN MA NO. 713/M/08DT.14-01-09. 3. BRIEFLY STATED THE ASSESSEE FILED RETURN OF LOSS O F ` 1 00 04 244/-. SUBSEQUENTLY IT FILED A REVISED RETU RN OF INCOME DECLARING A NET LOSS OF ` 33 56 816/-. FILING THE REVISED RETURN WAS ITA NOS.6193 40 & 86 AND 6560 TO 6562 DE BEERS INDIA PROSPECTING P LTD MUMBAI PAGE 3 OF 16 DUE TO THE FACT THAT AN EXPENDITURE OF ` 57.44 LAKHS STATED TO HAVE BEEN INCURRED ON PROSPECTING ACTIVITIES WERE NOT CL AIMED AS PER THE PROVISIONS OF SECTION 35E OF THE ACT AND WAS CAPITA LIZED BY THE ASSESSEE. STATING THAT THE ABOVE EXPENDITURE PERTAI NS TO PROSPECTING ACTIVITIES THE ASSESSEE CLAIMED BALANCE OF EXPENDI TURE TO AN EXTENT OF ` 27 88 030/- AND DEPRECIATION OF ` 7 13 781/- UNDER SECTION 37(1) BEING A NON-PROSPECTING EXPENDITURE. THE ASSESSING OFFICER HELD THAT THE ASSESSEE HAS NOT COMMENCED ITS BUSINESS AN D ALLOWED THE CAPITALIZATION OF THE ENTIRE EXPENDITURE CLAIMED IN CLUDING THE DEPRECIATION CLAIM. THE ASSESSEE HAS CONTESTED THE SAME BEFORE THE CIT (A) WHO WHILE ADMITTING THAT UNDER SECTION 35E EXPENDITURE OF 1/10 TH ONLY CAN BE ALLOWED TO THE APPELLANT CONSIDERED T HAT THE ASSESSEE HAS NOT COMMENCED THE MINING ACTIVITY AND SINCE THE MINING ACTIVITY OF THE COMPANY HAS NOT COMMENCED IN THE YEAR UNDER CONSIDERATION THERE IS NO QUESTION OF ALLOWI NG NON PROSPECTING OF EXPENDITURE OF ` .27.88 LAKHS TO THE ASSESSEE IN THE CURRENT YEAR. SIMILARLY CLAIM OF DEPRECIATION WAS ALSO DISALLOWED. THEREFORE THE ASSESSEE IS IN APPEAL BEFORE US. 4. REFERRING TO THE ORDERS OF THE ASSESSING OFFICER AN D THE CIT(A) THE LEARNED COUNSEL SUBMITTED THAT THE ASSESSEE OBT AINED FIPB PERMISSION AS EARLY AS OCTOBER 1996 WHICH WAS AMEN DED BY THE LETTERS DATED 15/07/1997 26/05/1998 06/11/1998 A ND 04/10/2000 AND THE MAIN OBJECTS OF THE COMPANY FOR WHICH THE FIPB PERMISSION WAS GRANTED WAS WITH REFERENCE TO UNDERTAKING PROSPECTING AND MINING ACTIVITIES FOR DIAMOND AND P ROSPECTING FOR OTHER MINERALS IDENTIFIED FOR PRIVATE PARTICIPATIO N (EXCEPT COAL AND IRON ORE). CONSEQUENT TO THE ABOVE PERMISSION THE ASSESSEE FURTHER OBTAINED PERMISSIONS FROM VARIOUS STATE GOVERNMENTS . IN THE PRESENT YEAR ASSESSEE DE BEERS INDIA PROSPECTING (P ) LTD HAD OBTAINED PERMIT FROM GOVT. OF ANDHRA PRADESH FOR PR OSPECTING OF DIAMOND IN VARIOUS AREAS OF THE DISTRICTS OF ANDHRA PRADESH. THE LEARNED COUNSEL REFERRED TO PAGE NO.117 IN THE PAPE R BOOK FOR THE ITA NOS.6193 40 & 86 AND 6560 TO 6562 DE BEERS INDIA PROSPECTING P LTD MUMBAI PAGE 4 OF 16 PERMISSION GRANTED BY THE MINISTRY OF INDUSTRY FOR PROSPECTING FOR DIAMOND AND FURTHER PAGE NOS.126 ONWARDS FOR THE PE RMISSIONS GRANTED BY THE GOVT. OF ANDHRA PRADESH IN VARIOUS A REAS. IT WAS HIS SUBMISSION THAT THE ASSESSEE HAVING BEEN INCORPORAT ED AND OBTAINED PERMISSION FROM THE FIPB CAN BE STATED TO HAVE COMMENCED BUSINESS OPERATIONS AND SINCE THE MAIN AC TIVITY IS EXPLORATION AND PROSPECTING FOR DIAMONDS THE ASSES SEE HAS COMMENCED ITS BUSINESS. IT WAS SUBMITTED THAT EVEN THOUGH THE ASSESSEE HAS NOT STARTED THE MINING ACTIVITY THE A SSESSEES BUSINESS OF PROSPECTING HAS BEEN COMMENCED. THE LEA RNED COUNSEL PLACED ON RECORD ALL THE DETAILS OF EXPENDITURE CLA IMED IN THE P&L ACCOUNT BIFURCATION BETWEEN THE PROSPECTING ACTIVI TIES CAPITALIZED UNDER SECTION 35E AND NON PROSPECTING ACTIVITIES IN RESPECTIVE ASSESSMENT YEARS. IT WAS SUBMITTED THAT THE EXPENDI TURE WHICH WAS CAPITALIZED UNDER SECTION 35E WAS NOT IN DISPUTE AN D AS THE ASSESSEE HAS NOT CLAIMED ANY DEDUCTION TO THE EXTEN T OF CAPITALIZATION BUT CLAIM OF OTHER EXPENDITURE NOT C OVERED BY SECTION 35E AND IS ELIGIBLE UNDER SECTION 37(1) IS THE ISSU E IN APPEAL. HE FURTHER SUBMITTED THAT THIS ISSUE WAS COVERED BY TH E DECISION OF THE MUMBAI TRIBUNAL IN ITS OWN CASE DE BEERS INDIA (P) LTD VS. DCIT IN ITA NO.6420/MUM/2008 FOR THE ASSESSMENT YEAR 2005-0 6. IT WAS SUBMITTED THAT THE HON'BLE TRIBUNAL HAS CONSIDERED THE ISSUE AND DIRECTED THE ASSESSING OFFICER TO ALLOW THE EXPENDI TURE UNDER SECTION 37(1) FOR NON-PROSPECTING. IT WAS FURTHER S UBMITTED THAT THE ASSESSING OFFICER DID NOT ALLOW THE EXPENDITURE AS REVENUE EXPENDITURE BUT PERMITTED TO BE CAPITALIZED ON THE REASON THAT THE ASSESSEE HAS NOT COMMENCED THE BUSINESS OF MINING A CTIVITIES. REFERRING TO THE VARIOUS PERMISSIONS AND THE LEGAL PROPOSITIONS ON THE ISSUE IT WAS SUBMITTED THAT THE ASSESSEE HAS CO MMENCED ITS ACTIVITIES OF PROSPECTING IN ASSESSMENT YEAR 2001-0 2 ITSELF AND SO THE BUSINESS OF THE ASSESSEE HAS BEEN SET UP AND EX PENDITURE ITA NOS.6193 40 & 86 AND 6560 TO 6562 DE BEERS INDIA PROSPECTING P LTD MUMBAI PAGE 5 OF 16 ALLOWABLE WAS UNDER SECTION 37(1) OF THE INCOME TAX ACT. THE LEARNED COUNSEL PLACED RELIANCE ON THE VARIOUS DECI SIONS: I) SAURASHTRA CEMENTS AND CHEMICAL INDUSTRY LTD 91 ITR 170( GUJ). II) SARABHAI MANAGEMENT CORPORATION LTD 192 ITR 151(SC) III) CIT VS. FRANCO TOSI INGEGNERIA (2000) 241 ITR 268 (MAD.) IV) DCIT VS. ACC RIO TINTO EXPLORATION LTD. (125 TTJ)( DEL) (92). V) DDIT V. STORK ENGINEERS &CONTRACTORS BV INDIA PROJE CT OFFICE (127 ITD 211)(MUM). HE ALSO DISTINGUISHED THE DECISIONS RELIED BY ASSES SING OFFICER IN CIT VS. SPONGE IRON INDIA LTD.[201 ITR 770] A.P AND CIT VS. L & T MACNEIL LTD. (1993) 202 ITR 662 (BOM).HE RAISED VAR IOUS PREPOSITIONS ON THE BASIS OF THE ABOVE CASE LAW TO SUBMIT THAT THE ASSESSEE HAS COMMENCED ITS BUSINESS ACTIVITIES OF P ROSPECTING AND SO THERE IS NO NEED FOR DISALLOWANCE OF THE EXPENDI TURE CLAIMED. 5. THE LEARNED DEPARTMENTAL REPRESENTATIVE HOWEVER SU BMITTED THAT THE ASSESSEE HAS NOT STARTED THE ACTIVITY OF M INING AND AS SEEN FROM THE PERMISSIONS GRANTED BY THE FIPB THE ASSES SEE WAS PERMITTED TO DO PROSPECTING AND MINING AS PER THE A PPROVALS GRANTED AND SINCE THE ASSESSEE HAS NOT COMMENCED IT S MINING ACTIVITY IT CANNOT BE STATED THAT THE ASSESSEE HAS COMMENCED ITS BUSINESS ACTIVITIES. IT WAS SUBMITTED THAT THE ASSE SSING OFFICER WAS CORRECT IN DISALLOWING THE EXPENDITURE CLAIMED AS R EVENUE EXPENDITURE IN THE ABSENCE OF ANY BUSINESS ACTIVITI ES DURING THE YEAR. IT WAS ALSO FURTHER SUBMITTED THAT THE ASSESS EE HAS NOT EARNED ANY INCOMES AND HAS ONLY CLAIMED EXPENDITURE AND RE LIED ON THE DECISIONS WHICH THE ASSESSING OFFICER RELIED AND DI STINGUISHED CASES RELIED BY THE ASSESSEE. 6. WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE FACTS AVAILABLE ON RECORD. THERE IS NO DISPUTE WITH REFER ENCE TO THE FACT THAT THE ASSESSEE HAS UNDERTAKEN PROSPECTING ACTIVI TIES IN THE YEAR ITA NOS.6193 40 & 86 AND 6560 TO 6562 DE BEERS INDIA PROSPECTING P LTD MUMBAI PAGE 6 OF 16 UNDER CONSIDERATION AND HAS SUO MOTO DISALLOWED THE EXPENDITURE PERTAINING TO THE PROSPECTING ACTIVITIES UNDER SECT ION 35E OF THE INCOME TAX ACT. THE ASSESSING OFFICER PERMITTED AS SUCH AS CLAIMED BY THE ASSESSEE. THERE IS ALSO NO DISPUTE WITH REFE RENCE TO THE BIFURCATION OF EXPENDITURE BETWEEN THE PROSPECTING ACTIVITIES AND NON PROSPECTING ACTIVITIES AS WAS DONE BY THE ASSES SEE WHILE FILING THE REVISED RETURN WITHDRAWING CLAIM TO THE EXTENT OF CAPITALIZED EXPENDITURE UNDER SECTION 35E. IT IS ALSO A FACT TH AT THE ASSESSEE HAS NOT YET CLAIMED ANY DEDUCTION UNDER SECTION 35E AS NO MINING ACTIVITY HAS COMMENCED YET. THE ISSUE IS WITH REFER ENCE TO THE CLAIM OF NON PROSPECTING EXPENDITURE STATED TO BE SALARIE S OF PERSONS IN HEAD QUARTERS AND OTHER EXPENDITURE OF THE COMPANY NOT RELATED TO PROSPECTING ACTIVITIES. AS SEEN FROM THE PROVISIONS OF SECTION 35E AND PARTICULARLY THE RESTRICTED MEANING GIVEN TO SU B SECTION 5(A) FOR OPERATION RELATING TO PROSPECTING ONE CANNOT FAU LT THE ASSESSEE IN BIFURCATING THE EXPENDITURE DIRECTLY RELATING TO PR OSPECTING ACTIVITIES AND OTHER EXPENDITURE AS NON-PROSPECTING ACTIVITIES . THE ASSESSING OFFICER HAS NOT DISPUTED THE BIFURCATION OF THE EXP ENDITURE. THE REASON FOR DISALLOWANCE OF THE EXPENDITURE AND PERM ITTING IT TO BE CAPITALIZED BY AO IS ON THE OPINION THAT THE ASSESS EE HAS NOT COMMENCED ITS BUSINESS ACTIVITIES. COMMENCEMENT OF THE BUSINESS ACTIVITIES HAS VARIOUS FACETS. AS PERMITTED BY THE DEPARTMENT OF INDUSTRIAL POLICY AND PROMOTION THE ASSESSEE IS PE RMITTED TO UNDERTAKE PROSPECTING AND MINING ACTIVITIES FOR DIA MONDS ORIGINALLY AND SUBSEQUENTLY PROSPECTING FOR OTHER MINERALS ALS O (EXCEPT COAL AND IRON ORE) FOR PRIVATE PARTICIPATION. THIS INDIC ATE THAT THE ASSESSEE WAS PERMITTED TO INDULGE IN MINING ACTIVIT IES ONLY WITH REFERENCE TO DIAMONDS WHEREAS IT WAS NOT PERMITTED TO INVOLVE IN MINING ACTIVITIES FOR OTHER MINERALS. PROSPECTING I S AN ACTIVITY PRIOR TO ACTIVITY OF MINING. WITHOUT PROSPECTING AND WITH OUT EXAMINING WHETHER PARTICULAR PRECIOUS STONES/MINERALS WERE AV AILABLE IN A PARTICULAR AREA IT IS NOT POSSIBLE TO UNDERTAKE MI NING ACTIVITIES. IT IS ITA NOS.6193 40 & 86 AND 6560 TO 6562 DE BEERS INDIA PROSPECTING P LTD MUMBAI PAGE 7 OF 16 ALSO OBSERVED THAT THE FIPB PERMITS VARIOUS FOREIGN COMPANIES HAVING EXPERTISE IN VARIOUS FIELDS TO UNDERTAKE VAR IOUS ACTIVITIES IN INDIA AND IN THE CASE OF THE ASSESSEE INITIALLY IT WAS PERMITTED TO UNDERTAKE PROSPECTING AND MINING ACTIVITIES FOR DIA MOND AND SUBSEQUENTLY MODIFIED TO INCLUDE PROSPECTING FOR OT HER MINERALS EXCEPT COAL AND IRON ORE. THIS INDICATES THAT THE A CTIVITIES OF PROSPECTING ARE ITSELF A SEPARATE BUSINESS ACTIVITI ES. THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. ACC RIO TIN TO EXPLORATION LTD 321 ITR 426 HAS CONSIDERED THAT THE ASSESSEE WA S NOT PERMITTED TO UNDERTAKE COMMERCIAL PRODUCTION OF ANY MINERAL OR ORE AND THEREFORE SECTION 35E HAS NO APPLICATION TO TH E FACTS OF THE CASE. THE FACTS ON THE ABOVE CASE WAS THAT THE ASSE SSEE WAS ENGAGED IN THE BUSINESS OF PROSPECTING AND EXPLORIN G ORES AND MINERALS THE ASSESSING OFFICER DID NOT PERMIT THE CLAIM OF EXPENDITURE ON THE REASON THAT THE APPARENT CHANGES IN THE ACCOUNTING POLICY WAS TO CIRCUMVENT THE PROVISIONS OF 35E AS THERE IS NO MINING ACTIVITY AND THE EXPENDITURE CANNOT BE ALLOWED AS REVENUE EXPENDITURE WHEN THE BUSINESS OF ACTIVITY H AS NOT COMMENCED. THE CIT (A) WHILE DELETING THE ADDITION MADE BY THE ASSESSING OFFICER CAME TO THE CONCLUSION THAT THE A CTIVITY OF EXPLORATION CONSTITUTED TO A SEPARATE ACTIVITY ITSE LF AND WAS DIFFERENT AND DISTINCT FROM COMMERCIAL PRODUCTION AND RELYING ON THE PERMISSIONS RECEIVED FROM THE FIPB WITH RESPECT TO ONLY EXPLORATION ACTIVITY IN VARIOUS STATES IN INDIA THE CIT(A) ALL OWED THE CLAIM OF THE ASSESSEE. THE ITAT CONFIRMED THE SAME AND HELD THAT THE PROVISIONS OF SECTION 35E ARE NOT APPLICABLE AS ASS ESSEE WAS NOT IN ENGAGED IN ANY COMMERCIAL PRODUCTION. THE HON'BLE D ELHI HIGH COURT UPHELD THE CONCLUSIONS THAT THE ASSESSEE COMP ANY OBJECTIVES DID NOT INCLUDE MINING OF ORE OR MINERAL OR COMMERC IAL PRODUCTION AND THEREFORE THE PROVISIONS OF SECTION 35E WOULD NOT BE APPLICABLE TO THE FACTS OF THE CASE AS THERE WAS NO POSSIBILIT Y OF ANY COMMERCIAL PRODUCTION. IN THE PRESENT CASE THE ASSE SSEE WAS ITA NOS.6193 40 & 86 AND 6560 TO 6562 DE BEERS INDIA PROSPECTING P LTD MUMBAI PAGE 8 OF 16 PERMITTED TO UNDERTAKE RECONNAISSANCE FOR PROSPECTI NG ACTIVITIES WITH REFERENCE TO DIAMONDS IN THE STATE OF ANDHRA P RADESH AND ACCORDINGLY CLAIMED EXPENDITURE UNDER SECTION 35E W HICH WAS DIRECTLY RELATED TO PROSPECTING EXPENDITURE. IT CA NNOT BE STATED THAT THE ASSESSEE HAS NOT COMMENCED THE BUSINESS ACTIVIT IES. THE ASSESSEES BUSINESS ACTIVITIES HAS ALREADY STARTED FROM THE TIME IT OBTAINED THE PERMISSION FROM THE GOVT. OF A.P. (IF NOT FROM THE TIME IT OBTAINED FIPB PERMISSION) AND STARTED THE ACTIVI TIES OF EXPLORATION/PROSPECTING AS PER THE PERMISSIONS GRAN TED BY VARIOUS GOVERNMENT AGENCIES. IN VIEW OF THIS WE ARE OF THE OPINION THAT UNDERTAKING PROSPECTING ACTIVITIES BEING AN ACTIVIT Y PRECEDING THE ACTIVITY OF MINING WHICH IS A SEPARATE ACTIVITY TH E SAME CAN BE SAID TO BE AN ACTIVITY BY WHICH THE ASSESSEE HAS COMMENC ED ITS BUSINESS. 7. THE ISSUE OF COMMENCEMENT OF THE BUSINESS WAS DISCU SSED ELABORATELY BY THE HON'BLE HIGH COURT OF GUJARAT IN THE CASE OF SAURASHTRA CEMENTS AND CHEMICAL INDUSTRY LTD 91 ITR 170 WHEREIN THE ASSESSEE STARTED EXTRACTING LIME STONE FROM THE LEASED AREA FROM 1958 COMPLETED INSTALLATION OF PLANT & M ACHINERY IN THE YEAR 1960 AND STARTED MANUFACTURING OF CEMENT IN OC TOBER 1960. IT WAS HELD THAT THE ASSESSEE HAD COMMENCED ITS BUSINE SS IN 1958 WHEN IT STARTED ITS ACTIVITY OF EXTRACTING LIMESTON E BY QUARRYING LEASED AREA OF LAND. WHILE ALLOWING THE HON'BLE HI GH COURT HAS HELD AS UNDER: TO DETERMINE WHAT WAS THE BUSINESS OF THE ASSESSEE ONE MUST CONSIDER WHAT WERE THE ACTIVITIES WHICH CONSTITUTED SUCH BUSINESS WITHOUT BEING MISGUIDED B Y LOOSE EXPRESSIONS OF VAGUE AND INDEFINITE IMPORT. T HE ACTIVITIES WHICH CONSTITUTED THE BUSINESS OF THE AS SESSEE WERE DIVISIBLE INTO THREE CATEGORIES: THE FIRST CAT EGORY CONSISTED OF THE ACTIVITY OF EXTRACTION OF LIMESTON E BY QUARRYING LEASED AREA OF LAND. THIS ACTIVITY WAS NECESSARY FOR THE PURPOSE OF ACQUIRING RAW MATERIAL TO BE UTILIZED IN MANUFACTURE OF CEMENT. THE SECOND CATEGORY COMPRISED THE ACTIVITY OF MANUFACTURE OF C EMENT ITA NOS.6193 40 & 86 AND 6560 TO 6562 DE BEERS INDIA PROSPECTING P LTD MUMBAI PAGE 9 OF 16 BY USER OF THE PLANT AND MACHINERY SET UP FOR THE PURPOSE; AND THE THIRD CATEGORY CONSISTED OF THE AC TIVITY OF SELLING MANUFACTURED CEMENT. THESE THREE ACTIVIT IES COMBINED TOGETHER CONSTITUTED THE BUSINESS OF THE ASSESSEE. EACH ONE OF THESE ACTIVITIES WAS AS MUCH ESSENTIAL FOR THE PURPOSE OF CARRYING ON THE BUSINE SS OF THE ASSESSEE AS THE OTHERS. IF THE ASSESSEE CEASED TO CARRY ON ANY ONE OF THESE ACTIVITIES THE BUSINESS WOULD COME TO AN END. EACH ONE OF THESE ACTIVITIES CONSTI TUTED AN INTEGRAL PART OF THE BUSINESS OF THE ASSESSEE. T HE ACTIVITY OF QUARRYING THE LEASED AREA OF LAND AND EXTRACTING LIMESTONE FROM IT WAS AS MUCH AN ACTIVIT Y IN THE COURSE OF CARRYING ON THE BUSINESS AS THE OTHER TWO ACTIVITIES OF MANUFACTURE OF CEMENT AND SALE OF MANUFACTURED CEMENT. THE BUSINESS COULD NOT IN FACT BE CARRIED ON WITHOUT THIS ACTIVITY. THIS ACTIVITY CAM E FIST IN POINT OF TIME AND LAID THE FOUNDATION FOR THE SECON D ACTIVITY AND THE SECOND ACTIVITY WHEN COMPLETED L AID THE FOUNDATION FOR THE THIRD ACTIVITY. THE BUSINESS CONSISTED OF A CONTINUOUS PROCESS OF THESE THREE ACTIVITIES AND WHEN THE FIRST ACTIVITY WAS STARTED WITH A VIEW TO EMBARKING UPON THE SECOND AND THE THIRD ACTIVITIES IT CLEARLY AMOUNTED TO COMMENCEMENT OF THE BUSINESS. IT MIGHT BE THAT THE WHOLE BUSINESS WAS N OT SET UP WHEN THE ACTIVITY OF QUARRYING THE LEASED AR EA OF LAND AND EXTRACTING LIMESTONE WAS STARTED. THAT WOU LD BE SET UP ONLY WHEN THE PLANT AND MACHINERY WAS INSTALLED THE MANUFACTURE OF CEMENT STARTED AND AN ORGANIZATION FOR SALE OF MANUFACTURE CEMENT WAS ESTABLISHED. BUT THE BUSINESS IS NOTHING MORE THAN A CONTINUOUS COURSE OF ACTIVITIES AND ALL THE ACTIVIT IES WHICH GO TO MAKE UP THE BUSINESS NEED NOT BE STARTE D SIMULTANEOUSLY IN ORDER THAT THE BUSINESS MAY COMMENCE. THE BUSINESS WOULD COMMENCE WHEN THE ACTIVITY WHICH IS FIRST IN POINT OF TIME AND WHICH MUST NECESSARILY PRECEDE THE OTHER ACTIVITIES IS STARTED . AS SOON AS AN ACTIVITY WHICH IS AN ESSENTIAL ACTIVI TY IN THE COURSE OF CARRYING ON THE BUSINESS OR WHICH I N OTHER WORDS IS A BUSINESS ACTIVITY IS STARTED THE ASSES SEE MUST BE HELD TO HAVE COMMENCED THE BUSINESS. TO TAK E ANY OTHER VIEW WOULD NOT ONLY BE ILLOGICAL BUT ALSO IRRATIONAL. THE CONCLUSION REACHED BY THE TRIBUNAL COULD NOT THEREFORE BE SAID TO BE UNREASONABLE OR PERVE RSE OR BASED ON NO EVIDENCE AT ALL. 8. THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. SA RABHAI MANAGEMENT CORPORATION LTD 192 ITR 151 ALSO TOOK SI MILAR VIEW IN ITA NOS.6193 40 & 86 AND 6560 TO 6562 DE BEERS INDIA PROSPECTING P LTD MUMBAI PAGE 10 OF 16 HOLDING THAT IT CANNOT BE SAID THAT THE ASSESSEE CO MMENCED ITS BUSINESS ONLY WHEN LICENSEE OR LESSEE OCCUPIED THE PREMISES AND STARTED PAYING RENT. HON'BLE MADRAS HIGH COURT IN T HE CASE OF CIT VS. FRANCO TOSI INGEGNERIA (2000) 241 ITR 268 CONSI DERED THAT ASSESSEE HAS COMMENCED ITS BUSINESS FROM THE TIME I T OPENED ITS SITE OFFICE AND ALLOWED THE EXPENDITURE UNDER SECTI ON 37(1). IN VIEW OF THE PRINCIPLES DECIDED IN ABOVE CASES WE ARE OF THE OPINION THAT THE ASSESSEES ACTIVITIES OF PROSPECTING WHICH IS A PERMITTED ACTIVITY BY THE FIPB IN WHICH THE ASSESSEE HAS CONSIDERABLE EXPERTISE AND FURTHER CONSIDERING THAT VARIOUS PERMISSIONS GRANT ED BY THE GOVT. OF ANDHRA PRADESH WAS ONLY FOR RECONNAISSANCE WITH REFERENCE TO EXPLORATION OF DIAMONDS IT CAN BE CONCLUDED THAT T HE ASSESSEE HAS COMMENCED ITS BUSINESS FROM THE TIME IT STARTED THE PROSPECTING ACTIVITY. IT IS ALSO SEEN FROM THE PERMISSIONS GRAN TED BY THE FIPB THAT IN SOME CASES THE ASSESSEE WAS PERMITTED TO UN DERTAKE FOR PROSPECTING ONLY FOR OTHER MINERALS (EXCEPT COAL AN D IRON ORE). THEREFORE PROSPECTING ACTIVITY ITSELF IS TO BE CON SIDERED AS ASSESSEES BUSINESS ACTIVITY. THERE IS NO DISPUTE W ITH REFERENCE TO THE EXPENDITURE BEING SPENT ON PROSPECTING ACTIVITI ES IN THE YEAR UNDER CONSIDERATION. ACCORDINGLY IT IS HELD THAT T HE ASSESSEE HAS COMMENCED ITS BUSINESS ACTIVITIES. 9. ANOTHER REASON FOR AO NOT ALLOWING NON PROSPECTING EXPENDITURE AS DEDUCTION TO THE ASSESSEE AS REVENUE EXPENDITURE IS THAT THERE WAS NO INCOME ON THIS ACTIVITY. JUST BEC AUSE THERE ARE NO INCOMES IT CANNOT BE STATED THAT THE ASSESSEES EX PENDITURE IS NOT ALLOWABLE. EVEN THOUGH THE ASSESSEE WAS INVOLVED IN PROSPECTING ACTIVITIES THERE WERE NO RECEIPTS DURING THE YEAR OTHER THAN INCOMES FROM INTEREST ON DEPOSITS. HOWEVER IT IS AN ESTABL ISHED LAW THAT THE RECEIPT OF INCOME IS NOT A CONDITION PRECEDENT FOR ALLOWING THE EXPENDITURE. THIS ISSUE WAS ALREADY CONSIDERED THE COORDINATED BENCH IN ASSESSEE OWN CASE IN ITA NO 6420/MUM/08 DT .05-09- 2011 AS UNDER: ITA NOS.6193 40 & 86 AND 6560 TO 6562 DE BEERS INDIA PROSPECTING P LTD MUMBAI PAGE 11 OF 16 8. IT IS IN THIS LIGHT THAT THE ASSESSEE HAS AMORT IZED PROSPECTING SURVEY AND EXPLORATION EXPENSES (AGGREGATING TO ` .9.51 CRORES AND THESE EXPENSES INCLUDE TENEMENTS FEES EQUIPMENT RENTAL AIRCRAFT CHARTER EXPLORATION DATA EXPLORATION DRILLING CONSUMABLES VEHICLE OPERATIONS AND MAINTENANCE CUSTOM DUTY AND CLEARANCE CHARGES COMPUTER SOFTWARE COSTS FREIGHT CHARGES AND PROFESSIONAL FEES ETC) PROFESSIONAL FEE( ` 35.94 LAKHS) DIRECT EMPLOYEE COSTS ( ` 4.82 CRORES) AND ADMINISTRATIVE CHARGES ( ` 2.29 CRORES).THESE EXPENSES ARE DIRECTLY RELATED TO PROSPECTING OF DIA MONDS AND HAVE BEEN THEREFORE RIGHTLY CAPITALIZED UNDER SECTION 35D. HOWEVER THE EXPENSES INCURRED BY THE ASSESSEE ON SALARIES OF EMPLOYEES WHO ARE NOT WORK ING ON THE PROSPECTING PROJECTS ( ` 1.93 CRORES) PROFESSIONAL FEES NOT CONNECTED WITH EXPLORATION PROJECT ( ` 36.80 LAKHS) ADMINISTRATION CHARGES NOT CONNECTED WITH PROSPECTING WORK ( ` 3.10 CRORES INCLUDING RATES AND TAXES PROPERTY RENTALS PROPERTY EXPENSES COMMUNICATION EXPENSES TRAVELLING AND CONVEYANCE UNCONNECTED WITH PROSPECTING PROJECTS AUDITORS REMUNERATION ETC) INTEREST AND FINANCIAL CHARGES ( ` 19.91 LAKHS) AMALGAMATION EXPENSES ( ` 4.33 LAKHS) AND DEPRECIATION ( ` 29.98 LAKHS) HAVE NOT BEEN INCLUDED IN THE SCOPE OF CAPITALIZATION UNDER SECTION 35E. THES E ARE THE EXPENSES SUBJECT TO SUO MOTU DISALLOWANCE BY T HE ASSESSEE WHICH IS NOT SUBJECT MATTER OF DISPUTE ANYWAY HAVE BEEN CLAIMED AS A DEDUCTION UNDER SECTION 37(1) OF THE ACT. THE ASSESSING OFFICER HAS HOWEVER PROCEEDED ON THE BASIS THAT SINCE ASSESSEE IS INTER ALIA ENGAGED IN THE BUSINESS OF PROSPECTING MINERALS- ALL THE EXPENSES INCURRED BY THE ASSESSEE ARE TO BE TREATED AS ELIGIBLE FOR AMORTIZATION UNDER SE CTION 35E UNLESS HE CAN DEMONSTRATE THAT THE EXPENSES AR E INCURRED FOR EARNING AN INCOME WHICH IS TAXABLE IN THE HANDS OF THE ASSESSEE. THAT IS CLEARLY AN INCORRECT APPROACH ON THE PART OF THE ASSESSING OFFICER. THE ASSESSEE EVEN WHEN ENGAGED IN THE BUSINESS OF PROSPECTING MINERALS IS ELIGIBLE FOR AMORTIZATION OF SUCH EXPENSES AS ARE ELIGIBLE UNDER SECTION 35E(2) R.W.S . 35E(5)(A). ALL OTHER EXPENSES ARE ELIGIBLE FOR DEDU CTION AS IN THE NORMAL COURSE OF COMPUTATION OF BUSINESS INC OME. 10. IN VIEW OF THIS RESPECTFULLY FOLLOWING THE SAME WE DIRECT THE ASSESSING OFFICER TO ALLOW THE EXPENSES ON NON-PROS PECTING ACTIVITIES AMOUNTING TO ` .27 88 030/- AND DEPRECIATION ` .7 13 781/- CLAIMED IN THIS YEAR. ITA NOS.6193 40 & 86 AND 6560 TO 6562 DE BEERS INDIA PROSPECTING P LTD MUMBAI PAGE 12 OF 16 11. GROUND NO.2 IN ASSESSEES APPEAL IS WITH REFERENCE TO TAXING THE INTEREST RECEIVED ON SHORT TERM DEPOSIT UNDER T HE HEAD INCOME FROM OTHER SOURCES INSTEAD OF BUSINESS INCOME AS CLAIMED IN THE RETURN OF INCOME. IT WAS THE CONTENTION OF THE ASSE SSEE THAT THE FUNDS RECEIVED IN THE COURSE OF ITS BUSINESS ACTIVI TY WERE KEPT IN SHORT TERM DEPOSIT ON WHICH THE INTERESTS WERE EARN ED BUT THESE ARE THE WORKING CAPITAL FUNDS THEREFORE THE INTER EST SO EARNED IS TO BE TREATED AS BUSINESS INCOME. THE ASSESSING OFFICE R HAS CONSIDERED THAT IN VIEW OF THE REASON THAT ASSESSEE NOT COMMENCED ITS BUSINESS INTEREST INCOME IS TO BE ASSESSED AS INCOME FROM OTHER SOURCES RELYING ON THE DECISION OF THE HON'BLE SUP REME COURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD. V. COMMISSIONER OF INCOME-TAX 227 ITR 172. THE CIT (A) CONFIRMED THE ACTION OF ASSESSING OFFICER THAT THE ASSESSEE HAS N OT COMMENCED ITS BUSINESS. 12. EVEN THOUGH BOTH THE COUNSELS RELIED ON VARIOUS CAS E LAW SUPPORTING THEIR RESPECTIVE STANDS WE ARE OF THE O PINION THAT THIS ISSUE HAS BECOME ACADEMIC IN NATURE AS THE INCOMES OF INTEREST WHETHER ASSESSED UNDER THE HEAD BUSINESS OR INC OME FROM OTHER SOURCES THE SAME IS ELIGIBLE FOR SET OFF TO THE O THER EXPENDITURE BEING CLAIMED UNDER THE HEAD BUSINESS. CONSEQUENT TO OUR FINDING THAT THE ASSESSEE HAS COMMENCED ITS BUSINESS AND IS ELIGIBLE FOR CLAIM OF DEDUCTION UNDER SECTION 37(1) ON EXPENDITU RE OF NON- PROSPECTING ACTIVITIES AND DEPRECIATION THEREON TH E ASSESSEE IS ELIGIBLE FOR SET OFF OF THE INTEREST INCOME. SINCE THE ISSUE BECOMES ACADEMIC IN NATURE WE DO NOT INTEND TO GO INTO THE ASPECT WHETHER INCOME IS TO BE ASSESSED AS BUSINESS INCOME OR OTHE R SOURCES. THERE IS VARIOUS CASE LAW ON THE ISSUE HOLDING IF THE CAPITAL FUNDS ARE KEPT IN DEPOSITS THEN THE INCOME IS TO BE ASSES SED AS INCOME FROM OTHER SOURCES AND IF THE WORKING CAPITAL FUNDS ARE KEPT THEN TO BE TREATED AS BUSINESS INCOME BUT MOST OF THE CASE LAW WAS GIVEN ON RESPECTIVE FACTS. MOST OF THE ISSUES AROSE AS DE DUCTIONS ARE BEING ITA NOS.6193 40 & 86 AND 6560 TO 6562 DE BEERS INDIA PROSPECTING P LTD MUMBAI PAGE 13 OF 16 CLAIMED ON NON-OPERATIONAL INCOMES ALSO. IN THAT CO NTEXT VARIOUS DECISIONS WERE RENDERED DEPENDING ON FACTS AND APPL ICABLE LAW. THE DISCUSSION WILL BECOME ONLY ACADEMIC IN NATURE IN T HIS CASE WITHOUT THERE BEING ANY CONSEQUENTIAL EFFECT AS INTEREST IN COME IS ELIGIBLE FOR SET OFF TO BUSINESS LOSS WHETHER ASSESSED AS INCOME FROM BUSINESS OR INCOME FROM OTHER SOURCES. THE ASSESSING OFFICER IS HOWEVER DIRECTED TO ALLOW THE SET OFF OF BUSINESS LOSS AS P ER THE PROVISIONS OF THE ACT. 13. WITH THESE DIRECTIONS THE APPEAL IS CONSIDERED AS PARTLY ALLOWED. ITA NO.6193/MUM/2007 FOR ASSESSMENT YEAR 2001-02 : 14. IN THIS APPEAL THE ASSESSEE IS CONTESTING IN GROUN D NO.2 CLAIM OF EXPENDITURE ON NON PROSPECTING ACTIVITIES AMOUNTING TO ` 8 75 744/- AND IN GROUND NO.3 TAXING OF INTEREST OF ` 2 58 505/- AS INCOME FROM OTHER SOURCES. FOR THE REASONS STATED I N ITA NO.40/MUM/ 2006 ON THE SIMILAR ISSUE WE DIRECT THE ASSESSING OFFICER TO ALLOW THE EXPENDITURE ON NON PROSPECTING ACTIVITIES UNDER SECTION 37(1) AND DIRECT TO SET OFF TO THE INTEREST INCOME AS PER THE PROVISIONS OF THE ACT. IN VIEW OF THE ABOVE DIRECTI ONS GROUND NO.1 CONTESTING ABOUT REOPENING OF THE ASSESSMENT UNDER SECTION 147 BECOMES ACADEMIC IN NATURE WHICH THE LEARNED COUNSE L ALSO ADMITTED AS SUCH. THEREFORE GROUND NO.2 IS CONSIDE RED ALLOWED AND GROUND NOS.1 & 3 ARE REJECTED. IN THE RESULT AP PEAL IN ITA NO/6193/MUM/2007 FOR THE ASSESSMENT YEAR 2001-02 IS PARTLY ALLOWED. ITA NO.86/MUM/2007 FOR THE ASSESSMENT YEAR 2003-04: 15. IN THIS APPEAL THE ASSESSEE IS CONTESTING IN GROUND NO.1 CLAIM OF EXPENDITURE ON NON-PROSPECTING ACTIVITIES AMOUNTING TO `63 91 157 /- AND IN GROUND NO.2 TAXING OF INTEREST OF ` 73 244 /- AS INCOME FROM OTHER SOURCES. FOR THE REASONS STATED I N ITA NO.40/MUM/ 2006 ON THE SIMILAR ISSUES WE DIRECT TH E ASSESSING ITA NOS.6193 40 & 86 AND 6560 TO 6562 DE BEERS INDIA PROSPECTING P LTD MUMBAI PAGE 14 OF 16 OFFICER TO ALLOW THE EXPENDITURE OF NON PROSPECTING UNDER SECTION 37(1) AND ALSO DIRECT TO SET OFF THE INTEREST INCOM E AS PER THE PROVISIONS OF THE ACT. IN THE RESULT APPEAL IN ITA NO/86/MUM/2007 FOR ASSESSMENT YEAR 2003-04 IS PARTLY ALLOWED. ITA NOS. 6560 AND 6561/MUM/2007 FOR THE ASSESSMENT YEARS 2001-02 AND 2003-04 : 16. THE ASSESSEE IN THESE CASES IS DE BEERS INDIA SURVE YS PVT. LTD. THE ASSESSEE FILED RETURN OF INCOME FOR ASSESS MENT YEAR 2001- 02 DECLARING LOSS OF ` .42 06 764/- AND FILED REVISED RETURN DISALLOWING EXPENDITURE ALLOWED FOR PROSPECTING UND ER SECTION 35E AND CLAIMED ONLY LOSS OF ` 7 36 797/- IN THE REVISED RETURN OF INCOME. THIS COMPANY IS ALSO A SUBSIDIARY OF DE BEE RS MAURITIES PVT. LTD AND COMMENCED ITS OPERATION UNDER APPROVAL FROM FIPB DATED 20.11.1997 AS AMENDED BY A LETTER DATED 16.09 .1998 WITH THE FOLLOWING OBJECTIVES: A) TO UNDERTAKE PROSPECTING THE MINING ACTIVITIES FOR DIAMOND IN THE STATE OF MADHYA PRADESH ANDHRA PRADESH AND ORISSA INCLUDING OTHER STATES. B) TO UNDERTAKE PROSPECTING FOR OTHER MINERALS EXCEPT COAL AND IRON ORE. IN BOTH THE ASSESSMENT YEARS THE ASSESSING OFFICER TOOK SIMILAR ACTION CONSEQUENT TO HIS FINDINGS IN DE BEERS INDIA PROSPECTING (P) LTD FOR ASSESSMENT YEAR 2001-02. THE ASSESSEE HAS R AISED SIMILAR GROUNDS IN BOTH THE ASSESSMENT YEARS. AS THE FACTS ARE SIMILAR AND NATURE OF EXPENDITURE AND ACTIVITY BEING SIMILAR FO R THE REASONS STATED IN ITA NO.40/MUM/2006 WE HOLD THAT THE ASSE SSEE HAS COMMENCED ITS BUSINESS OPERATIONS IN THE ACTIVITY O F PROSPECTING AND ACCORDINGLY IS ELIGIBLE FOR CLAIM OF DEDUCTION UNDER SECTION 37(1) OF THE EXPENDITURE OF NON PROSPECTING NATURE. THE A SSESSING OFFICER IS DIRECTED TO ALLOW THE AMOUNT AND GIVE SET OFF TO THE INTEREST INCOME EARNED BY THE ASSESSEE DURING THE YEAR AS PE R THE PROVISIONS ITA NOS.6193 40 & 86 AND 6560 TO 6562 DE BEERS INDIA PROSPECTING P LTD MUMBAI PAGE 15 OF 16 OF THE ACT. IN VIEW OF THE ABOVE DIRECTIONS IN ITA NO.6560/MUM/07 GROUND NO.1 CONTESTING ABOUT REOPENING OF THE ASSES SMENT UNDER SECTION 147 BECOMES ACADEMIC IN NATURE WHICH THE LE ARNED COUNSEL ALSO ADMITTED AS SUCH. GROUND NO.2 IS CONSIDERED AL LOWED AND GROUND NOS. 3 IS REJECTED. SIMILARLY GROUND NO.1 O N THE ISSUE OF CLAIM OF EXPENDITURE AND ALLOWANCE OF DEPRECIATION IS ALLOWED AND THE GROUND NO.2 ON HEADS OF INCOME TO BE CONSIDERED FOR INTEREST INCOME IS DISMISSED AS ACADEMIC IN NATURE IN ITA NO 6561/MUM/04. HENCE APPEALS IN ITA NOS. 6560 AND 6561/MUM/2007 FOR THE ASSESSMENT YEARS 2001-02 AND 2003-04 ARE PARTLY ALLOWED. ITA NO.6562/MUM/2007 FOR ASSESSMENT YEAR 2003-04 : 17. DE BEERS INDIA MINERALS (P) LTD IS THE SUBSIDI ARY OF DE BEERS MAURITIOUS (P) LTD COMMENCED ITS OPERATIONS UNDER A PPROVAL FROM FIPB DATED 2.11.1998 AS AMENDED BY LETTER DATED 12. 9.2000 INITIALLY FOR CONDUCTING DIAMOND PROSPECTING AND MI NING AND SUBSEQUENTLY FOR PROSPECTING AND MINING OF OTHER MI NERALS (EXCEPT COAL AND IRON ORE). THE COMPANY OBTAINED PERMISSION S FROM THE GOVT. OF ANDHRA PRADESH ON 28.2.2001 AND STARTED IT S OPERATION OF EXPLORATION IN THE STATE OF ANDHRA PRADESH. DURING THE YEAR THE ASSESSEE DECLARED A LOSS OF ` 42 85 363/- AFTER CAPITALIZING AN AMOUNT OF ` 57 245/- BEING THE AMOUNT COVERED UNDER SECTION 35E . FOR THE REASONS DISCUSSED BY THE ASSESSING OFFICER IN 2002-03 IN THE CASE OF DE BEERS INDIA PROSPECTING THE ASSESSI NG OFFICER DISALLOWED THE REVENUE EXPENDITURE BUT ALLOWED IT T O BE CAPITALIZED THE SAME ALONG WITH DEPRECIATION. THE GROUNDS RAISE D BY THE ASSESSEE ARE SIMILAR TO OTHER COMPANIES DISCUSSED A BOVE. THE ASSESSEES ACTIVITIES OF PROSPECTING HAS COMMENCED IN EARLIER YEARS AND FOR THE REASONS STATED IN ITA NO.40/MUM/2006 W E DIRECT THE ASSESSING OFFICER TO ALLOW THE EXPENDITURE UNDER SE CTION 37(1) INCLUDING THE DEPRECIATION AS CLAIMED. AO IS ALSO D IRECTED TO GIVE SET ITA NOS.6193 40 & 86 AND 6560 TO 6562 DE BEERS INDIA PROSPECTING P LTD MUMBAI PAGE 16 OF 16 OFF OF INTEREST OF ` 70 779/- EARNED BY THE ASSESSEE AS PER THE PROVISIONS OF THE ACT. ACCORDINGLY GROUND NO.1 IS C ONSIDERED AS ALLOWED AND GROUND NO.2 IS DISMISSED AS ACADEMIC IN NATURE. APPEAL IN ITA NO. 6562/MUM/2007 FOR THE ASSESSMENT YEAR 2003- 04 IS PARTLY ALLOWED. 18. IN THE RESULT ASSESSEES APPEALS ARE PARTLY AL LOWED. ORDER PRONOUNCED IN THE OPEN COURT ON16TH DECEMBER 2011. SD/- SD/- (D.K.AGARWAL) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER VNODAN/SPS MUMBAI DATED 16 TH DECEMBER 2011. COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR J BENCH ITAT MUMBAI BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES MUMBAI