Dy. CIT v. The Hutti Gold Mines Co. Ltd. [ITA No.
1339/Bang/2017, dt. 31-8-2020] : 2020 TaxPub(DT) 3414 (Bang-Trib)
Dead rent payable in years of no manufacturing when mines
were non-operational
Facts:
Assessee had to pay dead rent (minimum rent) despite there
being no mining or operational activity. This dead rent was disallowed by
assessing officer but allowed by Commissioner (Appeals) on higher appeal.
Aggrieved department went in higher appeal to ITAT.
Held against the revenue/in favour of the assessee that
dead rent was an allowable expenditure even if there was no operations/mining
activity.
Editorial Note: there
was no operations is one aspect as to whether the business was continuing this
aspect was not seen especially when it was gold mining activity in and around
Kolar Gold Field region. Even if there was meagre business the dead rent
becomes allowable. But if there was no operation or the entire business
activity itself ceased would the deduction be permissible is a bone to pick. In
these Covid times when business activity or volumes is in doldrums payment of
dead rent/minimum rent will assume importance in toll manufacturing and in many
other similar renting for exploitation of assets. With negligible or meagre
volumes the allowability of the minimum rent will certainly be questioned to
which this decision would definitely come in handy as a precedence.
What would happen if there was a dead rent payable to an AE
in a TP assessment when it was accepted in buoyant years and then in years like
Covid or of less business. Does that trigger a default disallowance is also
worth pondering.
The ITAT decided in favour of the assessee relying on the
CBDT circular as under --
"Board's
Circular No. 1-D(V-53) dt. 20-1-1966
Dead rent and royalty paid
mining lease--Allowance of--Revised instructions regarding 20/01/1966 BUSINESS
EXPENDITURE SECTION 37(1)
By Circular No. 16D of 1965,
dt. 21-6-1965, instructions were issued that in view of the decision of the
Rajasthan High Court in the case of Gotan Lime Syndicate (1947) 15 ITR 533
(Raj) : TC 17R.203 : 1964 TaxPub(DT) 0227 (Raj-HC) the payment of
dead rent or royalty in respect of a lease under the Mineral Concession Rules,
1960, should be regarded as expenditure of a capital nature and should not be
allowed as a deduction in computing the taxable income. The above decision of
the High Court has recently been reversed by the Supreme Court. A gist of the
above decision has appeared in short notes of current cases in (1965) 58 ITR
29 (SC) of short notes [since reported at (1966) 59 ITR 718 (SC) : TC
17R.197 : 1966 TaxPub(DT) 0242 (SC)]. The Supreme Court has held
that the royalty payment including the dead rent had relation only to the lime
deposits collected by the lessee and would, therefore, be revenue expenditure.
According to the Supreme Court,
the royalty paid in that case was not a direct payment for securing an enduring
advantage; it had relation to the raw material to be obtained. The mere fact
that there is no lump sum payment, would not itself, lead to the conclusion
that yearly payments made under the mining lease have relation to the
acquisition of an enduring advantage. The Supreme Court has also distinguished
the case of Gotan Lime Syndicate from the case of Pingle Industries
Ltd. v. CIT (1960) 40 ITR 67 (SC) : TC 16R.935 : 1960 TaxPub(DT) 0175
(SC) and Abdul Kayoom v. CIT 44 ITR 69 (SC) : TC 16R.1006 : 1962
TaxPub(DT) 0237 (SC).
2. In the light of the above
decision, the instructions issued in the Board's Circular referred to above may
now be treated as withdrawn. Under the Mineral Concession Rules, 1960, royalty
is payable in respect of any mineral removed by the lessee from the leased
area. The amount of royalty cannot be less than the amount of dead rent which
is in the nature of minimum royalty. In view of this, the royalty and dead rent
paid under the Mineral Concession Rules, 1960, will have to be allowed as
revenue deduction for the purpose of computation income under the Income Tax
Act. Similarly where the royalty has relation to the quantity extracted the
royalty and the dead rent may be allowed as revenue deduction. The Court has
observed that each case must depend 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 view of this, ITOs should examine the
mining lease deed and see whether the case is covered by the above decision of
the Supreme Court."