December 2008
S. 145 r.w. S. 35E — Change in method of accounting — Assessee engaged in prospecting and exploring minerals changed its method of capitalising expenditure incurred to charging same to P/L A/c. — Change bona fide.
By Jagdish D. Shah, Jagdish T. Punjabi, Chartered Accountants
Reading Time 3 mins
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16 DCIT v. ACC Rio Tinto Exploration Ltd.
ITAT ‘C’ Bench, New Delhi
Before R. K. Gupta (JM) and
K. G. Bansal (AM)
ITA Nos. 4908 /Del./2005
A.Y. : 2001-02. Decided on : 26-9-2008
Counsel for revenue/assessee : Suresh K. Jain/
Salil Kapoor
S. 145 read with S. 35E of the Income-tax Act, 1961 — Change
in method of accounting — Assessee engaged in the business of prospecting and
exploring ores and minerals changed its earlier method of accounting of
capitalising the expenditure incurred to charging the same to profit and loss
account — Whether the change was bona fide — Held, Yes.
Per K. G. Bansal :
Facts :
The assessee was engaged in the business of prospecting and
exploring ores and minerals. As per its method of accounting, expenditure
incurred on such activities was capitalised. During the year under appeal the
assessee changed its accounting policy in respect of the same and the
expenditure incurred on such activities was charged to profit and loss account.
The AO did not accept the change for the following reasons :
- Change was not bona fide and it was made only to get over the provisions of S.
35E;
- New method of accounting led to mismatch of the expenditure with the receipts;
- Business of the assessee i.e., mining minerals and ores, had not commenced;
- To
align its accounting policy with its parent company was not a good ground to
justify the change.
The CIT(A) on appeal came to the conclusion that the assessee
was in the business of exploration, and not mining as held by the AO. Further,
being satisfied that the change made in accounting policy was bona fide, the
CIT(A) allowed the assessee’s appeal.
Before the Tribunal the Revenue contended that the assessee
had changed its policy only to frustrate the provisions contained in S. 35E of
the Act and submitted that the order of the AO be restored.
Held :
Referring to the main objects as per the Memorandum of
Association of the assessee company, the Tribunal noted that the assessee
company was formed to carry on the business of prospecting or exploring the ores
and minerals. According to it, the conclusion got further strength from the FIPB
approval received by the assessee, which was only for carrying out exploration
activity. Thus, the Tribunal held that the mainstay of AO that the business of
the assessee had not commenced and therefore, the expenses cannot be charged to
profit and loss account failed. Further, the Tribunal held that to align the
accounting policy with that of one’s parent, could be a valid ground and it did
not agree with the AO that it was not a good ground to permit the change.
According to it, the change would lead to more appropriate preparation and
presentation of the financial statement for the reason that the losses will not
unnecessarily be carried forward as work-in-progress, when there was none.
