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Tax Publishers 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."

Tax Publishers

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."