A. Facts of the Case
1. A public sector company is engaged in the business of extraction of iron ore and diamonds from various mines in India. For extraction of iron ore and diamonds from these mines, the company has taken mining leases from the respective governments of the states in which the mines are situated.
2. The stamp duty and registration fee paid for obtaining the mining leases from respective state governments, were capitalised at the time of initial lease agreements, under the head ‘Leasehold Land’ and amortised over the period of the lease.
3. Some of the lease agreements expired during the financial years 1995-96 and 1996-97. On expiry of the initial lease period of the mines, the company applied for renewal of the same. The company, however, continued its mining operations on such mines.
4. Pending renewal of existing mining leases and considering the on-going operations in the mines, the company worked out the stamp duty and registration fee payable upon renewal of existing mining leases based on the rates prescribed under the Indian Stamp Act, 1899, and charged the same to the profit and loss account by creating a corresponding liability. The company, thus, treated the expenditure as revenue in nature.
5. During the course of audit of accounts for the year 1995-96, the government auditors objected to the above accounting treatment. According to the querist, in the opinion of the government auditors, treatment of the stamp duty and registration fee as a revenue expenditure resulted in the understatement of the fixed assets of the company.
6. As per the querist, on the basis of the opinion of the government auditors, the company started capitalising the stamp duty and registration fee for renewal of mining leases under the head ‘Leasehold Land’ and amortising the same over the lease period.
7. According to the querist, during the course of audit of accounts for the year 1997-98, the government auditors pointed out that the expenditure towards stamp duty and registration fee for renewal of mining lease was revenue in nature and the same could not be treated as capital expenditure. The government auditors observed that capitalisation of stamp duty and registration fee resulted in overstatement of fixed assets, viz., Leasehold Land.
8. The querist has referred to the decision of the Andhra Pradesh High Court in the case of CIT v. Panyam Cements and Mineral Industries Limited. [228 ITR 212 (A.P.)] in which it was held that such expenditure was of revenue nature.
9. The querist has sought the opinion of the Expert Advisory Committee on the following issues:
(a) Whether the expenditure on stamp duty and registration fee payable upon renewal of mining leases should be capitalised under the head ‘Leasehold Land’ and amortised over the lease period, or whether it should be charged to profit and loss account.
(b) If the expenditure referred to above is revenue in nature, whether the legal decision referred to in paragraph 8 above would be binding on the company with retrospective effect, i.e., from 1995-96 / 1996-97. If so, whether the said expenditure would be taken as a prior period expenditure.
C. Points Considered by the Committee
10. The Committee takes note of the judgement of the Andhra Pradesh High Court in the case of CIT v. Panyam Cements and Mineral Industries Ltd. The Committee is of the view that the manner of treatment of an item of expenditure in the books of account of an entity should be determined on the basis of sound accounting principles and practices rather than on the basis of consideration of tax laws which might have a different orientation.
11. The Committee further notes that while the company has applied for renewal of mining leases, the leases have not yet been renewed. However, pending renewal of the mining leases, the company has provided for stamp duty and registration fee payable upon such renewal. It is, thus, implicit that in the assessment of the company, it is probable that the mining leases would be renewed.
12. From the information furnished by the querist, the Committee is unable to judge whether the renewal of mining leases can be considered to be probable or not. The opinion of the Committee in the matter is based on the presumption that the assessment of the company that it is probable that the mining leases would be renewed is correct.
13. The Committee notes that the mining leases (assuming that they would be renewed) would give mining rights to the company for a number of years. The accounting principles regarding treatment of expenditure incurred for obtaining such rights have been enunciated in Accounting Standard (AS) 10, ‘Accounting for Fixed Assets’. Paragraph 6.1 of the said Standard defines a fixed asset as “an asset held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business”. Paragraph 9.1 of the said Standard states the following with regard to the cost of a fixed asset:
“9.1 The cost of an item of fixed asset comprises its purchase price, including import duties and other non-refundable taxes or levies and any directly attributable cost of bringing the asset to its working condition for its intended use; any trade discounts and rebates are deducted in arriving at the purchase price.”
14. The Committee is of the view that the leasehold rights for mining are in the nature of a fixed asset. As such, in terms of paragraph 9.1 of AS 10, taxes or levies incurred for obtaining the same should be considered as a part of cost thereof and capitalised.
15. Based on the above, the Expert Advisory Committee is of the following opinion on the issues raised in paragraph 9 above:
(a) Capitalisation of stamp duty and registration fee for renewal of mining leases by debiting the “leasehold land” as well as its amortisation over the lease period are appropriate. The Committee reiterates that its opinion is based on consideration of sound accounting principles and practices, and that a different position might prevail under the Income-tax Act, 1961.
(b) Not applicable in view of (a) above.
Opinion finalised by the Committee on 4.3.1999.