Amortisation of expenditure for prospecting certain minerals.
51(1)
An assessee, being an Indian company or a person (other than a company) who is resident in India, who is engaged in any operations relating to prospecting for, or extraction or production of, any mineral, shall be allowed a deduction of an amount equal to one-tenth of the amount of expenditure referred to in sub-section (2), in each of the relevant tax years.
51(2)
The expenditure referred to in sub-section (1) is the expenditure incurred by the assessee at any time during the year of commercial production and any one or more of the four tax years immediately preceding that year, wholly and exclusively on any operations relating to prospecting for any mineral or group of associated minerals specified in Part A or Part B, respectively, of the Schedule XII or on the development of a mine or other natural deposit of any such mineral or group of associated minerals
51(3)
The expenditure under sub-section (2) shall be reduced by such expenditure which is met directly or indirectly by any other person or authority and any sale, salvage, compensation or insurance moneys realised by the assessee in respect of any property or rights brought into existence as a result of the expenditure.
51(4)
For the purposes of sub-sections (2) and (3), the following expenditure shall be excluded:––
- (a) any expenditure on the acquisition of the site of the source of any mineral or group of associated minerals referred to in the said sub-sections or of any rights in or over such site; or
- (b) any expenditure on the acquisition of the deposits of such mineral or group of associated minerals or of any rights in or over such deposits; or
- (c) any expenditure of a capital nature in respect of any building, machinery, plant or furniture for which allowance by way of depreciation is admissible under section 33
51(5)
The deduction to be allowed under sub-section (1) for any relevant tax year shall be—
- (a) an amount equal to one-tenth of the expenditure specified in sub-sections (2) and (3) (such one-tenth being herein referred to as the instalment); or
- (b) such amount as is sufficient to reduce to nil the income (as computed before making the deduction under this section) of that tax year arising from the commercial exploitation [whether or not such commercial exploitation is as a result of the operations or development referred to in sub-sections (2) and (3)] of any mine or other natural deposit of the mineral or any one or more of the minerals in a group of associated minerals under this section in respect of which the expenditure was incurred, whichever is less.
51(6)
If any part of the instalment for a relevant tax year is not fully allowed, it shall be carried forward to the next year, becoming part of the instalment of that tax year and such carrying forward may continue for each following year, but no instalment shall be carried forward beyond the tenth year from the year in which commercial production began.
51(7)
Where the assessee is a person other than a company or a co-operative society, no deduction shall be admissible under sub-section (1) unless,––
- (a) the accounts of the assessee for the year or years in which the expenditure specified in sub-sections (2) and (3) are incurred have been audited by an accountant, before the specified date referred to in section 63; and
- (b) the assessee furnishes for the first year in which the deduction under this section is claimed, the report of such audit, by such date, in such form and duly signed and verified by such accountant, as prescribed.
51(8)
If an undertaking of an Indian company, entitled for deduction under sub-section (1), is transferred before ten years specified in the said sub-section in a scheme of amalgamation or demerger, to another Indian company, then,––
- (a) no deduction shall be allowed to the amalgamating or demerged company for the year in which such amalgamation or demerger takes place; and
- (b) all the provisions of this section shall continue to apply to the amalgamated or resulting company as it would have applied to the amalgamating or demerged company, as if the amalgamation or demerger has not taken place.
51(9)
If a deduction under this section is claimed and allowed for any tax year in respect of any expenditure referred to in sub-sections (2) and (3), deduction shall not be allowed for such expenditure under any other provision of this Act for the same or any other tax year.
51(10)
In this section,—
- (a) “operation relating to prospecting” means any operation undertaken for the purposes of exploring, locating or proving deposits of any mineral and includes any such operation which proves to be infructuous or abortive;
- (b) “year of commercial production” means the tax year in which as a result of any operation relating to prospecting, commercial production of any mineral or any one or more of the minerals in a group of associated minerals specified in Part A or Part B, respectively, of Schedule XII, commences;
- (c) “relevant tax years” means the ten tax years beginning with the year of commercial production.
Section Summary:
Section 51 of the new income tax law provides a mechanism for Indian companies and resident individuals (other than companies) engaged in prospecting, extraction, or production of specified minerals to claim a deduction for certain expenditures. The deduction is allowed over ten years, starting from the year of commercial production. This section aims to incentivize investment in mineral exploration and development by allowing taxpayers to amortize qualifying expenditures.
Key Changes:
- Amortization Over Ten Years: The new law allows taxpayers to amortize qualifying expenditures over ten years, starting from the year of commercial production. This replaces any previous provisions that may have treated such expenditures differently.
- Exclusions: Specific expenditures, such as those on acquiring mineral rights or capital assets eligible for depreciation, are explicitly excluded from the deduction.
- Carryforward of Unused Deductions: If the full deduction cannot be utilized in a given year, the unused portion can be carried forward to subsequent years, up to the tenth year.
- Audit Requirement: Non-corporate taxpayers must have their accounts audited and submit an audit report to claim the deduction.
- Transfer of Undertaking: In cases of amalgamation or demerger, the deduction benefits transfer to the new entity, ensuring continuity of the amortization schedule.
Practical Implications:
- For Taxpayers Engaged in Mineral Operations: Companies and individuals involved in mineral prospecting or production can now claim a deduction for qualifying expenditures over ten years, reducing their taxable income.
- Exclusions Impact: Expenditures on acquiring mineral rights or capital assets eligible for depreciation under Section 33 cannot be claimed under this section. Taxpayers must carefully segregate qualifying and non-qualifying expenditures.
- Audit Compliance: Non-corporate taxpayers must ensure their accounts are audited and the audit report is submitted on time to claim the deduction.
- Amalgamation/Demerger: In cases of corporate restructuring, the deduction benefits transfer to the new entity, ensuring no loss of tax benefits.
Critical Concepts:
- Qualifying Expenditure: Expenditures incurred during the year of commercial production or the four preceding years, wholly and exclusively for prospecting or developing a mine, are eligible. However, expenditures met by third parties or recovered through sale, salvage, or insurance are excluded.
- Instalment Calculation: The deduction is calculated as one-tenth of the qualifying expenditure or the amount needed to reduce taxable income to zero, whichever is lower.
- Year of Commercial Production: The tax year in which commercial production of the mineral begins.
- Relevant Tax Years: The ten-year period starting from the year of commercial production.
Compliance Steps:
- Identify Qualifying Expenditures: Segregate expenditures incurred on prospecting or mine development, excluding those on acquiring mineral rights or capital assets eligible for depreciation.
- Maintain Documentation: Keep detailed records of all qualifying expenditures, including dates, nature, and amounts.
- Audit Requirements (for Non-Corporate Taxpayers):
- Ensure accounts for the years in which qualifying expenditures were incurred are audited.
- Submit the audit report in the prescribed format by the due date.
- Claim Deduction: Calculate the deduction as one-tenth of the qualifying expenditure or the amount needed to reduce taxable income to zero, whichever is lower.
- Carryforward Unused Deductions: If the full deduction cannot be utilized in a given year, carry forward the unused portion to subsequent years, up to the tenth year.
Examples:
- Scenario 1: A company incurs ₹10 crore on prospecting for a mineral in Year 1. Commercial production begins in Year 5. The company can claim a deduction of ₹1 crore (one-tenth of ₹10 crore) each year from Year 5 to Year 14.
- Scenario 2: In Year 6, the company’s taxable income before the deduction is ₹50 lakh. The deduction for that year is limited to ₹50 lakh (to reduce taxable income to zero), and the remaining ₹50 lakh is carried forward to Year 7.
- Scenario 3: A non-corporate taxpayer incurs ₹5 crore on prospecting in Year 2. To claim the deduction, they must have their accounts audited and submit the audit report by the due date.
This section provides a structured approach to amortizing prospecting and development expenditures, ensuring taxpayers can benefit from deductions over a ten-year period while maintaining compliance with audit and documentation requirements.