A Comprehensive Guide to Deduction for Expenditure on Prospecting, etc., for Certain Minerals Section 35E of Income Tax Act 1961

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Mining and exploration of minerals require significant capital investments. These investments are made to explore the mineral-rich land, establish infrastructure, and extract minerals. However, these investments also come with risks, uncertainties, and upfront costs. To encourage these investments, the Income Tax Act 1961 has provisions for deductions on expenses related to mining and exploration of certain minerals.

Section 35E of the Income Tax Act 1961 is a provision that allows a deduction for expenditure incurred on prospecting, exploration, and survey for the following minerals:

Petroleum and natural gas
Shale oil
Lignite
Coking coal
Iron ore
Bauxite
Manganese ore
Gold
Silver
Diamond

The deduction is available for the expenditure incurred in the following financial year, subject to certain conditions and limitations.

In this blog, we will dive deep into the deduction for expenditure on prospecting, etc., for certain minerals section 35E of the Income Tax Act 1961. We will cover its eligibility, applicability, limitations, and FAQs.

Eligibility Criteria

To claim the deduction for expenditure on prospecting, etc., for certain minerals section 35E of the Income Tax Act 1961, the following eligibility criteria must be met:

The taxpayer must be engaged in the business of mining or exploration of any of the eligible minerals mentioned above.
The taxpayer must have incurred expenditure on prospecting, exploration, or survey of the eligible minerals.
The taxpayer must be the owner of the mining lease or hold the mining lease under an agreement with the owner of the lease.

If the taxpayer meets the above eligibility criteria, they can claim the deduction under section 35E of the Income Tax Act 1961.

Applicability

The deduction for expenditure on prospecting, etc., for certain minerals section 35E of the Income Tax Act 1961 is applicable in the following scenarios:

The expenditure is incurred on prospecting, exploration, or survey for the eligible minerals.
The expenditure is incurred in the financial year following the year of the prospecting, exploration, or survey.
The taxpayer is the owner of the mining lease or holds the mining lease under an agreement with the owner of the lease.
The taxpayer is engaged in the business of mining or exploration of the eligible minerals.

If the above conditions are met, the taxpayer can claim the deduction under section 35E of the Income Tax Act 1961.

Limitations

While the deduction for expenditure on prospecting, etc., for certain minerals section 35E of Income Tax Act 1961 provides relief to taxpayers, it also has certain limitations. Here are some of the limitations:

The deduction is available only for prospecting, exploration, and survey expenses and not for expenses incurred in extracting minerals.
The deduction is allowed only in the financial year following the year of the prospecting, exploration, or survey.
The deduction is available only to the taxpayer engaged in the business of mining or exploration of the eligible minerals.
The taxpayer must be the owner of the mining lease or hold the mining lease under an agreement with the owner of the lease.
The deduction is subject to a maximum limit of 100% of the total income of the taxpayer from mining or exploration of the eligible minerals.

FAQs

Can the deduction be claimed
multiple times for the same expenditure? No, the deduction for expenditure on prospecting, etc., for certain minerals section 35E of the Income Tax Act 1961 is available only once for the same expenditure.
1. Can the deduction be carried forward? No, the deduction cannot be carried forward to subsequent years.
2. What are the documents required to claim the deduction under section 35E of the Income Tax Act 1961? The taxpayer must maintain proper documentation and evidence to substantiate the expenditure incurred on prospecting, exploration, or survey of the eligible minerals. The documents required include invoices, bills, receipts, vouchers, agreements, and other relevant documents.
3. Is the deduction available for all minerals? No, the deduction is available only for the following minerals: petroleum and natural gas, shale oil, lignite, coking coal, iron ore, bauxite, manganese ore, gold, silver, and diamond.
4. Can the deduction be claimed for expenses incurred outside India? No, the deduction is available only for the expenditure incurred within India.
Conclusion
Section 35E of the Income Tax Act 1961 provides a much-needed relief to taxpayers engaged in the business of mining or exploration of certain minerals. The deduction for expenditure on prospecting, etc., for certain minerals section 35E of Income Tax Act 1961 allows a deduction on expenses incurred on prospecting, exploration, and survey of eligible minerals. However, the deduction is subject to certain conditions and limitations. It is essential to meet the eligibility criteria and maintain proper documentation to claim the deduction.
In conclusion, the deduction for expenditure on prospecting, etc., for certain minerals section 35E of Income Tax Act 1961 is a valuable provision for taxpayers engaged in the mining and exploration of eligible minerals. By understanding the eligibility criteria, applicability, limitations, and FAQs, taxpayers can effectively claim the deduction and optimize their tax savings.

Section 35E, of Income Tax Act, 1961

Section 35E, of Income Tax Act, 1961 states that

(1) Where an assessee, being an Indian company or a person (other than a company) who is resident in India, is engaged in any operations relating to prospecting for, or extraction or production of, any mineral and incurs, after the 31st day of March, 1970, any expenditure specified in sub-section (2), the assessee shall, in accordance with and subject to the provisions of this section, be allowed for each one of the relevant previous years a deduction of an amount equal to one-tenth of the amount of such expenditure.

(2) The expenditure referred to in sub-section (1) is that incurred by the assessee after the date specified in that sub-section at any time during the year of commercial production and any one or more of the four 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 Seventh Schedule or on the development of a mine or other natural deposit of any such mineral or group of associated minerals :

Provided that there shall be excluded from such expenditure any portion thereof 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.

(3) Any expenditure—

(i) on the acquisition of the site of the source of any mineral or group of associated minerals referred to in sub-section (2) or of any rights in or over such site;

(ii) on the acquisition of the deposits of such mineral or group of associated minerals or of any rights in or over such deposits; or

(iii) of a capital nature in respect of any building, machinery, plant or furniture for which allowance by way of depreciation is admissible under section 32,

shall not be deemed to be expenditure incurred by the assessee for any of the purposes specified in sub-section (2).

(4) The deduction to be allowed under sub-section (1) for any relevant previous year shall be—

(a) an amount equal to one-tenth of the expenditure specified in sub-section (2) (such one-tenth being hereafter in this sub-section 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 previous 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-section (2)] of any mine or other natural deposit of the mineral or any one or more of the minerals in a group of associated minerals as aforesaid in respect of which the expenditure was incurred,

whichever amount is less :

Provided that the amount of the instalment relating to any relevant previous year, to the extent to which it remains unallowed, shall be carried forward and added to the instalment relating to the previous year next following and deemed to be part of that instalment, and so on, for succeeding previous years, so, however, that no part of any instalment shall be carried forward beyond the tenth previous year as reckoned from the year of commercial production.

(5) For the purposes of 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 previous 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 the Seventh Schedule, commences;

(6) 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 the accounts of the assessee for the year or years in which the expenditure specified in sub-section (2) is incurred have been audited by an accountant as defined in the Explanation below sub-section (2) of section 288, ⁷¹[before the specified date referred to in section 44AB and the assessee furnishes for the first year in which the deduction under this section is claimed, the report of such audit by that date] in the prescribed form⁷²duly signed and verified by such accountant and setting forth such particulars as may be prescribed.

(7) Where the undertaking of an Indian company which is entitled to the deduction under sub-section (1) is transferred, before the expiry of the period of ten years specified in sub-section (1), to another Indian company in a scheme of amalgamation—

(i) no deduction shall be admissible under sub-section (1) in the case of the amalgamating company for the previous year in which the amalgamation takes place; and

(ii) the provisions of this section shall, as far as may be, apply to the amalgamated company as they would have applied to the amalgamating company if the amalgamation had not taken place.

(7A) Where the undertaking of an Indian company which is entitled to the deduction under sub-section (1) is transferred, before the expiry of the period of ten years specified in sub-section (1), to another Indian company in a scheme of demerger,—

(i) no deduction shall be admissible under sub-section (1) in the case of the demerged company for the previous year in which the demerger takes place; and

(ii) the provisions of this section shall, as far as may be, apply to the resulting company as they would have applied to the demerged company, if the demerger had not taken place.

(8) Where a deduction under this section is claimed and allowed for any assessment year in respect of any expenditure specified in sub-section (2), the expenditure in respect of which deduction is so allowed shall not qualify for deduction under any other provision of this Act for the same or any other assessment year.