2025 (8) TMI 536 - AT - Income Tax

Contribution to SPV for Mining Measures Held Deductible Business Expense Under Section 37(1)

The ITAT Mumbai allowed the assessee's appeal, holding that the contribution to the Special Purpose Vehicle (SPV), mandated by the SC and administered by ... Nature of expenses - expenditure towards contribution to a Special Purpose Vehicle (SPV) - as explained that the said contribution was mandated under the directions of the Hon’ble Supreme Court, to be utilised for various ameliorative and mitigative measures relating to mining operations, and was therefore in the nature of compensatory payment - As per AO assessee said expenditure was not incurred wholly and exclusively for the purposes of the assessee’s business, and hence was inadmissible u/s 37 HELD THAT:- The assessee is engaged in the business of extraction, processing, and trading of iron ore. The contribution of Rs. 64,19,87,000/– was deducted by the Monitoring Committee and retained by the Central Empowered Committee (CEC) pursuant to the express directions of the Hon’ble Supreme Court. The stated objective was to fund a variety of ameliorative and mitigative measures aimed at socio-economic development of the local population, infrastructure development, forest protection, and establishment of common transportation facilities for iron ore movement. The very nature and origin of the contribution, being judicially mandated and compulsory for continuation of business, distinguishes it from any penal imposition. Failure to comply would have resulted in the assessee being unable to carry on its mining operations, thereby establishing a clear nexus with the business. Assessee had no discretion to challenge the deduction, as it was imposed under the aegis of the Hon’ble Supreme Court and administered by a statutory committee. The classification of mining leases by the CEC into Categories A, B, and C further reveals that even entities without any irregularity (i.e., Category A) were required to contribute, reinforcing the compensatory not penal nature of the expenditure. As also pertinent to note that the coordinate Benches of the Tribunal have consistently upheld the allowability of such contributions as business expenditure under section 37(1). we are of the considered view that the contribution to SPV is a legitimate business expenditure, wholly and exclusively incurred for the purpose of the assessee’s business. Assessee appeal allowed. ISSUES: Whether the expenditure of Rs. 64,19,87,000/- claimed as contribution to a Special Purpose Vehicle (SPV) is allowable as a business expense under section 37(1) of the Income-tax Act, 1961.Whether the said SPV contribution is compensatory in nature and not penal, thus qualifying as deductible business expenditure. RULINGS / HOLDINGS: The expenditure of Rs. 64,19,87,000/- towards contribution to the SPV, mandated by the Hon'ble Supreme Court, is 'very much related and incurred for the purpose of appellant's business activities of mining' and is therefore allowable under section 37(1) of the Act.The SPV contribution is 'compensatory and not penal in nature,' aimed at mitigating environmental damage and ensuring sustainable mining practices, and hence qualifies as deductible business expenditure.Failure to comply with the SPV contribution would result in the inability to carry on mining operations, establishing a clear nexus with the business and negating the characterization of the expenditure as penal.Precedents from coordinate Benches consistently uphold the allowability of such SPV contributions as business expenditure under section 37(1) of the Act. RATIONALE: The legal framework applied includes section 37(1) of the Income-tax Act, 1961, which permits deduction of expenditure 'wholly and exclusively' incurred for business purposes.The Hon'ble Supreme Court's order directing the formation of the SPV and mandating contributions serves as the statutory basis for the expenditure, distinguishing it from penal payments.The Tribunal relied on multiple judicial precedents where similar SPV contributions were held to be compensatory and allowable business expenses, reinforcing the principle that such payments are integral to the business and necessary for compliance with environmental and regulatory mandates.The Tribunal emphasized that the expenditure is 'integral to the smooth functioning' of the mining business and that the assessee had no discretion to avoid the contribution, underscoring the compulsory and compensatory nature of the expense.No dissent or doctrinal shift was recorded; the decision aligns with established jurisprudence affirming the deductibility of judicially mandated environmental and socio-economic contributions as business expenses.