TaxTMI 
TaxTMI 
2021 (2) TMI 130
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.... incurred wholly and exclusively for the purpose of business and hence allowable as deduction u/s 37 of the Income Tax Act, 1961. Rs. 79,26,982/- 3 The learned CIT(A) erred in confirming the disallowance of Rs. 20,55,00,000/- (being compensatory payment made by assessee/retained from the sale proceeds by monitoring committee on the directions of Supreme Court for mining and dumping outside lease area) made by assessing officer by holding it as penalty ignoring that Hon'ble Supreme Court itself has termed this as "Compensatory Payment". Rs. 6,34,99,500/- 4 The learned CIT(A) erred in confirming that the payments are made for violation of law ignoring that such payment is made in order to fulfil the conditions recommended by CEC and accepted by Supreme Court for resuming and continuing the mining operations i.e. business of the assesse. 5 The learned CIT(A) erred in ignoring that the hon'ble Supreme Court has held that "There is nothing in the preconditions or in the details of the R&R plans suggested which are contrary to or in conflict or inconsistent with any of the statutory provisions of the MMDR Act, EP Act and FC Act" and since these p....
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....noted that the said sum was deducted by monitoring committee and retained by the Central empowered committee as per the directions of Hon'ble Supreme Court out of sale proceeds for purpose of taking various ameliorative and mitigative measures as compensatory payment. Ld.AO after calling for various explanations/submissions from assessee held the said amount as not allowable as per Explanation to section 37 (1) of the Act. 3. Second grievance of the assessee is regarding disallowance of compensation of Rs. 20,55,00,000/-. Assessee had debited to P & L Account Rs. 20,55,00,000/- under the head deductions from e- Auction account(as per supreme Court order). The said amount was deducted by Monitoring Committee towards compensation for various irregularities found by CEC in mining area of assessee being illegal pits(Rs. 17.15 crores) and illegal dumping waste(Rs. 3.40Crores). The said amount was retained by monitoring committee as per the directions of Hon'ble Supreme Court out of sale proceeds. Ld.AO disallowed the same by holding that penalties paid for violating laws in course of conducting business cannot be regarded as deductible expenditure as assessee is expected to carry bus....
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....for the purpose of taking various ameliorative and mitigative measures. The Ld.AR submitted that, assessee filed reply before authorities below and submitted that Hon'ble Supreme court in 'A' Category Mines, directed contribution of 10% out of e auction sales towards SPV and in Category 'B' mines the contribution was to the extent of 15% of e auction sales. The Ld.AR submitted that, SPV expenses are for socio economic development of the mining area. He further submitted that the Ld.AO invoked Explanation to section 37 (1) of Act. 7.5. The Ld.AR relied on decision of Hon'ble Hydrabad Tribunal in case of NMDC Ltd. Vs. ACIT as reported in 175 ITD 332. Our attention was drawn to paras 9 to 11 of the Tribunal's order. He pointed out that in Para 10 of order, Hon'ble Hydrabad Tribunal noted that assessee therein was classified as 'A' Category Mine and in para 11, it is held by the Tribunal that 10% of sale proceeds being SPV in 'A' category mine is was to be contributed without which, assessee therein could not have resumed its activities and therefore is a 'business expenditure' and is allowable u/s 37(1) of Income tax Act. He submitted that the only difference in percentage of SPV c....
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....of business. 7.10.2. On the contrary, Ld.CIT DR submitted that it is an application of income and therefore has to be disallowed in the hands of assessee. He submitted that Ld.AO in support of disallowing the claim of expenditure relied on following decisions: * CIT vs.KCP Ltd. reported in 245 ITR 421(SC) * G.Padnabha Chettiyar & Sons vs.CIT reported in 182 ITR 1(Mad) * ReformFlour Mills Pvt.Ltd Vs.CIT reported in 132 ITR 184,196(Cal) * CIT vs.A.Krishnaswamy udaliar & Ors reported in 53 ITR 122(SC) We note that these decisions are on the accrual of income, which has been considered by us in forgoing paras. We have already held that entire income accrued to assesee while deciding grounds 2.1 &2.2. In the issue of contribution towards SPV, one has to consider its correct nature. In our opinion these decisions do not assist revenue in any manner. 7.10.3. On careful reading of decision of Hon'ble Supreme Court in case of Samaj Parivartana Samudaya & Ors. Vs. State of Karanataka & Ors. (supra), it is clear that 10%/15% contribution to SPV account was guarantee payment for implementing of R & R plan, which would be deducted f....
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....the present facts of the case, we note that 10%/15% of sale proceeds was payable to SPV account, after it accrued to assessee, and the fact that, assessee was obliged to part with such portion of income, by virtue of directions of Hon'ble Supreme Court in case of Samaj Parivartana Samudaya & Ors. Vs. State of Karanataka & Ors. (supra), as a precondition to resume mining operations under Category 'A and 'B'. At this juncture we also emphasise that, but for the intervention by Hon'ble Supreme Court, assessee would not have contributed 10%/15% to SPV account for implementation of reclamation and rehabilitation scheme on its own, as there was no statutory requirement to do so under relevant statutes that regulate mining activities. 7.10.7. In our view contributing 10%/15% to SPV account on account of Category 'A'/ 'B' respectively, would be application of income, and therefore should be considered as expenditure incurred for carrying out its business activity. This we hold so, for the reason that, contributions determined by Hon'ble Supreme Court are in the nature of guarantee payment necessary for resuming mining activity. We also note that, alleged sum in these grounds are f....
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.... land; and that the Hon'ble Supreme Court had directed that each of the leaseholder should pay a sum equivalent to 15% of the sale proceeds of its iron ore sold through the Monitoring Committee. In accordance with the said direction, the assessee made payment of Rs. 337.13 Crs towards contribution for the Special Purpose Vehicle and the sum of Rs. 68.66 Crs towards penalty / compensation for encroachment of the mining area beyond the sanctioned / leased area. The A.O. observed that the total of the above payment of Rs. 405.79 Crs was punitive in nature and accordingly sought to disallow the same by issuance of a show-cause notice. ...... 4. The A.O. however did not accept the assessee's explanation and held that the assessee, being a Category-B leaseholder, has been directed to make the payment for infringement of MMDR Act and other allied laws. Therefore, he observed that the payment of Rs. 405.79 Crs is punitive in nature and brought it to tax. .......... 10. Thus, from the table reproduced above, it is seen that the assessee has been classified as Category-'A' whereas the Assessing Officer has considered the assessee as Categor....
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.... the assessee's business was not illegal and that compensation was paid because of its failure to install pollution control device within prescribed time and therefore, such payment was undoubtedly for the purpose of business and in consequence of business carried on by the assessee and was thus covered by section 37 of the Act. For coming to this conclusion, Hon'ble High Court has also considered the judgment of the Hon'ble National Green Tribunal in the case of State Pollution Control Board vs. Swastik Ispat (P.) Ltd wherein at para 38 of the judgment the Tribunal held as under:- "Being punitive is the essence of 'penalty'. It is in clear contradistinction to 'remedial' and / or 'compensatory'. 'penalty' essentially has to be for result of a default and imposed by way of punishment. On the contrary, 'compensatory' may be resulting from a default for the advantage already taken by that person and is intended to remedy or compensate the consequences of the wrong done. For instance, if a unit has been granted conditional consent and is in default of compliance, causes pollution by polluting a river or discharging ....
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....unal has also considered identical issue in the case of Ramgad Minerals & Mining Ltd (ITA No.1270 & 1271/B/2019 dated 04-11-2020) being Category 'B', an identical addition made by Ld.AO was held to be allowable as expenditure with following observations:- "7.8.9. In present appeals, only issue raised for our consideration is in respect of 15% contribution made to SPV for assessment year 2013-14 and 2014-15; and issue in respect of R&R expenses incurred during assessment year 2013 - 14. First of all, we summarise objections of Ld.AO as in respect of SPV expenses as under:- (a) This is one of the objections of the AO that the SPV Expenses is not allowable because it is not compensation but it is penal in nature for contravention of law as observed by him in para 4.3 of the assessment order for AY:2013-14. (b) Second objection of the Ld.AO is contained in para 4.9 of the assessment order for AY:2013-14 and as per the same, this is the objection of Ld.AO that the said SPV is nothing but CSR Expenses only and therefore not allowable. (c) Third objection of Ld.AO is also contained in para 4.9 of the assessment order for AY:2013-14 and as per the same, ....
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....us rulings that illustrated aspects of diversion of income by overriding title. "These are the cases which have considered the problem from various angles. Some of them appear to have applied the principle correctly and some, not. But we do not propose to examine the correctness of the decisions in the light of the facts in them. In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as its income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to pay out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Whereby the obligation income is diverted before it reaches the assessee, it is deductible but where the income is required to be applied to discharge an obligation after such income reaches the assessee the same consequence in law does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another portion of one's own income w....
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....ted as penal in nature. We, therefore, reject observations of authorities below that, such sum having contributed by assessee fall within ambit of explanation 1 to section 37 (1) of the Act." 7.10.10. We note that the CEC, vide its report dated 3-2-2012 and 13-3-2012 made recommendations with regard to setting up of SPV, transfer of funds collected from all lease holders under various heads, manner of utilisation of said funds etc., to Hon'ble Supreme Court, which is incorporated in Paragraph 7 at Page 164 to 171 as under: "(IX) A Special Purpose Vehicle (SPV) under the Chairmanship of Chief Secretary, Government Karnataka and with the senior officers of the concerned Departments of the State Government as Members may be directed to be set up for the purpose of taking various ameliorative and mitigative measures in Districts Bellary, Chitradurga and Tumkur. The additional resources mobilized by (a) allotment/ assignment of the cancelled mining leases as well as the mining leases belonging to M/s. MML, (b) the amount of the penalty/ compensation received/ receivable from the defaulting lessee, (c) the amount received/ receivable by the Monitoring Committee from the....
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....ply to these payments. We also note that Hon'ble Supreme Court at page 171 observed that, these payments are necessary to be made by the mining lease holders. Hence there is merit in the submission of Ld.Counsel that, without making these payments, assessee could not have resumed the mining operations. Hence, these expenses are incidental to carrying on the business and hence allowable u/s 37(1) of the Act." Based on above discussions and analysis, we are of opinion that contribution to SPV being 15% of sale proceeds, under category B, is to be allowable expenditure for year under consideration. Accordingly Ground No. 2 raised by assessee stands allowed. 8. Ground No.3 is in respect of disallowance of Rs. 20,55,00,000/- by hold to be penal in nature. Before us, the Ld.AR referred to breakup of Rs. 20,55,00,000/- at page 109 of paper book: Compensation (mining pit) 3.43Ha Rs. 17,15,00,000 Compensation (dump, received etc, 3.43 Ha) Rs. 3,40,00,000 Additional Other area(4.96 Ha) Rs. 4,96,00,000 Other category (1.51 Ha) Rs. 1,51,00,000 8.1. The Ld.AR submitted that, payment advises issued by Department of Mines and Geology, clearly mentions that, ....
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.....State of Karnataka & Oth.(supra). First of all, there should not be any dispute that the writ petition filed by M/s Samaj Parivartana Samudaya and Others was admitted by Hon'ble Supreme Court under Article 32 of the Act. Hence the lessees, inter alia, challenged before Hon'ble Supreme Court, the necessity to invoke Article 32 and Article 142 of the Act. 8.12.4. In the CEC report dated 3/02/2012 and 13/03/2012, following recommendations were provided in respect of Category B lease holders. Hon'ble Supreme Court extracted the same at page 166 of its order which is as under: "(V) In respect of the mining leases falling in "CATEGORYB" (details given at Annexure-R-10 to this Report) it is recommended that: i) the R&R Plan, under preparation by the ICFRE, after incorporating the appropriate changes as per the directions of this Hon'ble Court, should be implemented in a time bound manner by the respective lessees at his cost. In the event of his failure to do so or if the quality and/or the progress of the implementation of the R&R Plan is found to be unsatisfactory by the Monitoring Committee or by the designated officer(s) of the State of Kar....
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.... "I. Compensatory Payment a) Each of the leaseholders must pay compensation for the areas under illegal mining pits outside the sanctioned area, as found by the Joint Team (and as finally held by the CEC) at the rate of Rs. 5 crores per hectare, and (b) for the areas under illegal overburden dumps, roads, offices, etc. outside the sanctioned lease area, as found by the Joint Team (as might have been finally held by the CEC) at the rate of Rs. 1 crore per hectare. It is made clear that the payment at the rates aforesaid is the minimum payment and each leaseholder may be liable to pay additional amounts on the basis of the final determination of the national loss caused by the illegal mining and the illegal use of the land for overburden dumps, roads, offices, etc. Each leaseholder, besides making payment as directed above, must also give an undertaking to the CEC for payment of the additional amounts, if held liable on the basis of the final determination. At the same time, we direct for the constitution of a Committee to determine the amount of compensatory payment to be made by each of the leaseholders having regard to the value of the ore il....
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.... In the case of any leaseholder, if the money held on his account is not sufficient to cover the aforesaid three heads, he must pay the deficit within two months from today. 8.12.7. The contentions of the lessees have been succinctly stated as under by Hon'ble Supreme Court in paragraph 20 of the order, which is extracted below:- "To resolve the said issues it is the statutory scheme that should be directed to be followed and resort to the powers of this Court under Article 32 read with Article 142 of the Constitution, when a statutory scheme is in existence, would be wholly uncalled for." 8.12.8. This contention was discussed in detail as "Issue 2" in paragraphs 27 to 37 (pages180 to 187) Hon'ble Supreme Court. Following are the observations of Hon'ble Supreme Court: 27. On the above issue the short and precise argument on behalf of the leaseholders is that the provisions of each of the statutory enactments, i.e., the MMDR Act, FC Act and EP Act prescribe a distinct statutory scheme for regulation of mining activities and the corrective as well as punitive steps that may be taken in the event mining activities are carried out in a m....
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.... "32. Remedies for enforcement of rights conferred by this Part. (1) The right to move the Supreme Court by appropriate proceedings for the enforcement of the rights conferred by this Part is guaranteed. (2) The Supreme Court shall have power to issue directions or orders or writs, including writs in the nature of habeas corpus, mandamus, prohibition, quo warranto and certiorari, whichever may be appropriate, for the enforcement of any of the rights conferred by this Part. (3) Without prejudice to the powers conferred on the Supreme Court by clause ( 1 ) and ( 2 ), Parliament may by law empower any other court to exercise within the local limits of its jurisdiction all or any of the powers exercisable by the Supreme Court under clause (2). (4)The right guaranteed by this article shall not be suspended except as otherwise provided for by this Constitution." 33. In M.C. Mehta Vs. Union of India &Ors. (1987) 1 SCC 395, this Court not only reiterated the view adopted in Bandhua Mukti Morcha (supra) but also held that the power under Article 32 would be both injunctive as well as remedial and the power to grant remedial relief, naturall....
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....tead remedies should be sought within the relevant statutes. The sheet anchor is the case of Supreme Court Bar Association Vs. Union of India and Another reported in (1998) 4 SCC 409. We do not see how or why we should lie entrapped within the confines of any of the relevant Statutes on the strength of the views expressed in Supreme Court Bar Association (supra). The observations made in para 48 of the judgment and the use of words "ordinarily" and "are directly in conflict" as appearing in the said paragraph (underlined by us) directly militates against the view that the lease holders would like us to adopt in the present case. "48. The Supreme Court in exercise of its jurisdiction under Article 142 has the power to make such order as is necessary for doing complete justice "between the parties in any cause or matter pending before it". The very nature of the power must lead the Court to set limits for itself within which to exercise those powers and ordinarily it cannot disregard a statutory provision governing a subject, except perhaps to balance the equities between the conflicting claims of the litigating parties by "ironing out the creases" in a cause or matter befor....
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....ons reproduced herein above, it can be noticed that Hon'ble Supreme Court exercised its power under Article 32 and Article 142 to protect fundamental rights of public in order to prevent environmental degradation, i.e., the cost imposed on leaseholders to remedy the enormous wrong that has happened and to provide adequate protection for the future. 8.12.12. We note that Hyderabad bench of Tribunal in case of NMDC held that the above payment is not penal in nature, but a payment made for compensation. For the sake of convenience, we extract below the final decision rendered by Hyderabad bench of Tribunal:- The fact that the compensation is proportionate to area of illegal mining outside the leased area and that the assessee has paid the proportionate compensation for mining in the areas outside the sanctioned area allotted to it and that 10% of sum is to be transferred to SPV and the balance 10% is to be reimbursed to the respective lessees, according to us, proves that it is a payment made as 'compensation' for extra mining, without which the assessee could not have resumed its activities. Therefore, we are inclined to accept the contention of the assessee....
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....ation fund equal to net present value for diversion of forest land for non-forest purposes. The assessee paid a sum of Rs. 5,02,59,000/- to the fund and claimed the same as expenditure. The question that arose before the Tribunal was whether the amount so paid by the assessee is deductible as expenses are not? Tribunal therein noticed that an identical issue was examined in case of M/s Ramgad Minerals & Mining P Ltd (ITA No.1012/Bang/08 dated 9.4.2009) and was decided in favour of the assessee. Accordingly, the Tribunal decided this issue, with the following observations, in favour of the assessee:- "5.4 We have heard both parties and carefully perused the material on record and the judicial decisions cited and placed reliance upon. We have perused the decision of the co- ordinate bench of this Tribunal in the case of Ramgad Minerals & Mining Pvt Ltd Vs.ACIT in ITA No.1012/Bang/08 dt.9.4.2009 and find that in the cited case too a similar / identical issue was considered on the payments made towards contribution for compensatory afforestation as per the direction of the Hon'ble Apex Court when the mines are exploited on forest land. The Hon'ble Tribunal in ....
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....spondent-assessee. 4. As such, the Tribunal in the impugned order has relied upon its earlier decision in case of M/s.Ramgad Minerals and Mining Pvt.Ltd., vs. ACIT in ITA 1012(BNG)/2008 dated 9.4.2009. It has been brought to our notice by the learned counsel for respondent-assessee that the very decision of the Tribunal in case of Ramgad Minerals (supra) was carried before this Court in ITA 5021/09 and this Court has dismissed the appeal of the Revenue and it has been further stated that SLP was preferred against the aforesaid decision of this Court in case of Ramgad supra and the said SLP has also been dismissed. 5. We may record that in view of aforesaid decision as such, no substantial questions of law would arise for consideration. But even if it is to be examined, in view of the aforesaid decision that the decision of the Tribunal has been not interfered with by this Court and SLP is dismissed, the question has to be answered against the Revenue and in favour of Assessee." 8.12.17. In the present fact of case, Hon'ble Supreme Court observed large scale encroachment in forest areas and illegal mining. Hon'ble Court directed collection of such amount t....