TaxTMI 
TaxTMI 
2021 (2) TMI 1145
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.... brief. The assessee is a partnership firm and is engaged in the business of extraction of iron ore by taking lease of lands from Government. 3.1 Before proceeding to the specific issue urged before us, it is necessary to discuss about the back ground that led to scrutiny of mining operations carried out by various lessees of mines. These details have been culled out from the order dated 18-04-2013 passed by Hon'ble Supreme Court in the same of Samaj Parivartana Samudaya & Ors vs. State of Karnataka (Writ Petition (Civil) No.562 of 2009). The decision rendered by Hon'ble Supreme Court in this case has resulted in making certain additions by the Assessing officer. Hence, it is imperative to understand and appraise the decision rendered by Hon'ble Supreme Court. 3.2 Over exploitation or rampant mining in the State of Karnataka, particularly in the district of Bellary, was engaging the attention of the State Government from time to time. Not satisfied with the investigation carried in the State of Karnataka, a NGO named M/s Samaj Parivartana Samudaya had instituted a writ petition before Hon'ble Supreme Court under Article 32 of the Constitution complaining of little or no coerc....
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....on to reopen Category 'A' mines. * Thereafter, by order dated 03/09/2012 Hon'ble Apex Court in case of Samaj Parivartana Samudaya vs state of Karnataka, reported in (2013) 8 SCC 219 approved report dated 29/08/2012 filed by CEC. Hon'ble Apex Court ordered for reopening of category 'A' mines, and vacated order dated 29/07/2011 passed in case of GOI vs. Obulapuram Mining Co. Pvt.Ltd., (supra) and order dated 26/08/2011 in case of Samaj Parivartana Samudaya vs State of Karnataka (supra). * Thereafter, by order dated 28/09/2012, CEC filed detailed report dated 03/02/2012, categorising mines into 'A', 'B' and 'C', depending on various types of violations by mining lessee. 3.4 The reports also indicated large scale encroachment into forest areas by leaseholders and ongoing mining operations in such areas without requisite statutory approval and clearances. Hence a Joint Team was constituted by Hon'ble Supreme Court by order dated 6.5.2011 to determine the boundaries of initially 117 mining leases, which number was subsequently extended to 166 by inclusion of the mines in Tumkur and Chitradurga districts. The CEC submitted its final report dated 3.2.2012, which made t....
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....ed in subsequent months. 3.7 The categorisation of mines into "A", "B" and "C" had following financial impact:- (A) From sale proceeds realised by MC on sale of iron-ore belonging to Category A mining leases, 10% shall be retained by the MC. Balance 90% shall be paid to the concerned lessees. The above said 10% shall be transferred to Special Purpose Vehicle (SPV). (B) From the sale proceeds realised by MC on sale of iron-ore belonging to Category B mining leases, following amounts shall be deducted retained by MC:- (a) 15% of sale proceeds to be transferred to SPV. (b) Compensation for illegal mining and illegal dumping computed (i) @ Rs. 5.00 crores per Ha of the area found by the Joint Team to be under illegal mining pit; and (ii) @ Rs. 1.00 crore per Ha of area for illegal mining by way of over burden dump(s), road, office etc outside the sanctioned lese area. (c) The estimated cost of Reclamation and Rehabilitation Plans (R & R plans). For this purpose, a Guarantee money for implementation of R & R plans shall be collected. Category B lessees have to deposit a Guarantee money for implementation of R & R Plans....
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....ions of the Supreme Court on behalf of the assessee, which is given to the Special Purpose Vehicle (SPV) is on account of damages and loss caused to the forest and environment by contravention of laws. The said amount cannot be allowed as deduction out of sale proceeds even after accrual of such liability which is being compensation and penal in nature for contravention of laws. The amount so retained for adjusting penalty and other liabilities is nothing but appropriation of the profit of the assessee. (c) SPV established for Social economic development of the mining area is nothing but relating to Corporate Social responsibility only. Hence it is not allowable u/s 37(1), as it was not incurred by the assessee wholly and exclusively for the purpose of business. It was retained to meet the penal and other liabilities for contravention of law and therefore, the said amount cannot be allowed as deduction in view of the specific Explanation to section 37(1) of the Act. (d) The AO placed his reliance on the following case laws:- (i) CIT vs. KCP Limited (245 ITR 421)(SC) (ii) G. PadmanabhaChettiar& Sons (182 ITR 1,5)(Mad) (iii) Reform Flour M....
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....ture 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 which has been received and essence applied. The first is a case in which the income never reaches the assessee, who, even if he were to collect it, does so, not as part of his income but for and on behalf of the person to whom it was payable." Emphasis Supplied 7.10.5. Applying, thin line of difference interpreted by Hon'ble Supreme Court to present facts, we are of the opinion that, contribution to SPV account, cannot be considered to be diversion of income. This is because, we have already held while deciding ground 2.1 and 2.2 hereinabove, that entire sale proceeds accrued to assessee, and it is only due to direction of Hon'ble Supreme Court that such amount was contributed....
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....rea. 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 showcause 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 Category-'B' company. The Hon'ble Supreme Court has clearly indicated that Category-A comprises of (i) 'working leases' wherein no illegality / marginal illegality have been found and (ii) 'non-working leases' wherein no marginal / illegalities have been found, whereas Category-B comprises of (i) mining leases wherein illegal mining is 10% to 15% of the sanctioned lease areas. However, CEC had recommended that both "A" and "B" categories m....
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.... 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 sludge, trade affluent or trade waste into the river or on open land causing pollution, which a Board has to remove essentially to control and prevent the pollution, then the amount spent by the Board, is thus, spent by encashing the bank guarantee or is adjusted thread and this exercise would fall in the realm of compensatory restoration and not a penal consequence. In gathering the meaning of the word 'penalty' in reference to a law, the context in which it i....
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.... 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, this is the objection of the Ld.AO that the said SPV is not allowable u/s 37 (1) as it was not incurred by the assessee wholly and exclusively for the purpose of business. (d) In para 4.8 of the assessment order for AY:2013-14, Ld.AO is stating this that SPV rate is 10% in category 'A' Mines but 15% in Category 'B' Mines and this extra 5% in Category 'B' Mines is for various violations and illegal mining and even after this observation, he finally held in the....
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....gations, 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 which has been received and essence applied. The first is a case in which the income never reaches the assessee, who, even if he were to collect it, does so, not as part of his income but for and on behalf of the person to whom it was payable." Emphasis Supplied 7.8.13. In the present case, we note that 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 inco....
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....bad bench of Tribunal has taken the view that these payments are not punitive in nature, but compensation for scientific exploitation of minerals. However, the ld D.R contended that these amounts have been collected from the assessees, since they have caused damage to the environment and hence it is penal in nature. 4.6 The Hyderabad bench of Tribunal has also noticed that NMDC Ltd falls under "Category A". There is no dispute about the same. However, the CEC has recommended that M/s NMDC Ltd shall be liable to deposit penalty/compensation as payable for the mining leases falling in "Category B". The said recommendation was accepted by Hon'ble Supreme Court and hence NMDC Ltd has paid compensation @ 5.00 crores & 1.00 crores and also deduction from sale proceeds was made @ 15%. In any case, the question is here is about the nature of such payments. 4.7 We notice that, in the case of NMDC Ltd (supra), Hyderabad bench of Tribunal has relied upon the decision rendered by Hon'ble Kolkatta High Court in the case of Shyam Sel Ltd (supra) and also the decision rendered in the case of State Pollution Control Board vs. Swastik Ispat (P) Ltd (supra). In both the cases, the payment made....
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....s per the "Comprehensive Environment Plans for Mining Impact Zone (CPEMIZ) around mining leases in Bellary, Chitradurga and Tumkur. By order dated 28-09-2012, the Monitoring Committee was to make available the payments received by it under different heads of receivables to the SPV" 4.9 The Hon'ble Supreme Court has observed as under in respect of Reclamation and Rehabilitation Plans (R & R Plans) at page 168:- "8. As previously noticed, the CEC in its Report dated 13.3.2012 had set out in detail the objectives of the Reclamation and Rehabilitation (R&R) plans and the guidelines for preparation of detailed R & R plans in respect of each mining lease. The origins of the idea (R & R plans) are to be found in an earlier Report of the CEC dated 28.7.2011. As the suggestions of the CEC with regard to preparations of R & R plans for each mine is crucial to scientific and planned exploitation of the mineral resources in question it will be necessary for us to notice the said objectives and the detailed guidelines which are set out below. In this connection it would be worthwhile to take note of the fact that the guidelines in question have been prepared after detailed consu....
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....e to say that such recommendations are wholesome and in the interest not only of the environment and ecology but the mining industry as a whole so as to enable the industry to run in a more organized, planned and disciplined manner. 53. FIMI was actively associated in the framing of the guidelines and the preparation of the R&R Plans. 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. In such a situation, while accepting the preconditions subject to which the Category 'A' and 'B' mines are to be reopened and the R&R plans that must be put in place for Category 'B' mines, we are of the view that the suggestions made by the CEC for reopening of Category 'A' and 'B' mines as well as the details of the R&R plans should be accepted by us, which we accordingly do. This will bring us to the most vital issue of the case, i.e., the future of the Category 'C' mines." 4.11 It can be noticed that all the amounts collected from the lessees under different categories are directed to be given to the SPV, which will in turn take v....