TaxTMI 
TaxTMI 
2021 (8) TMI 67
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....sed area. 3.1 to 3.3 Issue raised Issue raised N.A. 3. Sales accounted in the following year )AY 2014-15) but added as income of the year. 4.1 to 4.2 Issue raised N.A. N.A. 4. Difference in receipts as per 26AS treated as unaccounted receipts 5 Issue raised N.A. N.A. 5. Contribution to the Deputy Commissioner Government of Karnataka for Hampi Utsav 3 N.A. N.A. Issue raised. We shall adjudicate the appeal issue-wise as under. 3. Sale proceeds at 15% retained through SPV (Asst.Years 2013-2014, 2014-2015 and 2015-2016) 3.1 The assessee is into the business of mining. All the area minted by the assessee was categorized as per the Central Empowering Committee (CEC) / order of the Hon'ble Supreme Court in B Category. As per the Supreme Court order, all the mining activities in the State of Karnataka was stopped vide judgment dated 29.07.2011 in WP No.562 of 2009 dated 29.07.2011. Later CEC was constituted under the direction and supervision of the Hon'ble Supreme Court, which took control of mining, processing, production and sale of iron ore. The CEC sold the iron ore through e-Auction and retained 10% / 15% o....
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....lised towards SPV, amounting to Rs. 3,18,41,886/-. Assessee debited Rs. 16,29,36,712/- to profit and loss account, under the head SPV charges. Facts relating to this issue are as under: 7.1. Hon'ble Supreme Court in case of Samaj Parivartana Samudaya & Ors. Vs. State of Karanataka & Ors. (supra), approved the recommendation of CEC for deducting and retaining part of sale proceeds for purpose of taking various ameliorative and mitigative measures. CEC recommended retaining of 10% of sale proceeds. Hon'ble Supreme Court accepted 10% for Category "A" mines and increased deduction to 15% for Category "B" mines. These amounts were directed by Hon'ble Supreme Court to be used to implement R & R plans, for taking ameliorative and mitigative measures. During the year under consideration, amount deducted from sale proceeds as per Ld.AO was Rs. 16,29,36,712/- and Rs. 17,05,60,822/- as per the assessee. However the fact remains that the amount of Rs. 16,29,36,712/- has been included in aggregate amount of Rs. 77,71,82,153/-, which was claimed as expenditure in the original return of income and excluded from the sales revenue in the revised return of income contending that th....
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.... 27. The CEC, based on the extent of illegal mining found by the Joint Team and as appropriately modified by the CEC in its Proceeding dated 25th January, 2012 and after considering the other relevant information has classified the mining leases into three categories namely "Category-A ", "Category-B" and "Category-C". 28. The "Category-A" comprises of (a) working leases wherein no illegality/marginal illegality have been found and (b) nonworking leases wherein no marginal/illegalities have been found. The number of such leases comes to 21 & 24 respectively. 29. "Category-B" comprises of (a) mining leases wherein illegal mining by way of (i) mining pits outside the sanctioned lease areas have been found to be up to 10% of the lease areas and/ or (ii) over burden/waste dumps, outside the sanctioned lease areas have been found to be up to 15% of the lease areas and (b) leases falling on interstate boundary between Karnataka and Andhra Pradesh and for which survey sketches have not been finalized. The numbers of such leases in "Category-B" comes to 72. 30. The "Category-C" comprises of leases wherein (i) the illegal mining by way of (a) mining pits outside....
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....roceeds of the existing stock of the mining leases, after deducting: a) The penalty/compensation payable; b) Estimated cost of the implementation of the R& R Plan; and c) 10% of the sale proceeds to be retained by the Monitoring Committee for being transferred to the SPV d) The balance amount, if any, may be allowed to be disbursed to the respective lessees. (VI) In respect of the mining leases falling in "CATEGORY-C" (details are given at annexure-R-11 to this Report) it is recommended that (a) such leases should be directed to be cancelled / determined on account of these leases having been found to be involved insubstantial illegal mining outside the sanctioned lease areas (b) the entire sale proceeds of the existing stock of the iron ore of these leases should be retained by the Monitoring Committee and (c) the implementation of the R&R Plan should be at the cost of the lessee; (IX) A Special Purpose Vehicle (SPV) under the Chairmanship of Chief Secretary, Government Karnataka and with the senior officer 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 ....
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....e sale proceeds of the iron ores of the lease holders, including the 63 leaseholds' being the subject of this order. In case, the money held by the CEC/Monitoring Committee on the account of any leaseholder is sufficient to cover the payments under the aforesaid three heads, the leaseholder may, in writing, authorize. the CEC to deduct from the sale proceeds on its account the amounts under the aforesaid three heads and an undertaking to make payment of any additional amount as compensatory payment." 4.2.d. As could be seen from the above observations of the Hon'ble Supreme Court the mine owners were placed in different category based on the illegal or marginal illegal mining done by them. The CEC was established to monitor the e-auction sale of the Iron-ore belonging to the mine-owners. The CEC is authorized to retain the portion of sale proceeds of the Ores collected from successful bidders. Further, the amount retained out of sale proceeds by the CEC has to be adjusted against penalty and compensation for illegal mining depending on Category of the mine owners i.e., 10% or 15% of the amount has to be deposited under Spy "for the purpose of taking various amelior....
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....ained by the CEC/Monitoring Committee cannot be allowed as deduction in view of the specific Explanation to section 37(1) of the Act. 4.2.h. The Hon'ble Supreme Court thought on the lines of 'Corporate Social Responsibility' much before its actual introduction in the Act and wanted to improve the lives of people & environment affected by the mining activities. On this line of thought, the Apex Court wanted the CEC/MC to collect certain amount of profit from the beneficiaries of mining lease and use the same exclusively for the socio-economic development of the area / local population, infrastructure development, conservation and protection of forest, developing common facilities for transportation of iron ore (such as maintenance and widening of existing road, construction of alternate road, conveyor belt, railway siding and improving communication system, etc.), From this, it is evident that the amount recovered towards SPV is nothing but an appropriation of profits earned by the mine owners and cannot be said to have incurred for the purpose of business or earning the profits. Hence, the assessee's claim of deduction towards SPY Charges cannot be allowed.....
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....na Samudaya & Others V/s. State of Karnataka & Others has pronounced its important judgment on illegal mining in the state of Karnataka and accordingly, a Central Empowered Committee (CEC)has identified three category of mining cases, Category - A, B & C. The assessee falls under the Category-B mines, the issues pertaining to category 'B' mines is discussed. B-Category mines comprises (a) mining leases wherein illegal mining by way of (i) mining pits outside the sanctioned lease areas have been found to be upto 10% of the lease areas and/or (ii) over burden/waste dumps outside the sanctioned lease areas have been found to be upto 15% of the lease areas and (b) leases falling on interstate boundary between Karnataka and Andhra Pradesh and for which survey sketches have not been finalized. 4.5) Further, the sale of Iron Ore should be through e-auction and the same should be conducted by Monitoring Committee constituted by the CEC and the sale proceeds are to be retained / disbursed to mine owner based on certain conditions. 4.6) The Hon'ble Apex Court in its order dated 23.09.2011 has described the modalities for the sale of iron ore and has clearly ment....
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....pective lessees. 4.9) A perusal of the directions of the Supreme Court shows that the part proceeds are retained to meet the penal and other liabilities for contravention of law and therefore the said amount was retained by the CEC/Monitoring Committee. The Hon'ble Supreme Court wanted the CEC/MC to collect certain amount of profit from the beneficiaries of mining lease and use the same exclusively for the socio-economic development of the area / local population, infrastructure development, conservation and protection of forest, developing common facilities for transportation of iron ore etc. Hence, it is evident that the amount recovered towards SPV is nothing but appropriation of profits earned by the mine owners and cannot be said to have incurred for the purpose of business or earning the profits. 4.10) In view of the above, the AO was correct in adding the amount of Rs. 16,29,36,712/- under SPV Charges. Further, the entire sale proceeds are assessed as trading receipts on accrual basis keeping in view the mercantile method of accounting followed by the assessee and no deduction is allowed in respect of the amount retained for SPV for the purpose in view ....
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.... been diverted at source and cannot constitute income of the assessee. 7.7. Alternatively, he also proposed that, such receipts could be considered as business loss under Section 28 of the Act, since such proceeds were utilised by SPV towards reclamation and rehabilitation of mining areas, as per direction of Hon'ble Supreme Court. Ld.Counsel placed reliance on following decisions in support: (a) Dr. T.A. Quereshi vs. CIT (2006)(287 ITR 547)(SC) (b) CIT vs. S.N.A.S.A. Annamalai Chettiar (1972)(86 ITR 607)(SC) (c) CIT vs. S.C.Kothari (1971)(82 ITR 794)(SC) (d) CIT vs. Piara Singh (1980)(124 ITR 40)(SC) (e) CIT vs. T.C. Reddy (2013)(356 ITR 516)(AP) (f) RamachandarShivnarayan vs. CIT (1978)(111 ITR 263)(SC) (g) Bipinchand K Bhatia vs. DCIT (Tax appeal No.107 of 2004 dated 16.10.2014) (h) BadridasDaga vs. CIT (1958)(34 ITR 10)(SC) (i) Poona Electric Supply Co Ltd vs. CIT (1965)(57 ITR 521)(SC) 7.7.1. Ld.Counsel, thus, submitted that the amount deducted by MC may also be taken as business loss and hence the same is deductible u/s.28 of the Act. Ld.Counsel placed reliance on decision of Hon'ble Supreme Court in the case of Dr.T.A.Quereshi vs. CIT (Supra) and a....
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....this regard:- (a) ITO vs. Reliance Share and Stock Brokers Ltd (ITA No.274/Mum/2013) (b) CIT vs. Ajanta Pharma Ltd (2017)(85 taxmann.com 252)(Bom) (c) CIT vs. Regalia Apparels (P) Ltd (2013)(352 ITR 71)(Bom) (d) CIT vs. Vikas Chemicals (2015)(53 taxmann.com 171)(Delhi) 7.8.3. He submitted that Hon'ble Hyderabad Tribunal examined identical issue in the case of NMDC Ltd (supra) and the deductions made by MC have been allowed as business expenditure. 7.9. Ld.CIT.DR supported orders passed by authorities below. According to Ld.CIT DR, Hon'ble Supreme Court in case of Samaj Parivartana Samudaya & Ors. Vs. State of Karanataka & Ors. (supra), directed assessee to contribute 10%/15% under category 'A'/'B' towards SPV account. Referring to paragraph 10 for Catagory 'A' and paragraph 11(III) for Category 'B' at page 171-173 of decision by Hon'ble Supreme Court (supra), Ld.CIT.DR submitted that, assessee was also directed to give authorisation letter to CEC/MC for contributing such sum of sale proceeds equivalent to 10% and 15% of its iron ore sold through MC, towards SPV account, which would be utilised for rehabilitation and reclamation activities. It was submitted that, s....
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.... 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 from sale proceeds. This was one of the conditions for resuming mining operations under categories 'A' and 'B' respectively. 7.10.4. With this background, we once again refer to and rely on observations by Hon'ble Supreme Court in case of CIT vs Sitaldas Tirathdas (supra). Hon'ble Supreme Court laying down following principal referred to various 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 d....
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....enditure 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 for implementation of R&R Plans in respective sanctioned lease areas held by assessee, where illegal mining activities or which were used for illegal overburden dumps, roads, offices etc., beyond sanctioned lease area were carried out. Here, we also note that, Hon'ble Supreme Court directed CEC to refund any leftover guarantee money, after completion of implementation of R& R plan, subject to satisfaction of CEC and approval by Hon'ble Supreme Court. For this peculiar reason amount so contributed towards SPV being 10%/15% of sale proceeds, under category A/B, cannot be treated as penal in nature. 7.10.8. We note that co-ordinate Hydrabad bench of Tribunal in NMDC (supra) was the case of Category 'A' wherein it was allowed as expenditure by observing as under: Page 88 of 138 ITA No. 1054/Bang/2019 A.Y:2013-14 "2. Brief facts of the case are that the assessee-company, a Public Sector Undertakin....
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....ore, 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 may be allowed to resume the mining activity subject to the payment of penalty / compensation decided by the Court. Thus, according to the assessee, the said expenditure is nothing but a payment which was required to be made without which the assessee could not have carried on the mining activities and therefore, it is a 'business expenditure'. Since the CEC had categorised the assessee as a Category-A company and the Hon'ble Sup....
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....ult 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 is used is significant." 11. Applying this ratio to the facts of the case before us, we find from para 43 of the Hon'ble Supreme Court's order reproduced above that the condition of payment for resuming the mining activity by Categories 'A' & 'B' companies is to not to punish the companies for any violation of law but is to ensure scientific and planned exploitation of mineral resources in India. Further the Hon'ble Suprem....
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....ion 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 same para that whole SPV Expenses of 15% is not allowable. 7.8.10. Ld.AO observed that, these SPV were deducted pursuant to directions of Hon'ble Supreme Court (supra) by order dated 18/04/2013, wherein, it was directed that, sum so paid towards SPV charges should be exhaustively and exclusively used to undertake socio economic and infrastructure development, afforestation, soil and biodiversity conservation and for ensuring inclusive growth of the area surrounding mining leases. 7.8.11. Ld.AO further....
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....w 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 income, by virtue of directions of Hon'ble Supreme Court, as a precondition to resume mining operations under Category 'B'. At this juncture, we also emphasise that, but for the intervention by Hon'ble Supreme Court, assessee would not have contributed 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. 7.8.14. Hon'ble Supreme Court has been very clear regarding the types of payments that needs to be ....
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...., (b) the amount of the penalty/ compensation received/ receivable from the defaulting lessee, (c) the amount received/ receivable by the Monitoring Committee from the mining leases falling in "Category- A" and "Category-B", (d) amount received/ receivable from the sale proceeds of the confiscated material etc., may be directed to be transferred to the SPV and used exclusively for the socioeconomic development of the area/local population, infrastructure development, conservation and protection of forest, developing common facilities for transportation of iron ore (such as maintenance and widening of existing road, construction of alternate road, conveyor belt, railway siding and improving communication system, etc.). A detailed scheme in this regard may be directed to be prepared and implemented after obtaining permission of this Hon'ble Court;" 7.10.11. Hon'ble Supreme Court at 176 of its order made following observations with regard to SPV:- "By order dated 28-09-2012, this Court had constituted a Special Purpose Vehicle (for short "SPV") on the suggestion of the learned amicus curiae. The purpose of constitution of the SPV, it may be noticed, is for taking of ameliorat....
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....ure. It is ordered accordingly. 3.6 In the result, ground Nos.2.1 to 2.4 for assessment years 2013-2014 to 2015-2016 are allowed. 4. Amount retained towards SPV for mining and dumping sub-grade material outside the leased area (Asst. Years 2013-2014 and 2014-2015) 4.1 The above issue is also covered in favour of the assessee by the order of the Co-ordinate Bench of the Tribunal in the case of M/s.Veerabhadrappa Sangappa & Co. (supra). The relevant finding of the Co-ordinate Bench order reads as follow:- "8. Ground No.2.5 has been raised against the disallowance of Rs. 9,69,00,000/-, by treating it as penalty. Ld.AO observed that, for year under consideration, assessee debited sum of Rs. 9,69,00,000/- under the head, compensation for Category 'B'. It was observed that, the said amount have been deducted by MC towards penalty/compensation for various irregularities found by CEC being illegal mining pit, illegal dumping of waste, illegal encroachment of wrote and other violations by assessee. It was also noted by Ld.AO that, said amount has been retained by CEC as per directions of Hon'ble Supreme Court, out of sale proceeds for purpose of taking various ameliorative....
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....he Survey by Joint Team that you, holder of Mining Lease No.2160 in PMB range, Sandur taluk, Bellary, have illegally conducted mining operations and / or illegally dumped the waste outside the lease area and committed certain other illegalities. Accordingly, in the reports dated: 03/02/2012 and 13/03/2012 submitted to the Hon'ble Supreme Court, the Central Empowered Committee had recommended imposing a penalty of Rs. 5 Crores per hectare for illegal mining and Rs.l Crore per hectare for dumping the waste outside the lease area on you for involving yourself in the above illegal act. The Hon'ble Supreme Court in its Orders dated: 13/04/2012 and 28/09/2012 referred to at Sl.No. (2) above accepted the recommendations of the Central Powered Committee." In the circumstances, you are hereby called upon to pay immediately, by way of penalty, a total amount of Rs. 9.69 Crores for committing various irregularities such as (i) illegal mining pit in 0.46 Hectares (Rs. 2.30 Crores), (ii) illegal dumping of waste in 2.50 Hectares (Rs. 2.50 Crores), (iii) illegal approached road 4.40 Hectares (Rs. 4.40 Crores) and other violations (Rs. 0.49 Crores) in proportion to the area encroached by ....
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....ase area and committed certain other illegalities. In view of this, the DM&G has imposed certain penalty* on the assessee firm as per the recommendations of the Apex Court and further has called upon the assessee firm to made payment towards the probable expenditure by ICFRE for implementation of R & R Plan. Out of this, the assessee has claimed a deduction towards penalty imposed at Rs. Rs. 9,69,00,000/- and probable expenditure for implementation of R & R Plan Rs.l,48,97,000/- respectively, during the previous year in question. 4.3.d. The explanation offered by the assessee firm for claiming deduction of said expenditure has been perused and found not acceptable. The various case laws relied on by the assessee firm have no direct nexus to the facts of the instant case, hence, fail to give support the assessee firm's stand that the expenditure incurred is Compensatory/Compounding fee and paid as a Commercial expediency. Further, the assessee's contention that, the said expenses are in nature of Compensatory/ Compounding fee paid to regularise the pending issue and by doing so the Company is allowed to commence its business operations be treated as payment....
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....commendation of the CEC has directed to collect the amounts as penalty for violation of such law. 4.3.g. Infraction of the law is not a normal incident of business and, therefore, no expense which is paid by way of penalty for breach of the law can be said to be an amount wholly and exclusively laid for the purpose of business [Haji Aziz & Abdul Shakoor Bros. Vs. CIT (1961) 41 CTR 350 (SC)J. A payment made under a statutory obligation, because the assessee was in default could not constitute expenditure laid out for the purpose of assessee's business [Indian Aluminium Co. Ltd. Vs CIT (SC) 79 ITR 514]. 4.3.h. Further, probable expenditure for implementation of R & R Plan Rs.l,48,97,000/- claimed by the assessee firm is a provisional & probable one. Provisions are contingent liabilities which do not constitute expenditure and cannot be the subject matter of deduction even under the mercantile system of accounting. Further, it is well established fact that the assessee has carried out illegal mining over a period of time and hence, cannot be related and allowed in the year under consideration. Further, allowing such huge deduction though not only belongs to the previ....
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....I have gone through the facts of the case and the submissions of the appellant. As per the directions of the Supreme Court part proceeds are to be retained by the CEC/Monitoring Committee to meet the penal and other liabilities for contravention of law. Further, if an assessee is penalized under one Act, he cannot claim that the amount to be set off against his income under another Act, because that will be frustrating/ defeating the entire object of penalizing under the other Act. If the assessee resorts to unlawful means to augment his profits or reduce his loss, then the expenditure incurred for these unlawful activities cannot be allowed to be deducted whether the business is lawful or otherwise. Even if the entire business of the assessee is illegal and income is sought to be taxed by the Assessing Officer, the expenditure in the illegal activities is not deductible after the insertion of Explanation to Section 37(1) by the Finance Act, 1998. It has been consistently held by the Courts that fines or penalties payable for Violation of law of the land cannot be permitted as deduction under the Income-tax Act. That will be against public policy to allow the benefit of deduction u....
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....as directed to collect the amounts for violation of such law. In view of the above, the said deduction cannot be allowed which is being compensation and penalty in nature for contravention of laws. This ground is dismissed." Aggrieved by order of Ld.CIT(A), assessee is in appeal before us now. 8.4. Before us, Ld.Counsel referred to breakup of Rs. 9,69,00,000/- at page 201 of paper book: Compensation (mining pit) 0.4 6Ha Rs. 2,30,00,000 Compensation (dump, received etc, 2.50 HA) Rs. 2,50,00,000 Encroachment of road (4.40 HA) Rs. 4,40,00,000 Other category (0.49 HA) Rs. 49,00,000 8.5. Ld.Counsel submitted that payment advises issued by Department of Mines and Geology, clearly mentions that, above amounts retained by MC are towards R&R plan as compensation, and that, no where in the payment advise, the term, "penalty" is used. Ld.Counsel, therefore, emphasised that, lower authorities erred in treating said compensation as penalty. He thus submitted that the said amount ought to have been allowed as expenditure in the hands of assessee incurred for the purpose of business. 8.6. Alternatively, Ld.Counsel submitted that, sinc....
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....f 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 manner contrary to the terms of the lease or the provisions of any of the statutes, as may be. The argument advanced is that as the statutes in question contemplate a particular scheme to deal with instances of illegal mining or carrying on mining operations which is hazardous to the environment, the CEC could not have recommended the taking of any step or measure beyond what is contemplated by the statutory scheme(s) in force. It is argued that it will not be proper for this Court to act under Article 32 and to accept any of the said recommendations which are beyond the scheme(s) contemplated by the Statute(s). In other words, what is sought to be advanced on behalf of the leaseholders is that no step should be taken or direction issued by this Court which will be contrary to or in conflict with the provisions of the relevant statutes. Several judgments of this Court, which are....
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.... & R/Notice/2012- 13/11 dated 28-02-2013 issued by Department of Mines and Geology, Bangalore demanding the payment from the assessee. It is pertinent to note that the above said letter uses the expression "penalty" for these payments. Accordingly, the AO took the view that these payments are in the nature of penalty for various irregularities committed by the assessee in the mining area like illegal mining, illegal dumping of waste and other violations like encroachment etc. Ld.AO relied upon following case laws to buttress his view that the penalty is not allowable as deduction:- (a) Maddi Venkataramana& Co (P) Ltd vs. CIT (1998)(229 ITR 534)(SC) (b) Haji Azis& Abdul Shakoor Bros. Vs. CIT (1961)(41 ITR 350)(SC) (c) Indian Aluminium Co. Ltd vs. CIT (79 ITR 514)(SC) 8.12.2. Assessee claimed Rs. 9,69,00,000/- as expenditure in the original return of income and excluded the same from Sales revenue in the revised return of income contending that the same is diversion by overriding title. 8.12.3. Ld.CIT.D.R placed his reliance on certain observations made by Hon'ble Supreme Court in M/s Samaj Parivartana Samudaya and Oth. Vs.State of Karnataka & Oth.(supra). First of all, ....
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....ning operation should presently remain suspended. The survey sketches of these leases should be finalized after the interstate boundary is decided and thereafter the individual leases should be dealt with depending upon the level of the illegality found; and v) Out of the sale proceeds of the existing stock of the mining leases, after deducting : a) The penalty/compensation payable; b) Estimated cost of the implementation of the R& R Plan; and c) 10% of the sale proceeds to be retained by the Monitoring Committee for being transferred to the SPV d) The balance amount, if any, may be allowed to be disbursed to the respective lessees". 8.12.5. Hon'ble Supreme Court in para 11 at page 172 accepted the recommendation of CEC by observing as under: "11. The order of the Court dated 28.9.2012, laying down certain conditions "as the absolute first step before consideration of any resumption of mining operations by Category-'B' leaseholders" would also be required to be specifically noticed at this stage. "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....
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.... clarified that the CEC/Monitoring Committee is holding the sale proceeds of the iron ores of the leaseholders, including the 63 leaseholds being the subject of this order. In case, the money held by the CEC/Monitoring Committee on the account of any leaseholder is sufficient to cover the payments under the aforesaid three heads, the leaseholder may, in writing, authorize the CEC to deduct from the sale proceeds on its account the amounts under the aforesaid three heads and an undertaking to make payment of any additional amount as compensatory payment. On submission of such authorization and undertaking, the CEC shall retain the amounts covering the aforesaid three heads and pay to the concerned leaseholder the balance amount, if any. It is expected that the balance amount, after making the adjustments as indicated here, would be paid to the concerned leaseholder within one month from the date of submission of the authorization and the undertaking. 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 succi....
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.... devise its own procedure and issue whatever directions are considered necessary to effectuate the Fundamental Rights. The only restriction that the Court will bear in mind is that its orders or directions will not be in conflict with the provisions of any Statute. However, if the statute does not forbid a particular course of action it will be certainly open for the Court under Article 32 to issue appropriate directions..... 31. The question that has been raised on behalf of the leaseholders is whether the aforesaid provisions under the different statutes should be resorted to and the recommendations made by the CEC including closure of Category- "C" mines should not commend for acceptance of this Court. 32. In Bandhua Mukti Morcha Vs. Union of India &Ors. (1984) 3 SCC 161, this Court had the occasion to consider the nature of a proceeding under Article 32 of the Constitution which is in the following terms :- "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 ....
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....onstitution of India. In fact, these articles have been extensively discussed in the judgment in [M.C. Mehta case (2004) 12 SCC 118] which keeps the option of imposing a ban in future open." 8.12.10. After considering all these judgments rendered by earlier bench, Hon'ble Supreme Court, observed as under:- "35. The issue is not one of application of the above principles to a case of cancellation as distinguished from one of suspension. The issue is more fundamental, namely, the wisdom of the exercise of the powers under Article 32 read with Article 142 to prevent environmental degradation and thereby effectuate the Fundamental Rights under Article 21. 36. We may now take up the decisions cited on behalf of the leaseholders to contend that the power under Articles 32 and 142 ought not to be exercised in the present case and instead 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 ....
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....inst the backdrop of the Statutory schemes in question, we do not see how any of the recommendations of the CEC, if accepted, would come into conflict with any law enacted by the legislature. It is only in the above situation that the Court may consider the necessity of placing the recommendations made by the CEC on a finer balancing scale before accepting the same. We, therefore, feel uninhibited to proceed to exercise our constitutional jurisdiction to remedy the enormous wrong that has happened and to provide adequate protection for the future, as may be required." 8.12.11. Ld.Counsel, during his arguments, pointed out that the CEC used the expression "Compensation/penalty" in its recommendations. But Hon'ble Supreme Court, while accepting such recommendations used the expression "Compensation" for such payments. From the observations 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 fu....
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....e conveyor etc. iv) specification of internal roads, v) details of existing transport system and proposed improvements vi) railways siding (if feasible) vii) capacity building of personnel involved in the mining and environmental management viii) rain water harvesting" 8.12.15. We note that co-ordinate bench of Tribunal considered an identical issue in the case of Mysore Minerals Ltd vs. ACIT (ITA No.679/Bang/2010 dated 2.11.2012). In this case, the assessee was engaged in the business of mining of iron ore, other minerals and granite. In consequence to the order passed by Hon'ble Supreme Court in the case of T.N Godavarman Tirumalpad vs. UOI, the assessee was liable to pay to Compensatory afforestation 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 decide....
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.... M/s.Mysore Minerals(supra) was upheld by Hon'ble Karnataka High Court in the appeal filed by revenue against order of this Tribunal. Relevant extract of the view taken by Hon'ble High Court in CIT vs. M/s Mysore Minerals Ltd in ITA No.144/2013 dated 08/03/2017 is as undere:- "2. As such, in our view, the only question of law which may arise is, whether the payment made by way of compensation of Rs. 5,02,59,000/- by the assessee as per the direction of the Apex Court for mining lease to the Forest Department can be said as a revenue expenditure or a capital expenditure? 3. We have heard Mr.Sanmathi, learned counsel for the appellant-revenue and Mr.A.Shankar, learned counsel for the respondent-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....
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.... 9,69,00,000/- is compensatory in nature only as these funds are meant to be used for public purposes and the assessee could not have commenced its operations without paying the same, the same is allowable as revenue expenditure. We are therefore of the view that payment made as compensation is not hit by Explanation 1 to Section 37(1) and is an allowable expenditure. Accordingly this ground raised by assessee stands allowed." 4.2 In view of the Co-ordinate Bench order of the Tribunal, we hold that the amount retained towards SPV for mining and dumping sub-grade material outside the leased area is an allowable expenditure. It is ordered accordingly. 4.3 In the result, ground Nos.3.1 to 3.3 for assessment years 2013-2014 and 2014-2015 are allowed. 5. Sales accounted in Asst.Year 2014-2015, but added as income of the year. 5.1 The learned AR fairly submitted that the above issue is decided against the assessee by the Tribunal in the case of M/s.Veerabhadrappa Sangappa & Co. (supra), wherein it was held that income in respect of sales did accrue in the subject assessment year itself, and therefore, the recognition of income cannot be deferred to the subsequent ass....
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....ation. He submitted that, MC could not be considered as agent of assessee as there was no agreement between assessee and MC, for principle agent relationship to exist. Ld.Counsel submitted that, MC was acting in accordance with direction of Hon'ble Supreme Court visà- vis assessee. He also submitted that, assessee had not appointed MC to act on its behalf in order to constitute an 'Agent' under section 182 of Indian Contract Act, 1872. He thus submitted that, it is settled rule that, contract is not assignable without consent of both parties thereto, where, personal acts and qualities of one of the parties, form material and ingredient part of the contract. A.2. Ld.Counsel argued that, revenue from declared stock was not recognised during the year under consideration due to existence of uncertainty in realisation of said amount. It has been submitted that, Section 5 of the Act, manifests that, an income can be said to have accrued, only when a person has legal right to receive such income, and its recognition is on such accrual, which is tempered by section 145 read with AS-9 of ICAI. Ld.Counsel submitted that, in order to charge an income to tax, it is necessary th....
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....be recognised when there is reasonable uncertainty of its ultimate collection. Referring to AS 9, Ld.Counsel submitted that, recognition of revenue requires that it is measurable, and that at the time of sale or rendering of services, it would not be unreasonable to expect ultimate collection. He relied on AS-9, paragraph 9.1 and 9.2, where ability to assess ultimate collection with reasonable uncertainty is lacking at the time of raising any claim. He thus submitted that revenue recognition is to be postponed to the extent of uncertainty involved. In such circumstances, it was appropriate to recognise such revenue, only when it is reasonably certain that ultimate collection will be made. He referred to decision of Hon'ble Supreme Court in case of CIT vs Woodward Governor India Pvt.Ltd., reported in (2009) 312 ITR 254, wherein, Hon'ble Court held that, profits and gains of previous year are required to be computed in accordance with relevant accounting standard. Referring to decision of Hon'ble Supreme Court in case of JK industries Ltd vs UOI, reported in (2008) 297 ITR 176, Ld.Counsel submitted that, rules by which inventories are to be valued are laid down in accounting standard....
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....eipt and expenditure to be incurred is to be applied. Reference was made to decision of Hon'ble Supreme Court in CIT vs. Bilahari Investment (P) Ltd. reported in (2008) 299 ITR 1, wherein referring to concept of matching Hon'ble Court observed that: "82. Matching Concept is based on the accounting period concept. The paramount object of running a business is to earn profit. In order to ascertain the profit made by the business during a period, it is necessary that "revenues" of the period should be matched with the costs (expenses) of that period. In other words, income made by the business during a period can be measured only with the revenue earned during a period is compared with the expenditure incurred for earning that revenue. However, in cases of mergers and acquisitions, companies sometimes undertake to defer revenue expenditure over future years which brings in the concept of Deferred Tax Accounting. Therefore, today it cannot be said that the concept of accrual is limited to one year. 83. It is a principle of recognizing costs (expenses) against revenues or against the relevant time period in order to determine the periodic income. This principle is an important component....
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....te of sale by virtue of directions of Hon'ble Supreme Court in case of Samaj Parivartana Samudaya vs State of Karnataka, (supra). Merely because MC disbursed payments in subsequent financial year, would not postpone revenue recognition in the hands of assessee to subsequent years. He vehemently opposed argument of Ld.Counsel that, income received by assessee was un-ascertainable and hypothetical. Ld.CIT.DR submitted that, accrual of income must be judged on 'Principle of real income theory', and that, what is necessary to be considered is the true nature of transaction. Ld.CIT.DR submitted that, what has really accrued to assessee has to be found out and what has accrued must be considered from the point of view of real income, taking the probability or improbability of realisation in a realistic manner. He also submitted that, merely because receipt takes place of such accrued income by conduct of parties in subsequent year, income which has accrued for year under consideration, cannot be made as 'no income'. A.12. Ld.CIT.DR emphasised that, admittedly, in subsequent years, assessee received 80% of total sale proceeds from E auction carried out by MC. It has been contende....
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....ssee. Once accrual takes place and income accrues, the same cannot be defeated. Even under the mercantile system of accounting, it is only the accrual of real income which is chargeable to tax. The income should not be hypothetical income, but real income. If income is given up unilaterally by the assessee after it had accrued, it could not escape liability to tax. When income is in fact received but subsequently given up it remains the income of the recipient and taxes payable. When income is not resulted at all, there is neither accrual nor receipt of income even if there is an entry to that effect in the books of account. Mere postponing of an entry in the account books would not always supply conclusive evidence on the question whether the disputed amount has accrued to the assessee or not. Mere effort on the part of the assessee to realise the amount by sending a bill or making a claim or filing a suit for recovery would not in law make it an income which has accrued in the year in question. The transfer of the amount to the profit and loss account is bereft of any significance." A.13.5. We also refer to decision by Hon'ble Bombay High Court on concept of rea....
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....be decided/provided by the respective leaseholders. It is also noted that, MC may permit the leaseholders to put up for e-auction the quantities of iron ore planned to be produced in subsequent months. Hence, we cannot agree that, assessee was unaware regarding total quantity of iron ore sold and total sale proceeds received towards total quantities sold during the year. A.13.8. On perusal of documents placed on record, we are of the view that, assessee was aware of total quantity of iron ore sold and dispatched, total sale proceeds received towards total quantity sold during the year and value of stock that was not considered for release. This is evident from page 178, 180-181 of paper book, wherein, date of sale, for both mining leases and amount realised are placed. Under such circumstances, assessee cannot escape from incident of accrual of such income during financial year relevant to assessment year under consideration. A.13.9. There is no dispute with regard to the fact that, declared stock belongs to assessee and assessee has to recognise revenue arising on sale of such stock. We have already noted that the role of MC was to carry out the e-auction of the ....
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....e therefore do not find any force in the submissions made by Ld.Counsel that there is no necessity to assess the impugned sale proceeds during the year since it has been already offered to tax in subsequent assessment year and the exercise is tax neutral. Under Income tax Act, total income of each year is to be determined separately and hence income has to be assessed in the right assessment year. Considering totality of facts in the present case, we are of the view that, sale proceeds of assessee's stock accrued to assessee during financial year relevant to assessment year under consideration. Based on above discussions and observations, in our view, we are of opinion that, sale proceeds from disclosed stock accrued to assessee during the year under consideration and has to be considered for determining income under the head 'profits and gains from business for year under consideration. We have already noted that assessee has offered the above sale consideration on subsequent assessment years, and income tax act does not permit to assess same income twice. Hence in our view assessee may move appropriate petition before the authorities below for exclusion of above sale proceeds fro....