TaxTMI 
TaxTMI 
TaxTMI 
2021 (11) TMI 141
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.... with one another. 2.2. The Learned Assessing officer and Learned CIT(A) have erred in law and on facts in stating that the repair expenditure was not incurred wholly and exclusively for the purpose of the business without appreciating that the repair of roads would facilitate transportation of mines. 2.3. The Learned Assessing officer and Learned CIT(A) have erred in law and on facts in failing to appreciate that the Appellant has satisfied all the conditions under section 37(1) of IT Act where the amount expended by the Appellant is towards the repair of road. 2.4. The Learned Assessing Officer and Learned CIT(A) are not justified in law in failing to appreciate that payment as per statutory direction for compensating the expenditure on repair is a revenue expenditure. 2.5. The Learned Assessing Officer and Learned CIT(A) have erred in law and on facts in deeming the repair of roads as capital expenditure without appreciating that no new asset ever came into existence as a result of the said expenditure. 2.6. The Learned Assessing Officer and Learned CIT(A) are not justified in law in disallowing the expenditure of Rs. 75,00,000/- incurred by the Appellant towards repai....
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....earned CIT(A) have failed to appreciate that the forfeited sale proceeds never ever reached the Appellant directly or indirectly and therefore, the same did not accrue to the Appellant at all. 3.4 Without prejudice to the above, the Learned Assessing officer and Learned CIT(A) have failed to appreciate that the forfeiture of sale proceeds of confiscated stock as per the direction of the Honourable Supreme Court is an allowable business loss under Section 28 itself. 3.5 The Learned Assessing officer and Learned CIT(A) are not justified in adding the forfeited sales proceeds by invoking Explanation 1 to Section 37(1) when the said Explanation applies only to an expenditure and not to a loss. 3.6 Without prejudice to the above, the sale proceeds which were utilized by the Monitoring Committee towards SPV charges as per the direction of Hon'ble Supreme Court is allowable expenditure under section 37. 3.7 The Leaned Assessing Officer and Learned CIT(A) have erred in law and on fact in failing to appreciate that Appellant's lease was placed in the 'Category A of clean lease' and therefore, there is absolutely no illegality associated with the appellant's busin....
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....oresaid appeal be allowed." Similarly, the grounds raised by the revenue in its appeal are as under: "1. The order of the learned Commissioner of Income-tax (Appeals) is opposed to law and facts of the case. 2. In the facts and circumstances of the case, the Id. CIT(A), has erred in treating the legal expenses incurred "to protect the lease, for defending the claim made against the assessee by third parties" as revenue expenditure. The said expenditure was incurred to protect and defend the lease "a source of business" and not for carrying on the business as contended by the business. The legal expenditure was incurred for "protecting source of business" and not for "protecting or defending business interest" resulting in expenditure to P&L account. Therefore, the said expenditure is clearly in the nature of capital expenditure. 3. On the same issue pertaining to AYs.2008-09 and 2009-10 in the case of the assessee, appeals are still pending before the Hon'ble High Court of Karnataka. 4. Any other facts and grounds of the case which may arise during the hearing." Brief facts of the case are as under. 2. The assessee is an individual, engaged in the business of extract....
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.... for A.Y. 2013-14, wherein an identical expenditure has been allowed by observing as under: "10. Ground No.3 is in respect of disallowance of Rs. 31,27,668/- expended towards Corporate Social responsibility. 10.1. Ld.AO noted that assessee has claimed deduction of Rs. 31,27,668/- as expenditure under section 37(1). Assessee submitted that it had made such payment in view of complying the directions of government of Karnataka towards payment of school fees of students in providing of books to the students and hence the expenditure incurred is not of capital or personal in nature. 10.2. Ld.AO disallowed the said sum by holding that it was not incurred for purposes of business. He placed reliance upon decision of Hon'ble Supreme Court in case of Indian Molasses Co. (P) Ltd vs CIT reported in 37 ITR 66 and decision of Hon'ble Karnataka High Court in case of CIT vs Infosys Technologies Ltd., reported in reported in 203-TOIL-507-High Court-Kar-IT. 10.3. On an appeal before Ld.CIT(A), observations of Ld.AO was upheld. 10.4. Aggrieved by the order of Ld.CIT(A), assessee is in appeal before us now.. 10.4.1. Ld.Counsel placed reliance on page 290 of paper book, wherein, Deputy Co....
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.... "8. It is not in dispute that an MOU came to be entered into between appellants and the Government of Karnataka, represented by jurisdictional Deputy Commissioner on 02.07.2010, a copy of which has been made available for our perusal. It would clearly indicate on account of unprecedented floods and abnormal rain which severely ravaged the North Interior Karnataka during last week of September and first week of October, 2009, which claimed more than 226 human lives and loss of nearly 8000 head of cattle, flattened about 5.41 lakhs houses and destroyed standing crops in about 25 lakh hectares of land huge destruction of infrastructure, Government of Karnataka which was facing an undaunted task of rehabilitating the persons who were in destitute and to restore the normalcy for nearly about 7.2 lakh people and to build 5.41 lakhs houses spread over 12 affected districts, an appeal came to be made by then Hon'ble Chief Minister to all to lend their hands for restoring normalcy. .......... 13. A plain reading of Section 37 would also indicate that emphasis is on the expression "wholly and exclusively for the purposes of the business or profession". These two expressions namely....
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....s clear from the case of Mysore Kirloskar Ltd, the expenditure claimed need not be necessarily spent by the assessee. It might be incurred voluntarily and without any necessity, but it must be for promoting the business. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under Section 37(1) of the Act, if it satisfies otherwise the tests laid down by law. Similarly, the words 'for the purpose of business' used in Section 37(1) of the Act, should not be limited to the meaning of earning profit alone. Business expediency or commercial expediency may require providing facilities like schools, hospitals, etc., for the employees or their children or for the children of the ex- employees. The employees of today may become the ex-employees tomorrow. Any expenditure laid out or expended for their benefit, if it satisfied the other requirements, must be allowed as deduction under Section 37(1) of the Act. Expenditure primarily denotes the idea of spending or paying out or away. It is something which is gone irretrievably, but should not be in respect of an unascertained li....
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....nt had been made for the purpose of assessee's business." ..................... 28. In the light of the analysis of the case laws above referred to, it cannot be gain said by the revenue that contribution made by an assessee to a public welfare cause is not directly connected or related with the carrying on of the assessee's business. As to whether such activity undertaken and discharged by the assessee would benefit to the assessee's business has to be examined in the light of the observations made by us herein above. Tribunal committed a serious error in arriving at a conclusion that MOU entered into between the assessee and the Government of Karnataka is opposed to public policy and void under Section 23 of the Contract Act. In fact, Hon'ble Apex Court in case of SRI VENKATA SATHYANARAYANA RICE MILL CONTRACTORS COMPANY's case referred to herein supra has held that where a donation, whether voluntary or at the instance of the authorities concerned, when made to a Chief Ministers Drought Relief Fund or a District Welfare Fund established by the District Collector or any other fund for the benefit of the public and with a view to secure benefit to the assess....
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....ee accept the claim. In other words, assessing officer would be required to scrutinise and examine as to whether said deduction claimed for having incurred the expenditure has been incurred and only on being satisfied that expenditure so incurred is relatable to the work undertaken by the assessee namely, only on nexus being established, assessing officer would be required to allow such expenditure under Section 37(1) of the Act and not otherwise. 31. For the reasons afore stated, we are of the considered view that substantial question law formulated herein is to be answered in the negative i.e., against the revenue and in favour of the assessee." 10.5.3. In the instant case also, the assessee has contributed funds at the specific request of local administration, which is meant to be used for the benefit of public. As observed in the above said case, the assessee would also be required to approach the appropriate Government and its authorities for grant of permits, licenses. Hence it is a prudent decision of the assessee to oblige to the appeal made by the local administration and incurred the expenses for public purposes. Hence the assessee has incurred expenses not only on ac....
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....) * 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 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 variou....
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....ntributed 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 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 p....
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....ure 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 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, ac....
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....ld 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 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 Supr....
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....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 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 18/04/201....
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....ature 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 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 contrib....
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....ay 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 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 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.). 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 or....
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....ands of assessee. Accordingly we allow grounds 2.3.8-2.3.9 and dismiss grounds 2.3.1- 2.3.7." 3.2 The Ld.AR submitted that the facts are identical and circumstances under which the disallowance was made by the Ld.AO are similar. We therefore, respectfully following the view taken hereinabove direct the Ld.AO to allow the same as business expenditure for year under consideration. Accordingly we allow ground no. 3.6 raised by the assessee. Therefore alternative grounds raised does not arise and the same is dismissed. Ground No. 3 stands partly allowed. Revenue's appeal: 4. All grounds raised by the revenue is against the disallowance being deleted in respect of the legal fees incurred by assessee to protect and defend the claim made against the assessee by third parties. 4.1 It has been submitted that assessee incurred expenditure of Rs. 9,41,07,014/- towards legal expenditure. The Ld.AO treated the said expenditure as capital in nature and disallowed the same. 4.2 The Ld.CIT(A) following the order passed by the Tribunal in the case of assessee's brother, treated the expenditure to be revenue in nature, with the direction to the Ld.AO to verify, whether TDS was deducted and a....