TaxTMI 
TaxTMI 
2022 (3) TMI 608
X X X X Extracts X X X X
X X X X Extracts X X X X
....12-13, the assessee has raised two other issues mentioned below:- (a) Difference in stock valuation - Rs. 90,58,713/- (b) Addition of closing stock -- Rs. 12,75,26,801/- 3. The facts relating to the case are discussed in 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 common 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....se sale proceeds for payment of royalty, taxes etc. * Subsequently, a plea by Karnataka Iron and Steel Manufacturers Association was raised regarding shortage of supply of minerals due to suspension of mining activity, before Hon'ble Apex Court. The association also sought for a direction 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mittee (MC) constituted by Hon'ble Supreme Court. However, the quantity to be put up for e-auction, its grade, lot sizes, its base/floor price and the period of delivery will be decided/provided by the respective lease holders. It was also held that the Monitoring Committee may permit the lease holders to put up for e-auction the quantities of iron ore planned to be produced 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 pe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e assessee. The AO gave following reasoning in this regard in AY 2013-14:- (a) Entire sale proceeds as per E-auction bit sheets/invoices has to be assessed to tax as trading receipts, since retention money is part of sale proceeds only. Hence it constitutes income in the hands of the assessee. Since the assessee is following mercantile system of accounting, it cannot be taxed on receipt basis. (b) The amount retained by CEC/MC, as per directions of the Supreme Court on behalf of the assessee, which is given to the Special Purpose Vehicle (SPV) is on account of penal and other liabilities for contravention of laws. Hence it cannot be allowed u/s. 37(1) of the Act. (c) SPV established for Social economic development of the mining area is nothing but relating to Corporate Social responsibility only. Hence it is only appropriation of profits and hence it cannot be said to have been incurred for the purpose of business or earning the profits. (d) The AO placed his reliance on the following case laws:- (i) CIT vs. KCP Limited (245 ITR 421)(SC) (ii) G. Padmanabha Chettiar & Sons (182 ITR 1,5)(Mad) iii) Reform Flour Mills P Ltd....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 to SPV ac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....a. 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 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 is used is....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng 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 obs....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ought 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 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....submitted that NMDC Ltd is a public sector undertaking and further, there is no allegation of illegalities. He also submitted that the Hyderabad 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 Kolkata High Court in the case of Shyam Sel Ltd (s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n the suggestion of the learned amicus curiae. The purpose of constitution of the SPV, it may be noticed, is for taking of ameliorative and mitigative measures as 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed exploitation of the scarce mineral resources of the country. The details of the preconditions and the R & R plans have already been noticed and would not require a repetition. Suffice it would be 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....in assessment year 2009-10. The facts relating to the same are that the closing stock value as on 31.3.2009 pertaining to the assessment year 2009-10 was increased by Rs. 90,58,713/- by the A.O., vide his assessment order dated 27.12.2011. While determining total income of AY 2012-13, the assessee claimed above said amount as deduction by increasing the value of opening stock as on 1.4.2011. The assessee was constrained to increase the opening stock as on 1.4.2011, since the assessment order for AY 2009-10 was passed on 27.12.2011, i.e., subsequent to the closure of accounting years relevant to assessment years 2010-11 & 2011-12. 5.1. The A.O. did not accept the claim and accordingly added the above said amount. The Ld. CIT(A) also confirmed the same. 5.2. We heard the parties on this issue and perused the record. We notice that the A.O. has disallowed the claim by observing that the assessee should have made the claim only in assessment year 2010-11, i.e., in the year succeeding to AY 2009-10. He also observed that the assessee has not reconciled closing stock quantity variation subsequently as on 31.3.2010 & 31.3.2011. Accordingly, the A.O. observed that the value of openin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to tax in the year of sale. 6.1. The AO did not accept the explanations of the assessee. He expressed the view that the physical inspection carried on by Department of Mines on 16-08-2012 does not mean that the assessee did not produce and did not have stock to the extent of 580830 MT as on 31.3.2012. The AO also expressed the view that the shortfall in the quantity shows that the assessee has sold the stock. Accordingly, the AO took the view that the value of 580830 MT should be included in the closing stock. Accordingly, the AO valued the above said quantity at Rs. 12,75,26,801/- and accordingly increased the closing stock value, which has resulted in an addition of equal amount to the total income. The Ld. CIT(A) also confirmed the same. 6.2. The main contention of Ld. A.R. is that the dump stock does not have market value and hence it is not valued both in the opening stock and closing stock. He submitted that the assessee is required to report the dump stock also to the Department of Mines and Geology in the Annual return and hence the assessee has reported the same. He submitted that the AO has valued the dump stock and included the same in the closing stock only. Invit....