2020 (2) TMI 984 - AT - Income Tax

Disallowance of expenditure toward Special Purpose Vehicle u/s 37 - HELD THAT - As decided in own case 2018 (10) TMI 1120 - ITAT AHMEDABAD compensation is proportionate to area of illegal mining outside the leased area and that the assessee has paid the proportionate compensation for mining in the areas outside the sanctioned area allotted to it and that 10% of sum is to be transferred to SPV and the balance 10% is to be reimbursed to the respective lessees, according to us, proves that it is a payment made as compensation for extra mining, without which the assessee could not have resumed its activities. Therefore, we are inclined to accept the contention of the assessee that it is compensatory in nature and is a business expenditure and is allowable u/s 37(1) of the Act. Addition made towards mine closure obligation - ascertained liability OR not ? - HELD THAT - As decided in own case 2017 (5) TMI 1714 - ITAT HYDERABAD Mine closure obligation is not a contingent liability but an ascertained liability. Since the quantum of such ascertained liability has to be determined year-wise, we direct the assessee to furnish the relevant data to the Assessing Officer towards mines closure obligation. The Assessing Officer shall verify such data and recompute the disallowance, if any, warranted, in accordance with law and after giving reasonable opportunity of hearing to the assessee. Decided against revenue

Summary

Issues Involved:
1. Disallowance of expenditure towards Special Purpose Vehicle (SPV) under Section 37 of the Income Tax Act.
2. Disallowance of expenditure towards mine closure obligation as contingent liability.

Detailed Analysis:

1. Disallowance of Expenditure towards Special Purpose Vehicle (SPV):

The primary issue was whether the expenditure towards the Special Purpose Vehicle (SPV) mandated by the Supreme Court was punitive in nature and thus disallowable under Section 37 of the Income Tax Act. The assessee company, engaged in mining activities, was categorized under Category-B by the Supreme Court, which directed it to pay 15% of its iron ore sale proceeds as penalty/compensation for illegal mining activities. The Assessing Officer (AO) disallowed this expenditure, considering it punitive.

However, the CIT (A) allowed the expenditure, following previous ITAT orders for the assessee’s earlier assessment years. The ITAT upheld the CIT (A)’s decision, referencing the Supreme Court's directions and the Central Empowered Committee (CEC) report, which categorized the mines into Categories A, B, and C based on the extent of illegal mining. The ITAT noted that the payment was compensatory for the government’s loss of revenue due to marginal illegalities and not punitive for any legal infraction. The Tribunal cited various case laws, including the decision of the Hon’ble Calcutta High Court in Shyam Sel Ltd vs. DCIT, which differentiated between compensatory payments and penalties. Consequently, the ITAT concluded that the expenditure was a business expenditure allowable under Section 37(1) of the Act.

2. Disallowance of Expenditure towards Mine Closure Obligation:

The second issue involved the disallowance of ?7.79 crores towards mine closure obligation, which the AO considered a contingent liability. The CIT (A) deleted this addition, following the ITAT’s decisions in the assessee’s previous assessment years. The ITAT reaffirmed this stance, referencing its earlier judgments where it held that mine closure obligations are ascertained liabilities, not contingent ones.

The Tribunal referred to its decision for the A.Y 2009-10, where it was established that provisions for mine closure obligations, even if actual expenditure occurs later, are allowable deductions. The ITAT directed that the quantum of such liabilities should be determined year-wise, and the assessee should furnish relevant data to the AO for verification. The Tribunal emphasized that the mine closure obligation is not a contingent liability but an ascertained one, necessary for the business's ongoing operations.

Conclusion:

The ITAT dismissed the Revenue’s appeal, upholding the CIT (A)’s order on both issues. The Tribunal concluded that the expenditure towards the SPV was compensatory and allowable under Section 37(1) of the Act. It also reaffirmed that mine closure obligations are ascertained liabilities, not contingent ones, and thus allowable. The ITAT’s decision was consistent with its previous rulings in the assessee’s own cases for earlier assessment years.