TMI Blog2021 (2) TMI 130X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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. - we are of opinion that payment made as compensation is allowable expenditure for year under consideration. - Assessee appeal allowed. - ITA No.522/Bang/2019 - - - Dated:- 1-2-2021 - Shri. Chandra Poojari, Accountant Member And Smt. Beena Pillai, Judicial Member For the Appellant : Shri Laxminiwas Sharma, C.A For the Respondent : Smt. Muzaffar Hussain, CIT (DR) ORDER PER BEENA PILLAI, JUDICIAL MEMBER: Present appeal is filed by the assessee against order passed by Ld.CIT(A), Gulbarga dated 24.01.2019 on following grounds of appeal: Ground of appeal Tax effect relating to each Ground of appeal 1 The order of the learned Commissioner of Income Tax (Appeals), Gulbarga [CIT(A)] is erroneous both on facts and in law to the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... correctly estimated and hence it is an ascertained liability which was already retained by monitoring committee. 8 For these and any other grounds which may be raised on or before hearing of the appeal. Total Tax effect ₹ 7,14,26,482/- Brief facts of the case are as under: 2. Assessee is a partnership firm and is into the business of extraction of iron ore processing and iron ore trading . For year under consideration assessee filed its return of income on 30/09/2013 declaring total loss of ₹ 7,60,04,425/-. The case of assessee was selected for scrutiny and notices under section 143(2) and 142(1) were issued to assessee. In response to the statutory notices, representatives of assessee appeared before Ld.AO and filed details called for. 2.1. Ld.AO observed that the total income declared by assessee includes income from mining activity that is trading in iron ore, transportation and hire charges, loading charges, income and sale of wind power. The return was selected for scrutiny and statutory notices were issued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 350 (SC), Indian Aluminium Co. Ltd. Vs. CIT, 79 ITR 514 (SC) and Maddi Venkatraman Co. (P) Ltd. Vs. CIT, 229 ITR 534 (SC). 4.1 On the second issue Ld.CIT(A) , upheld he addition by LD.AO. Ld.AIT(A) held that, no where in the Income Tax Act, particularly such nature of expenditure is allowable under section 37. The Ld.CIT(A) taking recourse under Explanation 1 to Section 37, upheld the disallowance being penalty for breach of law. 6. Aggrieved by the order of Ld.CIT(A) assessee is in appeal before us now for both years under consideration. 7. At the outset, the Ld.AR submitted that Ground No.1 is general in nature and Grounds 4-8 are in relation to the disallowance made. The Ld.AR submitted that only two disallowance were made by the Ld.AO, pertaining to mining activity carried on by assessee for year under consideration. One is SPV contribution by the Monitoring Committee out of sale proceeds and Compensation paid as per direction of Hon ble Supreme Court. He submitted that contribution to SPV account are recurring in nature to assessee, and that the assessee has to contribute to SPV against every sale as per the scheme approved by Hon ble Supreme Court. Ld.AR regardi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Vs.ACIT in ITA No.1270 1271/Bang/2019 by order dsted 04/11/2020 and M/s.Veerabhadrappa Sangapa Co. Vs. ACIT in ITA no.1054/Bang/2019 by order dated 08/12/2020. 7.7. The Ld.CIT.DR supported orders of the lower authorities. About the decision of Hon ble Hydrabad Tribunal, cited by Ld.AR in the case of NMDC Ltd. Vs. ACIT (Supra), it was submitted that in that case, the assessee was in A category and therefore, the decision is not applicable in the present facts of case. He placed reliance on various observations of Hon ble Supreme Court emphasising that the SPV contributions are basically in the nature of penalty which are to be disallowed under explanation to section 37 (1) of the Act. 7.8. We have considered rival submissions of both sides in light of records placed before us. We note that this issue stands squarely covered by decisions of coordinate bench of this Tribunal in case of M/s.Ramgad Minerals Mining Ltd Vs. ACIT in ITA No.1270 1271/Bang/2019 by order dated 04/11/2020 and M/s.Veerabhadrappa Sangapa Co. Vs. ACIT in ITA no.1054/Bang/2019 by order dated 08/12/2020. We refer to following observation by this Tribunal in case of M/s.Veerabhadrappa Sangapa Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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: 2. Brief facts of the case are that the assessee-company, a Public Sector Undertaking, engaged in the business of 'mining of iron ore diamonds; and generation and sale of wind power', filed its return of income for the relevant Assessment Years 2013-14 and 2014-15 both under the normal provisions as well as u/s 115JB of the Act for the relevant AYs. During the assessment proceedings u/s 143(3) of the Act, the A.O. observed that the assessee-company is carrying out mining activity in India and particularly in Karnataka and that the Hon'ble Supreme Court of India took note of the large scale illegal mining activity carried on by various companies in Karnataka at the cost or detriment of environment and delivered their judgment on 18.04.2013 levying appropriate charges on the leaseholders. A.O. also observed that the Hon'ble Supreme Court, based on the extent of illegal mining, classified the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Supreme Court has accepted the said categorization, there would have been marginal illegalities committed by the assessee and the compensation / penalty as directed by the Hon'ble Supreme Court is only to compensate the Government for the loss of revenue from such mining or marginal illegalities and not as a penalty. Though the nomenclature given is penalty it is not for infraction or violation of any law to hold it to be punitive in nature, as presumed by the Assessing Officer. Learned Counsel for the Assessee placed reliance on various case law, particularly the decision of the Coordinate Bench of the ITAT, Kolkata in the case of Essel Mining Industries Ltd vs. Addl. CIT (ITA No. 352/Kol/2011 and others, dated 20.05.2016); ACIT vs. Freegade Co. Ltd (ITA No.934/Kol/2009, dated 05.08.2011) and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... io 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 Supreme Court had directed as under:- (X) Out of the 20% of sale proceeds retained by the Monitoring Committee in respect of the cleared mining leases falling in Category- A , 10% of the sale proceeds may be transferred to the SPV while the balance 10% of the sale proceeds may be reimbursed to the respective lessees. In respect of the mining leases falling in Category-B , after deducting the penalty / compensation, the estimated cost of the implementation of the R R Plan, and 10% of the sale proceeds to be retained for being transferred to the SPV, the balance amount, if any may be reimbursed to the respective lessees; The fact that the compensation is proportionate to area of illegal mining outside the leased area and that the assessee has paid the proportionate compensa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 observed that these payments are nothing but appropriation of profits earned by assessee that cannot be said to have incurred for purpose of business or earning profits. Accordingly, entire amount adjusted towards SPV was disallowed by Ld.AO. Ld.AO was of opinion that entire sale proceeds as per E auction bid Sheets/invoices were to be assessed as trading receipts. The amount retained by CEC/monitoring committee as per directions of Hon ble Supreme Court, on behalf of assessee for SPV purposes, was on account of damages and loss caused to environment due to contravention of law, and therefore, cannot be allowed as deduction out of sale proceeds, even after accrual of such liability. Ld.AO was of opinion that, even in Category A mines, there was marginal ill ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 recovered from lessee s under Category B , from the sale proceeds as well as otherwise. All the payments form part of R R plan for recouping and rehabilitating the environment. Certain payments are onetime payment and some others are recurring depending upon the sale of iron ore sold in the name of each licensee or depending on the need for rehabilitation. 7.8.15. In our view, contributing 15% to SPV account on account of Category B , 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, all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 7.10.12. It is noticed that amounts collected from assessee are directed to be given to the SPV, which will in turn take various types of ameliorative and mitigative steps 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. Under these set of facts, it cannot be said that these amounts are penal in nature. We notice that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of coordinate bench of this Tribunal in case of M/s.Veerabhadrappa Sangapa Co. Vs. ACIT in ITA no.1054/Bang/2019 by order dated 08/12/2020, wherein on identical facts it has been held as expenditure allowable under section 37 of the Act. 8.3 On the contrary the Ld.CIT(DR) relied observations of Hon ble Supreme Court (Supra) and orders passed by the Ld.AO/CIT(A). 8.4 On this issue this Tribunal observed and held as under: 8.12 . We have perused submissions advanced by both sides, in light of records placed before us. 8.12.1. Ld.AO took the view that these payments are penal in nature as they have been levied for contravention of laws by way of damages caused to forest and environment. Ld.AO referred to the letter F.No.DMG/R 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 viol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a. of the area found by the Joint Team to be under illegal mining pit; and b) For illegal mining by way of over burden dump(s) road, office, etc. outside the sanctioned lease area, the compensation/ penalty may be imposed @ ₹ 1.00 crores (Rs. One Crores only) for per ha. of the area found to be under illegal over burden dump etc. iii) Mining operation may be allowed to be undertaken after (a) the implementation of the R R Plan is physically undertaken and is found to be satisfactory based on the pre-determined parameters, (b) penalty/ compensation as decided by this Hon ble Court is deposited and (c) the conditions as applicable in respect of Category-A leases are fulfilled/followed; iv) In respect of the seven mining leases located on/nearby the interstate boundary, the mining 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 payab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Secretary, CEC shall co-opt two or three officers from the State Government. The Committee shall submit its report on the aforesaid issue through the CEC to this Court within three months from today. The final determination so made, on being approved by the Court, shall be payable by each of the leaseholders. 8.12.6. Hon ble Supreme Court further directed as under( page 173 clause): III.. In addition to the above, each leaseholder must pay a sum equivalent to 15% of the sale proceeds of its iron ore sold through the Monitoring Committee as per the earlier orders of this Court. In this regard, it may be stated that though the amicus suggests the payment @ 10% of the sale proceeds, having regard to the overall facts and circumstances of the case, we have enhanced this payment to 15% of the sale proceeds. Here it needs to be 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 lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to or in conflict with the provisions of the relevant statutes. Several judgments of this Court, which are perceived to be precedents in support of the proposition advanced, have been cited in the course of arguments made. 29. According to Shri Divan (Amicus Curiae), the present is a case of mass tort resulting in the abridgment of the fundamental rights of a large number of citizens for enforcement of which the writ petition has been filed under Article 32. Shri Divan has submitted, by relying on several decisions of this Court, that in a situation where the Court is called upon to enforce the fundamental rights and that too of an indeterminate number of citizens there can be no limitations on the power of Court. It is the satisfaction of the Court that alone would be material. Once such satisfaction is reached, the Court will be free to 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... granted, requisite clearances for carrying out mining operations were not obtained which have resulted in land and environmental degradation. Despite such breaches, approvals had been granted for subsequent slots because in the past the authorities have not taken into account the macro effect of such wide-scale land and environmental degradation caused by the absence of remedial measures (including rehabilitation plan). Time has now come, therefore, to suspend mining in the above area till statutory provisions for restoration and reclamation are duly complied with, particularly in cases where pits/quarries have been left abandoned. 45. Environment and ecology are national assets. They are subject to intergenerational equity. Time has now come to suspend all mining in the above area on sustainable development principle which is part of Articles 21, 48-A and 51-A(g) of the Constitution 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed when their exercise may come directly in conflict with what has been expressly provided for in a statute dealing expressly with the subject. (Emphasis supplied) 37. Even if the above observations is understood to be laying down a note of caution, the same would be a qualified one and can have no application in a case of mass tort as has been occasioned in the present case. The mechanism provided by any of the Statutes in question would neither be effective nor efficacious to deal with the extraordinary situation that has arisen on account of the large scale illegalities committed in the operation of the mines in question resulting in grave and irreparable loss to the forest wealth of the country besides the colossal loss caused to the national exchequer. The situation being extraordinary the remedy, indeed, must also be extraordinary. Considered against 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mining affected areas. 8.12.14. We note that Hon ble Supreme Court directed that the funds so collected to be transferred to SPV. These funds were to be used for R R Plans, which inter alia, would include following measures:- (Page 171 of Hon ble Supreme Court s order) E) SOIL AND MOISTURE CONSERVATIONS, AFFORESTATION AND OTHER MEASURES 26. The R R plan would inter alia provide for: i) broad design/specification for: b) retaining walls c) check dams d) gully plugs and/or culverts (if required) e) geo textile/geo matting of dumps f) afforestation in the safety zones g) afforestation in peripheral area, road side, over burden dumps and other areas ii) dust suppression measures at/for loading, unloading and transfer points, internal roads, mineral stacks etc. iii) covered conveyor belts (if feasible) such as down hill conveyor, pipe 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore at no point of time could it be said that the assessee had incurred a capital expenditure giving the assessee a benefit of enduring nature for the purpose of earning segmented income to render the same to income tax. In other words, the authorities below have not pointed out the income generated against the purported deferred Revenue expenditure so proposed by them in their impugned orders. The amount was incurred as a Revenue expenditure and is directed tobe allowed in the year it has been incurred. Respectfully following the decision of the co-ordinate bench of the Bangalore Tribunal, in the case of Ramgad Minerals Mining P. Ltd. (supra), we hold that the entire expenditure of ₹ 5,02,59,000 incurred by the assessee of net present value to CAMPA in the relevant period are to be allowed as revenue expenditure for Assessment Year 2004-05. 8.12.16. Above decision of this Tribunal in case of 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: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 1 to sec.37(1) refers to any expenditure incurred by the assessee for any purposes which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. A careful perusal of the above said provision would show that the purpose of expenditure should be an offence or prohibited by law. In the instant cases, the purpose of payments is for R R plans and the same cannot be considered as payment for the purposes, which is an offence or which is prohibited by law. Hence Explanation 1 to section 37 is not applicable to these payments. 8.12.19. Respectfully following Hyderabad bench of Tribunal in case of NMDC Ltd (supra) and Bangalore Tribunal M/s Mysore Minerals Ltd (supra) which has been upheld by Hon'ble Karnataka High Court, the payment of ₹ 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 compensati ..... X X X X Extracts X X X X X X X X Extracts X X X X
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