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TMI Blog2021 (2) TMI 130X X X X Extracts X X X X X X X X Extracts X X X X ..... ness and hence allowable as deduction u/s 37 of the Income Tax Act, 1961. Rs. 79,26,982/- 3 The learned CIT(A) erred in confirming the disallowance of Rs. 20,55,00,000/- (being compensatory payment made by assessee/retained from the sale proceeds by monitoring committee on the directions of Supreme Court for mining and dumping outside lease area) made by assessing officer by holding it as penalty ignoring that Hon'ble Supreme Court itself has termed this as "Compensatory Payment". Rs. 6,34,99,500/- 4 The learned CIT(A) erred in confirming that the payments are made for violation of law ignoring that such payment is made in order to fulfil the conditions recommended by CEC and accepted by Supreme Court for resuming and continuing the mining operations i.e. business of the assesse. 5 The learned CIT(A) erred in ignoring that the hon'ble Supreme Court has held that "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" and since these payments are made only to comply 6 The learned CIT(A) and AO erre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ections of Hon'ble Supreme Court out of sale proceeds for purpose of taking various ameliorative and mitigative measures as compensatory payment. Ld.AO after calling for various explanations/submissions from assessee held the said amount as not allowable as per Explanation to section 37 (1) of the Act. 3. Second grievance of the assessee is regarding disallowance of compensation of Rs. 20,55,00,000/-. Assessee had debited to P & L Account Rs. 20,55,00,000/- under the head deductions from e- Auction account(as per supreme Court order). The said amount was deducted by Monitoring Committee towards compensation for various irregularities found by CEC in mining area of assessee being illegal pits(Rs. 17.15 crores) and illegal dumping waste(Rs. 3.40Crores). The said amount was retained by monitoring committee as per the directions of Hon'ble Supreme Court out of sale proceeds. Ld.AO disallowed the same by holding that penalties paid for violating laws in course of conducting business cannot be regarded as deductible expenditure as assessee is expected to carry business in accordance with law. 4. Aggrieved by additions made by Ld.AO assessee preferred appeal before Ld.CIT(A), who upheld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow and submitted that Hon'ble Supreme court in 'A' Category Mines, directed contribution of 10% out of e auction sales towards SPV and in Category 'B' mines the contribution was to the extent of 15% of e auction sales. The Ld.AR submitted that, SPV expenses are for socio economic development of the mining area. He further submitted that the Ld.AO invoked Explanation to section 37 (1) of Act. 7.5. The Ld.AR relied on decision of Hon'ble Hydrabad Tribunal in case of NMDC Ltd. Vs. ACIT as reported in 175 ITD 332. Our attention was drawn to paras 9 to 11 of the Tribunal's order. He pointed out that in Para 10 of order, Hon'ble Hydrabad Tribunal noted that assessee therein was classified as 'A' Category Mine and in para 11, it is held by the Tribunal that 10% of sale proceeds being SPV in 'A' category mine is was to be contributed without which, assessee therein could not have resumed its activities and therefore is a 'business expenditure' and is allowable u/s 37(1) of Income tax Act. He submitted that the only difference in percentage of SPV contribution, which is 15% of sale proceeds in 'B' Category as against 10% of sale proceeds in 'A' Category. The Ld.AR submitted that, it does n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pport of disallowing the claim of expenditure relied on following decisions: * CIT vs.KCP Ltd. reported in 245 ITR 421(SC) * G.Padnabha Chettiyar & Sons vs.CIT reported in 182 ITR 1(Mad) * ReformFlour Mills Pvt.Ltd Vs.CIT reported in 132 ITR 184,196(Cal) * 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 cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Parivartana Samudaya & Ors. Vs. State of Karanataka & Ors. (supra), as a precondition to resume mining operations under Category 'A and 'B'. At this juncture we also emphasise that, but for the intervention by Hon'ble Supreme Court, assessee would not have contributed 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 C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion for the Special Purpose Vehicle and the sum of Rs. 68.66 Crs towards penalty / compensation for encroachment of the mining area beyond the sanctioned / leased area. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act. For coming to this conclusion, Hon'ble High Court has also considered the judgment of the Hon'ble National Green Tribunal in the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SPV for assessment year 2013-14 and 2014-15; and issue in respect of R&R expenses incurred during 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 assessee and the fact that, assessee was obliged to part with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich is incorporated in Paragraph 7 at Page 164 to 171 as under: "(IX) A Special Purpose Vehicle (SPV) under the Chairmanship of Chief Secretary, Government Karnataka and with the senior officers 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 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 altern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f sale proceeds, under category B, is to be allowable expenditure for year under consideration. Accordingly Ground No. 2 raised by assessee stands allowed. 8. Ground No.3 is in respect of disallowance of Rs. 20,55,00,000/- by hold to be penal in nature. Before us, the Ld.AR referred to breakup of Rs. 20,55,00,000/- at page 109 of paper book: Compensation (mining pit) 3.43Ha Rs. 17,15,00,000 Compensation (dump, received etc, 3.43 Ha) Rs. 3,40,00,000 Additional Other area(4.96 Ha) Rs. 4,96,00,000 Other category (1.51 Ha) Rs. 1,51,00,000 8.1. The Ld.AR submitted that, payment advises issued by Department of Mines and Geology, clearly mentions that, above amounts retained by the MC are towards R&R plan as compensation, and that, no where in the payment advise, the term, "penalty" is used. The Ld.AR, 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. 8.2. In respect of this issue, assessee relied on decision of coordinate bench of this Tribunal in case of M/s.Veerabhadrappa Sangapa &Co. Vs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "(V) In respect of the mining leases falling in "CATEGORYB" (details given at Annexure-R-10 to this Report) it is recommended that: i) the R&R Plan, under preparation by the ICFRE, after incorporating the appropriate changes as per the directions of this Hon'ble Court, should be implemented in a time bound manner by the respective lessees at his cost. In the event of his failure to do so or if the quality and/or the progress of the implementation of the R&R Plan is found to be unsatisfactory by the Monitoring Committee or by the designated officer(s) of the State of Karnataka, the same should be implemented by the State of Karnataka through appropriate agency(ies) and at the cost of the lessee; ii) for carrying out the illegal mining outside the lease area, exemplary compensation/ penalty may be imposed on the lessee. It is recommended that: a) For illegal mining by way of mining pits outside the leases area, as found by the Joint Team, the compensation/ penalty may be imposed at the rate of Rs. 5.00 crore (Rs. Five Crore only) for per ha. 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, o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llegal use of the land for overburden dumps, roads, offices, etc. Each leaseholder, besides making payment as directed above, must also give an undertaking to the CEC for payment of the additional amounts, if held liable on the basis of the final determination. At the same time, we direct for the constitution of a Committee to determine the amount of compensatory payment to be made by each of the leaseholders having regard to the value of the ore illegally extracted from forest/non-forest land falling within or outside the sanctioned lease area and the profit made from such illegal extraction and the resultant damage caused to the environment and the ecology of the area. The Committee shall consist of experts/officers nominated each by the Ministry of Mines and the Ministry of Environment and Forests. The convener of the Committee will be the Member Secretary of the CEC. The two members nominated by the Ministry of Mines and the Ministry of Environment and Forests along with the Member 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 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt: 27. On the above issue the short and precise argument on behalf 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. 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 perceived to be precedents in support of the proposition advanced, have been cited in the course of arguments made. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vided for by this Constitution." 33. In M.C. Mehta Vs. Union of India &Ors. (1987) 1 SCC 395, this Court not only reiterated the view adopted in Bandhua Mukti Morcha (supra) but also held that the power under Article 32 would be both injunctive as well as remedial and the power to grant remedial relief, naturally, would extend to a wide range of situations and cannot be put in a straight jacket formula. 8.12.9. In the case of M C Mehta vs. Union of India (2009)(6 SCC), it was contended that Hon'ble Supreme Court cannot exercise powers under Article 142 of the Constitution when specific provisions are made under various forest and environmental laws dealing with the manner and procedure for cancellation/determination of mining leases. This argument was rejected by Hon'ble Supreme Court with the following observations:- "44. We find no merit in the above arguments. As stated above, in the past when mining leases were 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithin which to exercise those powers and ordinarily it cannot disregard a statutory provision governing a subject, except perhaps to balance the equities between the conflicting claims of the litigating parties by "ironing out the creases" in a cause or matter before it. Indeed this Court is not a court of restricted jurisdiction of only dispute-settling. It is well recognised and established that this Court has always been a law-maker and its role travels beyond merely dispute-settling. It is a "problem-solver in the nebulous areas" [see K. Veeraswami v. Union of India (1991) 3 SCC 55)] but the substantive statutory provisions dealing with the subject-matter of a given case cannot be altogether ignored by this Court, while making an order under Article 142. Indeed, these constitutional powers cannot, in any way, be controlled by any statutory provisions but at the same time these powers are not meant to be exercised 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, 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. Thus, Grounds No.2 and 3 raised by the assessee are allowed." 8.12.13. We notice that, Hyderabad bench held the compensation paid @ Rs. 5 crores and Rs. 1.00 crores for illegal mining and illegal overburden dumps to be in construed in the nature of compensation. The Ld.CIT.DR placed reliance on the letter issued by Department of Mines and Geology, wherein these payments have been referred to as "penalty". However going by the observations of Hon'ble Supreme Court, these were payments formimg part of SPV to be used for developing ecology in the 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 CON ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt when the mines are exploited on forest land. The Hon'ble Tribunal in para 5 of its order held that the amount expended on this count was incurred as a revenue expenditure and was directed to be allowed in the year in which it was incurred. The operative part of the order in para 5 at pages 7 and 8 is extracted and reproduced here under : " We find force in the submission of the learned counsel that payments to the government are to be paid once the mining lease is obtained and such payments are governed by various Acts along with the Apex Court making a ruling for State Governments to participate in the granting of mining lease by recovering compensation when their forests are uprooted. Therefore for this purpose, the funds are used for a natural regeneration which the assessee participates indirectly. Therefore 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 the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of such amount to be used for public purposes listed above, which includes afforestation etc. Further we note that these amounts have not been collected for violation under any specific Acts applicable to Mining. It for these reasons that Hon'ble Supreme Court used the term 'Compensation' as against the term 'Penalties' recommended by CEC. However it is also noticed that subsequent to the order passed by Hon'ble Supreme Court, State Act, controlling mining activity were amended. We further notice that assessee could not have commenced its operations without paying these amounts. Hence there is commercial expediency in incurring these expenses. 8.12.18. Ld.AO invoked Explanation-1 u/s 37(1) of the Act in support of the disallowance made him. As per the provisions of Explanation 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 offenc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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