TMI Blog2021 (2) TMI 1145X X X X Extracts X X X X X X X X Extracts X X X X ..... r making these payments have been made for the purpose of resuming the mining operations. Hence there is merit in the submission of the ld A.R that, without making these payments, the assessee could not have resumed the mining operations. Hence, these expenses are incidental to carrying on the business and hence allowable u/s 37(1) of the Act. We hold that the amount deducted @ 15% from the sale proceeds constitute trading receipts in the hands of the assessee, but at the same time it is allowable as deduction u/s 37(1) of the Act. Accordingly, we set aside the order passed by Ld CIT(A) on this issue in both the years under consideration and direct the AO to delete the impugned addition in both the years. Appeals of the assessee are allowed. - ITA No. 3298 & 3299/Bang/2018 - - - Dated:- 25-2-2021 - SHRI N. V. VASUDEVAN , VICE PRESIDENT AND SHRI B. R. BASKARAN , ACCOUNTANT MEMBER Appellant by : Shri Laxminiwas Sharma , A.R. Respondent by : Shri Muzaffar Hussain , D.R. ORDER PER B. R. BASKARAN, ACCOUNTANT MEMBER Both the appeals of the assessee are directed against the orders passed by Ld CIT(A), Kalaburagi and they relate to the assessment years 2013 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llary. 3.3 The details of various orders passed by Hon ble Supreme Court in this regard are given below:- Hon ble Supreme Court by order dated 29/07/2011 passed in GOI vs. Obulapuram Mining Co. Pvt.Ltd., reported in (2011) 12 SCC 491, suspended all mining and transportation activities in areas admeasuring approximately 10,868 ha, pertaining to district of Bellary. Subsequently, by order dated 26/08/2011 passed in Samaj Parivartana Samudaya vs state of Karnataka, reported in (2013) 8 SCC 209, Hon ble Apex Court extended ban to Tumkur and Chitradurga mines, based upon a report filed by Central Empowered Committee (hereinafter referred to as CEC). Hon ble Apex Court directed Ld.Amicus Curiae to submit quantity which could be released from existing stock of 25,000,000 Ton of iron ore, subject to reclamation and rehabilitation plans being submitted. This was pursuance to plea raised by Association of Steel Industry and other affected parties. On 23/09/2011 Hon ble Apex Court was appraised by CEC report dated 01/09/2011, regarding modalities of sale of existing stock of iron ore through E-Auction, sale proceeds to be deposited in nationalised bank. It was submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The CEC categorised the mines into A , B and C on the following basis:- (a) The Category A comprises of (a) working leases wherein no illegality/marginal illegality have been found and (b) non-working leases wherein no/marginal illegalities have been found. (b) The Category B comprises of (a) mining leases wherein illegal mining by way of (i) mining pits outside the sanctioned lease areas have been found to be upto 10% of the lease areas and/or (ii) over burden/waste dumps outside the sanctioned lease areas have been found to be upto 15% of the lease areas and (b) leases falling on interstate boundary between Karnataka and Andhra Pradesh and for which survey sketches have not been finalised. (c) The Category C comprises of leases wherein (i) the illegal mining by way of (a) mining pits outside the sanctioned lease area have been found to be more than 10% of the lease area and/or (b) over burden/waste dumps outside the sanctioned lease areas have been found to be more than 15% of the lease areas and/or (ii) the leases found to be involved in flagrant violation of the Forest (Conservation) Act and/or found to be involved in illegal mining in other lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the iron ore of these leases should be retained by the MC and (c) the implementation of the R R plan should be at the cost of the lessee. 4. Now we shall turn to the facts relating to the issue urged before us. The mines owned by the assessee herein have been categorised as B category mines. Hence 15% of sale proceeds has been deducted by Monitoring Committee during the years under consideration as detailed below:- Assessment year 2013-14 : ₹ 3,58,87,698/- Assessment year 2014-15 : ₹ 1,48,60,184/- The assessee had reduced the above said amounts from the gross sale proceeds and accordingly declared only net sale proceeds as its income in both the years. However, the AO was of the view that the amount retained by MC as per the proposal approved by Hon ble Supreme Court is in the nature of appropriation of profit and penal/compensatory payment towards damages caused to environment and forest by contravention of laws. Accordingly, the AO took the view that the said payment cannot be said to be incurred wholly and exclusively for the purpose of business within the meaning of provisions of sec.37 of the Act. Hence the AO proposed to disal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal that the amount of 10%/15% as the case may be retained by the Monitory committee is assessable as trading receipts, but allowable as business expenditure, net effect of which is NIL addition. Accordingly he submitted that the addition made by the AO in both the years is liable to be deleted. 4.3 The Ld D.R, however, placed his reliance on the orders passed by Ld CIT(A). His further submissions are discussed infra. 4.4 We heard the parties on this issue and perused the record. We notice that identical issue has been examined by the co-ordinate benches in the cases relied upon by the assessee. For the sake of convenience, we extract below the relevant observations made by the co-ordinate bench in the case of M/s Veerabhadrappa Sangappa Co (supra):- 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 various angles. Some of them appear to have applied the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 mining leases into three categories viz., Category A , B and C and that the assessee is falling in Category-B in respect of Donimali Complex and that in their order, the Apex Court observed that before consideration of any resumption of mining operations by Category-B leaseholders, each of the lease holder must pay compensation for the areas under illegal mining pits outside the sanctioned area at the rate of ₹ 5 Crs per hectare and for illegal overburden for at the rate of ₹ 1 Cr per hectare. Further, A.O. observed that the said direction of the Apex Court was subject to the final determination of the notional loss caused by the illegal mining and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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 also the decision of the Hon'ble Calcutta High Court in the case of ShyamSel Ltd vs. DCIT (72 Taxmann.com 105) (Cal.). On going through the said decisions, we find that the Hon'ble Calcutta High Court has considered the case of an assessee who failed to install Pollution Control Device within factory premise within prescribed time and that the assessee had to pay ₹ 12.50 lakh for compensating damage to environment and the same was recovered by State Pollution Control Board on the principle of 'polluter pays' and the A.O. had treated it as penalty and did not allow the same as business expenditure. The Hon'ble High Court had taken note of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. Thus, Grounds No.2 and 3 raised by the assessee are allowed. 7.10.9. We also notice that the co-ordinate Bangalore bench of Tribunal has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 illegality found by CEC, because of which 10% of contribution was attributed out of sale proceeds to the SPV. 7.8.12. On careful reading of decision of Hon ble Supreme Court dated 18/04/2013, it is clear that 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 Category B . We refer to and rely on observations by Hon ble Supreme Court in case of CIT vs SitaldasTirathdasreported in(1961) 41 ITR 367.Hon ble Supreme Court laying down following principal referred to various rulings that illustrated aspects ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, 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 15% of sale proceeds, under Category B, cannot be treated as penal in nature. We, therefore, reject obser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a 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 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 afte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the various environmental/mining statutes e.g. air quality (SPM, RPM), noise/vibration level, water quality (surface as well as ground water), scientific over burden/waste dumping, stabilization of slopes and benches, proper stacking and preservation of top soil, sub grade mineral and saleable minerals, proper quality of internal roads, adequate protective measures such as dust suppression/control measures for screening and crushing plants, beneficiation plants, provision for retention walls, garland drains, check dams, siltation ponds, afforestation, safety zones, proper covering of truck, exploring possibility of back filling of part of over burden/waste dumps in the mining pits, sale/beneficiation of sub grade iron ore, water harvesting, etc. iv) for achieving (ii) and (iii) above, fixation of permissible annual production; and v) regular and effective monitoring and evaluation. The Hon'ble Supreme Court has also recorded lease wise R R Plans in continuation of the above said observations. 4.10 The Hon'ble Supreme Court has accepted the recommendations of CEC with the following observations at page 194:- 52. The conditions subject to which Cate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence, as held by Hyderabad bench of Tribunal in the case of NMDC Ltd (supra), these expenses are allowable as deduction u/s 37(1) of the Act. 4.12 Another important point we notice is that the recommendations made by CEC for making these payments have been made for the purpose of resuming the mining operations. The Hon'ble Supreme Court discusses these points at page 171 from paragraph 10 onwards. Hence there is merit in the submission of the ld A.R that, without making these payments, the assessee could not have resumed the mining operations. Hence, these expenses are incidental to carrying on the business and hence allowable u/s 37(1) of the Act. 4.13 In view of the foregoing discussions and also following the decision rendered by the co-ordinate benches referred above, we hold that the amount deducted @ 15% from the sale proceeds constitute trading receipts in the hands of the assessee, but at the same time it is allowable as deduction u/s 37(1) of the Act. Accordingly, we set aside the order passed by Ld CIT(A) on this issue in both the years under consideration and direct the AO to delete the impugned addition in both the years. 5. In the result, both the appeals ..... X X X X Extracts X X X X X X X X Extracts X X X X
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