TMI Blog2021 (3) TMI 113X X X X Extracts X X X X X X X X Extracts X X X X ..... ment Years 2012- 13 to 2014-15. Since common issue is involved in these appeals, they are clubbed and heard together, consolidated order is passed. 2. In all these three appeals, the common issue is regarding non-granting of deduction u/s.37 of the Income Tax Act, 1961 (the Act) in respect of sale proceeds retained by the monetary committee on the direction of Hon ble Supreme Court by holding that same is in penal nature ignoring that it is compensatory in nature incurred wholly and exclusively for the purpose of business and hence allowable u/s.37 of the Act. 3. The facts of the case are that the assessee had claimed Special Purpose Vehicle charges being 15% of sales done through e-auction. The said SPV charges was deducted by Monitoring Committee and retained by Central Empower Committee (CEC) as per the directions of the Supreme Court for the purpose of taking various ameliorative and mitigative measures as a compensatory payment. The Assessing Officer held that the said payment cannot be said to be incurred wholly and exclusively for the purpose of business u/s. 37 of the Act. The 15% of sale proceeds from e-auction of iron ore is to be utilized as per the directions of H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... report and classified the assessee under the category B . The Hon'ble Supreme Court fixed the compensation payable by all the mining owners as per the categorisatio9n. But the assessee has not filed any necessary details and evidences or statement of facts of his case to strengthen the arguments. Moreover the as mentioned that the expenses are related to the assessee's business and are allowable u/s. 37 of the Act. Under Sec. 37, the expenses which are not allowable are Capital Expenditure Personal Expenditures. The Explanation 1 to Section 37(1) of the Act clearly bars deduction of any expenditure incurred which is an offence or which is prohibited by law. The Assessing Officer stated that the said amount liable to be assessed to tax as trading receipts during the financial year of e-auction and particularly such nature of expenditure is also not allowable u/s. 37 of the Act. Aggrieved by the assessee, filed an appeal before the CIT(A). On appeal, the CIT(A) observed that the expenditure incurred by the assessee hit by the Expln. 1 to Section 37 of the Act. Aggrieved by the order of CIT(A), the assessee is in appeal before us. 4. We have heard both the parties and pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue in any manner. 7.10.3. On careful reading of decision of Hon'ble Supreme Court in case of Samaj Parivartana. Sarnudaya Ors. Vs. State of Karnataka 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 case of CIT vs Sitaldas Tirath.das (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 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, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 l0%/15% of sale proceeds, under category A/B, cannot be treated as penal in nature. 7.10.8. We note that co-ordinate Hyderabad 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of MMDR Act and other allied laws. Therefore, he observed that the payment of ₹ 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 allowed to resume the mining activity subject to 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 Catego ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. 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 significant. 11. Applying this ratio 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 exploit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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:20.13-14, Ld.AO is stating this that SPV rate is 10% in category 'A' Mines but 15% in Category 'El' Mines and this extra 5% in Category 'B' Mines is for various violations and illegal mining and even after this observation, he finally held in the same para that whole SPV Expenses of 15% is not allowable. 7.8.10. Ld.AO observed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 some 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. 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. such portion of income, by virtue of directions of Hon'ble Supreme Court, as a precondition to resume mining operations under Category `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 requirem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 or ..... X X X X Extracts X X X X X X X X Extracts X X X X
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