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TMI Blog2022 (3) TMI 608X X X X Extracts X X X X X X X X Extracts X X X X ..... ues mentioned below:- (a) Difference in stock valuation - Rs. 90,58,713/- (b) Addition of closing stock -- Rs. 12,75,26,801/- 3. The facts relating to the case are discussed in brief. The assessee is a partnership firm and is engaged in the business of extraction of iron ore by taking lease of lands from Government. 3.1. Before proceeding to the common issue urged before us, it is necessary to discuss about the back ground that led to scrutiny of mining operations carried out by various lessees of mines. These details have been culled out from the order dated 18-04-2013 passed by Hon'ble Supreme Court in the same of Samaj Parivartana Samudaya & Ors. vs. State of Karnataka (Writ Petition (Civil) No. 562 of 2009). The decision rendered by Hon'ble Supreme Court in this case has resulted in making certain additions by the Assessing officer. Hence, it is imperative to understand and appraise the decision rendered by Hon'ble Supreme Court. 3.2. Over exploitation or rampant mining in the State of Karnataka, particularly in the district of Bellary, was engaging the attention of the State Government from time to time. Not satisfied with the investigation carried in the St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ka Iron and Steel Manufacturers Association was raised regarding shortage of supply of minerals due to suspension of mining activity, before Hon'ble Apex Court. The association also sought for a direction to reopen Category 'A' mines. * Thereafter, by order dated 03/09/2012 Hon'ble Apex Court in case of Samaj Parivartana Samudaya vs. state of Karnataka, reported in (2013) 8 SCC 219 approved report dated 29/08/2012 filed by CEC. Hon'ble Apex Court ordered for reopening of category 'A' mines, and vacated order dated 29/07/2011 passed in case of GOI vs. Obulapuram Mining Co. Pvt. Ltd., (supra) and order dated 26/08/2011 in case of Samaj Parivartana Samudaya vs. State of Karnataka (supra). * Thereafter, by order dated 28/09/2012, CEC filed detailed report dated 03/02/2012, categorising mines into 'A', 'B' and 'C', depending on various types of violations by mining lessee. 3.4. The reports also indicated large scale encroachment into forest areas by leaseholders and ongoing mining operations in such areas without requisite statutory approval and clearances. Hence a Joint Team was constituted by Hon'ble Supreme Court by order d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... delivery will be decided/provided by the respective lease holders. It was also held that the Monitoring Committee may permit the lease holders to put up for e-auction the quantities of iron ore planned to be produced in subsequent months. 3.7. The categorisation of mines into "A", "B" and "C" had following financial impact:- (A) From sale proceeds realised by MC on sale of iron-ore belonging to Category A mining leases, 10% shall be retained by the MC. Balance 90% shall be paid to the concerned lessees. The above said 10% shall be transferred to Special Purpose Vehicle (SPV). (B) From the sale proceeds realised by MC on sale of iron-ore belonging to Category B mining leases, following amounts shall be deducted retained by MC:- (a) 15% of sale proceeds to be transferred to SPV. (b) Compensation for illegal mining and illegal dumping computed (i) @ Rs. 5.00 crores per Ha of the area found by the Joint Team to be under illegal mining pit; and (ii) @ Rs. 1.00 crore per Ha of area for illegal mining by way of over burden dump(s), road, office etc outside the sanctioned lease area. (c) The estimated cost of Reclamation and Rehabilitation Plans (R & R plans). For this purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the hands of the assessee. Since the assessee is following mercantile system of accounting, it cannot be taxed on receipt basis. (b) The amount retained by CEC/MC, as per directions of the Supreme Court on behalf of the assessee, which is given to the Special Purpose Vehicle (SPV) is on account of penal and other liabilities for contravention of laws. Hence it cannot be allowed u/s. 37(1) of the Act. (c) SPV established for Social economic development of the mining area is nothing but relating to Corporate Social responsibility only. Hence it is only appropriation of profits and hence it cannot be said to have been incurred for the purpose of business or earning the profits. (d) The AO placed his reliance on the following case laws:- (i) CIT vs. KCP Limited (245 ITR 421)(SC) (ii) G. Padmanabha Chettiar & Sons (182 ITR 1,5)(Mad) iii) Reform Flour Mills P Ltd vs. CIT (132 ITR 184, 196) (Cal.) (iv) CIT vs. A. Krishnaswamy Mudaliar & Others (53 ITR 122)(SC) Accordingly, the AO added the above said amounts in the total income of the assessee of respective years. The Ld. CIT(A) also confirmed the same. 4.2. Before us, the Ld. A.R. placed his reliance on the decision r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch 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 7.10.5. Applying, thin line of difference interpreted by Hon'ble Supreme Court to present facts, we are of the opinion that, contribution to SPV account, cannot be considered to be diversion of income. This is because, we have already held while deciding ground 2.1 and 2.2 hereinabove, that entire sale proceeds accrued to assessee, and it is only due to direction of Hon'ble Supreme Court that such amount was contributed to SPV account, for which assessee was to authorise CEC/MC in relevant paragraph 11(III) refer to and relied by Ld. CIT DR. ............... 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 asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct 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 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 Category-A c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 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 exploitation of mineral resources in India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... :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 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 and biodiversity conservation and for ensuring inclusiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 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 requirement to do so under relevant statutes that regulate min ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Category A". There is no dispute about the same. However, the CEC has recommended that M/s. NMDC Ltd shall be liable to deposit penalty/compensation as payable for the mining leases falling in "Category B". The said recommendation was accepted by Hon'ble Supreme Court and hence NMDC Ltd has paid compensation @ 5.00 crores & 1.00 crores and also deduction from sale proceeds was made @ 15%. In any case, the question is here is about the nature of such payments. 4.7. We notice that, in the case of NMDC Ltd (supra), Hyderabad bench of Tribunal has relied upon the decision rendered by Hon'ble Kolkata High Court in the case of Shyam Sel Ltd (supra) and also the decision rendered in the case of State Pollution Control Board vs. Swastik Ispat (P) Ltd (supra). In both the cases, the payment made by an assessee to the Pollution Control Board in order to take remedial action in respect of the pollution caused by the assessee would be compensatory in nature. 4.8. We have earlier noticed that the CEC, vide its report dated 3-2-2012 and 13-3-2012 had made certain recommendations to the Hon'ble Supreme Court. The Hon'ble Supreme Court has incorporated those recommendations in Pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s) at page 168:- "8. As previously noticed, the CEC in its Report dated 13.3.2012 had set out in detail the objectives of the Reclamation and Rehabilitation (R & R) plans and the guidelines for preparation of detailed R & R plans in respect of each mining lease. The origins of the idea (R & R plans) are to be found in an earlier Report of the CEC dated 28.7.2011. As the suggestions of the CEC with regard to preparations of R & R plans for each mine is crucial to scientific and planned exploitation of the mineral resources in question it will be necessary for us to notice the said objectives and the detailed guidelines which are set out below. In this connection it would be worthwhile to take note of the fact that the guidelines in question have been prepared after detailed consultation with different stakeholders including the Federation of Indian Mineral Industries (FIMI) which claims to be the representative body of the majority of the mining lessees of the present case. II. BROAD OBJECTIVES/PARAMETERS OF R & R PLANS 8. The broad objectives/parameters of the R & R Plans would be: i) to carry out time bound reclamation and rehabilitation of the areas found to be under ille ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contrary to or in conflict or inconsistent with any of the statutory provisions of the MMDR Act, EP Act and FC Act. In such a situation, while accepting the preconditions subject to which the Category 'A' and 'B' mines are to be reopened and the R & R plans that must be put in place for Category 'B' mines, we are of the view that the suggestions made by the CEC for reopening of Category 'A' and 'B' mines as well as the details of the R & R plans should be accepted by us, which we accordingly do. This will bring us to the most vital issue of the case, i.e., the future of the Category 'C' mines." 4.11. It can be noticed that all the amounts collected from the lessees under different categories 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 the Hyderabad bench of Tribunal in the case of NMDC Ltd (su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.O. did not accept the claim and accordingly added the above said amount. The Ld. CIT(A) also confirmed the same. 5.2. We heard the parties on this issue and perused the record. We notice that the A.O. has disallowed the claim by observing that the assessee should have made the claim only in assessment year 2010-11, i.e., in the year succeeding to AY 2009-10. He also observed that the assessee has not reconciled closing stock quantity variation subsequently as on 31.3.2010 & 31.3.2011. Accordingly, the A.O. observed that the value of opening stock as on 1.4.2011 cannot be increased without disturbing the value of closing stock as on 31.3.2011. Accordingly, he rejected the claim for deduction of Rs. 90,58,713/-. Before us, though the Ld. A.R. submitted that the increase in closing stock as on 31.3.2009 shall have cascading effect and hence, the deduction claimed by the assessee in assessment year 2012-13 should be allowed. However, we are of the view that the A.O. was right in observing that the difference in closing stock determined as on 31.3.2009 cannot straightaway have impact to the opening stock shown as on 1.4.2011, without modifying the closing stock as on 31.3.2010 and 31 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of equal amount to the total income. The Ld. CIT(A) also confirmed the same. 6.2. The main contention of Ld. A.R. is that the dump stock does not have market value and hence it is not valued both in the opening stock and closing stock. He submitted that the assessee is required to report the dump stock also to the Department of Mines and Geology in the Annual return and hence the assessee has reported the same. He submitted that the AO has valued the dump stock and included the same in the closing stock only. Inviting our attention to page 94 of the Annual return, wherein the quantity details are given, the Ld. A.R. submitted that the dump stock of 5,80,830 MT is shown as opening stock also, i.e., it is brought forward from earlier years. Hence, the AO should have increased the value of opening stock also, in which case, the said exercise shall be revenue neutral. He submitted that the assessee did not value dump stock quantity in the preceding years also. Accordingly he submitted that the impugned addition should be deleted. 6.3. The Ld. D.R., on the contrary, submitted that it is not clear from record as to whether the opening stock includes the value of dump stock or not. He ..... X X X X Extracts X X X X X X X X Extracts X X X X
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