2021 (4) TMI 1249 - AT - Income Tax

Nature of expenditure - Disallowance of community welfare expenses - assessee incurred this expenditure on upkeep of road as per the direction of Deputy Commissioner, Bellary - AO treated the expenditure as capital expenditure - assessee contended that expenditure is revenue in nature allowable u/s. 37(1) - HELD THAT - In the present case, the assessee being an individual, the restriction imposed under Explanation (2) to section 37 is not applicable to assessee s case. See M/S GUJARAT NARMADA VALLEY FERTILIZER AND CHEMICALS LTD 2019 (8) TMI 1288 - GUJARAT HIGH COURT Disallowance is restricted to the expenses incurred by the assessee under a statutory obligation u/s. 135 of the Companies Act, 2013 and there is thus now a line of demarcation between the expenses incurred by the assessee on discharging corporate social responsibility under such a statutory obligation and under a voluntary assumption of responsibility. As for the former, the disallowance under Explanation 2 to section 37(1) comes into play, but as for latter, there is no such disabling provision as long as the expenses, even in discharge of corporate social responsibility on voluntary basis, can be said to be wholly and exclusively for the purposes of business . There is no dispute that the expenses in question are not incurred under the aforesaid statutory obligation. In the present case, the said expenditure is incurred by the assessee on discharging social responsibility so as to earn the goodwill of the society and it is wholly and exclusively for the purpose of business. The provisions of Explanation to section 37 of the Act cannot be applied. Further, in the present case, the assessee being an individual, and not a corporation under the Companies Act, 2013, Explanation 2 to section 37 cannot be applied so as to deny the voluntary expenditure incurred by assessee towards community welfare. Accordingly, we are of the opinion that the expenditure incurred is wholly and exclusively for the purpose of business of assessee and has to be allowed as business expenditure. Accordingly, this ground of appeal is allowed. Loss from derivatives F O - assessable under the head capital gains OR 'business loss' thereby not allowing set off of the same - whether trading in F 0 derivative is taxable under section 28(i) and not a speculative transaction under section 43(5) - HELD THAT - When the AO had accepted the income from trading in F O derivatives as business income in earlier year, specifically in the immediate preceding AY 2015-16, the revenue cannot be allowed to change its view with regard to fundamental aspect of a transaction taken in earlier year, unless it is able to demonstrate change in circumstances in the subsequent assessment year. In the case of CIT v. Escorts Ltd. 2011 (2) TMI 579 - DELHI HIGH COURT it was held that the principle of res judicata did not apply to income tax proceedings, the revenue cannot be allowed to change its view with regard to fundamental aspect of a transaction taken in earlier assessment year, unless it is able to demonstrate any change in the circumstances in the subsequent assessment year. It was held that as a fundamental aspect permeating through different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. On these reasonings, in the absence of any material change justifying the revenue to take a different view of the matter and if there is no change, it was in support of assessee that the AO is precluded to reopen that issue and take a contrary view of what he has taken in earlier assessment proceedings and taking such a contrary decision should be have been avoided Whether the assessee is prevented to make such a claim without filing revised return? - Regarding the additional claim made during the assessment proceedings other than the claim made in the return of income u/s. 139, in our opinion, the assessee cannot make additional claim before the AO without revised return - as held by the Hon ble Supreme Court in the case of Goetze (India) Ltd. 2006 (3) TMI 75 - SUPREME COURT the appellate authorities are not precluded in entertaining such claim without any revised return. Being so, we do not find any infirmity in making such claim by the assessee before the CIT(Appeals) with regard to treatment of loss from F O transaction as business loss. Therefore, this ground of appeal is allowed.

Summary

Issues Involved:
1. Disallowance of community welfare expenses.
2. Additions on account of withheld amounts by the Monitoring Committee for Reclamation & Rehabilitation of mining areas.
3. Treatment of loss from derivatives (F&O) as capital gains instead of business loss.

Issue-wise Detailed Analysis:

1. Disallowance of Community Welfare Expenses:
The assessee incurred expenditures of ?43,55,905 and ?16,73,153 for AYs 2015-16 and 2016-17 respectively, on the upkeep of roads as directed by the Deputy Commissioner, Bellary. The Assessing Officer (AO) treated these expenditures as capital expenditures, while the assessee contended they were revenue in nature, allowable under Section 37(1) of the Income-tax Act, 1961. The assessee argued that such expenditures facilitated day-to-day business activities and were part of its corporate social responsibility (CSR) to improve the living conditions of local communities, which indirectly benefited its mining operations. The assessee cited several case laws to support its claim, including CIT v. Karnataka Financial Corporation and CIT v. Infosys Technologies Ltd.

The Tribunal noted that Explanation 2 to Section 37, introduced by the Finance (No.2) Act, 2014, disallows CSR expenditures for companies. However, it clarified that this restriction applies only to companies and not to individuals. The Tribunal referenced the Gujarat High Court's ruling in Pr. CIT v. Gujarat Narmada Valley Fertilizers & Chemicals Ltd., which distinguished between statutory and voluntary CSR expenditures. The Tribunal concluded that the expenditures were incurred for business purposes and allowed them as business expenditures under Section 37.

2. Additions on Account of Withheld Amounts by the Monitoring Committee:
The AO disallowed amounts retained by the Monitoring Committee (MC) towards Special Purpose Vehicle (SPV) charges for Reclamation & Rehabilitation (R&R) of mining areas, treating them as compensatory payments for environmental damage due to illegal mining. The assessee argued that these amounts constituted a diversion of income by overriding title, as they were retained by the MC before the income reached the assessee. The assessee cited several judicial pronouncements supporting the principle of diversion of income by overriding title.

The Tribunal referred to the Supreme Court's order, which mandated the retention of a percentage of sale proceeds by the MC for R&R purposes. It noted that the amounts retained by the MC were not penalties but compensatory payments necessary for resuming mining operations. The Tribunal referenced the coordinate Bench's decisions in Ramgad Minerals & Mining Ltd. and Veerabhadrappa Sangappa & Co., which held that contributions to SPV were allowable expenditures. The Tribunal concluded that the amounts retained by the MC were business expenditures and allowed them under Section 37.

3. Treatment of Loss from Derivatives (F&O) as Capital Gains Instead of Business Loss:
The assessee initially declared a loss of ?9,43,60,600 from Futures & Options (F&O) transactions as a capital loss in the return of income but later claimed it as a business loss during assessment proceedings. The AO and CIT(A) rejected the claim, citing the Supreme Court's decision in Goetze (India) Ltd. v. CIT, which precludes the AO from entertaining new claims without a revised return. The assessee argued that trading in F&O derivatives should be treated as business income based on the systematic nature of the transactions and cited several judicial precedents supporting this view.

The Tribunal noted that the AO had treated similar F&O transactions as business income in the preceding AY 2015-16. It emphasized the principle of consistency, stating that the revenue could not change its view on the nature of transactions without demonstrating a change in circumstances. The Tribunal referenced the Supreme Court's ruling in Radhasoami Satsang v. CIT, which held that fundamental aspects decided in earlier years should not be changed in subsequent years without material changes. The Tribunal concluded that the loss from F&O transactions should be treated as a business loss and allowed set-off against other business income.

Conclusion:
The Tribunal allowed the appeals, ruling in favor of the assessee on all issues. The community welfare expenses and amounts retained by the MC for R&R were allowed as business expenditures under Section 37. The loss from F&O transactions was treated as a business loss, allowing set-off against other business income.