2020 (12) TMI 1145 - AT - Income Tax

Accrual of income - Revenue recognition - sale proceeds from declared and undeclared stock - case was selected for scrutiny and notice under section 143(2) on the basis of revised return filed - HELD THAT - Recognition of sale proceeds from declared stock received by assessee - Accrual of income must be judged, depending facts and circumstances of each case. Sale proceeds from disclosed stock accrued to assessee during the year under consideration and has to be considered for determining income under the head profits and gains from business for year under consideration. We have already noted that assessee has offered the above sale consideration on subsequent assessment years, and income tax act does not permit to assess same income twice. Hence in our view assessee may move appropriate petition before the authorities below for exclusion of above sale proceeds from declared stock in the relevant assessment year. Addition of sale proceeds of undeclared stock - what could be considered under section 37, are probable expenditure for purposes of earning income? - On perusal of decision in case of Prakash Cotton . 1993 (4) TMI 3 - SUPREME COURT . Hon ble Court was considering determination of real income in case of finance lease that forms part of lease Rentals . Hon ble Karnataka High Court following decision of Hon ble Delhi High Court in case of CIT Vs. Virtual Soft Systems Ltd 2012 (2) TMI 120 - DELHI HIGH COURT held that, only financing charges represents real income, and not capital receipt, though both have been accrued and received. In present facts there is no doubt that sale proceeds from undeclared stock assume character of income in the hands of assessee. Merely because sale proceeds were not parted to assessee, it cannot be considered as probable expenditure u/s 37(1). Whether to be treated as diversion of income by overriding title or Trading Loss? - There is no doubt that, sale proceeds arises out of dump considered by assessee to be not saleable that was generated in course of its regular business. Therefore, such undeclared stock, in principle belongs to assessee and sale proceeds of such undeclared stock assume character of income in the hands of assessee when sale proceeds are recovered by assessee. Hence in principle, such income should be considered as accrued to assessee on the date of sale by MC - even if the receipt is considered as taxable on accrual basis, the same is deductable as trading loss. Addition under the head SPV charges - Whether part of Corporate Social Responsibility (CSR) activity - addition on account of Category A-10% of confiscated sale proceeds utilised towards SPV and addition on account of Category B-15% of confiscated sale proceeds, utilised towards SPV - HELD THAT - We note that 10%/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 in case of Samaj Parivartana Samudaya Ors. Vs. State of Karanataka Ors. 2011 (8) TMI 1339 - SUPREME COURT 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. 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. Provisions of Explanation 1 to sec.37 will not apply to these payments. We also note that Hon ble Supreme Court at page 171 observed that, these payments are necessary to be made by the mining lease holders. Hence there is merit in the submission of Ld.Counsel that, without making these payments, 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. Based on above discussions and analysis, we are of opinion that contribution to SPV being 10%/15% of sale proceeds, under category A/B, is to be allowable as expenditure for year under consideration. Disallowing the expenditure paid to the department of Mining and Geology on the premise that the said payment is in the nature of penalty for breach of law under Explanation 1 to section 37 - Assessee contested that, expenditure was incurred as compensatory/compounding fee, and paid as commercial expediency to regularise pending issues and by doing so, assessee was allowed to commence its business operations - Assessee claimed it as expenditure in the original return of income and excluded the same from Sales revenue in the revised return of income contending that the same is diversion by overriding title.- HELD THAT - As relying on NMDC Ltd vs ACIT 2018 (10) TMI 1120 - ITAT AHMEDABAD Payment made is compensatory in nature only as these funds are meant to be used for public purposes and the assessee could not have commenced its operations without paying the same, the same is allowable as revenue expenditure. We are therefore of the view that payment made as compensation is not hit by Explanation 1 to Section 37(1) and is an allowable expenditure. Disallowance of probable expenditure for R R retained/deducted by monitoring committee under Category B - assessee has not submitted any details with regard to R R expenditure and its nature and for what purpose the amount was spent - HELD THAT - Assessee was directed to make such payments in order to resume the mining activity. It is also clear that payment intimations may be issued as and when found necessary by the Department of Mining. Assessee cannot ignore such intimations for its smooth functioning of business. We therefore are of the opinion that these are expenditure incurred by assessee in lieu of business. We therefore reject the argument of revenue that such payment is hit by Explanation to section 1 to Section 37. Assessee submitted that in lieu of above directions, assessee was refunded ₹ 1,21,94,000/- out of Rs,1,48,97,000/-, during the financial year relevant to the assessment year 2019-20, which has been offered to tax. This fact supports the submission of assessee that, it did not have any control over the amount so deducted. Accordingly, demand raised by the Department of Mining in its letter would create a liability on assessee. Assessee was therefore justified in creating provision for this expenditure. Since the provision for expenses so made is related to the business activities of assessee, the same is allowable as deduction. Accordingly, we Ld.AO to delete the disallowance of ₹ 1,48,97,000/-. Disallowance expended towards Corporate Social responsibility - AO disallowed the said sum by holding that it was not incurred for purposes of business - Assessee s claim of above said expenses were disallowed on the ground that it was not incurred in the course of business but for philanthropic purposes - HELD THAT - Assessee has contributed funds at the specific request of local administration, which is meant to be used for the benefit of public. As observed in the above said case, the assessee would also be required to approach the appropriate Government and its authorities for grant of permits, licenses. Hence it is a prudent decision of the assessee to oblige to the appeal made by the local administration and incurred the expenses for public purposes. Hence the assessee has incurred expenses not only on account of social responsibility, but also keeping in mind the goodwill and benefit it would yield in the long run in earning profit. Hence this expenditure would be in the realm of business expenditure . Accordingly, we hold this expenditure is allowable as deduction. Accordingly, we set aside the order passed by Ld.CIT(A) on this issue and direct the AO to delete this disallowance. Addition of unaccounted receipts being the difference between books of accounts and Form No.26AS - HELD THAT - There is no estoppel against law. Hence, if the assessee proves that any transaction does not belong to it, then no addition is called for. Hence acceptance of any addition, which is against law, will not bar the assessee from contesting the same. However, it is the responsibility of the assessee to substantiate its claim. It is also quite possible that some of the companies might have rectified their Statement of TDS in order to correct mistakes, if any. Hence the position available in Form 26AS as on today may depict different picture. Accordingly, we are of the view that the assessee may be provided with an opportunity to reconcile the differences in respect of two companies cited above and also to prove that it did not have transactions with other companies. Accordingly, we set aside the order passed by Ld.CIT(A) on this issue and restore the same to the file of the AO for examining it afresh.

Summary

Issues Involved:
1. Disallowance of expenditure of ?77,71,82,151/-.
2. Taxing the amounts retained towards contribution to SPV.
3. Disallowance of ?9,69,00,000/- paid to the Department of Mining and Geology.
4. Disallowance of ?31,27,668/- expended towards Corporate Social Responsibility.
5. Addition of unaccounted receipts of ?21,62,803/-.
6. Levy of interest under sections 234B and 234C.

Detailed Analysis:

1. Disallowance of Expenditure of ?77,71,82,151/-:
- Recognition of Sale Proceeds from Declared Stock:
The assessee argued that the sale proceeds from declared stock were accounted for in subsequent years when received, citing uncertainty in realization as per AS-9 and ICDS-IV. The Tribunal held that the sale proceeds accrued during the year of sale, as the assessee had control over the stock and was aware of the sale proceeds. The Tribunal directed the assessee to seek exclusion of the sale proceeds from the subsequent years to avoid double taxation.

- Addition of Sale Proceeds of Undeclared Stock:
The assessee contended that the sale proceeds from undeclared stock were not recognized due to the stock being overburden dumps not accounted for in books or IBM returns. The Tribunal noted that the undeclared stock was from overburden dumps and directed that the sale proceeds should be taxable when actually received. The Tribunal allowed the assessee's claim to treat the sale proceeds as business loss under Section 28 but dismissed the claim under Section 37(1).

2. Taxing the Amounts Retained Towards Contribution to SPV:
- The assessee argued that the amounts retained by CEC/MC towards SPV were diversion of income by overriding title. The Tribunal held that the contributions were necessary for resuming mining activities and were application of income. The Tribunal allowed the contributions as expenditure under Section 37(1), rejecting the claim of diversion by overriding title and the claim of treating it as business loss.

3. Disallowance of ?9,69,00,000/- Paid to the Department of Mining and Geology:
- The assessee argued that the payment was compensatory and not penal. The Tribunal, referring to the Supreme Court's directions, held that the payment was compensatory for environmental damage and not penal. The Tribunal allowed the payment as revenue expenditure under Section 37(1), rejecting the application of Explanation 1 to Section 37(1).

4. Disallowance of ?31,27,668/- Expended Towards Corporate Social Responsibility:
- The assessee argued that the expenditure was incurred as per the directions of the Deputy Commissioner, Bellary, for the welfare of students. The Tribunal, relying on the Karnataka High Court's decision in Kanhaiyalal Dudheria vs JCIT, held that the expenditure was allowable as business expenditure under Section 37(1), considering the commercial expediency and the benefit to the business.

5. Addition of Unaccounted Receipts of ?21,62,803/-:
- The assessee contended that it had transactions only with M/s Orris Infrastructure Ltd and M/s Pragathi Krishna Gramin Bank and not with other companies listed in Form 26AS. The Tribunal directed the AO to provide the assessee an opportunity to reconcile the differences and prove the non-existence of transactions with other companies.

6. Levy of Interest Under Sections 234B and 234C:
- The Tribunal did not specifically address the issue of interest under sections 234B and 234C, as the additions to the total income were under dispute.

Conclusion:
The Tribunal partly allowed the appeal, directing the AO to re-examine certain issues and allowing specific claims as business expenditure while rejecting others. The Tribunal emphasized the principles of revenue recognition, commercial expediency, and the nature of payments in determining the allowability of deductions.