2021 (2) TMI 130 - AT - Income Tax

Disallowance of SPV (Special Purpose Vehicle) Charges - Allowability of SPV Expenses - AR submitted that SPV expenses are for socio economic development of the mining area - AO invoked Explanation to section 37 (1) - HELD THAT - We note that this issue stands squarely covered by decisions of coordinate bench of this Tribunal in case of M/s.Ramgad Minerals Mining Ltd 2012 (1) TMI 313 - KARNATAKA HIGH COURT and M/S VEERABHADRAPPA SANGAPPA CO. 2020 (12) TMI 1145 - ITAT BANGALORE - Thus we are of opinion that contribution to SPV being 15% of sale proceeds, under category B, is to be allowable expenditure for year under consideration. Disallowance of payments as penal in nature - AR emphasised that, lower authorities erred in treating said compensation as penalty and submitted that the said amount ought to have been allowed as expenditure in the hands of assessee incurred for the purpose of business - HELD THAT - Respectfully following Hyderabad bench of Tribunal in case of NMDC Ltd 2018 (10) TMI 1120 - ITAT AHMEDABAD the payment 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. - we are of opinion that payment made as compensation is allowable expenditure for year under consideration. - Assessee appeal allowed.

Issues Involved:
1. Erroneous order by CIT(A)
2. Disallowance of ?2,56,53,662/- as penal in nature
3. Disallowance of ?20,55,00,000/- as penalty
4. Payments made for violation of law
5. Compliance with Supreme Court’s recommendations
6. Applicability of corporate social responsibility provisions
7. Treatment of amounts retained by Monitoring Committee as contingent liability

Detailed Analysis:

1. Erroneous Order by CIT(A):
The assessee contended that the order passed by the CIT(A) was erroneous both on facts and in law, thus prejudicial to the assessee.

2. Disallowance of ?2,56,53,662/- as Penal in Nature:
The assessee argued that the disallowance of ?2,56,53,662/- by the AO, confirmed by the CIT(A), was erroneous. This amount was retained by the Monitoring Committee as per the Supreme Court’s directions and was compensatory, not penal. The ITAT referenced the Hyderabad Tribunal's decision in NMDC Ltd. vs. ACIT, which allowed similar expenses as business expenditure under Section 37(1) of the Income Tax Act. The ITAT concluded that the SPV contribution was necessary for resuming mining activities and hence allowable as business expenditure.

3. Disallowance of ?20,55,00,000/- as Penalty:
The assessee challenged the disallowance of ?20,55,00,000/-, arguing it was compensatory for illegal mining and dumping outside the lease area, as directed by the Supreme Court. The ITAT referred to the Supreme Court’s order and previous Tribunal decisions, concluding that the payments were compensatory and necessary for business operations, thus allowable under Section 37(1).

4. Payments Made for Violation of Law:
The CIT(A) and AO held that the payments were for violations of law and hence disallowed under Explanation 1 to Section 37(1). The ITAT, however, found that the payments were compensatory and necessary for business operations, not penal, and thus allowable.

5. Compliance with Supreme Court’s Recommendations:
The assessee argued that the payments were made to comply with the Supreme Court’s recommendations, which were not contrary to any statutory provisions. The ITAT agreed, noting that the payments were necessary for resuming mining operations and were compensatory.

6. Applicability of Corporate Social Responsibility Provisions:
The assessee contended that the CIT(A) and AO erred in applying corporate social responsibility provisions, which were not applicable to a partnership firm. The ITAT did not specifically address this issue but allowed the expenses as business expenditure.

7. Treatment of Amounts Retained by Monitoring Committee as Contingent Liability:
The AO treated the amounts retained by the Monitoring Committee as contingent liabilities. The ITAT, however, found that the amounts were correctly estimated and ascertained liabilities, thus allowable as business expenditure.

Conclusion:
The ITAT allowed the appeal, holding that the disallowances made by the AO and confirmed by the CIT(A) were erroneous. The contributions to the SPV and the compensatory payments were necessary for business operations and allowable under Section 37(1) of the Income Tax Act. The ITAT emphasized that these payments were compensatory, not penal, and were made to comply with the Supreme Court’s directions for resuming mining activities. The appeal was thus allowed in favor of the assessee.

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