2022 (2) TMI 314 - AT - Income Tax

Deduction of the amount retained by the monitoring committee out of sale proceeds - Disallowance relating to the 15% of sale proceeds retained by monitoring committee - assessee is a partnership firm and is engaged in the business of extraction of iron ore by taking lands on lease from Government - HELD 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 Tribunal in the case of NMDC Ltd 2018 (10) TMI 1120 - ITAT AHMEDABAD came to the same conclusion by following the decision rendered by Hon'ble Kolkata High Court in the case of Shyam Sel Ltd 2016 (8) TMI 511 - CALCUTTA HIGH COURT and State Pollution Control Board vs. Swastik Ispat (P) Ltd 2014 (1) TMI 1893 - NATIONAL GREEN TRIBUNAL, NEW DELHI wherein identical types of payments made to remedy the river pollution caused by the parties were held to be compensatory in nature. Hence the provisions of Explanation 1 to sec.37 will not apply to these payments. Hence, these expenses are allowable as deduction u/s 37(1) of the Act. Thus we hold that the amount deducted @ 15% from the sale proceeds constitute trading receipts in the hands of the assessee, but at the same time it is allowable as deduction u/s 37(1). - Decided in favour of assessee. Compensation amount retained from sale proceeds of iron ore - assessee claimed the same as deduction in its Profit and Loss account - AO considered the same as payment of penalty and accordingly opined that the same is not allowable u/s 37(1) - HELD THAT - We hold that the compensation amount paid by the assessee is allowable as deduction. However, we notice that, in the instant case, the assessee has not furnished break-up details of payment while the details of break-up of payments was furnished in the case of Veerabhadrappa Sangappa Co. 2020 (12) TMI 1145 - ITAT BANGALORE - AO also did not have occasion to examine the claim at all, since he had disallowed the entire claim. There should not be any dispute that, before applying the ratio of decision of Veerabhadrappa Sangappa Co. (supra), it is necessary to examine break-up details vis- -vis the decision rendered by Hon ble Supreme Court, to determine whether this claim pertain to the year under consideration etc., i.e., the AO should satisfy himself on parity of facts and year of claim. Hence for the limited purpose of examining factual aspects and applying the ratio of the decision rendered in the case of Veerabhadrappa Sangappa Co (supra), we restore this issue to the file of AO. Accordingly, the order passed by Ld CIT(A) on this issue is set aside. Appeal of the assessee is treated as allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance of claim as deduction of the amount retained by the monitoring committee out of sale proceeds.
2. Disallowance of amount withheld as compensation payment out of sale proceeds.
3. Disallowance of contribution made to Humpi Utsav.

Issue-wise Detailed Analysis:

1. Disallowance of claim as deduction of the amount retained by the monitoring committee out of sale proceeds:
The first issue pertains to the disallowance of ?1,52,84,756/- relating to the 15% of sale proceeds retained by the monitoring committee. The assessee argued that the mines owned were categorized as 'B' category mines, and hence 15% was deducted by the monitoring committee from the sales, which was claimed as an expenditure allowable under Section 37 of the Income Tax Act. The Assessing Officer (AO) disallowed this claim, and the CIT(A) confirmed the disallowance. The assessee cited precedents from the cases of M/s. Veerabhadrappa Sangappa & Company and M/s. Ramgad Minerals & Mining Ltd., where similar disallowances were deleted by the Tribunal, holding that the amount retained by the monitoring committee is assessable as trading receipts but allowable as business expenditure, resulting in a net effect of NIL addition. The Tribunal, after hearing both parties and reviewing the records, agreed with the assessee's reliance on these precedents, concluding that the 15% retained by the monitoring committee should be treated as trading receipts but allowable as a deduction under Section 37(1) of the Act. Thus, the Tribunal directed the AO to delete the impugned addition.

2. Disallowance of amount withheld as compensation payment out of sale proceeds:
The second issue involves the disallowance of ?12,07,51,307/- claimed as compensation for illegal mining pits and overburden dumps. The AO considered this as a penalty and disallowed it under Section 37(1) of the Act, supported by various judicial precedents that penalties for violation of law are not allowable as deductions. The CIT(A) upheld this view. The assessee referred to the case of Veerabhadrappa Sangappa & Co., where similar payments were allowed as deductions. The Tribunal reviewed the relevant observations and judgments, noting that the payments were directed by the Supreme Court for compensatory and rehabilitative purposes rather than as penalties. The Tribunal emphasized that these payments were necessary for resuming mining operations and were thus incidental to carrying on the business. Consequently, the Tribunal held that the compensation amounts are allowable as deductions under Section 37(1) of the Act. However, the Tribunal noted that the assessee had not furnished the break-up details of the payment and directed the AO to examine the factual aspects and apply the ratio of the decision in Veerabhadrappa Sangappa & Co. accordingly.

3. Disallowance of contribution made to Humpi Utsav:
This issue was not specifically detailed in the provided judgment text. However, typically, such contributions are evaluated based on whether they are considered to be for business promotion or social responsibility, and their allowability under Section 37(1) of the Income Tax Act depends on the nature and purpose of the expenditure.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, directing the AO to re-examine the factual aspects of the compensation payments and apply the relevant judicial precedents to determine the allowability of the claimed deductions. The Tribunal upheld the principle that payments made under judicial directives for compensatory and rehabilitative purposes are allowable as business expenditures, provided they are necessary for the continuation of business operations.