2021 (2) TMI 1145 - AT - Income Tax

Deduction u/s 37(1) - addition of amount representing 15% of sale proceeds deducted by the Monitory committee from e-auction sale of mineral stock belonging to the assessee and which was contributed to Special Purpose Vehicle, as per the direction given by Hon ble Supreme Court - HELD THAT - 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 2018 (10) TMI 1120 - ITAT AHMEDABAD came to the same conclusion by following the decision rendered by Hon'ble Kolkatta High Court in the case of Shyam Sel Ltd 2016 (8) TMI 511 - CALCUTTA HIGH COURT 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, as held by Hyderabad bench of Tribunal in the case of NMDC Ltd 2018 (10) TMI 1120 - ITAT AHMEDABAD these expenses are allowable as deduction u/s 37(1) of the Act. Another important point we notice is that the recommendations made by CEC for making these payments have been made for the purpose of resuming the mining operations. Hence there is merit in the submission of the ld A.R that, without making these payments, the 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. 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) of the Act. Accordingly, we set aside the order passed by Ld CIT(A) on this issue in both the years under consideration and direct the AO to delete the impugned addition in both the years. Appeals of the assessee are allowed.

Summary

Issues Involved:

1. Whether the CIT(A) was justified in confirming the addition of 15% of sale proceeds deducted by the Monitoring Committee from the e-auction sale of mineral stock belonging to the assessee and contributed to the Special Purpose Vehicle (SPV) as per the Supreme Court's direction.

Issue-wise Detailed Analysis:

1. Background and Context:
The assessee, a partnership firm engaged in iron ore extraction, faced scrutiny due to rampant mining in Karnataka's Bellary district. The Supreme Court intervened through a writ petition filed by an NGO, leading to the formation of the Central Empowered Committee (CEC) to investigate illegal mining activities. The Supreme Court imposed a mining ban and later categorized mines into "A," "B," and "C" based on the extent of illegalities, with specific financial implications for each category.

2. Financial Implications and Categorization:
- Category A: 10% of sale proceeds retained by the Monitoring Committee (MC) and transferred to the SPV.
- Category B: 15% of sale proceeds retained by the MC, compensation for illegal mining and dumping, and costs for Reclamation and Rehabilitation (R&R) plans.
- Category C: Leases canceled, entire sale proceeds retained by the MC, and R&R costs borne by the lessee.

The assessee's mines fell under Category B, leading to a 15% deduction from sale proceeds by the MC.

3. Assessing Officer's (AO) View:
The AO treated the 15% deduction as "appropriation of profit" and "penal/compensatory payment" for environmental damages, disallowing it as a business expense under Section 37 of the Income Tax Act. The AO considered the entire sale proceeds as trading receipts, with the retained amount being a penalty for contravening laws, thus not allowable as a business expense.

4. Assessee's Contention:
The assessee argued that the deducted amounts were not received and should not be considered as income. The assessee relied on precedents where similar deductions were treated as trading receipts but allowed as business expenses, resulting in a net zero addition.

5. Tribunal's Analysis and Conclusion:
The Tribunal referred to similar cases, particularly M/s Veerabhadrappa Sangappa & Co and M/s Ramgad Minerals & Mining Ltd, where it was held that such deductions are trading receipts but allowable as business expenses. The Tribunal emphasized that the contributions to the SPV were mandated by the Supreme Court for resuming mining operations and were compensatory rather than penal.

6. Legal Precedents and Reasoning:
The Tribunal cited the Supreme Court's principle in CIT vs. Sitaldas Tirathdas, distinguishing between income diverted by overriding title (deductible) and income applied to discharge an obligation after reaching the assessee (not deductible). The Tribunal concluded that the 15% contribution to the SPV was an application of income necessary for business operations, not a penalty, and thus allowable as a business expense under Section 37(1).

7. Final Decision:
The Tribunal set aside the CIT(A)'s order, directing the AO to delete the addition in both assessment years, recognizing the 15% deduction as an allowable business expense.

Conclusion:
The Tribunal allowed the assessee's appeals, holding that the 15% deduction for the SPV contribution was a business expense necessary for resuming mining operations and not a penal payment, thus allowable under Section 37(1) of the Income Tax Act.