2021 (3) TMI 417 - AT - Income Tax

Expenditure towards contribution to SPV - Allowable revenue expenditure u/s 37(1) - HELD THAT - Facts leading to the disallowance is in the present case is similar and identical to the facts in the case of Veerbhadrappa Sangappa Co. 2020 (12) TMI 1145 - ITAT BANGALORE , we note that same is the view taken by Co-ordinate Bench in case of M/s Ramgad Minerals Mining Ltd. 2020 (11) TMI 174 - ITAT BANGALORE Respectfully following the view taken in above decisions and based on the above discussions and analysis, we are of the opinion that 15% contribution to SPV retained by the monitoring committee on behalf of assessee deserves to be treated as business expenditure for the year under consideration. - Decided in favour of assessee.

Summary

Issues Involved:

1. Allowability of expenditure amounting to ?51,20,653/- being contribution to SPV as per directions of the Apex Court.
2. Treatment of the expenditure towards contribution to SPV under Explanation 1 to Section 37(1) of the IT Act, 1961.
3. Whether the contribution to SPV qualifies as an expenditure for the purpose of business carried on by the assessee.
4. Distinguishing the cases relied upon by the Assessing Officer.
5. Nature of the contribution to SPV - whether penal or business expenditure.

Detailed Analysis:

1. Allowability of Expenditure towards SPV Contribution:

The primary issue is whether the expenditure of ?51,20,653/- contributed to the Special Purpose Vehicle (SPV) as directed by the Apex Court is allowable. The assessee, a partnership firm engaged in iron ore extraction, debited this amount to its Profit & Loss account under the head "social welfare-government fund." The Assessing Officer (AO) disallowed this deduction, treating it as penal in nature under Explanation 1 to Section 37(1) of the Income Tax Act, 1961. The CIT(A) upheld this disallowance, leading to the present appeal.

2. Treatment under Explanation 1 to Section 37(1):

The AO and CIT(A) both treated the SPV contribution as penal, disallowing it under Explanation 1 to Section 37(1). The AO cited the Supreme Court's decision in WP(C) No.562 of 2009 and other precedents, asserting that the contribution was penal for environmental damages and thus not allowable as a business expenditure. The CIT(A) concurred, emphasizing the penal nature of the contribution.

3. Qualification as Business Expenditure:

The assessee argued that the contribution was made at the direction of the Supreme Court and was essential for continuing its business operations. The Tribunal examined whether the contribution was an application of income or a diversion of income by overriding title. It referred to the Supreme Court's decision in CIT vs Sitaldas Tirathdas, which distinguished between obligations paid out of income and those diverting income before it reaches the assessee. The Tribunal concluded that the contribution was necessary for resuming mining operations and thus an allowable business expenditure.

4. Distinguishing Cases Relied Upon by the AO:

The Tribunal reviewed the cases cited by the AO, which dealt with penalties. It found that these cases were not applicable as the SPV contribution was a precondition for resuming business operations, not a penalty. The Tribunal emphasized that the contribution was mandated by the Supreme Court for environmental reclamation and rehabilitation, not as a penalty for contravention of law.

5. Nature of the Contribution - Penal or Business Expenditure:

The Tribunal analyzed the nature of the SPV contribution, concluding that it was a business expenditure. It noted that the contribution was part of the conditions set by the Supreme Court for resuming mining operations under Category 'B' and was not a penalty. The Tribunal referred to similar cases decided by the coordinate bench, including M/s. Veerabhadrappa Sangappa & Co. and M/s. Ramgad Minerals & Mining Ltd., which treated such contributions as business expenditures.

Conclusion:

The Tribunal held that the 15% contribution to the SPV retained by the monitoring committee on behalf of the assessee should be treated as a business expenditure for the year under consideration. It allowed the appeal, concluding that the contribution was necessary for carrying out the assessee's business activities and was not penal in nature. The Tribunal's decision was based on the principle that the contribution was an application of income, not a diversion, and was essential for resuming mining operations as directed by the Supreme Court.