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2021 (12) TMI 547 - AT - Income TaxDeduction u/s 37 in respect of 15% of sale proceeds retained by the CEC Central Empowered Committee - sale proceeds of iron ore extractions as a compensatory payment towards damages caused to the environment and forest degradation on account of mining - assessee firm has credited an amount as iron ore sales through e-auction - HELD THAT - ITAT in assessee s own case 2021 (2) TMI 1145 - ITAT BANGALORE had rejected the plea of the assessee that 15% of the sale proceeds retained by the CEC is to be excluded from the total turnover on the principle of diversion of income by way of overriding title. The Tribunal had categorically held that 15% of sale proceeds was payable to SPV account after it accrued to the assessee. However, the ITAT held that 15% of the sale proceeds constitute an allowable business expenditure u/s 37 Observation of the AO and the CIT(A) (ground No.5) that the contribution to SPV is nothing but CSR - As we find that the assessee is a partnership firm, which is not under the statutory obligation for complying with CSR provisions. The Bangalore Bench of the Tribunal in the case of Shri B.Rudragouda 2021 (4) TMI 1249 - ITAT BANGALORE had held that the assessee being an individual and not a company, is not governed by section 135 of the Companies Act, 2013 and the impugned expenditure incurred by the assessee is not in the nature of CSR expenditure as mentioned in that section and it cannot be disallowed by invoking the provisions of Explanation 2 to section 37 We hold that the assessee is entitled to deduction u/s 37 of the I.T.Act in respect of 15% of sale proceeds retained by the CEC. It is ordered accordingly.
Issues Involved:
1. Applicability of "diversion of income by overriding title." 2. Right of the appellant to receive the amount retained by the monitoring committee. 3. Nature of the amount retained by the monitoring committee (penal vs. compensatory). 4. Application of corporate social responsibility (CSR) provisions to the appellant. Issue-wise Detailed Analysis: 1. Applicability of "diversion of income by overriding title": The appellant argued that the concept of "diversion of income by overriding title" should apply, asserting that the amount retained by the monitoring committee on the direction of the Supreme Court does not form part of its income. The Tribunal, referencing its own earlier decisions for assessment years 2013-2014 and 2014-2015, held that 15% of the sale proceeds, retained by the Central Empowered Committee (CEC), accrued to the appellant first and was then payable to the Special Purpose Vehicle (SPV) account. Thus, it was not a case of income diversion by overriding title. 2. Right of the appellant to receive the amount retained by the monitoring committee: The appellant contended that it did not have the right to receive the amount retained by the monitoring committee. The Tribunal reiterated that the entire sale proceeds accrued to the appellant, and the retention by the CEC was a subsequent obligation. Therefore, the amount retained by the CEC was considered to have accrued to the appellant first. 3. Nature of the amount retained by the monitoring committee (penal vs. compensatory): The appellant claimed that the amount retained was compensatory and not penal. The Tribunal, drawing from its previous rulings and the Supreme Court's directions, concluded that the 15% contribution to the SPV was compensatory in nature. It was necessary for the appellant to continue its business operations and was thus an allowable business expenditure under section 37 of the Income Tax Act. The Tribunal referenced the Supreme Court's emphasis on scientific and planned exploitation of mineral resources and the need for reclamation and rehabilitation plans, which supported the compensatory nature of the payment. 4. Application of corporate social responsibility (CSR) provisions to the appellant: The appellant, a partnership firm, argued that it was not under any statutory obligation to comply with CSR provisions, which apply to companies. The Tribunal agreed, citing the Bangalore Bench's decision in the case of Shri B. Rudragouda v. ACIT, which held that CSR provisions under section 135 of the Companies Act, 2013, do not apply to non-corporate entities. Therefore, the expenditure incurred by the appellant towards the SPV was not CSR expenditure and was allowable as a business expense. Conclusion: The Tribunal allowed the appeal, holding that the appellant was entitled to a deduction under section 37 of the Income Tax Act for the 15% of sale proceeds retained by the CEC. The Stay Application filed by the appellant was dismissed as it became infructuous. The Tribunal's decision emphasized the compensatory nature of the payment and the non-applicability of CSR provisions to the appellant, a partnership firm.
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