2022 (3) TMI 608 - AT - Income Tax

Addition of amount representing 10% 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 - AO was of the view that the amount retained by MC as per the proposal approved by Hon'ble Supreme Court is in the nature of appropriation of profit for adjusting it against the penalty and other liabilities - 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. 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 and State Pollution Control Board vs. Swastik Ispat (P) Ltd . 2014 (1) TMI 1913 - NATIONAL GREEN TRIBUNAL PRINCIPAL BENCH 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, as held by Hyderabad bench of Tribunal in the case of NMDC Ltd (supra), these expenses are allowable as deduction u/s. 37(1) of the Act. The recommendations made by CEC for making these payments have been made for the purpose of resuming the mining operations. The Hon'ble Supreme Court discusses these points at page 171 from paragraph 10 onwards. 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. Thus we hold that the above said amounts deducted from the sale proceeds 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 made in both the years. Rejection of claim for deduction being the difference in valuation of stock made by the AO in assessment year 2009-10 - A.O. has disallowed the claim by observing that the assessee should have made the claim only in assessment year 2010-11, i.e., in the year succeeding to AY 2009-10 - HELD THAT - AO was right in observing that the difference in closing stock determined as on 31.3.2009 cannot straightaway have impact to the opening stock shown as on 1.4.2011, without modifying the closing stock as on 31.3.2010 and 31.3.2011. Further, the assessee has not furnished any material to show that the closing stock added by the A.O. in assessment year 2009-10 was still available with the assessee as on 31.3.2011. The closing stock as at the year end is determined on the basis of physical quantity available. Hence, without showing that the physical quantity which was added as on 31.3.2009 was available with the assessee as on 31.3.2011 over and above the quantity originally shown, it is not possible to increase the opening stock as on 1.4.2011. Accordingly, we confirm the disallowance made by the A.O. on this issue. Addition of difference in closing stock - main contention of Ld. A.R. is that the dump stock does not have market value and hence it is not valued both in the opening stock and closing stock - HELD THAT - The opening stock quantity is shown at 193559 MT. There is no production during the year and sales during the year is 152360 MT. Accordingly the closing stock quantity is shown at 41,199 MT. The value of opening stock shown by the assessee is ₹ 4,24,98,060/- for the quantity of 193559, which translates to average price of ₹ 219.56 per MT. We notice that the AO has adopted the very same rate for valuing the dump stock, meaning thereby, the assessee has not considered dump stock for opening stock purpose also, though the same was reported to the Department of Mines. Hence it is seen that the assessee is adopting consistent practice of considering the realizable value of dump stock as Nil. In these set of facts, we are of the view that the AO was not justified in valuing the closing stock of dump stock by adopting the price applicable to good stock, when the assessee is consistently considering the realizable value of dump stock at NIL. Further, the very same stock has been brought forward from the prior year, wherein the value of dump stock was taken as NIL. Hence the AO was not justified in changing his stand and valuing the dump stock as on 31.3.2012 alone. Accordingly, we are of the view that the Ld. CIT(A) was not justified in confirming this addition. Accordingly, we set aside the order passed by Ld. CIT(A) and direct the AO to delete this addition made by valuing dump stock.

Summary

Issues Involved:
1. Addition of amount representing 10% of sale proceeds deducted by the Monitoring Committee from e-auction sale of mineral stock.
2. Difference in stock valuation - ?90,58,713/- (Assessment Year 2012-13).
3. Addition of closing stock - ?12,75,26,801/- (Assessment Year 2012-13).

Issue-wise Detailed Analysis:

1. Addition of Amount Representing 10% of Sale Proceeds Deducted by the Monitoring Committee:

The common issue in both appeals is whether the CIT(A) was justified in confirming the addition of 10% of sale proceeds deducted by the Monitoring Committee from the e-auction sale of mineral stock belonging to the assessee, which was contributed to a Special Purpose Vehicle (SPV) as per the Supreme Court's direction. The assessee's mines were categorized as "A" category mines, leading to a 10% deduction from sale proceeds by the Monitoring Committee during the years under consideration. The AO viewed this deduction as an appropriation of profit and disallowed the claim under sec. 37 of the Act, considering it not incurred wholly and exclusively for business purposes. The CIT(A) confirmed this view.

The assessee relied on decisions from coordinate benches, which held that such amounts retained by the Monitoring Committee are assessable as trading receipts but allowable as business expenditure, resulting in a net effect of NIL addition. The Tribunal agreed with this view, citing that the amounts collected from lessees under different categories are directed to be given to the SPV for ameliorative and mitigative steps beneficial to the environment and the mining industry. These amounts are not penal but compensatory in nature, and thus, allowable as deductions under sec. 37(1) of the Act. The Tribunal set aside the CIT(A)'s order and directed the AO to delete the impugned addition for both years.

2. Difference in Stock Valuation - ?90,58,713/- (Assessment Year 2012-13):

The issue pertains to the rejection of the assessee's claim for deduction of ?90,58,713/-, being the difference in stock valuation made by the AO in AY 2009-10. The assessee claimed this amount as a deduction by increasing the opening stock value as on 1.4.2011, as the assessment order for AY 2009-10 was passed after the closure of accounting years relevant to AYs 2010-11 and 2011-12. The AO and CIT(A) rejected this claim, stating that the difference in closing stock as on 31.3.2009 cannot impact the opening stock as on 1.4.2011 without modifying the closing stock as on 31.3.2010 and 31.3.2011. The Tribunal upheld this view, noting the lack of evidence that the stock added in AY 2009-10 was still available as on 31.3.2011. Thus, the disallowance was confirmed.

3. Addition of Closing Stock - ?12,75,26,801/- (Assessment Year 2012-13):

The AO noticed that the assessee reported a closing stock of 41,199 tonnes but did not value the dump stock of 580,830 tonnes reported in the Annual return to the Department of Mines and Geology. The assessee argued that the dump stock had no market value and was not considered for valuation. The AO, however, valued the dump stock and added ?12,75,26,801/- to the closing stock value, resulting in an equal addition to the total income. The CIT(A) confirmed this addition.

The Tribunal found that the assessee consistently considered the realizable value of dump stock as NIL, both for opening and closing stock. The Tribunal noted that the AO's valuation of the dump stock at the rate applicable to good stock was unjustified, given the consistent practice of the assessee and the fact that the same stock was brought forward from prior years. The Tribunal set aside the CIT(A)'s order and directed the AO to delete the addition made by valuing the dump stock.

Conclusion:

The appeal for AY 2012-13 was partly allowed, and the appeal for AY 2013-14 was allowed, with the Tribunal directing the deletion of the additions made by the AO and confirmed by the CIT(A).