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2025 (3) TMI 878 - HC - Income TaxReopening of assessment u/s 147 - illegal activity attracting rigor of explanation (1) u/s 37 (1) - HELD THAT - Appellate authority had examined Form H-1 submitted to Indian Bureau of Mines in regard to production of iron ore to find that very same figure had been reported by the assessee in its audit report in Form 3CD. The Tribunal thus concurrently found. There is no perversity in the concurrent finding of fact. No question of law let alone a substantial question can arise from such concurrent finding on fact. It appears the AO relied on report of Justice M.B. Shah Commission which said leases operated under deemed extension without statutory clearance under EIA notification dated 27th January 1994 and amendments therein for environmental clearance is considered as illegal. Action should be initiated to recover value equivalent to market value. The assessee when show caused came up with its explanation that Central Empowered Committee (CEC). We have not been able to find there arises a substantial question of law on the concurrent finding of fact. So far as disallowing the expenditure in terms of explanation (1) under section 37 (1) is concerned the Tribunal said that the assessee had not claimed any expenditure on account of penalty imposed and paid. Reliance by the assessee was on report filed by the CEC pursuant to Justice M.B. Shah Commission. It was on page 29 in the report containing opinion that inter alia mining operations without clearance does not constitute illegal mining. Revenue will be able to apply explanation (1) under section 37 (1) if in future the activity is declared to be illegal penalty imposed and claimed by assessee as an expenditure in its relevant return. Presently there is nothing to show the activity stood declared as illegal for the explanation to be invoked. No substantial question of law arises from impugned order of the Tribunal. Decided against revenue.
ISSUES PRESENTED and CONSIDERED
The core legal questions considered in this judgment include:
ISSUE-WISE DETAILED ANALYSIS Reopening of Assessment under Section 147 The relevant legal framework involves section 147 of the Income Tax Act, which allows for the reopening of assessments if there is reason to believe that income has escaped assessment. The revenue argued that the assessee was involved in illegal mining activities, as statutory clearances were not obtained, justifying the reopening of the assessment. The Court examined the Tribunal's findings, which were based on the assessee's reported figures in Form H-1 and audit report in Form 3CD. The Tribunal found no discrepancy or suppression of production particulars, leading to a concurrent finding of fact that did not support the revenue's claim of illegal activity. The Court concluded that no substantial question of law arose from these concurrent findings. Disallowance of Expenditure under Section 37(1) Section 37(1) of the Income Tax Act disallows deductions for expenses incurred for purposes that are an offense or prohibited by law. The revenue contended that the Tribunal erred in deleting the addition of expenditure related to the alleged illegal mining activities. The Tribunal, agreeing with the first appellate authority, found that no penalty imposed for statutory violations had been claimed by the assessee as an expenditure. The Tribunal relied on the Central Empowered Committee's (CEC) report, which stated that mining without environmental clearances does not constitute illegal mining under section 21(5) of the MMDR Act, 1957. The Court affirmed that explanation (1) under section 37(1) could not be applied as the activity was not declared illegal, and no penalty was claimed as an expense. Substantial Question of Law The Court emphasized that a substantial question of law does not arise from concurrent findings of fact unless there is perversity or a significant legal error. The Tribunal's findings were based on evidence and reports, including the CEC's opinion and the Justice M.B. Shah Commission's report, which did not conclusively establish illegal mining by the assessee. The Court found no legal error in the Tribunal's decision. SIGNIFICANT HOLDINGS The Court held that no substantial question of law arose from the Tribunal's order, as the findings were based on concurrent facts and evidence. The Court preserved the Tribunal's reasoning that:
The core principles established include the requirement for a substantial question of law to arise from legal error or perversity in findings, and the necessity for an activity to be declared illegal before applying explanation (1) under section 37(1) for disallowing expenditures. The final determination was the dismissal of the appeal, as the materials on record did not substantiate the revenue's claims of illegal mining activities by the assessee.
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