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TMI Blog2021 (11) TMI 141X X X X Extracts X X X X X X X X Extracts X X X X ..... LORE] assessee concerned was resisting a suit for protecting its business and not with a view get a new lease. Hon'ble Apex Court in the case of Sree Meenakshi Mill Ltd., has clearly held that taxability of expenditure must depend on the purpose of the legal proceeding, in relation to the business and cannot be computed by the final outcome of the proceedings. We are therefore, of the opinion that the CIT(A) was justified in holding that legal expenses incurred by assessee for litigation deserves to be deleted. - Decided against revenue. - ITA No. 938/Bang/2018 And ITA No. 1199/Bang/2018 - - - Dated:- 27-10-2021 - Shri Chandra Poojari, Accountant Member And Smt. Beena Pillai, Judicial Member For the Assessee : Shri Tatakrishna, Advocate For the Revenue : Shri Pradeep Kumar, CIT (DR) ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeals are cross appeals filed by assessee and revenue against the order of Ld.CIT(A), Gulbarga dated 30.01.2018 for A.Y. 2012-13. The grounds raised by the assessee in its appeal are as under: 1. The Assessment Order passed by the Learned Assessing Officer is not justified in law and on facts and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s settled that CSR expenditure is not allowable as expenditure under Income Tax Act, 1961, where the said prohibition has been introduced by Finance (No.2) Act, 2014 by inserting Explanation 2 to Section 37(1) of IT Act which is prospective in nature and in the impugned case the assessment year involved is prior to said amendment. 2.10. The Learned Assessing officer and Learned CIT(A) have erred in law and on facts in disallowing the impugned expenditure incurred for compensating the damage to roads suffered incidentally on transportation of iron-ore on the basis that the same is penal in nature. 2.11. Without prejudice to above, if the expenditure is held to be capital in nature, the Learned Assessing Officer and Learned CIT(A) ought to have granted statutory depreciation suo-moto under section 32(1) of the Act. 3. As regards disallowance of Reclamation Rehabilitation expenses: 3.1 The Learned Assessing officer and Learned CIT(A) have failed to appreciate that the amount deducted by Central Empower Committee (CEC) of ₹ 14,54,31,191/- is nothing but diversion of income by overriding title as the stock is confiscated by the CEC who has control o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... noted by him in para 4 at page 9 of his order. 3.10 Without prejudice to the above, the Explanation 1 to section 37(1) is not at all applicable as in the instant case, no illegality whatsoever was noticed in the case of appellant. 3.11 The Learned Assessing officer and Learned CIT(A) are not justified in taking contradictory position by first calling the impugned sum as towards corporate social responsibility not relating to business and next calling it as expenditure on illegality associated with the business. 3.12 The Learned Assessing officer and Learned CIT(A) having accepted the sale proceeds transferred to SPV is part of Corporate Social Responsibility, are unjust in denying the said expenditure which is expended towards the conservation of eco-system. 3.13 Without prejudice to the above, the Learned Assessing officer and Learned CIT(A) have failed to appreciate that the Explanation 2 to section 37 introduced by Finance Act 2015 barring the allowability of CSR applies only to the companies and not to other assessees. 3.14 Without prejudice to the above, the Learned Assessing Officer and Learned CIT(A) have erred in law and on facts in disal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y making the following adjustments: By disallowing the expenditure incurred by the Appellant towards construction of roads as a Corporate Social Responsibility for the purpose of business of ₹ 75,00,000/; By disallowing the expenditure of ₹ 14,54,31,191/ - claimed towards Reclamation 86 Rehabilitation of mining area as per the direction of Hon'ble Supreme Court; By treating the legal expenses of ₹ 9,41,07,014/- incurred for defending the lease property against the claim by the third party as capital expenditure; By levying of interest under section 234B of ₹ 3,44,80,540/-. Aggrieved by the order of Ld.AO, assessee preferred appeal before Ld.CIT(A). The Ld.CIT(A) upheld the disallowance in respect of Corporate Social Responsibility as well as Reclamation and Rehabilitation expenditure but treated the legal expenses incurred by assessee as revenue. Aggrieved by the order of Ld.CIT(A), both assessee as well as revenue are in appeal before us now. Assessee s appeal: Ground No. 1 is general in nature. Ground No. 2, the issue involved is in respect of disallowance at expenditure incurred toward constructio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... panies, whereas, assessee is a partnership firm. 10.4.2. Ld.Counsel submitted that commercial expediency should be judged in the context of prevailing social economic condition and that business undertaking is a product of combined effort s of all. He submitted that such expenditure incurred by assessee satisfies the requirement of commercial expediency in the present scenario. He placed reliance on order dated 31/07/2019 by Hon ble Karnataka High Court, Dharwad Bench, in case of Kanhaiyalal Dudheria vs JCIT in ITA NO. 100016/2018 c/w. ITA NO. 100017/2018. He submitted that mining activity in the lease areas causes ecological disbalances thereby hampering inhabitation in the nearby villages. Assessee incurred expenses towards re-establishing various facilities to support livelihood of people living in nearby villages. 10.4.3. On the contrary, Ld.CIT.DR placed reliance on observations of authorities below. 10.5. We have perused submissions advanced by both sides, in light of records placed before us. 10.5.1. We heard rival contentions and perused the record. We notice that an identical issue was examined by the Hon'ble Karnatak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus, the purpose and intent must be the sole purpose of expending the amount as a business expenditure. If the activity be undertaken with the object both of promoting business and also with some other purpose, such expenditure so incurred would not be disqualified from being claimed as a business expenditure, solely on the ground that the activity involved for such expenditure is not directly connected to the business activity. In other words, the issue of commercial expediency would also arise. 20. In fact, the Hon'ble Apex Court approving the observation of ATHERTON's case - 1926 AC 205 in the matter of EASTERN INVESTMENT LIMITED vs COMMISSIONER OF INCOME TAX reported in (1951) 20 ITR 1, held: ..a sum of money expended, none of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade , can be adopted as the best interpretation of the crucial words of Section 10(2)(xv). The imprudence of the expenditure and its depressing effect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or is an expenditure allowable under Section 37(1) of the Act and it came to be held that such contribution is not against public policy and would be allowable under Section 37(1) of the Act. It was also held 'any contribution made by an assessee to a public welfare fund which is directly connected or related with the carrying on the assessee's business or which results in the benefit of the assessee's business has to be regarded as an allowable deduction under Section 37(1)'. In the facts obtained in the said case, it was noticed that assessee was doing business of export of rice and contributing 50 paise per quintal to the district welfare fund maintained by the District Collector, without which contribution, he would not get permit and as such, it came to be held that expenditure so incurred by way of contribution is directly connected with the assessee's carrying on the business. It is further held: 10. From the abovesaid discussion it follows that any contribution made by an assessee to a public welfare fund which is directly connected or related with the carrying on of the assessee's business or which results in the benefit to the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder the MOU in question which came to be entered into by the assessee with Government of Karnataka was on account of the clarion call given by the then Chief Minister of Karnataka in the hour of crisis to all the Philanthropist, industrial and commercial enterprises to extended their whole hearted support and the entire logistic support has been extended by the Government of Karnataka namely, providing land and design of the house to be constructed, approval of layout and to take care of all local problems. In fact, the State Government had also agreed to exempt such of those persons who undertake to execute the work from the purview of sale tax, royalty, entry tax and other related State taxes and is said to have extended to the appellant also. In this background it cannot be construed that MOU entered into between the assessee and the Government of Karnataka is opposed to public policy. 29. In the facts on hand, it requires to be noticed that assessee is carrying of business of iron ore and also trading in iron ore. Thus, day in and day out the assessee would be approaching the appropriate Government and its authorities for grant of permits, licenses and as such the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... instant case also, the assessee has incurred the expenditure at the behest of the Deputy Commissioner, Bellary which was necessary to be incurred for the purposes of business, in public interest. Respectfully following the aforesaid view, we direct the Ld.AO to delete the disallowance. Accordingly, this ground raised by assessee stands allowed. 3. Ground No. 3 is in respect of disallowance of ₹ 14,54,31,191/- deducted by Central Empower Committee (CEC) towards Reclamation and Rehabilitation expenses. 3.1 It has been submitted by Ld.AR that the said expenses was as per the directions of Hon ble Supreme Court towards the Special Purpose Vehicle account. He submitted that this issue also stands squarely covered by the decision of the co-ordinate bench of the Tribunal in the case of M/s. Veerabhadrappa Sangappa Co. Vs. ACIT(supra) wherein the Tribunal observed as under: 7.10. We have perused submissions advanced by both sides in light of records placed before us. 7.10.1. Ld.Counsel again raised 3 prepositions before us in respect of the contribution made to SPV account from the sale proceeds. Primarily he con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , never reached the assessee as its income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to pay out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Whereby the obligation income is diverted before it reaches the assessee, it is deductible but where the income is required to be applied to discharge an obligation after such income reaches the assessee the same consequence in law does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another portion of one s own income which has been received and essence applied. The first is a case in which the income never reaches the assessee, who, even if he were to collect it, does so, not as part of his income but for and on behalf of the person to whom it was payable. Emphasis Supplied 7.10.5. Applying, thin line of difference interpreted by Hon ble Supreme Court to present facts, we are of the opinion that, contribution to S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ving as under: 2. Brief facts of the case are that the assessee-company, a Public Sector Undertaking, engaged in the business of 'mining of iron ore diamonds; and generation and sale of wind power', filed its return of income for the relevant Assessment Years 2013-14 and 2014-15 both under the normal provisions as well as u/s 115JB of the Act for the relevant AYs. During the assessment proceedings u/s 143(3) of the Act, the A.O. observed that the assessee-company is carrying out mining activity in India and particularly in Karnataka and that the Hon'ble Supreme Court of India took note of the large scale illegal mining activity carried on by various companies in Karnataka at the cost or detriment of environment and delivered their judgment on 18.04.2013 levying appropriate charges on the leaseholders. A.O. also observed that the Hon'ble Supreme Court, based on the extent of illegal mining, classified the mining leases into three categories viz., Category A , B and C and that the assessee is falling in Category-B in respect of Donimali Complex and that in their order, the Apex Court observed that before consideration of any resumption of mining operation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, it is a 'business expenditure'. Since the CEC had categorised the assessee as a Category-A company and the Hon'ble Supreme Court has accepted the said categorization, there would have been marginal illegalities committed by the assessee and the compensation / penalty as directed by the Hon'ble Supreme Court is only to compensate the Government for the loss of revenue from such mining or marginal illegalities and not as a penalty. Though the nomenclature given is penalty it is not for infraction or violation of any law to hold it to be punitive in nature, as presumed by the Assessing Officer. Learned Counsel for the Assessee placed reliance on various case law, particularly the decision of the Coordinate Bench of the ITAT, Kolkata in the case of Essel Mining Industries Ltd vs. Addl. CIT (ITA No. 352/Kol/2011 and others, dated 20.05.2016); ACIT vs. Freegade Co. Ltd (ITA No.934/Kol/2009, dated 05.08.2011) and also the decision of the Hon'ble Calcutta High Court in the case of ShyamSel Ltd vs. DCIT (72 Taxmann.com 105) (Cal.). On going through the said decisions, we find that the Hon'ble Calcutta High Court has considered the case of an assessee w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nish the companies for any violation of law but is to ensure scientific and planned exploitation of mineral resources in India. Further the Hon'ble Supreme Court had directed as under:- (X) Out of the 20% of sale proceeds retained by the Monitoring Committee in respect of the cleared mining leases falling in Category- A , 10% of the sale proceeds may be transferred to the SPV while the balance 10% of the sale proceeds may be reimbursed to the respective lessees. In respect of the mining leases falling in Category-B , after deducting the penalty / compensation, the estimated cost of the implementation of the R R Plan, and 10% of the sale proceeds to be retained for being transferred to the SPV, the balance amount, if any may be reimbursed to the respective lessees; The fact that the compensation is proportionate to area of illegal mining outside the leased area and that the assessee has paid the proportionate compensation for mining in the areas outside the sanctioned area allotted to it and that 10% of sum is to be transferred to SPV and the balance 10% is to be reimbursed to the respective lessees, according to us, proves that it is a payment made as 'compensa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to undertake socio economic and infrastructure development, afforestation, soil and biodiversity conservation and for ensuring inclusive growth of the area surrounding mining leases. 7.8.11. Ld.AO further observed that these payments are nothing but appropriation of profits earned by assessee that cannot be said to have incurred for purpose of business or earning profits. Accordingly, entire amount adjusted towards SPV was disallowed by Ld.AO. Ld.AO was of opinion that entire sale proceeds as per E auction bid Sheets/invoices were to be assessed as trading receipts. The amount retained by CEC/monitoring committee as per directions of Hon ble Supreme Court, on behalf of assessee for SPV purposes, was on account of damages and loss caused to environment due to contravention of law, and therefore, cannot be allowed as deduction out of sale proceeds, even after accrual of such liability. Ld.AO was of opinion that, even in Category A mines, there was marginal illegality found by CEC, because of which 10% of contribution was attributed out of sale proceeds to the SPV. 7.8.12. On careful reading of decision of Hon ble Supreme Court dated 18/04/2013, it is clea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rehabilitation scheme on its own, as there was no statutory requirement to do so under relevant statutes that regulate mining activities. 7.8.14. Hon ble Supreme Court has been very clear regarding the types of payments that needs to be recovered from lessee s under Category B , from the sale proceeds as well as otherwise. All the payments form part of R R plan for recouping and rehabilitating the environment. Certain payments are onetime payment and some others are recurring depending upon the sale of iron ore sold in the name of each licensee or depending on the need for rehabilitation. 7.8.15. In our view, contributing 15% to SPV account on account of Category B , would be application of income, and therefore, should be considered as expenditure incurred for carrying out its business activity. This we hold so, for the reason that, contributions determined by Hon ble Supreme Court are in the nature of guarantee payment necessary for resuming mining activity. We also note that, alleged sum in these grounds are for implementation of R R Plans in respective sanctioned lease areas held by assessee, where illegal mining activities or which were used for il ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollowing observations with regard to SPV:- By order dated 28-09-2012, this Court had constituted a Special Purpose Vehicle (for short SPV ) on the suggestion of the learned amicus curiae. The purpose of constitution of the SPV, it may be noticed, is for taking of ameliorative and mitigative measures as per the Comprehensive Environment Plans for Mining Impact Zone (CPEMIZ) around mining leases in Bellary, Chitradurga and Tumkur. By order dated 28-09-2012, the Monitoring Committee was to make available the payments received by it under different heads of receivables to the SPV 7.10.12. It is noticed that amounts collected from assessee 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 (supra) and Co-ordinate bench of Bangalore Tribunal in Ramgad Minerals (supra) came to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture, with the direction to the Ld.AO to verify, whether TDS was deducted and also to verify applicability of provisions of section 40(a)(ia). 4.3 Before us, the Ld.AR submitted that, the facts are same and the circumstances under which the disallowance was made by the Ld.AO are identical. He placed before us the order passed by the co-ordinate bench of this Tribunal in case of DCIT Vs. Shri B. Kumara Gowda in ITA Nos. 1053 1054/Bang/2012 vide order dated 28.08.2014 for A.Ys. 2008-09 2009-10, wherein the identical expenditure was allowed by observing as under. 9. We have perused the orders and heard the rival contentions. There is no dispute that expenditure incurred for defending Writ Petitions filed by the third parties in which the grant of mining lease to the assessee by the Government was challenged. It is also not disputed that the lease of the mines were granted to the assessee in the year 2006, and it had started commercial production, from that year itself. Thus, in our opinion, assesseee was only protecting a right which it was already enjoying under the mining lease. It had a turnover of ₹ 41.30Crores in the previous year relevant t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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