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TMI Blog2021 (12) TMI 547X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - ITA No.3300/Bang/2018, SA No.51/Bang/2021 - - - Dated:- 1-12-2021 - Shri Chandra Poojari, AM And Shri George George K, JM For the Appellant : Sri.Laxminiwas Sharma, CA For the Respondent : Dr.Manjunath Karkihalli, CIT-DR ORDER PER GEORGE GEORGE K, JM This appeal at the instance of the assessee is directed against CIT(A) s order dated 30.10.2018. The relevant assessment year is 2015-2016. The assessee has also preferred a Stay Petition seeking to stay the outstanding demand. 2. The grounds raised read as follows:- 1. The order of the lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee s mine falls within B category and as per the Hon ble Supreme Court judgment, the Central Empowered Committee (CEC) appropriated 15% of the total sale proceeds of iron ore extractions as a compensatory payment towards damages caused to the environment and forest degradation on account of mining. It was submitted by the assessee that an amount of ₹ 6,08,17,563 representing 15% of sale proceeds of iron ore does not form part of the income since it was appropriated by the CEC at the very source. Further, it was submitted that in the event the 15% of sale proceeds retained by CEC is to be held as income, the assessee is entitled to the deduction of the same u/s 37 of the I.T.Act. The A.O., however, rejected the contentions of the assessee and held that 15% of the sale proceeds retained by the CEC is to meet penal liabilities for contravention of law and cannot be held to be deductible in view of Explanation to section 37(1) of the I.T.Act. Therefore, the A.O. disallowed a sum of ₹ 6,08,17,563 and added the same to the total income. 4. Aggrieved by the assessment order, assessee filed an appeal before the first appellate authority. The CIT(A) upheld the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT vs Sitaldas Tirathdas (supra). Hon ble Supreme Court laying down following principal referred to various rulings that illustrated aspects of diversion of income by overriding title. These are the cases which have considered the problem from various angles. Some of them appear to have applied the principle correctly and some, not. But we do not propose to examine the correctness of the decisions in the light of the facts in them. In our opinion, the true test is whether the amount sought to be deducted, in truth, 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 no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s outside the sanctioned area at the rate of ₹ 5 Crs per hectare and for illegal overburden for at the rate of ₹ 1 Cr per hectare. Further, A.O. observed that the said direction of the Apex Court was subject to the final determination of the notional loss caused by the illegal mining and illegal use of the land; and that the Hon'ble Supreme Court had directed that each of the leaseholder should pay a sum equivalent to 15% of the sale proceeds of its iron ore sold through the Monitoring Committee. In accordance with the said direction, the assessee made payment of ₹ 337.13 Crs towards contribution for the Special Purpose Vehicle and the sum of ₹ 68.66 Crs towards penalty / compensation for encroachment of the mining area beyond the sanctioned / leased area. The A.O. observed that the total of the above payment of ₹ 405.79 Crs was punitive in nature and accordingly sought to disallow the same by issuance of a show-cause notice. 4. The A.O. however did not accept the assessee's explanation and held that the assessee, being a Category-B leaseholder, has been directed to make the payment for infringement of MMDR Act and other allied law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 12.50 lakh for compensating damage to environment and the same was recovered by State Pollution Control Board on the principle of 'polluter pays' and the A.O. had treated it as penalty and did not allow the same as business expenditure. The Hon'ble High Court had taken note of the fact that the assessee's business was not illegal and that compensation was paid because of its failure to install pollution control device within prescribed time and therefore, such payment was undoubtedly for the purpose of business and in consequence of business carried on by the assessee and was thus covered by section 37 of the Act. For coming to this conclusion, Hon'ble High Court has also considered the judgment of the Hon'ble National Green Tribunal in the case of State Pollution Control Board vs. Swastik Ispat (P.) Ltd wherein at para 38 of the judgment the Tribunal held as under:- Being punitive is the essence of 'penalty'. It is in clear contradistinction to 'remedial' and / or 'compensatory'. 'penalty' essentially has to be for result of a default and imposed by way of punishment. On the contrary, 'compensatory' may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccept the contention of the assessee that it is compensatory in nature and is a 'business expenditure' and is allowable u/s 37(1) of the Act. Thus, Grounds No.2 and 3 raised by the assessee are allowed. 7.10.9. We also notice that the co-ordinate Bangalore bench of Tribunal has also considered identical issue in the case of Ramgad Minerals Mining Ltd (ITA No.1270 1271/B/2019 dated 04- 11-2020) being Category B , an identical addition made by Ld.AO was held to be allowable as expenditure with following observations:- 7.8.9. In present appeals, only issue raised for our consideration is in respect of 15% contribution made to SPV for assessment year 2013-14 and 2014-15; and issue in respect of R R expenses incurred during assessment year 2013 14. First of all, we summarise objections of Ld.AO as in respect of SPV expenses as under:- (a) This is one of the objections of the AO that the SPV Expenses is not allowable because it is not compensation but it is penal in nature for contravention of law as observed by him in para 4.3 of the assessment order for AY:2013-14. (b) Second objection of the Ld.AO is contained in para 4.9 of the assessment order fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resuming mining operations under Category B . We refer to and rely on observations by Hon ble Supreme Court in case of CIT vs SitaldasTirathdasreported in(1961) 41 ITR 367.Hon ble Supreme Court laying down following principal referred to various rulings that illustrated aspects of diversion of income by overriding title. These are the cases which have considered the problem from various angles. Some of them appear to have applied the principle correctly and some, not. But we do not propose to examine the correctness of the decisions in the light of the facts in them. In our opinion, the true test is whether the amount sought to be deducted, in truth, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... letion of implementation of R R plan, subject to satisfaction of CEC and approval by Hon ble Supreme Court. For this peculiar reason, amount so contributed towards SPV being 15% of sale proceeds, under Category B, cannot be treated as penal in nature. We, therefore, reject observations of authorities below that, such sum having contributed by assessee fall within ambit of explanation 1 to section 37 (1) of the Act. 4.5 The Ld D.R, however, contended that the decision rendered in the case of NMDC Ltd (supra) cannot be relied upon by the assessee. He submitted that NMDC Ltd is a public sector undertaking and further, there is no allegation of illegalities. He also submitted that the Hyderabad bench of Tribunal has taken the view that these payments are not punitive in nature, but compensation for scientific exploitation of minerals. However, the ld D.R contended that these amounts have been collected from the assessees, since they have caused damage to the environment and hence it is penal in nature. 4.6 The Hyderabad bench of Tribunal has also noticed that NMDC Ltd falls under Category A . There is no dispute about the same. However, the CEC has recommended that M/s NMD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on facilities for transportation of iron ore (such as maintenance and widening of existing road, construction of alternate road, conveyor belt, railway siding and improving communication system, etc.). A detailed scheme in this regard may be directed to be prepared and implemented after obtaining permission of this Hon ble Court; The Hon ble Supreme Court @ 176 of its order has made following 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 4.9 The Hon'ble Supreme Court has observed as under in respect of Reclamation and Rehabilitation Plans (R R Plans) at page 168:- 8. As previously noticed, the CEC in its Report dated 13.3.2012 had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;ble Supreme Court has also recorded lease wise R R Plans in continuation of the above said observations. 4.10 The Hon'ble Supreme Court has accepted the recommendations of CEC with the following observations at page 194:- 52. The conditions subject to which Category A and B mines are to be reopened and the R R Plans that have been recommended as a precondition for reopening of Category B mines are essentially steps to ensure scientific and planned exploitation of the scarce mineral resources of the country. The details of the preconditions and the R R plans have already been noticed and would not require a repetition. Suffice it would be to say that such recommendations are wholesome and 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. 53. FIMI was actively associated in the framing of the guidelines and the preparation of the R R Plans. There is nothing in the preconditions or in the details of the R R plans suggested which are contrary to or in conflict or inconsistent with any of the statutory provisions of the MMDR Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance is restricted to the expenses incurred by the assessee under a statutory obligation u/s. 135 of the Companies Act, 2013 and there is thus now a line of demarcation between the expenses incurred by the assessee on discharging corporate social responsibility under such a statutory obligation and under a voluntary assumption of responsibility. As for the former, the disallowance under Explanation 2 to section 37(1) comes into play, but as for latter, there is no such disabling provision as long as the expenses, even in discharge of corporate social responsibility on voluntary basis, can be said to be wholly and exclusively for the purposes of business . There is no dispute that the expenses in question are not incurred under the aforesaid statutory obligation. In the present case, the said expenditure is incurred by the assessee on discharging social responsibility so as to earn the goodwill of the society and it is wholly and exclusively for the purpose of business. 20. Therefore, the provisions of Explanation to section 37 of the Act cannot be applied. Further, in the present case, the assessee being an individual, and not a corporation under the Companies Act, 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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