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TMI Blog2022 (2) TMI 314X X X X Extracts X X X X X X X X Extracts X X X X ..... [ 2016 (8) TMI 511 - CALCUTTA HIGH COURT] and State Pollution Control Board vs. Swastik Ispat (P) Ltd [ 2014 (1) TMI 1893 - NATIONAL GREEN TRIBUNAL, 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, these expenses are allowable as deduction u/s 37(1) of the Act. Thus we hold that the amount deducted @ 15% from the sale proceeds constitute trading receipts in the hands of the assessee, but at the same time it is allowable as deduction u/s 37(1). - Decided in favour of assessee. Compensation amount retained from sale proceeds of iron ore - assessee claimed the same as deduction in its Profit and Loss account - AO considered the same as payment of penalty and accordingly opined that the same is not allowable u/s 37(1) - HELD THAT:- We hold that the compensation amount paid by the assessee is allowable as deduction. However, we notice that, in the instant case, the assessee has not furnished break-up details of payment while the details of break-up of payments was furnished in the case of Veerabhadrappa Sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exploitation or rampant mining in the State of Karnataka, particularly in the district of Bellary, was engaging the attention of the State Government from time to time. Not satisfied with the investigation carried in the State of Karnataka, a NGO named M/s Samaj Parivartana Samudaya had instituted a writ petition before Hon'ble Supreme Court under Article 32 of the Constitution complaining of little or no coercive action on the part of the State; seeking Hon'ble Supreme Court's intervention in the matter and specifically praying for certain reliefs. The writ petition was entertained and a Committee called "Central Empowered Committee" (CEC) was formed and it was asked to submit a report on the allegations of illegal mining in the Bellary region of the State of Karnataka. The initial reports submitted by CEC indicated large scale illegal mining at the cost and to the detriment of the environment. Hence, vide its order dated 29-7-2011, the Hon'ble Supreme Court imposed complete ban on mining in the district of Bellary. 3.3 The details of various orders passed by Hon'ble Supreme Court in this regard are given below:- • Hon'ble Supreme Court by order dated 29/07/2011 passed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning operations in such areas without requisite statutory approval and clearances. Hence a Joint Team was constituted by Hon'ble Supreme Court by order dated 6.5.2011 to determine the boundaries of initially 117 mining leases, which number was subsequently extended to 166 by inclusion of the mines in Tumkur and Chitradurga districts. The CEC submitted its final report dated 3.2.2012, which made two significant recommendations:- (A) Categorisation of mines into three categories, i.e., "A", "B" and "C" on the basis of extent of encroachment in respect of mining pits and over burden dumps determined in terms of percentage qua the total lease area. (B) Conditions subject to which reopening of the mines and resumption of mining operations were to be considered by the Court. A set of modified recommendations along with a set of detailed guidelines for preparation and implementation of Reclamation and Rehabilitation Plans (R & R) were also submitted to the Hon'ble Supreme Court by CEC on 13.3.2012. 3.5 The CEC categorised the mines into "A", "B" and "C" on the following basis:- (a) The Category "A" comprises of (a) working leases wherein no illegality/marginal illegality have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad, office etc outside the sanctioned lese area. (c) The estimated cost of Reclamation and Rehabilitation Plans (R & R plans). For this purpose, a Guarantee money for implementation of R & R plans shall be collected. Category B lessees have to deposit a Guarantee money for implementation of R & R Plans in the respective sanctioned lease areas. On full implementation of the R & R Plans to the complete satisfaction of the CEC and subject to the approval by Hon'ble Supreme Court, the guarantee money would be refundable to the lease holder. It was also stated that the lessees shall be liable to pay additional amount, if the R & R Plan expenditure exceeded the estimates. (C) In respect of mining leases falling under Category C:- (a) such leases are cancelled/determined on account of the leases having been found to be involved in substantial illegal mining outside the sanctioned lease areas (b) the entire sale proceeds of the existing stock of the iron ore of these leases should be retained by the MC and (c) the implementation of the R & R plan should be at the cost of the lessee. 4. Now we shall turn to the facts relating to the issues urged before us. The first issue relates ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns, 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 SPV account, cannot be considered to be diversion of income. This is b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dance 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 laws. Therefore, he observed that the payment of ₹ 405.79 Crs is punitive in nature and brought it to tax. ………. 10. Thus, from the table reproduced above, it is seen that the assessee has been classified as Category-'A' whereas the Assessing Officer has considered the assessee as Category-'B' company. The Hon'ble Supreme Court has clearly indicated that Category-A comprises of (i) 'working leases' wherein no illegality / marginal illegality have been found a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 be resulting from a default for the advantage already taken by that person and is intended to remedy or compensate the consequences of the wrong done. For instance, if a unit has been granted conditional consent and is in default of compliance, causes pollution by polluting a river or discharging sludge, trade affluent or trade waste into the river or on open land causing pollution, which a Board has to remove essentially to control and prevent the pollution, then ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 for AY:2013-14 and as per the same, this is the objection of Ld.AO that the said SPV is nothing but CSR Expenses only and therefore not allowable. (c) Third objection of Ld.AO is also contained in para 4.9 of the assessment order for AY:2013-14 and as per the same, this is the objection of the Ld.AO that the said SPV is not allowable u/s 37 (1) as it was not incurred by the assessee wholly and exclusively for the purpose of business. (d) In para 4.8 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me, 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 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2-2012 and 13-3-2012 had made certain recommendations to the Hon'ble Supreme Court. The Hon'ble Supreme Court has incorporated those recommendations in Paragraph 7 (Page 164 to 171 of its order reported in (2013)(8 SCC 154). The CEC had made following recommendation with regard to setting up of Special Purpose Vehicle, transfer of funds collected from all lease holders under various heads, the purpose of utilisation of said funds etc. "(IX) A Special Purpose Vehicle (SPV) under the Chairmanship of Chief Secretary, Government Karnataka and with the senior officers of the concerned Departments of the State Government as Members may be directed to be set up for the purpose of taking various ameliorative and mitigative measures in Districts Bellary, Chitradurga and Tumkur. The additional resources mobilized by (a) allotment/ assignment of the cancelled mining leases as well as the mining leases belonging to M/s. MML, (b) the amount of the penalty/ compensation received/ receivable from the defaulting lessee, (c) the amount received/ receivable by the Monitoring Committee from the mining leases falling in "Category- A" and "Category-B", (d) amount received/ receivable from the sale p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bjectives/parameters of the R&R Plans would be: i) to carry out time bound reclamation and rehabilitation of the areas found to be under illegal mining by way of mining pits, over burden/waste dumps etc. outside the sanctioned areas; ii) to ensure scientific and sustainable mining after taking into consideration the mining reserves assessed to be available within the lease area; iii) to ensure environmental friendly mining and related activities and complying with the standards stipulated under the various environmental/mining statutes e.g. air quality (SPM, RPM), noise/vibration level, water quality (surface as well as ground water), scientific over burden/waste dumping, stabilization of slopes and benches, proper stacking and preservation of top soil, sub grade mineral and saleable minerals, proper quality of internal roads, adequate protective measures such as dust suppression/control measures for screening and crushing plants, beneficiation plants, provision for retention walls, garland drains, check dams, siltation ponds, afforestation, safety zones, proper covering of truck, exploring possibility of back filling of part of over burden/waste dumps in the mining pits, sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hyderabad bench of Tribunal in the case of NMDC Ltd (supra) came to the same conclusion by following the decision rendered by Hon'ble Kolkata High Court in the case of Shyam Sel Ltd (supra) and State Pollution Control Board vs. Swastik Ispat (P) Ltd (supra), 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. 4.8 Another important point we notice is that 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. 4.9 In view of the foregoing discussions and also following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discussions made by the Tribunal are extracted below:- "8.4. Before us, Ld.Counsel referred to breakup of At page 201 of paper book ₹ 9,69,00,000/- Compensation (mining pit) 0.4 6HA ₹ 2,30,00,000/- Compensation (dump, received etc, 2.50 HA) ₹ 2,50,00,000/- Encroachment of road (4.40 HA) ₹ 4,40,00,000/- Other category (0.49 HA) ₹ 49,00,000/- 8.5. Ld.Counsel submitted that payment advises issued by Department of Mines and Geology, clearly mentions that, above amounts retained by MC are towards R&R plan as compensation, and that, no where in the payment advise, the term, "penalty" is used. Ld.Counsel, therefore, emphasised that, lower authorities erred in treating said compensation as penalty. He thus submitted that the said amount ought to have been allowed as expenditure in the hands of assessee incurred for the purpose of business. 8.6. Alternatively, Ld.Counsel submitted that, since said amount has been diverted to SPV account by direction of Hon'ble Supreme Court, the said sum must be treated as having diverted at source by overriding title. 8.7. It was also submitted that failing the above two submissions, the said sum may be t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carried out in a manner contrary to the terms of the lease or the provisions of any of the statutes, as may be. The argument advanced is that as the statutes in question contemplate a particular scheme to deal with instances of illegal mining or carrying on mining operations which is hazardous to the environment, the CEC could not have recommended the taking of any step or measure beyond what is contemplated by the statutory scheme(s) in force. It is argued that it will not be proper for this Court to act under Article 32 and to accept any of the said recommendations which are beyond the scheme(s) contemplated by the Statute(s). In other words, what is sought to be advanced on behalf of the leaseholders is that no step should be taken or direction issued by this Court which will be contrary to or in conflict with the provisions of the relevant statutes. Several judgments of this Court, which are perceived to be precedents in support of the proposition advanced, have been cited in the course of the arguments made. 8.10. Ld.CIT.DR referring to paragraph 37 of the order, submitted that Hon'ble Supreme Court after considering arguments advanced by both sides observed as under: 37. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s irregularities committed by the assessee in the mining area like illegal mining, illegal dumping of waste and other violations like encroachment etc. Ld.AO relied upon following case laws to buttress his view that the penalty is not allowable as deduction:- (a) Maddi Venkataramana& Co (P) Ltd vs. CIT (1998)(229 ITR 534)(SC) (b) Haji Azis& Abdul Shakoor Bros. Vs. CIT (1961)(41 ITR 350)(SC) (c) Indian Aluminium Co. Ltd vs. CIT (79 ITR 514)(SC) 8.12.2. Assessee claimed ₹ 9,69,00,000/- as expenditure in the original return of income and excluded the same from Sales revenue in the revised return of income contending that the same is diversion by overriding title. 8.12.3. Ld.CIT.D.R placed his reliance on certain observations made by Hon'ble Supreme Court in M/s Samaj Parivartana Samudaya and Oth. Vs.State of Karnataka & Oth.(supra). First of all, there should not be any dispute that the writ petition filed by M/s Samaj Parivartana Samudaya and Others was admitted by Hon'ble Supreme Court under Article 32 of the Act. Hence the lessees, inter alia, challenged before Hon'ble Supreme Court, the necessity to invoke Article 32 and Article 142 of the Act. 8.12.4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mining leases, after deducting : a) The penalty/compensation payable; b) Estimated cost of the implementation of the R& R Plan; and c) 10% of the sale proceeds to be retained by the Monitoring Committee for being transferred to the SPV d) The balance amount, if any, may be allowed to be disbursed to the respective lessees". 8.12.5. Hon'ble Supreme Court in para 11 at page 172 accepted the recommendation of CEC by observing as under: "11. The order of the Court dated 28.9.2012, laying down certain conditions "as the absolute first step before consideration of any resumption of mining operations by Category-'B' leaseholders" would also be required to be specifically noticed at this stage. "I. Compensatory Payment a) Each of the leaseholders must pay compensation for the areas under illegal mining pits outside the sanctioned area, as found by the Joint Team (and as finally held by the CEC) at the rate of ₹ 5 crores per hectare, and (b) for the areas under illegal overburden dumps, roads, offices, etc. outside the sanctioned lease area, as found by the Joint Team (as might have been finally held by the CEC) at the rate of ₹ 1 crore per hectare. It is mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e heads, the leaseholder may, in writing, authorize the CEC to deduct from the sale proceeds on its account the amounts under the aforesaid three heads and an undertaking to make payment of any additional amount as compensatory payment. On submission of such authorization and undertaking, the CEC shall retain the amounts covering the aforesaid three heads and pay to the concerned leaseholder the balance amount, if any. It is expected that the balance amount, after making the adjustments as indicated here, would be paid to the concerned leaseholder within one month from the date of submission of the authorization and the undertaking. In the case of any leaseholder, if the money held on his account is not sufficient to cover the aforesaid three heads, he must pay the deficit within two months from today. 8.12.7. The contentions of the lessees have been succinctly stated as under by Hon'ble Supreme Court in paragraph 20 of the order, which is extracted below:- "To resolve the said issues it is the statutory scheme that should be directed to be followed and resort to the powers of this Court under Article 32 read with Article 142 of the Constitution, when a statutory scheme i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certainly open for the Court under Article 32 to issue appropriate directions ......... 31. The question that has been raised on behalf of the leaseholders is whether the aforesaid provisions under the different statutes should be resorted to and the recommendations made by the CEC including closure of Category- "C" mines should not commend for acceptance of this Court. 32. In Bandhua Mukti Morcha Vs. Union of India &Ors. (1984) 3 SCC 161, this Court had the occasion to consider the nature of a proceeding under Article 32 of the Constitution which is in the following terms :- "32. Remedies for enforcement of rights conferred by this Part. (1) The right to move the Supreme Court by appropriate proceedings for the enforcement of the rights conferred by this Part is guaranteed. (2) The Supreme Court shall have power to issue directions or orders or writs, including writs in the nature of habeas corpus, mandamus, prohibition, quo warranto and certiorari, whichever may be appropriate, for the enforcement of any of the rights conferred by this Part. (3) Without prejudice to the powers conferred on the Supreme Court by clause (1) and ( 2 ), Parliament may by law empower any ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of application of the above principles to a case of cancellation as distinguished from one of suspension. The issue is more fundamental, namely, the wisdom of the exercise of the powers under Article 32 read with Article 142 to prevent environmental degradation and thereby effectuate the Fundamental Rights under Article 21. 36. We may now take up the decisions cited on behalf of the leaseholders to contend that the power under Articles 32 and 142 ought not to be exercised in the present case and instead remedies should be sought within the relevant statutes. The sheet anchor is the case of Supreme Court Bar Association Vs. Union of India and Another reported in (1998) 4 SCC 409. We do not see how or why we should lie entrapped within the confines of any of the relevant Statutes on the strength of the views expressed in Supreme Court Bar Association (supra). The observations made in para 48 of the judgment and the use of words "ordinarily" and "are directly in conflict" as appearing in the said paragraph (underlined by us) directly militates against the view that the lease holders would like us to adopt in the present case. "48. The Supreme Court in exercise of its jurisdiction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, therefore, feel uninhibited to proceed to exercise our constitutional jurisdiction to remedy the enormous wrong that has happened and to provide adequate protection for the future, as may be required." 8.12.11. Ld. Counsel, during his arguments, pointed out that the CEC used the expression "Compensation/penalty" in its recommendations. But Hon'ble Supreme Court, while accepting such recommendations used the expression "Compensation" for such payments. From the observations reproduced herein above, it can be noticed that Hon'ble Supreme Court exercised its power under Article 32 and Article 142 to protect fundamental rights of public in order to prevent environmental degradation, i.e., the cost imposed on leaseholders to remedy the enormous wrong that has happened and to provide adequate protection for the future. 8.12.12. We note that Hyderabad bench of Tribunal in case of NMDC held that the above payment is not penal in nature, but a payment made for compensation. For the sake of convenience, we extract below the final decision rendered by Hyderabad bench of Tribunal:- The fact that the compensation is proportionate to area of illegal mining outside the leased area and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d vs. ACIT (ITA No.679/Bang/2010 dated 2.11.2012). In this case, the assessee was engaged in the business of mining of iron ore, other minerals and granite. In consequence to the order passed by Hon'ble Supreme Court in the case of T.N Godavarman Tirumalpad vs. UOI, the assessee was liable to pay to Compensatory afforestation fund equal to net present value for diversion of forest land for non-forest purposes. The assessee paid a sum of ₹ 5,02,59,000/- to the fund and claimed the same as expenditure. The question that arose before the Tribunal was whether the amount so paid by the assessee is deductible as expenses are not? Tribunal therein noticed that an identical issue was examined in case of M/s Ramgad Minerals & Mining P Ltd (ITA No.1012/Bang/08 dated 9.4.2009) and was decided in favour of the assessee. Accordingly, the Tribunal decided this issue, with the following observations, in favour of the assessee:- "5.4 We have heard both parties and carefully perused the material on record and the judicial decisions cited and placed reliance upon. We have perused the decision of the co- ordinate bench of this Tribunal in the case of Ramgad Minerals & Mining Pvt Ltd Vs. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #8377; 5,02,59,000/-by the assessee as per the direction of the Apex Court for mining lease to the Forest Department can be said as a revenue expenditure or a capital expenditure? 3. We have heard Mr.Sanmathi, learned counsel for the appellant-revenue and Mr.A.Shankar, learned counsel for the respondent-assessee. 4. As such, the Tribunal in the impugned order has relied upon its earlier decision in case of M/s.Ramgad Minerals and Mining Pvt.Ltd., vs. ACIT in ITA 1012(BNG)/2008 dated 9.4.2009. It has been brought to our notice by the learned counsel for respondent-assessee that the very decision of the Tribunal in case of Ramgad Minerals (supra) was carried before this Court in ITA 5021/09 and this Court has dismissed the appeal of the Revenue and it has been further stated that SLP was preferred against the aforesaid decision of this Court in case of Ramgad supra and the said SLP has also been dismissed. 5. We may record that in view of aforesaid decision as such, no substantial questions of law would arise for consideration. But even if it is to be examined, in view of the aforesaid decision that the decision of the Tribunal has been not interfered with by this Court and SLP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nciple, following the decision rendered by the coordinate bench in the above cited case, we hold that the compensation amount paid by the assessee is allowable as deduction. However, we notice that, in the instant case, the assessee has not furnished break-up details of payment of ₹ 12,07,51,307/-, while the details of break-up of payments was furnished in the case of Veerabhadrappa Sangappa & Co. (supra). The AO also did not have occasion to examine the claim at all, since he had disallowed the entire claim. There should not be any dispute that, before applying the ratio of decision of Veerabhadrappa Sangappa & Co. (supra), it is necessary to examine break-up details vis-à-vis the decision rendered by Hon'ble Supreme Court, to determine whether this claim pertain to the year under consideration etc., i.e., the AO should satisfy himself on parity of facts and year of claim. Hence for the limited purpose of examining factual aspects and applying the ratio of the decision rendered in the case of Veerabhadrappa Sangappa & Co (supra), we restore this issue to the file of AO. Accordingly, the order passed by Ld CIT(A) on this issue is set aside. 6. In the result, the appea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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