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TMI Blog2022 (3) TMI 608X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icable 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. - ITA Nos. 1538 & 1539/Bang/2018 - - - Dated:- 22-2-2022 - SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI B.R. BASKARAN, ACCOUNTANT MEMBER Appellant by : Shri Siva Prasad Reddy, A.R. Respondent by : Shri Sumer Singh Meena, D.R. ORDER PER B. R. BASKARAN , ACCOUNTANT MEMBER Both the appeals of the assessee are directed against the orders passed by Ld. CIT(A), Gulbarga and they relate to the assessment years 2012-13 and 2013-14. Since one of the issues urged in these two appeals is common in nature, these appeals were heard together and are being disposed of by this common order, for the sake of convenience ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reme 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 GOI vs. Obulapuram Mining Co. Pvt. Ltd., reported in (2011) 12 SCC 491, suspended all mining and transportation activities in areas admeasuring approximately 10,868 ha, pertaining to district of Bellary. Subsequently, by order dated 26/08/2011 passed in Samaj Parivartana Samudaya vs. state of Karnataka, reported in (2013) 8 SCC 209, Hon'ble Apex Court extended ban to Tumkur and Chitradurga mines, based upon a report filed by Central Empowered Committee (hereinafter referred to as CEC). Hon'ble Apex Court directed Ld. Amicus Curiae to submit quantity which could be released from existing stock of 25,000,000 Ton of iron ore, subject to reclamation and rehabilitation plans being submitted. This was pursuance to plea raised by Association of Steel Industry and other affected parties. On 23/09/2011 Hon'ble Apex Court was appraised by CEC report dated 01/09/2011, regarding modalities of sale of existing stock of iron ore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mplementation 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 found and (b) non-working leases wherein no/marginal illegalities have been found. (b) The Category B comprises of (a) mining leases wherein illegal mining by way of (i) mining pits outside the sanctioned lease areas have been found to be upto 10% of the lease areas and/or (ii) over burden/waste dumps outside the sanctioned lease areas have been found to be upto 15% of the lease areas and (b) leases falling on interstate boundary between Karnataka and Andhra Pradesh and for which survey sketches have not been finalised. (c) The Category C comprises of leases wherein (i) the illegal mining by way of (a) mining pits outside the sanctioned lease area have been found to be more than 10% of the lease area and/or (b) over burden/waste dumps outside the sanctioned lease areas have been found to be more than 15% of the lease areas and/or (ii) the leas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 issue urged before us. The mines owned by the assessee herein have been categorised as A category mines. Hence 10% of sale proceeds has been deducted by Monitoring Committee during the years under consideration as detailed below:- Assessment year 2012-13 : ₹ 3,47,45,617/- Assessment year 2013-14 : ₹ 1,22,93,688/- The assessee claimed deduction of above said payments as expenditure. However, the 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. Accordingly, the AO took the view that the above said payments cannot be said to be incurred wholly and exclusively for the purpose of business within the meaning of provisions of sec. 37 of the Act. Hence the AO prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the AO in both the years is liable to be deleted. 4.3. The Ld. D.R., however, placed his reliance on the orders passed by Ld. CIT(A). 4.4. We heard the parties on this issue and perused the record. We notice that identical issue has been examined by the co-ordinate benches in the cases relied upon by the assessee. For the sake of convenience, we extract below the relevant observations made by the co-ordinate bench in the case of M/s. Veerabhadrappa Sangappa Co (supra):- 7.10.4. With this background, we once again refer to and rely on observations by Hon'ble Supreme Court in case of CIT 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 operations by Category-B leaseholders, each of the lease holder must pay compensation for the areas under illegal mining pits 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 direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 who failed to install Pollution Control Device within factory premise within prescribed time and that the assessee had to pay ₹ 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 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 'compensation' for extra mining, without which the assessee could not have resumed its activities. Therefore, we are inclined to accept 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:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upreme 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 clear that 15% contribution to SPV account was guarantee payment for implementing of R R plan, which would be deducted from sale proceeds. This was one of the conditions for resuming mining operations under Category 'B'. We refer to and rely on observations by Hon'ble Supreme Court in case of CIT vs. Sitaldas Tirathdas reported 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 correct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 illegal overburden dumps, roads, offices etc., beyond sanctioned lease area were carried out. Here, we also note that, Hon'ble Supreme Court directed CEC to refund any leftover guarantee money, after completion 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted 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 proceeds of the confiscated material etc., may be directed to be transferred to the SPV and used exclusively for the socio-economic development of the area/local population, infrastructure development, conservation and protection of forest, developing common 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty (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, sale/beneficiation of sub grade iron ore, water harvesting, etc. iv) for achieving (ii) and (iii) above, fixation of permissible annual production; and v) regular and effective monitoring and evaluation. The Hon'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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bad bench of Tribunal in the case of NMDC Ltd (supra), these expenses are allowable as deduction u/s. 37(1) of the Act. 4.12. 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. 4.13. In view of the foregoing discussions and also following the decision rendered by the co-ordinate benches referred above, 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. 5. We shall take up the individual issues urged by the assessee in assessment year 2012-13. The first issue relates to re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 6. The last issue urged in AY 2012-13 relates to the addition of difference in closing stock of ₹ 12,75,26,801/-. The AO noticed that the assessee has shown closing stock quantity at 41,199 tonnes. The AO noticed that the assessee has shown following quantities in the Annual return in Form No. H-1 filed before Department of Mines and Geology:- From Open Cast working Dump workings Opening stock 1,93,559 Tonnes 5,80,830 Tonnes Production NIL NIL Closing stock 41,198 Tonnes 5,80,830 Tonnes The AO took the view that the assessee should have valued the Dump workings quantity of 5,80,830 tonnes also and should have included it in the closing stock value. The assessee submitted that the dump stock does not have market value and hence it was not considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sue and perused the record. The table containing quantity details have been extracted by us in an earlier paragraph from the Annual return filed with Department of Mines. A perusal of the same would show that the assessee is segregating its stock into two categories, viz., From Opencast working and Dump working . It can also be noticed that the quantity of opening stock as well as closing stock of Dump workings was 580830 MT as on 1.4.2011 and 31.03.2011. Before us, the Ld. A.R. submitted that the dump stock has not been valued both for opening stock and closing stock. We find that the said submission to be true from page 32 of the paper book, wherein the quantity details is given in Point 28(a) of the Tax audit report. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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