KALINGA MINING CORPORATION,CUTTACK vs. A.C.I.T., CIRCLE-2(1), CUTTACK

O R D E R

Per Bench : These are two appeals filed by the assessee against the separate orders of ld. CIT(A), National Faceless Centre (NFAC), Dehli, both dated 20.10.2023 for the assessment years 2008-2009 & 2009-2010. 2. As per the office note, there a delay of 2761 days in filing the present appeals. In this regard, the assessee has filed an application for condonation of delay supported by an affidavit stating therein sufficient reasons for delay. Ld. CIT-DR though objected, however, looking to the facts and circumstances of the case and the reasons stated in the affidavit for delay, we condone the delay of 2761 days in filing the present appeals and both the appeals of the assessee are heard on merits. 3. As the issues involved in both the years under appeal are common and the grounds taken by the assessee are also similar, therefore, both the appeals are decided together. For the sake of convenience, facts and grounds mentioned in 2008-2009 shall be taken into consideration for decision of both the appeals. 4. Brief facts of the case are that the assessee is the lease-holder of Joruri Iron & Manganese Mine in Keonjhar district. The return of income was filed for the assessment year 2008-2009 on 29.09.2008 declaring total income at Rs.43,57,28,924/-, which was processed u/s.143(1) of the Act and assessment was completed u/s.143(3) of the Act on 03.12.2010 and after making certain additions, determined total income at Rs.51,67,03,080/-. Subsequently, the assessment in the case of the assessee was reopened by issuing notice u/s.148 of the Act for the reasons recorded by the AO as under :- 11. Reasons for belief that income has escaped assessment: As per the report of Hon'ble Justice M.B. Saha Commission the assessee has shown more production of 8800 MT of iron than the quantity shown by the DMG. To be specific, as per the report, production reported by the assessee is at 630300 MT whereas, as per the information available with the DMG it is at 621500 MT. As no quantitative details are available in the assessment record it is not possible to ascertain whether all the production disclosed by the assessee has been duly consider in his books of account. Prima facie, excess production shown by the assessee may be a device to inflate expenses to reduce the profit. DMG being the appropriate authority for providing au information in regards the production of iron ore. excess production of quantity reported by assessee is nothing but an action contrary to law for which expenses pertaining to such production cannot be allowed U/s 37 of the IT Act. Considering the fact that the GP declared in such activities is at 52.48% and average "base rate" as determined in the assessment order is at Rs.1447.72 MT. Then expenses not allowable u/s.37 of the Act is at Rs.60,54,017/- (8800 X 1447.72 X 47.52%). In view of the above I have reasons to believe that income chargeable to tax has escaped at least to the extent of Rs.60,54,017/- which requires reopening of the assessment u/s.147 of the I.T.Act, 1961. I, solicit necessary approval of the Joint Commissioner of Income-tax for Notice u/s 148 of the l.T.Act, 1961 for assessment year 2008-09. 5. Thereafter the AO completed the reassessment proceedings and has disallowed the expenses of Rs.34,11,77,436/- by holding that these expenses were incurred in violation to Rule 37 of Mineral Concession Rule, 1960 and, therefore, not allowable u/s.37 of the Act. 6. In first appeal, the ld. CIT(A) upheld the disallowawnce so made, therefore, the present appeal is filed before us by the assessee. 7. Before us, ld. AR has filed the written submissions which reads as under :- The appellant most respectfully sweth; 1. That the appellant had filed appeal before the CIT (Appeals), Cuttack for the Assessment Years 2008-09 challenging the order dated 31.03.2016 passed U/s. 147/143(3) of the IT Act, 1961, by the Ld. Asst. Commissioner, Circle 2(1), Cuttack on various grounds. Appellant filed its return for the above mentioned year disclosing income of RS.43,57,28,924/-. The case was selected for scrutiny and assessment u/s.143(3) of the IT Act, 1961 was completed on 03.12.2010 determining total income at RS.51 ,67,03,080/- which was rectified u/s.154 and the income was determined at Rs.52,61 ,49,480/-. The assessee preferred appeal before the CIT (Appeals) Cuttack and then before the Hon'ble ITAT, Cuttack Bench, Cuttack and the income was finally recomputed at RS.43,83,32,884/-. 2. That the assessment was again reopened u/s.147/148 of the IT Act, 1961 for the reasons recorded by the AO as under:- "As per the report of the Hon'ble Justice M.B. Shah Commission the assessee has shown more production of 8800MT of iron ores than the quantity shown by the DMG. To be specific, as per the report, production reported by the assessee is at 630300 MT whereas as per the information available with the DMG it is at 621500 MT. As no quantitative details were available in the assessment order it was not possible to ascertain whether all the production disclosed by the assessee had been duly considered in its books of account. Prima facie excess production shown by the assessee might be a device to inflate expenses to reduce the profit. DMG being the appropriate authority for providing authentic information as regards pertaining to such production cannot be allowed u/s. 37 of the Act. Considering the fact that the GP declared in such activities at 52.48% and average" base rate" as determined in the assessment order is at Rs. 1447.72/MT, then expenses not allowable u/s. 37 of the Act was calculated at RS.60,54,017/- [8800 x 1447.72 x 47.52%]. Hence, it was believed that the income chargeable to tax amounting to Rs.60,45,017/- has escaped assessment for the year under consideration". 3. That the basic condition precedent for invoking jurisdiction/power u/s.147/148 of the IT Act, 1961 is missing in present case, in as much as, to initiate the proceeding under the said provision, the assessing officer must have "reason to believe" that the income has escaped assessment for any assessment year. "Reason to believe" must be based on legally sustainable information/basis. Here the assessing, officer's satisfaction is a borrowed satisfaction. Hence borrowed satisfaction is not sufficient to confer power to the assessing officer to initiate proceeding u/s.147. The first provision to section 147 reads as under:- "Provided that where as assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year:" 4. That, the revising, reopening or reconsidering the whole assessment u/s.147 by issuance of notice u/s.148 in the pretext that income has escaped assessment in absence of any credible additional material evidences is not permissible on the ground that the whole exercise amounts to review not permissible by law, particularly when the assessment is completed U/s.143(3) and as more than 4 years have passed the same is illegal and barred by limitation. 5. Section 147 of the IT Act does not allow the reassessment of an income merely because of the fact that the AO has a change of opinion with regard to the interpretation of law differently on the facts that were well within his knowledge even at the time of assessment. Doing so would have the effect of giving the AO the power of review and Sec 147 covers the power to re-assess and not the power to review. 6. That, the bare perusal of the provision contained in section 147 it is evident that to confer the jurisdiction u/s.147 two conditions are required to be satisfied i.e. (1) the AO must have reason to believe that income chargeable to tax has escaped assessment and (2) he must also have a reason to believe that such escapement occurred by a reason of either (a) omission or failure on the part of the assessee to make a return of his income u/s.139 (b) omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that year. 7. That, the aforementioned requirements of law are the condition precedent for invoking jurisdiction by the AO to reopen the assessment U/s.147. It is trite that both the conditions aforementioned are cumulative. It is well settled principle of law that in the event it is found that any of the said two conditions are not fulfilled the notice issued by AO will be wholly without jurisdiction. 8. That in the present case, the condition precedent for invocation of section 147 is completely absent as evident in the assessment order and the reassessment is based on reappraisal or reconsideration of the material/information already available on record for which the Ld. AO is taking a different view on the self same facts on record which is nothing but mere change of opinion. 9. That, several numbers of judgments pronounced on this issue by Hon'ble ITAT, Cuttack Bench, Cuttack, Hon'ble High Court of Orissa and also Hon'ble Apex Court which are very clear on this issue. 10. That, the appellant has disclosed fully and truly all information, materials in connection with the assessment and no new facts have been found out or utilized by the AO to empower him to exercise jurisdiction u/s.147/148. No fresh tangible information has come to the notice of the assessing officer after completion of assessment u/s.143 (3). 11. That, the fact of payment of Rs.34,11,77,436/- to Orewin Engineering, its raising contractor was well within the knowledge and information of the AO at the time of first assessment U/s.143(3). It shows that on the basis of the very same materials and facts the assessing officer has now formed a different opinion. The AO has now disallowed the entire payment to the raising contractor on the ground of violation of rule 37 of Mineral Concession Rule 1960 and hence not allowable u/s.37 of the IT Act, 1961. 12. That without prejudice to the above, it is submitted that the Shah Commission Report both in law as well as in facts cannot form legally permissible basis for the issuance of notice and raising of the demand under section 147/148 of the Act and for that matter seeking to add back Rs.34, 11,77,436.00 to the income of the appellant and .to disallow any deduction in respect of expenditure under Section 37 (1) of the Income Tax Act. The said report based mandatory provisions of law postulated under the Act. Justice Shah Commission was tabled in Parliament and uploaded on the website inviting queries and explanations. The above invitation indicates that the said report is subject to requisite modifications and alternations. Hence to go by the contents of the said report purely on guess work without analyzing and verifying the correctness of the fact and to proceed with fishing enquiries will not be in accordance with the provisions of law. [Ajanta Pharma Ltd. -vrs- ACIT (2004) 267 ITR 200] 13. It is also respectfully submitted that the said report is a subject matter of challenge before the Hon'ble High Court of Delhi at New Delhi in WP (C) No. 6512 of 2014, wherein, the Hon'ble High Court of Delhi, has been pleased to issue notice on 29.09.2014. The said report is only a tentative as will be evident from a bare reading of the said report itself. The Hon'ble Supreme Court of India in the case of Goa Foundation VS. Union of India = (2014) 6 SCC 590; While considering another report of the very same Shah Commission has felt that such report cannot form the basis of initiating action against the lessee, as principles of natural justice have not been complied with. 14. It is also respectfully submitted that in the case of Mudra Exports vrs Deputy Commissioner of Income Tax Writ Tax No.628 of 2015 dtd.05j04j2024 in the Hon'ble High Court, Allahabad, an opinion expressed by an expert howsoever, revered and respected remains only an opinion. In the context of the Report relied by learned counsel for the revenue, it was wholly subjective. The only fact that was considered and found in existence by the Commission was of the invoice price disclosed by the petitioner being lower than the prevailing international price of that commodity. No other fact was gone into or brought out in the Report to suggest that the invoice price was deliberately suppressed or that actual consideration received was more. The vital fact of the value/price realized by the petitioner against the invoice issued, was neither gone into nor any definite opinion was expressed thereto. In any case, no material was discovered by the commission, as may support that "relief'. 15. That, vital fact fell within the domain of the assessing authority. It is that fact alone which may have given rise to a reason to believe that income had escaped assessment at the hands of the petitioner. Since there is no material in that regard, we find that the present re- assessment proceedings have been initiated without any relevant material coming to the hands of the assessing authority to form any "reason to believe" as to escapement. Once the tangible/relevant material itself is missing, there arose no occasion with the assessing authority to form any "reason". In absence of material and reasons what arose was a simple subjective "belief' based on no objective/tangible material and reason. It was in actionable. 16. In. exactly similar facts, the Bombay High Court has also quashed re-assessment proceeding, in Sesa Sterlite Limited (supra) and Sociedade de Famento Industrial Pt. Ltd. (supra). We are in agreement with that view. For the reasons note above, we find re-assessment proceeding initiated against the petitioner for the Assessment Year 2011-12 were wholly without jurisdiction. It also being beyond the pale of doubt-unless jurisdiction is first clearly established, the re-assessment proceeding may not survive and an assessee may not be forced to participate in the same. The writ petition is allowed, the re-assessment proceeding are quashed. No order as to costs. 17. That without prejudice to the above it is further humbly submitted that the sole basis and the consequential proposed action of seeking to add back Rs.34, 11,77,436/- to the total income of the assessee and to disallow deduction under Section 37(1) of the Income Tax Act in the impugned order is based upon the allegation of illegal mining and violation of Rule 37 of the M.C. Rules 1960. The said alleqation in turn, stems from Shah Commission report and without any basis and application of mind. It is respectfully submitted that the lessee had engaged a raising contractor for excavation of ores only. The engagement of raising contractor is not illegal/violation of MMDR Act / MCR Rules. The raising contractor was paid Rs.34, 11,77,436/- during the A.Y. 2008-09. Even the Shah Commission report does not give a finding to the effect that the lessee has violated any provisions of MCR 37. The attempt to add back Rs.34, 11,77,436/- which was paid to the raising contractor to the total income of the assessee for the assessment year 2008-09, and to decline deduction in respect of the expenditure under Section.37(1) of the Income Tax Act, is an exercise without application of mind and contrary to the judgment of the Hon'ble Supreme Court and various High Courts. The finding of the Honble Supreme Court in writ petition (civil) No- 114 of 2014 on violation of Rule 37 of the Mineral Concession Rules 1960 is reproduced here for your Honor's ready reference. "Violation of Rule 37 of the Mineral Concession Rules,1960 The CEC has discussed the possible the possible violation of Rule 37 of the MCR. In this' context, it was noted that there were several mining lease holders who had entered into raising contracts which were actually a transfer of the lease as postulated by Rule 37 of the MCR. On this basis the State of Odisha constituted a Committee on 8th July,2011 to carry out a study of the financial transactions between the mining lease holders and the raising contractors to determine whether there is a prima facie violation of Rule 37 of the MCR. MCR. These mining lease holders are as under: i) R.P. Sao,Guali Iron Ore Mines, Keonjhar ii) Indrani Patnaik, Unchabali Iron Ore Mines, Keonjhar iii) M/s. K.J.S. Ahluwalia, Nuagaon Iron Ore Mines, Keonjhar iv) M/s. Aryan Mining & Trading Corporation Pvt. Ltd., Narayanposhi Iron Ore Mines, Sundergarh v) M/s. Mideast Integrated Steel Ltd., Roida, Sidhamatha Iron Ore Mines, Keonjhar vi) Kavita Agrawal, Kusumdihi Manganese Mines, Sundergarh vii) Mala Roy & Others, Jalabari Iron Ore Mines, Keonjhar viii) M/s. Sharda Mines (P) Ltd., Thakurani Iron Ores Mines, Keonjhar" 18. It is the respectful submission of the appellant that the exercise undertaken by the Ld. Asst. Commissioner of Income Tax, is ex- facie without jurisdiction, in as much as, even the basic condition precedent for invoking jurisdiction/power under section 147/148 of the Act is missing in the present case. It is a settled position of law as held by the Hon'ble Supreme Court in the case of Calcutta Discount Co. Ltd. Vs. ITO-AIR 1961 SC- 372; Ganqa Prasad Maheswari Vs. CID- 1391TR 1043; Sheonath Sinqh Vs. ACC - 82 ITR - 87; ITO Vs. Laxmani Mewal Das - 103 ITR - 437; that; a) If the condition precedent for exercising jurisdiction under section 147/148 of the Act, does not exist, then the entire exercise, by the Income Tax Authorities is wholly without jurisdiction; b) The expression "reason to believe' does not mean a purely subjective satisfaction of Income Tax Officer. Such a belief has to br founded upon legally sustainable information/basis; c) Where such satisfaction is not based on any material or it cannot withstand the test of reason, which is a integral part of it then it falls through 'and the Court is empowered to strike it down; d) "reason to believe" suggest that the belief based upon reasonable grounds; e) If the reason for his belief is not based upon material relevant to the belief required by the section, then there is no "reason to believe" 19. That, our submissions further gets support and strength from the decisions of the Hon"ble Bombay High Court in IT Appeal No. 1714 of 2009, ClT-5, Mumbai -vrs- Jet Airways (I) Ltd., Mumbai, Writ Petition NO.2036 of 2016, Bharati Infratel Ltd. - vrs- Dy. CIT & ANR, High Court of Delhi reported in Volume 306 CTR Page-529 and of ITAT, Cuttack Bench, Cuttack, ACIT, Circle-2(1), Sambalpur -vrs- Mahanadi Coalfields Ltd, Sambalpur 20. That the impugned order had been passed by the AO on alleged grounds that the assessee's mining activity is in violation of Rule 37 of the Mineral Concession Rules, 1960. It is the Department of Mines, the Centre and Sate who are the implementing authority under the MMDR Act and the M.C. Rules. There are specific authority under the Act and Rules who have been bestowed with the duty and the power to implement Rule 37 of the Mineral Concession Rules, 1960. In fact, the power to interpret the Rules and the power to give a finding on the violation of Rule 37 of the Mineral Concession Rules, 1960 rests with the Mining Department, with distribution of power between the Centre and the States. It is respectfully submitted that the competent authority to decide whether there is violation of Rule 37 of the Mineral Concession Rules, 1960 is not the Income Tax authority. The appropriate authority is the mining authority constituted under the Mines and Minerals (Development and Regulation) Act, 1957, competent to decide matters relating to i'llegal and unauthorized mining. Necessary action has been contemplated under the said Act for infringement or violation of any statutory provisions prescribed under the said Act. It is respectfully submitted that till date the authority prescribed under the statute have not found the petitioner having violated any provision. The assessee is a bonafide lessee and operating its mine by following all the Rules and Regulations prescribed under the MMDR Act. Therefore, the action initiated by the assessing authority under the Income Tax Act is without jurisdiction and authority of law. Further the findings of the authorities under the MMDR Act and Rules are also not final. The Statue provide for quasi judicial authorities before whom any finding of the administrative authorities can be challenged. In short unless and until there is a finding of violation of Rule 37 of the Mineral Concession Rules, 1960 by the authorities under the MMRD Act and Rules, the Income Tax authority cannot make it a ground and raise a demand. 21. That the alleged ground for raising the demand is that there is violation of the provisions of Rule 37 of the M.C Rules, 1960, In this regard the appellant begs to submit that an agreement had been executed between the lessee and the raising contractor for excavation of ore in the mines under the strict supervision and direction of the Mines Manager of the lessee. In order to execute the work given by the lessee, the raising contractor has to engage machinery and manpower to fulfill the contractual obligation to achieve the said target. The mining activities are directly controlled by the Manager of the petitioner company. For dispatching of the stock, Form-l is submitted by Manager to the DY. Director. Hence there is no direct or indirect financing by the raising contractor. 22. The fact of payment of Rs.34, 11,77,436/- to the raising contractor had been enquired into and accepted by the AO at the time of first assessment order u/s.143(3) dtd.03.12.201 0 as is evident from the notice u/s.142(1) dtd.25.10.2010. In annexure of said notice at SI.No.11 .a the AO has specifically asked for the details of the payment to the contractors, sub-contractors and being satisfied has accepted the same. Hence the addition now is mere change of opinion which is not permissible under the purview of U/s.147. The payment is neither illegal nor unlawful under any stretch of imagination. Section 370f the Income Tax Act, 1961 provides for deduction of business expenditure incurred wholly and exclusively for the purpose of business. An amendment made by Finance (No.2) Act, 1998 enabled Revenue to disallow payments of an illegal nature. The amendment declared that no allowance shall be made in respect of expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law. This payment of Rs 34,11,77,436/- to the raising contractor is neither an offence nor illegal. Hence, should not have been disallowed. 23. That, the addition of Rs.34,11,77,436/-, the total payment to the raising contractor is a double taxation which is against the principle of natural justice and equity. The raising contractor has shown this receipt' in his income tax return and has been taxed on the same. 24. That, it is well settled principle of law when the income is taken for taxation the legitimate expenses incurred for the same has to be allowed. 25. That the Ld. CIT (Appeals), Cuttack considering our above submissions and the law as it stands has rightly deleted the addition made by the AO by invoking explanation 1 of section 37 of IT Act, 1961 Prayer It is therefore humbly prayed that the Ld. CIT (Appeals), NFAC, Delhi is not justified in sustaining the disallowance of payment made to the raising contractor. Hence the additions being illegal and uncalled for should be quashed for which the petitioner as in duty bound shall ever remain grateful'. 8. Ld. AR further submitted that the case of the assessee was reopened solely on the basis of Justice MB Shah Commission Report and the payments made to the raising contractor were disallowed by alleging Rule, 1960. The ld. AR submitted that Justice MB Shah Commission Report is only an opinion expressed by the Commission and no new information or material was brought before initiating the proceedings u/s.148 as in the instant case reopening is done after 4 years from the end of the relevant year and assessment was already completed u/s.143(3) of the Act where all the details with respect to production were examined and no doubts whatsoever was raised for the same. With regard to the so-called difference between figures reported to the Justice MB Shah Commission, the ld. AR of the assessee submitted that during the course of reassessment proceedings vide reply dated 08.06.2015 it was submitted that the figures as taken from DGM report are related to dispatch, whereas the figures reported to the Justice MB Shah Commission related to the production, therefore, they are not comparables as such there was no difference. These facts were however, ignored by the AO. Besides this, there was no fresh material available with the Assessing Officer, therefore, the reopening of the completed assessment is deserves to be held bad in law and consequential order passed deserves to be quashed. 9. On merits, it was submitted by the ld. AR that the entire expenses towards payment made to raising contractor of Rs.34,11,77,436/- was disallowed by alleging that the assessee has violated the provisions of rule 37 of Mineral Concession Rule, 1960. It was submitted that all the expenses were incurred in the normal course of business and the sales/turnover and has no link with the production done. Ld. AR further submitted that the details have been examined in original assessment proceedings in regard to the payment to the raising contractor and, therefore, the expenses disallowed deserves to be deleted on merits also. 10. On the other hand, ld. CIT(A) vehemently supported the order of the lower authorities and submitted that the case of the assessee was reopened not solely on the Justice MB Shah Commission Report but for the reasons that certain difference in the quantity of production reported by the assessee before the Commission and before the Mining Department. Moreover, the assessee has never submitted any production details during the course of assessment proceedings, therefore, there was escapement of income to the extent of the difference in the figures reported to Justice MB Shah Commission. He further submitted that the assessee has claimed expenses on excess production to inflate the expenses thus, the same deserves to be disallowed and accordingly the reasons taken by the AO was correct and consequently the order passed u/s.147 of the Act should be upheld. With regard to the merits, the ld. CIT- DR submitted that disallowance to the extent of the excess production should be upheld. 11. We have considered the rival submissions and perused the material available on record. From the perusal of the reasons recorded, which has been reproduced hereinabove, it is seen that the case of the assessee Commission. Admittedly, no new fact was brought on record and reopening is based on the opinion expressed by Justice MB Shah Commission with regard to illegal mining and production and expenses claimed on such illegal mining. 12. The Hon'ble Bombay High Court at Goa in the case of Balaji Mines and Minerals Pvt. Ltd. vide its order dated 26th April, 2024 passed in WP Nos.262 of 2016 along with connected Writ Petitions, has held that the reopening on the basis of Justice MB Shah Commission Report is an expression of opinion without any authoritativeness and, therefore, no independent satisfaction is recorded by the AO for reopening the assessment. The relevant observations made by the Hon'ble High Court in paras 51 to 61 are as under :- 51. We have already dealt with the reasons for re-opening of the assessment on the basis of material borrowed from DRI authorities and how it cannot be considered as tangible material having a live link for the purpose of forming independent opinion of the Assessing Officer, which is in fact not formed in all the matters. Thus, as far as the re-opening on the basis of borrowed material from DRI is concerned, we are firm on our opinion that such material without application of mind of the Assessing Officer could not have been directly borrowed and used. 52. Other reasons basically deals with the report from Justice M.B. Shah Commission as well as the observations of the Apex Court in the case of Goa Foundation, thereby holding that the mining leases beyond 22.11.2007 in Goa, were illegal. 53. As far as the report of Justice M.B. Shah Commission is concerned, the Co-ordinate Bench of this Court(S.C. Gupte & N.D. Sardessai, JJ.) clearly observed that the third report of Justice M.B. Shah Commission contains merely the expression of its opinion and it lacks finality as well as authoritativeness. Only on the basis of expression of such opinion by the commission, there cannot be any prima facie belief which could be recorded by the Assessing Officer, without any independent material for the purpose of reopening. 54. We are fully endorsing such view taken by the Co-ordinate Bench and have no reason to deviate from it in any manner. Similarly, we have taken the same view while deciding Writ Petition No. 233/2015 with Writ Petition No. 883/2016 in our Judge