SALITHO ORES PVT. LTD,PANAJI vs. ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE, PANAJI
In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.
What did the Tribunal hold?
The ITAT held that the disallowance of royalty expenditure of Rs.1,59,22,685/- was not justified. The Tribunal noted that the liability to pay royalty on rejections/waste dumps for FY 2007-08 and FY 2008-09 was initiated by the Director of Mines, Geology, and crystallized during the year under appeal. Citing the Gujarat High Court's decision in CIT vs. Indian Petrochemicals Corporation Limited, the Tribunal held that expenses quantified and paid during the year are allowable as business expenditure even under the mercantile system. Therefore, the royalty payment was allowed. Regarding the interest expenditure of Rs.78,73,785/-, the Tribunal found that the interest was levied for the delay in payment, which was due to the demand being raised during the year. Citing the Supreme Court's decision in CIT vs. Ahmedabad Cotton Manufacturing Company Ltd., the Tribunal held that if a payment is made without breach of law and in obedience to statutory provisions as a measure of business expediency, it should be allowed. The interest was considered compensatory in nature, incurred wholly and exclusively for business purposes, and thus allowable under Section 37(1). The CIT(A)'s finding was set aside, and the interest expenditure was allowed.
What were the facts?
The assessee, Salitho Ores Pvt. Ltd., is in appeal before the Income Tax Appellate Tribunal (ITAT) against the order of the CIT(A)-2, Panaji, which upheld the disallowance of royalty expenditure and interest on delayed payment. The assessment year is 2010-11. The Assessing Officer had disallowed Rs.1,59,22,685/- as prior period expenditure for royalty on rejections/waste dumps sold in FY 2007-08 and FY 2008-09, and Rs.78,73,785/- as penal interest on delayed royalty payment. The assessee's initial assessment was framed under section 144, later restored to the AO by the ITAT, leading to a revised assessment under section 143(3) r.w.s. 254. The CIT(A) confirmed the disallowances, holding that the liability did not crystallize in the year under appeal and the assessee's stand was against the mercantile system of accounting.
What were the issues?
1. Whether the disallowance of royalty expenditure of Rs.1,59,22,685/- on rejection/waste dumps sold in preceding financial years (2007-08 and 2008-09) is justified, turning on the applicability of Section 37(1) of the Income Tax Act, 1961, and the mercantile system of accounting. 2. Whether the disallowance of interest expenditure of Rs.78,73,785/- on delayed payment of royalty is justified, turning on the applicability of Section 37(1) of the Income Tax Act, 1961. Assessee's contentions: The assessee argued that it was under a bonafide belief that royalty was not payable on rejections/waste dumps. The liability crystallized during the year under consideration when the Mining Department demanded payment. The interest expenditure was incurred wholly and exclusively for business purposes and was neither capital nor personal in nature. Revenue's contentions: The Revenue supported the order of the CIT(A).
Which sections of the Income-tax Act were involved?
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, PANAJI DB BENCH, PANAJI
Before: DR.MANISH BORAD & SHRI VINAY BHAMORE
PER DR. MANISH BORAD, ACCOUNTANT MEMBER :
The captioned appeal at the instance of assessee pertaining to A.Y. 2010-11 is directed against the order dated 20.03.2025 of ld. CIT(A)-2, Panaji emanating out of Assessment Order dated 14.12.2018 passed u/s.143(3) r.w.s.254 of the Income Tax Act, 1961 (in short ‘the Act’).
The only issue for consideration is disallowance of Royalty expenditure at Rs.1,59,22,685/- and the interest paid on delayed payment of Royalty at Rs.78,73,785/-.
Brief facts of the case are that the assessee is a Private Limited Company and engaged in the business of Mining, Processing and Sale of Iron ore. Assessee declared loss of (-) Rs.1,68,26,007/- in the return of income for A.Y. 2010-11 e-filed on 15.10.2010. Case selected for scrutiny through CASS and assessment framed u/s.144 of the Act on 19.03.2013 assessing the income at Rs.5,13,38,353/-.
Thereafter, the matter travelled before ld.CIT(A) where assessee got part relief and then it reached before this Tribunal which restored the matter to the file of ld. Assessing Officer. In compliance thereto, assessment u/s.143(3) r.w.s.254 of the Act carried out. Ld.Assessing Officer noticed that assessee had to pay Royalty on rection/ waste dumps for the financial years from F.Y. 2007-08 to F.Y. 2009-10 along with interest. Ld. Assessing Officer allowed the claim for the current year but for the amount paid for the F.Y. 2007-08 and F.Y. 2008-09 ld. Assessing Officer disallowed the sum at Rs.1,59,22,685/- as prior period expenditure. Ld. Assessing Officer further disallowed the interest expenditure of Rs.78,73,785/- observing that such interest payment is of penal nature and therefore cannot be allowed as business expenditure u/s.37(1) of the Act. After giving set off of the loss for the year) assessing the income at Rs.69,70,463/-.
Aggrieved assessee preferred appeal before ld.CIT(A) but could not succeed as ld.CIT(A) held that non payment of Royalty on sale of rejection/waste dump was a decision taken by the assessee and there is no ambiguity of the applicability of the statutory provisions and therefore one cannot say that the liability to pay Royalty crystallised during the year and therefore the stand adopted by the assessee is against the principle of matching concept and not in accordance with Mercantile system of account and accordingly disallowed the Royalty payment as well as interest on delayed payment.
Aggrieved assessee is now in appeal before this Tribunal against the .
Ld. Counsel for the assessee vehemently argued referring to the written submissions filed before ld.CIT(A) as well as before this Tribunal forming part of the paper book running into 240 pages. He submitted that the assessee is into business of Mining, Processing and Sale of Iron ore and in the course of mining excavated lumps and fines and Royalty was paid on lumps and fines. As regards rejection of waste dumps which were sold, the assessee was under Bonafide belief that Royalty was not payable on rejections and therefore no provisions of Royalty on rejection was made in the earlier years. He submitted that during the year under consideration, the Mining Department called upon the assessee to pay Royalty on rejections and therefore the liability crystallised during the year. As regards the interest expenditure is concerned, it is neither a capital expenditure nor of personal in nature and is actually incurred wholly and exclusively incurred for the business and therefore allowable u/s.37(1) of the Act.
On the other hand, ld. DR supported the order of ld.CIT(A).
We have heard the rival submissions and perused the record placed before us. The only issue for our consideration is disallowance of Royalty expenditure paid towards the rejection/waste dumps sold by the assessee in the preceeding two financial years along with interest for late payment of Royalty. We observe that assessee is into Mining business and is regularly paying the Royalty on the mining excavated lumps and fines. During the year under consideration, the Director of Mines, Geology called upon the assessee to pay Royalty on rejection sold in the earlier years. Assessee is under the bonafide belief that for selling the rejections/waste dumps, Royalty is not payable. No demand was raised in the past on account of Royalty payable on such rejections/waste dumps. It is not in dispute that during the year under consideration itself, the demand has been raised for paying the Royalty on rejection in lumps for the preceeding two financial years as well as this year. Ld. Assessing Officer has allowed the claim for the Royalty paid for the rejections/waste dumps sold during the year but has denied the alleged Royalty payment for preceeding two financial years on the ground that they are prior period in nature.
We observe that Hon’ble High Court of Gujarat in the case of CIT Vs. Indian Petrochemicals Corporation Limited (2016) 74 taxmann.com 163 has held that the expenses quantified and paid during the year would be allowed as business expenditure in relevant assessment year even though the assessee follows Mercantile system of account. We find that facts are identical in the instant case also and that the liability to pay the alleged Royalty amount for F.Y. 2007-08 and F.Y. 2008-09 initiated by the Director of Mines, Geology crystallised during the year and the same being a business expenditure deserves to be allowed. Therefore, finding of ld.CIT(A) is reversed and the payment of Royalty for rejection of waste dumps for F.Ys. 2007-08 and 2008-09 at Rs.1,59,22,685/- is hereby allowed.
As regards the delayed interest of Royalty payment of Rs.78,73,785/- is concerned, ld. Assessing Officer has disallowed treating it as penal in nature and invoked the provisions of section 37(1) of the Act. We however find that expenditure incurred towards Royalty is a genuine business expenditure and the interest has been levied for the delay in payment and such delay is on account of demand being raised during the year under consideration. Hon’ble Company Ltd. (1993) 71 Taxman 56 (SC) has held that “if a payment is made by the assessee during the relevant accounting year without any breach or infraction of any law or any public policy sought to be achieved by it and infact in obedience to provisions of such law as a measure of business expediency, there could be no valid reason not to allow such payment as deductible expenditure u/s.37 of the Act”. In light of the above judgment, we find that in the instant case also, the interest paid is not for any breach or infraction of law but is only for the delayed payment of Royalty. The payment of interest for delayed payment of Royalty is akin to the business carried out by the assessee and such payment has been made by the assessee to ensure that the business is not stopped and therefore the interest expenditure incurred on delayed payment of Royalty being compensatory in nature is wholly and exclusively for the purpose of business and therefore is allowable u/s.37(1) of the Act. Thus, finding of ld.CIT(A) is set aside and the interest on delayed payment of Royalty at Rs.78,73,785/- is allowed as business expenditure. Grounds of appeal raised by the assessee are allowed.
In the result, the appeal of the assessee is allowed.
Order pronounced on 22nd October 2026 under Rule 34(5) of the Income Tax (Appellate Tribunal) Rules, 1963. (VINAY BHAMORE) (MANISH BORAD) JUDICIAL MEMBER ACCOUNTANT MEMBER Panaji; दिन ंक / Dated : 22nd October, 2026. Satish Satish Kumar Madishetty Madishetty Date: 2026.10.22 16:56:40 +05'30'
आदेश की प्रतिलिपि अग्रेपिि / Copy of the Order forwarded to : अपील र्थी / The Appellant. 1. प्रत्यर्थी / The Respondent.
The Pr. CIT concerned. विभ गीय प्रतितनधि, आयकर अपीलीय अधिकरण, Panaji 4. ‘DB’ Bench / DR, ITAT, Panaji ‘DB’ Bench ग र्ड फ़ इल / Guard File. 5. आिेश नुस र / BY ORDER,
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