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Facts
The assessee contributed Rs. 64,19,87,000/- to a Special Purpose Vehicle (SPV) as mandated by the Supreme Court for socio-economic development and environmental mitigation. The Assessing Officer disallowed this as it was not considered a business expediency. The CIT(A) allowed the expense.
Held
The Tribunal held that the contribution to the SPV, being judicially mandated and compulsory for the continuation of business, is a legitimate business expenditure. It was compensatory in nature, aimed at mitigating environmental damage, and not a penal imposition.
Key Issues
Whether the contribution made to a Special Purpose Vehicle (SPV), as mandated by the Supreme Court, is an allowable business expenditure under Section 37(1) of the Income Tax Act.
Sections Cited
143(3), 144C, 37
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Income Tax Appellate Tribunal, ‘C’ BENCH
आदेश / O R D E R PER AMIT SHUKLA (J.M): This appeal by the Revenue is directed against the order dated 14/02/2025 passed by the National Faceless Appeal Centre (NFAC), Delhi, under section 143(3) read with section 144C of the Income-tax Act, 1961 (“the Act”) for the Assessment Year 2020–21.
The Revenue has raised the following grounds of appeal:
1. MSPL Limited "I. Whether on the facts and in the circumstances of the case and in law Id.CIT(A) was right in allowing the expense of Rs 64,19,87,000/- claimed by the assessee as contribution made to special Purpose Vehicles (SPV) expenses?" II "Whether on the facts and in the circumstances of the case and in law Id CIT(A) was right in allowing the expense of Rs 64,19,87,000/- claimed by the assessee as SPV expenses treating the said expenditure as compensatory and not penal in nature.?"
The brief facts relevant to the issue are that during the year under consideration, the assessee incurred an expenditure of Rs.64,19,87,000/- towards contribution to a Special Purpose Vehicle (SPV). It was explained that the said contribution was mandated under the directions of the Hon’ble Supreme Court, to be utilised for various ameliorative and mitigative measures relating to mining operations, and was therefore in the nature of compensatory payment.
However, the Assessing Officer did not accept the assessee’s explanation and proceeded to disallow the claim. According to him, the expenditure of Rs.64,19,87,000/- was not incurred wholly and exclusively for the purposes of the assessee’s business, and hence was inadmissible under section 37 of the Act. The AO opined that the assessee had failed to substantiate the business expediency of the said contribution, other than merely stating that it was a compulsory levy imposed by the Monitoring Committee to mitigate the environmental impact of mining. In his view, the contribution lacked direct nexus with the business operations and was not a commercial necessity. Consequently, the
The assessee, in response, submitted that the Hon’ble Supreme Court, vide its order dated 28/04/2013 in Writ Petition (Civil) No. 562 of 2009, directed the formation of an SPV under the chairmanship of the Chief Secretary of the Government of Karnataka, with the specific purpose of facilitating socio-economic development, forest conservation, and infrastructure development in the mining regions. It was further submitted that even “Category A” mines which were not found to be involved in any illegality were equally mandated to contribute. The assessee also pointed out that penalties for illegal mining had been imposed and disallowed separately and that the present contribution was distinct from such penalties. It was emphasized that similar expenditure had been allowed in the past in the assessee’s group companies. Nonetheless, the AO, after considering the submissions, passed the disallowance order in the following terms:
“The assessee has claimed an expense of Rs. 64,19,87,000/- being contribution made towards SPV. When asked to furnish details about the nature of expense, how is it incidental to business and a detailed note on its allowability. In response, it was submitted that the contribution made is a compulsory contribution imposed by the monitoring committee and hence such expenditure is very much related to the business of the assessee and hence shall be allowed as deduction form the total taxable income of the assessee.
MSPL Limited The assessee has not substantiated the business expediency of the deduction claimed except for mentioning the fact that such contribution is a compulsory contribution imposed by the monitoring committee in order to mitigate the impact of mining. Since assessee has been unable to prove the business expediency of the expenditure incurred and claimed as allowable, such expenditure disallowed as business expenditure.
The Ld. CIT(A), however, appreciated the factual and legal position and proceeded to delete the disallowance with the following detailed observations:
6.3.3 I have carefully considered the assessment order and submissions made by the appellant along with judicial pronouncements cited. The contribution towards SPV, as directed by the Hon'ble Supreme Court, order in respect of WRIT PETITION (CIVIL) NO. 562 of 2009 dated 18/04/2013is mandatory as per directions of Hon'ble Supreme Court. The deduction of the said amount from the sale proceeds of iron ore is as per the regulations being imposed by Monitoring Committee as per the directions of Supreme Court to mitigate the environmental damages. This expenditure is therefore very much related and incurred for the purpose of appellant's business activities of mining Failure to comply with this obligation would result in the inability to conduct business activities by the appellant. Therefore, it is integral to the smooth functioning of the appellant's business. The appellant has no option to avoid SPV expenses as the same are incurred as per directions of Hon'ble Supreme Court. The expenditure is compensatory and not penal in nature, aimed at mitigating environmental damage and ensuring sustainable mining practices. Judicial precedents in the cases cited by the appellant including the decision in M/s Ramgad Minerals & Mining Limited Vs. ACIT circle-1, Bellary for AYs 2013-14 & 2014-15 in & 1271/Bang/2019unequivocally support the allowability of SPV contributions as allowable business expenditures. In view of the above, I am of the opinion that the SPV expenses of Rs. 64,19,87,000/-claimed by the appellant are allowable MSPL Limited under Section 37(1) of the Income Tax Act. Therefore, disallowance of SPV expenses of Rs. 64,19,87,000/- made by the Assessing Officer is deleted and accordingly the ground no. 2 is allowed in favour of the appellant.
We have heard the rival contentions and perused the material on record. The assessee is engaged in the business of extraction, processing, and trading of iron ore. The contribution of Rs.64,19,87,000/– was deducted by the Monitoring Committee and retained by the Central Empowered Committee (CEC) pursuant to the express directions of the Hon’ble Supreme Court. The stated objective was to fund a variety of ameliorative and mitigative measures aimed at socio-economic development of the local population, infrastructure development, forest protection, and establishment of common transportation facilities for iron ore movement.
The very nature and origin of the contribution, being judicially mandated and compulsory for continuation of business, distinguishes it from any penal imposition. Failure to comply would have resulted in the assessee being unable to carry on its mining operations, thereby establishing a clear nexus with the business. Moreover, the assessee had no discretion to challenge the deduction, as it was imposed under the aegis of the Hon’ble Supreme Court and administered by a statutory committee. The classification of mining leases by the CEC into Categories A, B, and C further reveals that even entities without any irregularity (i.e.,
It is also pertinent to note that the coordinate Benches of the Tribunal have consistently upheld the allowability of such contributions as business expenditure under section 37(1) of the Act. The following decisions squarely support the assessee’s claim:
Decision of Hon'ble ITAT in appellant's group company case le. M/s. Ramgad Minerals & Mining Limited vs. ACIT Circle-1, Bellary for AYs 2013-14 & 2014-15 in & 1271/Bang/2019 wherein Hon'ble ITAT has passed the order in favor of M/s Ramgad Minerals & Mining Limited on similar issue, holding that contribution to SPV, under category B, is an allowable expenditure. The relevant extract of the said order is reproduced herewith for your ready reference Decision of Hon'ble ITAT in the case of M/s Muncer Enterprises vs ACIT in for A.Y. 2013-14, date of pronouncement 09.03.2021 The relevant extract of the said case is as under 20 Respectfully following the view taken in above decisions and based on the above discussions and analysis, we are of the opinion that 15% contribution to SPV retained by the monitoring committee on behalf of assessee deserves to be treated as business expenditure for the year under consideration" Decision of the Hon'ble ITAT, Hyderabad in case of Deputy Commissioner of Income-Tax, Circle 16(1) Hyderabad vs. NMDC Ltd in ITA No. 1022/Hyd/2019 Assessment Year 2015-16 wherein the facts of this case are exactly similar to the appellant's facts. The relevant extract of the case are reproduced herewith:
MSPL Limited "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 us 37(1) of the Act. Thus, Grounds No.2 and 3 raised by the assessee Decision of the Hon'ble ITAT, Kolkata in case of ACIT Circle-5, Kolkata vs. Free grade & Co. Ltd in L.T.A No. 934/Kol/2009 Assessment Year: 2006-2007. The relevant portion of the said judgement is reproduced below for your ready reference: "The assessee was engaged in the business of Mining as a licensee for mining in Nadidih Mines in Orissa, which was acquired by the assessee-company in the year 1979. During the assessment proceedings Assessing Officer observed that the assessee debited a sum of Rs. 2,96,76,750/- under the head "Environment & Ecology" in its profit & loss account. On being asked by Assessing Officer, assessee stated that the said expenses are levied and collected by the State Government for the transfer to Compensation Afforestation Management and Planning Agency (CAMPA) being Net Present Value paid as per direction of Hon'ble Supreme Court of India and as per the guidelines issued by the Ministry of Environment & Forest to enable the assessee for utilization of land for mining purposes. The assessee claimed the said amount as revenue expenditure. The assessee stated that the said expenditure was incurred by the assessee not for the purpose of obtaining any asset but for smooth running of the business of mining and it was obligatory in nature. That on failure of payment of NPV, no approval would be granted by the Government to the assessee for operations of the Mines. Thus, the expenses incurred towards NPV are for the purpose of business and revenue in nature. That, no enduring benefit is being obtained by assessee-company. 15 In view of the above decision and the facts of the case before us, we hold that Id.
MSPL Limited CIT(Appeals) has righily held that the above expenditure of Rs. 3,95,56,500/-paid by the assessee as NPV to enable the assessee to carry on its mining business is revenue in nature, which is allowable as business expenditure under section371) of the Act. Therefore, we uphold the order of Id. CIT(Appeals) by rejecting Ground No. I of the appeal taken by the Department. Hence, Ground No. 1 is rejected. Decision of the Hon'ble ITAT Kolkata in case of ACIT Circle-5, Kolkata vs. M/s Essel Mining & Industries Ltd in Assessment Year 2006-07 The relevant portion of the said judgement is reproduced below for your ready reference:
In light of the aforesaid judicial pronouncements and the statutory mandate underlying the expenditure, we are of the considered view that the contribution to SPV is a legitimate business expenditure, wholly and exclusively incurred for the purpose of the assessee’s business. The findings of the Ld. CIT(A), being reasoned and in accordance with law, merit affirmation.
Accordingly, we uphold the order of the Ld. CIT(A) and dismiss the appeal of the Revenue.
In the result, appeal of the Revenue is dismissed.
Order pronounced on 31st July, 2025.