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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI N. V. VASUDEVAN & MS. S. PADMAVATHY
per cent of the amount should be advanced to other lease holders and the rest 20 per cent be retained with the government. The report had come pursuant to apex court’s direction dated August 28, 2011 to file a report charting out modalities for sale and keeping the accounts of sale proceeds of about 25 million MT of existing stock of iron ore pertaining to various mining leases in Bellary, Chitradurga and Tumkur in Karnataka. It is pursuant to this order of the Hon’ble Supreme Court that e-auctioning of extracted iron ore lying in the Assessee’s leasehold sites came to be made through E-auction. The Assessee pleads complete ignorance of the sale by the CEC and pleads that it came to know about the exact details of sale only CEC gave break up details vide its letter dated 22.11.2014 and therefore offered to tax the sale proceeds as detailed in those letters. In the course of assessment proceedings, the Assessee in a letter dated 17.1.2015 gave a statement of sale of iron ore by CEC through e-auction. The quantity of iron ore sold in e-auction and the sale proceeds as given in this statement (extracted in the earlier part of this order) shows that 1,71,571 MT of iron ore was sold during the period December, 2011 to March 2012 and the gross sale value was Rs.30,08,67,247/-. The actual quantity and gross sale value as given by MC in the letter dated 22.11.2014 was 2,04,000 MT with a gross sale value of Rs.36,46,40,720/-. The sale value was declared by the Assessee in the return of income filed for AY 2015-16 and the revenue has accepted the said return of income. As per the enclosure to the letter dated 22.11.2014 of the MC, 85% of the gross sale value of Rs.36,45,74,280/- viz., a sum of Rs.30,98,88,138/- was payable to the Assessee and 15% viz., Rs.5,46,86,142/- was retained by the MC towards SPV. The details of amount detected from the gross sale value as given by the MC is as follows:
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2,07,922.00 1) Total quantity sold (MT) 36,45,74,1.80 2) Total sale proceeds (Rs.) Recoveries 5,46,86.142 3) 15% of the sale proceeds to be retained 4) Estimated R & R expenditure to be retained 2,49,82,000 5) Compensation (Mining pit) (1.43 Ha) 7,15,00,000 _______________________________________________________________________ 6) Compensation (Dump, received etc 2.21 Ha) 2,21,00,000 7)Arrears Difference Royalty for the period 2009-10, 2010- 1,17,95.020 11 & 2011-12 8)The value of 16951 MT of material produced in excess of limits fixed by KSPCB during the year 2009-10 1,69.51,000 9 )TOTAL RECOVERIES 20,20,14,162 16,25,60,118 8) Balance amount (2-9) 1) Less: MSTC commission payable 18,82.913 16,06,77,205 Balance amount payable to the lessee.
The Assessee’s claim for deduction from the gross sale value as given by the Assessee in the letter dated 17.1.2015 before the AO is different and it reads thus: Gross sale value of 171,571 MT of Rs.30,08,67,247 from which the Assessee sought to deduct Rs.4,51,30,087 towards SPV at 15% of gross sale value and Rs.2,49,82,000/- towards R & R, Rs.7,15,00,000/- towards Mine Pit Penalty and Rs.2,21,00,000/- towards Dump Penalty.
The letter of the Assessee dated 17.1.2015 is admittedly after the MC’s letter dated 22.11.2014 but yet the Assessee is unable to explain the basis on which it gave details in its letter dated 17.1.2015. The Assessee’s claim has been that the MC had control over the inventory of the Assessee and it was not aware of the sales being made through e-auction. The Assessee however admits that it had to give no objection certificate (NOC) at the time stocks was to be lifted by the buyer and the stock sold was weighed in the presence of the Assessee’s representative. The Assessee remains silent on when it gave NOC to the buyer and when the stocks were
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lifted by the buyer. The Assessee claims that the figures it gave to the AO vide its letter dated 17.1.2015 were tentative figures based on the figures of sale noted by the Assessee’s representative at the time of movement of ore and the figures were only tentative. This stand of the Assessee is clearly false because as on 171.2015, it was in receipt of the letter dated 22.11.2014 by the MC wherein actual quantities were given by the MC.
The question is as to whether it can be said that the sale value of iron ore sold during the previous year by the MC thorugh e-auction can be said to have accrued or arisen to the Assessee and therefore the Assessee was bound to offer the sale value to tax. If the answer is in the affirmative, then whether the gross sale value or the gross sale value after reducing the amounts as claimed by the Assessee had to be accounted for by the Assessee as its sale.
The Assessee follows mercantile system of accounting and the moment sale is complete vis-à-vis the Assessee it had to account for sale in its books of accounts. Sale by the MC was by e auction and the sale happened during the relevant previous year. The Assessee was required to identify and appropriate the quantum of iron ore sold in e auction, which event, in the absence of any evidence to the contrary and in the light of the admission of the Assessee that it had identified the quantum of iron ore sold, has to be assumed to have happened during the relevant previous year. As we have already said, the Assessee is a privy to the process of sale through e-auction, in the sense was a participant in the process of identification and delivery of the quantity of iron ore sold through e-auction. Except a bald denial of actual knowledge of when the e-auction sale took place, the
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Assessee has not placed any facts within its knowledge. Therefore sale is deemed to be complete during the previous year relevant to AY 2012-13 when through the process of e-auction, property in the goods passed from the Assessee to the purchaser at the e-auction. The fact that some portion of the sale value has to be appropriated for specific purpose laid down by the Court in its order cannot be the basis to hold that sale value has to be accounted for only when the quantum of sum to be reduced is ascertained and the Assessee receives the net sale proceeds. Therefore, we hold that the conclusions of the AO that the sale value has accrued and arisen to the Assessee in tune with the mercantile system of accounting, during the previous year relevant to AY 2012-13.
The CIT(A) in coming to a contrary conclusion has placed reliance on the decision of the ITAT Bangalore Bench in the case of M.Hanumantha Rao (supra). In the said case, the facts were that the Assessee, who is also in the business of extraction of iron ore in the district of Bellary, Karnataka and in whose case also, there was a sale of iron ore through e-auction pursuant to orders of the Hon’ble Supreme Court, accounted for sale to the extent of Rs.14,68,19,400/- through e-auction. The actual sale of iron ore through e- auction was RS.17,27,28,707/-. The Assessee reduced a sum of Rs.2,59,09,307/- which was 15% contribution to SPV of the sale value, as per directions of the Supreme Court. The Assessee had offered sale value of Rs.14,68,19,400 (Rs.17,27,28,707 – Rs.2,59,09,307). The AO completed the Assessment without questioning as to how the Assessee was entitled to deduction of Rs.2,59,09,307/-. So also, the Assessee had claimed deduction of Rs.6,05,00,000 paid as penalty towards illegal mining, which was claimed and allowed as deduction by the AO. The CIT in exercise of his powers
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u/s.263 of the Act initiated proceedings for revision of the AO’s order on the ground that the sum of RS.2,59,09,307 was an application of income and therefore cannot be allowed as a deduction. He was also of the view that the sum of Rs.6,05,00,000/- being compensation paid for illegal mining was an expenditure in the nature of penalty for infraction of law and therefore cannot be allowed as deduction in view of explanation to Sec.37(1) of the Act. The order of the CIT u/s.263 of the Act was in challenge before the Tribunal. The tribunal in paragraph-8 of its order held that it was not going into merits of the case and further held that the sale through e-auction was pursuant to order of Supreme Court passed after the end of the previous year relevant to AY 2012-13 and therefore the sale proceeds itself was not assessable for the period relevant to AY 2012-13. The Tribunal held in the second part of paragraph 9 of its order that the Assessee had offered income which was not assessable for AY 2012-13 at all. The AO committed an error in not examining the claim for deduction of Rs.2,59,09,307/- being 15% contribution to SPV and deduction of Rs.6,05,00,000 paid as penalty. Since the order of the AO was not prejudicial to the interest of the revenue because the sum which was not taxable in AY 2012-13 had been offered to tax, the second condition for invoking jurisdiction u/s.263 of the Act, viz., the order of the AO should be prejudicial to the interest of the revenue was not satisfied, the order u/s.263 of the Act was quashed by the Tribunal.
The aforesaid decision is not applicable to the facts of the present case because the sale in the present case is admittedly pursuant to order of Supreme Court dated 2.9.2011 passed during the previous year relevant to AY 2012-13 and the sale process was also completed during the previous year relevant to AY 2012-13. Hence, we hold that the CIT(A) fell into an
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error in following the decision of the ITAT Bangalore Bench in the case of M. Hanumantha Rao (supra).
The reliance placed by the learned counsel on AS-9 of ICAI, in our view are not relevant in the context of accrual of income under the Act, which are governed by principles laid down by Courts. In AY 2012-13, AS- 9 of ICAI was not binding on the AO. These standards are framed to ensure disclosure of true and fair view of the state of affairs of the Assessee to the various stake holders in a limited liability company. We therefore hold that the sale proceeds of e-auction are assessable in AY 2012-13.
As far as the claim of the Assessee for deduction from the Gross sale value of 171,571 MT of Rs.30,08,67,247 to the following sums viz., (i) Rs.4,51,30,087 towards SPV at 15% of gross sale value and (ii) Rs.2,49,82,000/- towards R & R, (iii) Rs.7,15,00,000/- towards Mine Pit Penalty and (iv) Rs.2,21,00,000/- towards Dump Penalty. is concerned, the CIT(A) did not consider the said issue because of his conclusion that the E-auction sale value did not accrue or arise to the Assessee for AY 2012-13 and that the said sum was offered and taxed in AY 2015-16 and hence cannot be taxed twice.
As far as the issue whether the aforesaid sums can be claimed as deduction or not, the issue is no longer res integra and has been settled by the ITAT Bangalore Bench in the case of M/s. Veerabahadrappa Sangappa & Co. Vs. ACIT ITA No.1054/Bang/2019 for AY 2013-14 order dated 8.12.2020.
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(i) On Contribution to SPV at 15% of sale value: In paragraph 7 to 7.10.13 has elaborately discussed the question whether contribution to SPV at 15% can be allowed as deduction and held in paragraph 7.10.12 that the said payment is allowable as deduction u/s.37(1) of the Act with the following observations: “It is noticed that amounts collected from assessee are directed to be given to the SPV, which will in turn take various types of ameliorative and mitigative steps in the interest not only of the environment and ecology but the mining industry as a whole so as to enable the industry to run in a more organized, planned and disciplined manner. Under these set of facts, it cannot be said that these amounts are penal in nature. We notice that the Hyderabad bench of Tribunal in the case of NMDC Ltd (supra) and Co-ordinate bench of Bangalore Tribunal in Ramgad Minerals (supra) came to the same conclusion. We note that in NMDC case (supra), Hon'ble Hydrabad Tribunal followed decision of Hon'ble Kolkatta High Court in the case of ShyamSel 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. We also note that Hon'ble Supreme Court at page 171 observed that, these payments are necessary to be made by the mining lease holders. Hence there is merit in the submission of Ld.Counsel that, without making these payments, 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.”
(ii) On the deductibility of contributions towards R & R, the Tribunal held after elaborate discussion in paragraph 9 to 9.5.8 of its order finally concluded in para 9.5.7 that the payment in question is allowable as business expenditure with the following observations:
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“From the above it is clear that assessee was directed to make such payments in order to resume the mining activity. It is also clear that payment intimations may be issued as and when found necessary by the Department of Mining. Assessee cannot ignore such intimations for its smooth functioning of business. We therefore are of the opinion that these are expenditure incurred by assessee in lieu of business. We therefore reject the argument of revenue that such payment is hit by Explanation to section 1 to Section 37”. (iii) On the question whether mines pit penalty and dump penalty can be allowed as deduction, the Tribunal discussed the issue elaborately in paragraph 8 to 8.12.19 of its order and finally concluded in paragraph 8.12.19 that the sum can be allowed as deduction with the following observations: “Respectfully following Hyderabad bench of Tribunal in case of NMDC Ltd (supra) and Bangalore Tribunal M/s Mysore Minerals Ltd (supra) which has been upheld by Hon'ble Karnataka High Court, the payment of Rs.9,69,00,000/- is compensatory in nature only as these funds are meant to be used for public purposes and the assessee could not have commenced its operations without paying the same, the same is allowable as revenue expenditure. We are therefore of the view that payment made as compensation is not hit by Explanation 1 to Section 37(1) and is an allowable expenditure”.
In the light of the aforesaid decision, we direct the claim of the Assessee in this regard should be accepted.
The next aspect to be dealt with is as to whether the sale value of iron ore taxed in AY 2012-13 which was also offered to tax in AY 2015-16
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should be directed to be deleted to avoid double taxation of the same income. The facts in this regard are that the same income is also assessed by the AO in A.Y. 2015-16 wherein he has accepted the Return of income filed by the assessee including e-auction sale, The break up of sales so offered to tax are as under:
In February 2015, Gross sales Rs. 36,45,74,280: sales of F.Y. 11-12 Rs. 33,77,74,378 sales of F.Y. 12-13 Rs. 2,67,99,902 36,45,74,280
In March 2015, Gross sales Rs. 11,38,32,637 : sales of F.Y. 11-12 Rs. 1,65,57,723 sales in F.Y. 2012-13,13-14 Rs. 9,72,74,914 11,38,32,637
The sales year wise are as under: Gross sales of F.Y. 11-12 Rs. 35,43,32,101 F.Y. 12-13 Rs. 8,41,15,140 F.Y. 13-14 Rs. 3,99,59,676
As such for e-auction sales year wise as given by MC, sales for F.Y. 2011-12 were Rs. 35,43,32,101 42. The above sales were offered and assessed to tax in AY 2015-16 after claiming the expenses towards SPV charges, Compensation s for dump, mining pit, excess production, commission and royalty as retained by MC. The sales thus actually offered to tax are much higher than the incomplete and non accurate details of sales provided by the Assessee during the course of assessment. It was submitted that taxing the sales in A.Y. 2012-13 would amount to doubly taxing the same income which is against the cannons of taxation with regard to taxing real income.
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We are of the view that a direction to the AO to pass orders in AY 2015-16 to avoid double taxation of the same income, would be just and proper and meet the ends of justice. We hold and direct accordingly.
The next issue projected by the Revenue in ground No.5 is with regard to the addition made by the AO on account of undervaluation of closing stock to the extent of Rs.77,26,446/- which addition was deleted by the CIT(A). The facts with regard to this addition are that the Assessee consistently follows the method of valuing its closing stock of ore at the cost at ore at mine pit i.e., only the direct costs incurred are considered. Accordingly, the closing stock of the Assessee being 56,443 MT was valued at the rate of Rs. 184 ie approx. Rs. 103,86,000. This method is followed by the Assessee consistently every year and has been accepted by the Department. During the year under consideration, the Assessee was asked to furnish details of valuation of closing stock. The Assessee furnished the same giving details of direct and indirect cost. The indirect cost comprised of security service charges, Rent rates and taxes, water charges, transport charges, royalty, miscellaneous expenses and depreciation. The Assessee had valued closing stock basaed on direct costi.e. Rs. 184/- per ton however the AO for the reasons that Assessee did not furnish details to justify segregation of expenses as direct and indirect cost, chose to value the closing stock during the year at total cost including direct and indirect costs. He thus held the value of stock to be Rs. 374/MT (184 direct cost + 190 indirect cost) as against Assessee 's value of Rs. 184/MT. Thus, he added the difference of Rs. 77,26,446 i.e. [(48,249 MT closing stock*374=1,81,12,446)-(1,03,86,000: value of stock as per Assessee ).
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Before CIT(A), the Assessee drew attention to the details of closing stock of earlier year i.e., A.Y. 2011-12. The details of closing stock and of cost of production expense wise submitted vide letter dated 14.3.2015 during the course of assessment for AY 2011-12 was also enclosed. Based on these expense details, Assessee had arrived at direct cost being value of stock at mine pits at Rs. 286/MT. Assessee had accordingly in A.Y. 2011-12 also valued its closing stock at Rs. 286/MT based on the direct costs incurred. This method was accepted by the assessing officer. The AO had accepted the method of valuation of closing stock of the Assessee for A.Y. 2011-12 i.e. Rs. 286/MT which included direct costs only. It was submitted that the method of valuation of closing stock is followed consistently and accepted year after year the same cannot be changed by the AO in a particular year, with no change in facts.
Without prejudice to above submission it was submitted that if the AO revalues the closing stock as on 31.3.2012, directions need to be given for consideration of the same as opening stock in A.Y. 2013-14 and accordingly relief be given to the Assessee in A.Y. 2013-14 considering a higher value of opening stock i.e., Rs. 77,26,446. This will lead to reduction in profits of A.Y. 2013-14 by 77.26 lakhs. Also, during A.Y. 2012-13, the opening stock which is valued at Direct cost of Rs. 286/- be increased to include indirect costs.
The CIT(A) agreed with the submissions of the Assessee and deleted the addition made by the AO observing as follows: “The submission filed by the assessee, assessment order passed by the AO, grounds of appeal filed by the assessee and facts of the case
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has been carefully perused. The AO has valued the closing' stock of 4829 MT impounded but not sold through e-auction by the Monitoring Comthittee at Rs. 374 Per Metric Tons stating that the closing stock to be valued at the rate on which the cost of production debited in the books of accounts. However, the AO has not considered the valuation of corresponding opening stock as on 01.04.2011 and as on 01.04.2012. The valuations of closing stock and opening stock have to be done considering the same cost of production. It cannot be different for opening stock and closing stock. Hence, I hold that the AO was not justified in making the additions of Rs. 77,26,446/-. Accordingly, the appeal filed by the assessee on this account is hereby allowed and the AO is directed to delete the additions of Rs. 77,26,446/-.”
Aggrieved by the order of the CIT(A), the revenue has raised ground No.5 before the Tribunal. We have heard the rival submissions. The learned counsel for Assessee relied on order of CIT(A). The learned DR relied on the order of the AO.
We have considered the rival submissions. section 145A of the Act mandates that the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head “Profits and gains of business or profession” shall be in accordance with the method of accounting regularly employed by the Assessee. The Act mandates that the valuation of inventory should be made in accordance with the method of accounting regularly employed by the Assessee. It is also equally well settled that a method of accounting followed consistently in the matter of valuation of inventory cannot be disturbed, except when there is a change as laid down by the Hon’ble Supreme Court in the case of United Commercial Bank vs. CIT (1999) 240ITR 355 (SC). In the present case, the AO, was wrong in disturbing the method of accounting regularly employed by the
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Assesee for valuation of closing stock. The opening stock of the Assessee should also be valued in the same manner in which the closing stock of the Assessee is valued. By not valuing the opening stock of the Assessee the AO erred in disturbing only the value of closing stock. In the present case it was not in dispute that the Assessee was consistently following the same method of valuation of closing stock at cost at the mine pit, which was also followed in the year under consideration. The profit was deduced in accordance with the method adopted by the Assessee. Therefore, the AO was not justified in disturbing the consistent method of valuation. We find no grounds to interfere with the decision of the CIT(A) and accordingly reject ground No.5 raised by the Revenue.
The next issue that requires adjudication is ground No.6 raised by the Revenue regarding the claim of the Assessee for deduction on account of forest development tax of Rs.2,37,51,074/- which was not allowed by the AO but allowed by the CIT(A). The facts with regard to this ground of appeal are that the Assessee during the year under consideration, debited Rs. 2,37,51,074 on account of Forest Development Tax (FDT). This included arrears of payment of FDT of Rs. 1,15,04,800 paid during the year and Rs. 1,22,46,274 incurred during the year.
The assessing officer disallowed FDT Rs. 2,37,51,074 for want of details i.e., relevant orders and challans and nature of arrears of tax. Further the assessing officer held that FDT was paid provisionally under protest and matter was pending before the High Court. Thus, liability of FDT is not crystallized during the year and therefore disallowed the same. In this regard it may be clarified that Vide a notification dated 16.8.2008 and letter
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dated 12.9.2008, the Govt. of Karnataka had directed recovery of FDT @8% from the lease holders of mines, based on the value shown in the invoice at the time of releasing the iron ore from the forest area. This was subsequently increased to 12%. Aggrieved by this notification, the Assessee preferred a writ petition before the Hon'ble Karnataka High Court vide WP No. 31189/2008 challenging this notification which considered the produce from mining leases to be governed under the Forest Conservation Act.
The Hon'ble High Court vide its order dated 28th May, 2009 granted interim relief subject to the condition that the Assessee pays 50% of the FDT payable. Accordingly, the Assessee complied with the interim order of the Hon'ble High Court and paid 50% of the FDT payable. According to the AO since the Assessee challenged the levy of FDT, the liability of the Assessee had crystallized and therefore the deduction claimed cannot be allowed.
Before CIT(A), the Assessee submitted the relevant ledger accounts FDT Account and FDT arrears account which put together was charged to the Profit & Loss A/c. Further Dy. Conservators account was also filed, reflecting the 'bank statements/payments made by both Assessee and purchaser. Lumpsum payments are made to the Deputy Conservator of Forest, Bellary towards FDT and subsequently credit of the FDT paid is utilized for obtaining Forest permits at the time of sale/movement of ore. In some cases if ore is not sold and forest permit is obtained, the Assessee applies for cancellation of permit and receives credit of FDT to that extent. No challans are issued by the Department for payment of FDT since the payments are paid /demand adjusted from advances/credits lying with them.
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Covering letters enclosing cheques/demand drafts for payments made during the year F.Y. 2011-12 duly acknowledged by the Forest Department were also filed by the Assessee. The relevant bank statements of the Assessee reflecting payments of FDT by Assessee to Dy. Conservator of Forest, Bellary, was also filed. It was also submitted that at times when the ore is to be urgently supplied to the buyer, the buyer of ore pays FDT on behalf of Assessee and subsequently recovers the same from Assessee. Accordingly, FDT of Rs. 74,88,296 is paid by M/s. Arks Minerals to whom ore is sold by Assessee and the same was recovered from Assessee thereafter. Accordingly, Assessee has incurred an expense towards FDT of Rs. 2,37,51,074 (Rs. 162,62,778 paid by Assessee and Rs. 74,88,296 paid by Arks Minerals during the year. It was submitted that FDT is paid in compliance with the order of high court. Thus, FDT paid during the year is a deductible expenditure. It was submitted that FDT was incurred in the course of mining operations and is as such Assessee 's business expenditure. In order to move the ore sold, the Assessee had to pay the FDT and only then the stock of ore sold could be moved to the buyer. Thus, the said FDT expense was incurred wholly and exclusively for the purpose of Assessee 's business. The Assessee also claimed the said FDT expenditure u/s 37(1) read with section 43B of the Act which allows certain deductions on payment basis. It was contended that the assessing officer failed to appreciate that FDT is a statutory liability covered by provisions of section 43B of the Act.
The CIT(A) agreed with the submission of the Assessee and he deleted the addition made by the AO observing as follows:
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“The submission filed by the assessee, assessment order passed by the AO and facts of the case has been carefully perused and the submission filed by the assessee is acceptable, as FDT expense was incurred wholly and exclusively for the purpose of Assessee 's business which is allowable business expenditure u/s 37(1) read with section 43B of the ITA which allows certain deductions on payment basis. Further, the 'assessee has submitted the supporting documents of proof of payment credited to the forest department.”
Aggrieved by the order of the CIT(A), the Revenue is in appeal before the Tribunal. We have heard the rival submissions. The AO disallowed the sum in question on the ground that the required details were not filed regarding FDT. The required details regarding FDT arrears are at page 211 of the paper book and the liability for the previous year relevant to AY 2012-13 are at pages 207 to 210 of the Assessee’s paper book. The evidence of actual payment during the previous year has also been filed in the form of bank statements of the Assessee as well as payments made by the Purchasers on behalf of the Assessee to the Deputy Conservator of Forest, Bellary towards FDT. Therefore, the reason assigned by the AO for not allowing deduction on the ground of want of required details is devoid of any merits. As far as the ground of disallowance viz., that the liability was disputed by the Assessee in a Court and hence the liability has not crystallized is concerned, we find that liability in question is a statutory liability imposed by virtue of the provisions of Sec.98-A of the Karnataka Forest Act. The law is well settled that a statutory liability is incurred on a mere issuance of a demand notice against the Assessee and becomes deductible at that point of time. The factum of the Assessee raising a dispute against such a demand does not ruin the incurring of liability. In Haji Lal Mohd. Biri Works v. CIT (1997) 3 SCC 659 SC it was explained by referring
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to the decisions in Kedarnath Jute Mfg. Co. Ltd. v. CIT (1972) 3 SCC 252 and CIT v. Kalinga Tubes Ltd. (1996) 2 SCC 277 that "when the Assessee is following mercantile system of accounting, in case of sales tax payable by the Assessee, the liability to pay sales tax would accrue the moment the dealer made sales which are subject to sales tax and, at that stage, the obligation to pay the sales tax arises and the raising of the dispute in this connection before the higher authorities would be irrelevant." In Kanoria Chemicals & Industries Limited v. U.P. State Electricity Board (1997) 5 SCC 772, the Court explained the legal position that would result when there is a stay of a government order in terms of which surcharge on electricity was payable. It was held that even if the Board did not raise a demand as a result of the stay order, the obligation of the consumers to pay the charges at the enhanced rate would continue. We also find that the Panaji Bench of ITAT in the case of ACIT Vs. M/S.SB Minerals ITA No.33/PNJ/2015 for AY 2010-11 order dated 2.3.2015 on identical facts with regard to levy of FDT where the Assessee had disputed FDT levy and claimed deduction on the basis of actual payment, directed the deduction claimed by the Assessee to be allowed. In view of the aforesaid legal position, we are of the view that the order of CIT(A) does not call for any interference. Accordingly, Grd.No.6 raised by the revenue is dismissed.
In the result, appeal by the Revenue is partly allowed.
As far as the appeal of the Assessee is concerned, the only issue in Assessee appeal is with regard to addition made by the AO on account of unaccounted sales of iron ore of Rs.1,08,79,446/- which was confirmed by the CIT(A). The facts with regard to this addition are that the Assessee had
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reported sales of 150,694 MT during A.Y. 2012-13. The assessing officer has in his order re-worked this quantity of iron ore sold by the Assessee considering the difference between estimated stock of 2,20,000 MT impounded by MC (stated in Tax audit report) and the opening stock and production of the Assessee as under: M.T Opening stock 172,426 actual Add: production 205,202 actual approximate Less: stock impounded 2,20,000 quantity as per by MC Tax audit report Balancing figure Stock sold 1,57,628
The Assessee reported sales of only Rs.1,50.694 MT. The AO held that the Assessee failed to disclose actual sales to the extent of 1,57,628 MT and brought the difference to tax which resulted in the addition of Rs.1,08,79,449 by the AO.
Before CIT(A) the Assessee submitted that as stated earlier Assessee would weigh the ore only at point of production/ sale. Thus, before the impounding of inventory i.e., upto 26.8.2011, the Assessee had produced iron ore to the extent of 205,202 MT approximately. Opening stock as on 1.4.2011 was 172,426 MT. Sales upto the date of impounding was 150,694 MT. Based on this data available, the inventory that was lying at the mines of Assessee and that would have been impounded by the MC was arrived at 226,934 MT. Since no particular details of quantity of stock impounded by MC was received by the Assessee, the auditor at the time of finalizing the
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audit in September 2012 considered approximate figure of stock impounded to be 2.20 lakhs MT. The Assessee pointed out that the quantity of sales arrived at by AO is higher due to consideration of lower quantity of stock impounded of 2,20,00.0.MT which was only an approximate figure of stock since the actual, was not known. (Quantity as per books, was 226,934 MT). The AO has proceeded an assumed figure reported and hence the entire addition based in surmises is fallacious and deserves to be deleted. The AO has not come to a conclusion that the 6934 MT has been actually sold to some party. He has merely by taking a closing balancing figure made an addition which is an adhoc addition. The Assessee submitted that courts have time and again deleted additions based on adhoc assumptions.
The CIT(A) however confirmed the order of the AO observing as follows: “The submission filed by the assessee, the assessment order passed by the AO, grounds of appeal filed by the assessee and the facts of the case have been carefully perused. The AO in his order has clearly mentioned the difference in stock and the assessee has not filed any specific defect / discrepancy in the computation of difference in stock done by the AO. The assessee has merely mentioned that quantity impounded by the CEC is approximate and not exact as there is no weighment of stock because of its nature. In other words, the assessee itself accepted that the stock was not exactly measured and there is no specific defect in computation done by the AO in order to compute unaccounted sale of iron ore of Rs. 1,08,79,446/-. Hence, the AO is justified in making the addition of Rs. 1,08,79,446/- and accordingly, grounds of appeal filed by the assessee from 19 to 22 are hereby dismissed.”
We have heard the rival submissions. The learned DR relied on the order of the AO/CIT(A). The learned counsel for the Assessee reiterated
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submissions made before the CIT(A) and further relied on the decision of the Hon’ble Jammu & Kashmir High Court in the case of International forest company Vs. CIT 101 ITR 721(J & K) wherein it was held: “22. Even if it be taken that the income-tax authorities are not bound by strict rules of evidence, the report of the Ayyangar Commission could not be referred to and relied upon by the Appellate Tribunal unless it had not only invited the attention of the assessee to the passages on which it intended to rely, but had also given an opportunity to the assessee to explain those passages and to adduce evidence against the truth of the recitals contained therein. Reference in this connection may be made to a decision of their Lordships of the Supreme Court in Commissioner of Income-tax v. East Coast Commercial Co. Ltd, [1967] 63 ITR 449 (SC) where it was held that the report of the Income-tax Investigation Commission could not be relied upon without giving an opportunity to the assessee to explain the passages of the report sought to be relied upon and to tender evidence against the truth of the recitals contained therein. 23. We are, therefore, of the opinion that the income-tax authorities, and the Appellate Tribunal erred in relying upon the aforesaid schedule of the forest department. The Appellate Tribunal also acted illegally in allowing the report of the Ayyangar Commission to be cited before it and relying on the same as expert report without giving an opportunity to the assessee to adduce evidence to controvert the recitals made therein. 24. We would also like to observe that even if the Income-tax Officer considered the material placed before him by the assessee to be unreliable keeping in view the comparative statement of accounts of the previous years, he could not proceed to make an arbitrary addition and base his conclusion purely on guess-work. He ought to have related his estimate to some evidence or material on the record as it is now well-settled that if the profits shown by the assessee in his return are not accepted, it is for the taxing authorities to prove that the assessee made more profits” .
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It was submitted that in the present case, the AO based his conclusions only on the basis of the approximate quantity of stock impounded by MC at 2,20,000 MT. as report by the tax auditor in the tax audit report, which was impermissible.
We have carefully considered the rival submissions. The addition has been made by the AO based on the figure of stock impounded by MC at 2,20,000 MT. This figure so reported was an approximate figure. As and when Iron ore is extracted it is kept in open mines and weighed at the point of production/sale. There is no dispute on the quantity of opening stock and actual production of iron ore and the closing stock was arrived at by the Assessee as a balancing figure by adding opening stock, production and reducing the sales. The sales reported by the Assessee was 1,50,694 MT. The AO has arbitrarily arrived at the sales figure of 1,57,628 Mt.by taking stock impounded and opening stock and reducing stock impounded by MC and arrived at the sale of 1.57.628 MT by the Assessee. We have already seen the sequence of events leading to the confiscation of stock of iron ore lying in various mines consequent to order of Hon’ble Supreme Court. There was no basis to arrive at the stock of iron ore impounded and the figures reported in the audit report were only approximation. There is no material before the AO to come to a conclusion that the Assessee sold 1,57,628 MT of iron ore as against the sales reported by the Assessee of 1,50,694 MT. In these circumstances, the addition made is arbitrary and deserves to be deleted and is hereby deleted.
The appeal of the Assessee is allowed.
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In the result, appeal of the Revenue is partly allowed and that of the Assessee allowed.
Pronounced in the open court on the date mentioned on the caption page.
Sd/- Sd/- (PADMAVATHY S) (N.V. VASUDEVAN) Accountant Member Vice President Bangalore, Dated: 18.05.2022. /NS/* Copy to: 1. Assessees 2. Respondent 3. CIT 4. CIT(A) 5. DR 6. Guard file By order
Assistant Registrar, ITAT, Bangalore.