M/S THE SANDUR MANGANESE & IRON ORES LTD.,,SANDUR vs. JCIT, BELLARY

PER B.R. BASKARAN, ACCOUNTANT MEMBER:

3.1 The facts relating to the above said issue are stated in brief. The A.O. noticed that the assessee has claimed expenditure of Rs.58.26 lakhs under the head “Provision towards Medical reimbursements”. The assessee submitted that it is liable to reimburse medical expenses up to 20% of basic pay and DA of employees. The reimbursement is made either on monthly or annual basis based on the request made by the employee. If the assessee has not claimed fully, then the balance amount will be carried forward to the next year. It was submitted that the assessee is following mercantile system of accounting and hence provision for medical reimbursement should be allowed as deduction u/s 37(1) of the Income-tax Act,1961 ['the Act' for short].

3.2 The A.O. took the view that the word “Reimbursement” itself represents that amount is payable only after incurring of expenditure on medical treatment by the assessee, that too, upon production of bills. The A.O. took the view that the assessee cannot anticipate or expect that any employee will go sick and would make a claim. Accordingly, the A.O. took the view that the claim made by the assessee is a contingent liability and accordingly, disallowed the same. The Ld. CIT(A) also confirmed the same.

3.3 We heard the parties on this issue and perused record. It was brought to our notice that an identical claim made by the to 1517/Bang/2015 M/s. The Sandur Manganese & Iron Ores Ltd., Sandur

Page 3 of 19 assessee was disallowed in assessment year 2008-09 and the said disallowance has been confirmed by the Tribunal vide its order dated 11.10.2017 passed in ITA No.559/Bang/2013. The Ld. A.R., however, put an alternative plea before us that actual reimbursement made during the year under consideration should be directed to be allowed. The Ld. A.R. submitted that the assessee was debiting the actual expenses to the account of “Provision for medical reimbursement”, i.e., actual payments were not debited to Profit and Loss account. Since the provision created by the assessee has been disallowed, the actual reimbursement made by the assessee during the year should be directed to be allowed.

3.4 We heard Ld. D.R. on this issue and perused the record. It is the case of the assessee that it has debited the profit & loss account with “Provision for medical reimbursement”. The actual claim, if any, made by the employees is directly debited to “Provision for medical reimbursement” account, meaning thereby, the actual reimbursement have not been debited to the Profit and Loss account. Since the provision for medical reimbursement claimed by the assessee has been disallowed, it is prayed that the actual medical reimbursement expenses incurred during the year should be allowed as deduction. We find merit in this prayer of the Ld. A.R. The claim of provision for medical reimbursement has been disallowed only for the reason that the same is contingent in nature. In that case, the actual expenses incurred during the year merits allowance. Accordingly, while confirming the order passed by the Ld. CIT(A) on this issue, in the interest of natural justice, we direct the A.O. to allow actual medical reimbursement expenses incurred by the assessee and which is debited to provision for medical reimbursement account during the year under consideration. We order accordingly. to 1517/Bang/2015 M/s. The Sandur Manganese & Iron Ores Ltd., Sandur 4.0 The next issue urged in ground nos. 4 to 7 relates to disallowance of “Provision for leave travelling allowance”. The A.O. noticed that the assessee has claimed a sum of Rs.43.14 lakhs as provision for leave travelling allowance. The A.O. took the view that the same is a future liability and accordingly, disallowed the same. The Ld. CIT(A) also confirmed the same.

4.1 The Ld. A.R. submitted that the provision made for leave travelling allowance is an ascertained liability and the same is allowable as deduction as per the decision rendered by Hon’ble Supreme Court in the case of Bharat Earth Movers Vs. CIT (245 ITR 428).

4.2 We heard Ld. D.R. on this issue, who submitted that the coordinate bench has taken identical view in the assessee’s own case in assessment year 2008-090 (referred supra).

4.3 We heard the parties on this issue and perused the record. As in the case of provision for medical reimbursements, in this claim also, the liability to pay would arise in the hands of the assessee only when an employee makes a claim. We notice that the co- ordinate bench has decided an identical issue against the assessee in the assessee’s own case in AY 2008-09. Hence, we do not find any infirmity in the decision of Ld. CIT(A) in confirming the disallowance. However, as held in the case of “Provision for medical reimbursements”, the actual expenditure towards leave travel expenses, if any, incurred by the assessee and debited to provision for leave travelling allowance during the year under consideration may be allowed as deduction. We order accordingly. to 1517/Bang/2015 M/s. The Sandur Manganese & Iron Ores Ltd., Sandur

Page 5 of 19 5.0 The Ld. A.R. did not press ground No.8 and the same is dismissed as not pressed.

6.0 Ground No.9 relates to disallowance of incidental expenses of Rs.5,66,703/-. The A.O. disallowed the same on the reasoning that the assessee did not furnish proper details. The Ld. CIT(A) confirmed the same since no detail was furnished before him also.

6.1 We heard the parties on this issue and perused the record. Before us also, the assessee did not furnish nature of incidental expenses claimed by it. Under these facts, we do not have any other option but to confirm the order passed by Ld. CIT(A) on this issue.

7.0 Ground Nos.10 to 14 relates to disallowance of payment of Rs.1,40,00,000/- made to Bellari Agenda Task Force (BATF). The A.O. disallowed the claim of the assessee with the following observations.

“Disallowance of payment to BATF – Rs.1,40,00,000/- On verification of the details, it is noticed that the assessee company has given a sum of Rs.1,40,00,000/- to the District Commissioner Bellary Agenda Task Force for the purpose of improving the infrastructure like roads, health center, drinking water and schools at rural areas. Merely incurring the expenditure for the infrastructure and other development works in the district cannot be treated as business expenditure, which is not at all related to the assessee company’s nature of business and at the most it can be treated as donation. The assessee company’s contention that it is a “Corporate Social Responsibility” is not acceptable. Since the above expenditure is not incurred for the purpose of business and cannot be allowed as expenditure u/s 37. Reliance is also placed on the recent pronouncement of “Hon’ble High Court of Karnataka in the case of Infosys which held that the any expenditure incurred which is not a business compulsion or commercial expenditure cannot be allowed as business expenditure u/s 37. Hence, the same is disallowed and added to the income returned.” to 1517/Bang/2015 M/s. The Sandur Manganese & Iron Ores Ltd., Sandur 7.1 The Ld. CIT(A) noticed that the Finance (No.2) Act, 2014 which inserted explanation 2 under 37(1) declaring that the expenditure on the activities relating to Corporate Social responsibility shall not be deemed to be an expenditure incurred by the assessee for the purpose of business or profession. The Ld CIT(A) took the view that the above said amendment applicable to expenditure incurred in respect of Corporate Social Responsibility is applicable to the present claim also. Accordingly, the Ld. CIT(A) confirmed the disallowance.

7.2. We heard the parties on this issue and perused the record. The Ld. A.R. submitted that the mining activities carried out in Bellari district have badly affected the ecology, infrastructure and ecology of the district. Hence, the District Commissioner of Bellari has formed BATF for the purpose of meeting the infrastructure like roads, health centre, drinking water and schools at rural areas. The assessee, being in the mining business, has been requested to contribute to BATF as per the directions given by District Commissioner. The Ld. A.R. also invited our attention to the copy of proceedings of the meeting held under the Presidentship of Deputy Commissioner, Ballari, who happens to be the President of BATF. He submitted that the assessee’s contribution of Rs.1.40 crores finds place in the minutes of the meeting and it has been clearly mentioned that the said amount will be used for the development works in Sandur Taluk. Accordingly, the same is indirectly connected with the business of the assessee and is allowable as deduction.

7.3 The Ld A.R further submitted that the assessee is required to have cordial relations with the District administration and hence, to 1517/Bang/2015 M/s. The Sandur Manganese & Iron Ores Ltd., Sandur

Page 7 of 19 the amount paid as per the directions of District administration is related to the business carried on by the assessee and allowable as deduction as per the decision rendered by the Hon’ble Karnataka High Courtin the case of M/s. Kanhaiyalal Dudheria Vs. JCIT (2019) 418 ITR 410. The Ld. A.R. also placed his reliance on the decision rendered by the Hon’ble Madras High Court in the case of CIT Vs. Madras Refineries Ltd. (2004) 266 ITR 17, wherein the money has been spent by the assessee for establishing drinking water facilities or for providing aid to the school meant for residents of the locality in which business is situated is held to be allowable as business expenditure.

7.4 The Ld D.R, on the contrary, supported the order passed by Ld CIT(A). He placed his reliance on the decision rendered by Hon’ble Karnataka High Court in the case of Wipro Ltd (2014)(41 taxmann.com 190).

7.5 We heard rival contentions and perused the record. We notice that the facts prevailing in the case of Wipro Ltd are different, which is evidenced by the following observations made by Hon’ble Karnataka High Court:-

“16. It is in this backdrop, we have perused the orders passed by the AOs in this appeal and in and 68/07. Though in the present appeal (ITA No.133/07) there is no whisper regarding the exact nature of the expenditure incurred for community development by the assessee, the AO in ITA No.68/08 has made reference to the nature of expenditure incurred under this head by the respondent-assessee. From the order of AO in ITA 68/07, it appears that the contributions were made to various religious functions, charitable institutions, social clubs and certain acts of charity such as donating a borewell to the Municipality, etc. The respondent- assessee has not placed any other materials on record in support of their claim of expenditure over community development, in other two appeals, so to apply the test of commercial expediency. to 1517/Bang/2015 M/s. The Sandur Manganese & Iron Ores Ltd., Sandur Page 8 of 19 17. From plain reading of the order of the AO and so also the order of the appellate authority in it appears to us that the expenses contributed for religious functions, charitable institutions, social clubs and charity such as donating a borewell to the municipality, etc. would not fall within the expenditure contemplated under Section 37(1) of the Act. Section 37(1) of the Act states that any expenditure not being expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". It is not the case of assessee that the expenditure incurred by them is covered by Sections 30 to 36 of the Act, and even if that was so the question of allowing the expenditure under Section 37(1) of the Act would not arise.

7.6 In the case of Wipro Ltd (supra), the existence of commercial expediency was not proved. In the instant case, the assessee is engaged in mining business and the BATF was formed to create infrastructure facilities in the Bellary district by the District Administration, which was necessity due to large scale mining operations carried there. The mining companies shall contribute to the BATF, which in turn would carry out various development activities. In this regard, it is relevant to extract relevant minutes of the meeting held on 28-02-2009:-

“2. Addressing the meeting The President and Dy. Commissioner informed that NMDC is paying 18.75 crores for purchasing land to construct houses under Ashraya Scheme to the beneficiaries who are below poverty line……During 2009-10, NMDC will pay Rs.50.00 crores for to 1517/Bang/2015 M/s. The Sandur Manganese & Iron Ores Ltd., Sandur

Page 9 of 19 development programmes. This money will be used to build Community halls, Anganawadi Centres, School and Hospital building in the villages.

…..

(** assessee herein)

We notice that the amount has been contributed to BATF by all mining companies as per the direction of district administration. The question whether such contribution is allowable as deduction has been examined by the Hon'ble jurisdictional Karnataka High Court in the case of Kanhaiyalal Dudheria (supra). In the case before the Hon'ble High Court, the assessee was carrying on the business of extraction of iron-ore and also trading in iron-ore. The assessee had incurred expenses of Rs.1,61,30,480/- and Rs.55,90,080/- in FY 2010-11 and 2011-12 towards construction of houses in certain villages as per MOU entered with Government of Karnataka. The assessee’s claim of above said expenses were disallowed on the ground that it was not incurred in the course of business but for philanthropic purposes. The Hon'ble High Court, to 1517/Bang/2015 M/s. The Sandur Manganese & Iron Ores Ltd., Sandur

Page 10 of 19 however, held that it is allowable as deduction. The relevant observations made by the jurisdictional High Court are extracted below:-

“8. It is not in dispute that an MOU came to be entered into between appellants and the Government of Karnataka, represented by jurisdictional Deputy Commissioner on 02.07.2010, a copy of which has been made available for our perusal. It would clearly indicate on account of unprecedented floods and abnormal rain which severely ravaged the North Interior Karnataka during last week of September and first week of October, 2009, which claimed more than 226 human lives and loss of nearly 8000 head of cattle, flattened about 5.41 lakhs houses and destroyed standing crops in about 25 lakh hectares of land huge destruction of infrastructure, Government of Karnataka which was facing an undaunted task of rehabilitating the persons who were in destitute and to restore the normalcy for nearly about 7.2 lakh people and to build 5.41 lakhs houses spread over 12 affected districts, an appeal came to be made by then Hon'ble Chief Minister to all to lend their hands for restoring normalcy.

……….

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to 1517/Bang/2015 M/s. The Sandur Manganese & Iron Ores Ltd., Sandur

Page 11 of 19 "..a sum of money expended, none of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade", can be adopted as the best interpretation of the crucial words of Section 10(2)(xv). The imprudence of the expenditure and its depressing effect on the taxable profits would not deflect the applicability of the section. The acid test, "did the expenditure fall on the assessee in this character as trader and was it for the purpose of the business".

Page 12 of 19 an expenditure allowable under Section 37(1) of the Act and it came to be held that such contribution is not against public policy and would be allowable under Section 37(1) of the Act. It was also held 'any contribution made by an assessee to a public welfare fund which is directly connected or related with the carrying on the assessee's business or which results in the benefit of the assessee's business has to be regarded as an allowable deduction under Section 37(1)'. In the facts obtained in the said case, it was noticed that assessee was doing business of export of rice and contributing 50 paise per quintal to the district welfare fund maintained by the District Collector, without which contribution, he would not get permit and as such, it came to be held that expenditure so incurred by way of contribution is directly connected with the assessee's carrying on the business. It is further held:

"10. From the abovesaid discussion it follows that any contribution made by an assessee to a public welfare fund which is directly connected or related with the carrying on of the assessee's business or which results in the benefit to the assessee's business has to be regarded as an allowable deduction under s. 37(1) of the Act. Such a donation, whether voluntary or at the instance of the authorities concerned, when made to a Chief Minister's Drought Relief Fund or a District Welfare Fund established by the District Collector or any business, cannot be regarded as payment opposed to public policy. It is not as if the payment in the present case had been made as an illegal gratification. There is no law which prohibits the making of such a donation. The mere fact that making of a donation for charitable or public cause or in public interest results in the Government giving patronage or benefit can be no ground to deny the assessee a deduction of that amount under s.37(1) of the Act when such payment had been made for the purpose of assessee's business." …………………

Page 13 of 19 any other fund for the benefit of the public and with a view to secure benefit to the assessee's business cannot be regarded as payment opposed to public policy. It came to be further held making of a donation for charitable or public cause or in the public interest results in the Government giving patronage or benefit can be no ground to deny the assessee a deduction of that amount under Section 37(1) of the Act, when such payment has been made for the purposes of assessee's business. In fact, it can be noticed under the MOU in question which came to be entered into by the assessee with Government of Karnataka was on account of the clarion call given by the then Chief Minister of Karnataka in the hour of crisis to all the Philanthropist, industrial and commercial enterprises to extended their whole hearted support and the entire logistic support has been extended by the Government of Karnataka namely, providing land and design of the house to be constructed, approval of layout and to take care of all local problems. In fact, the State Government had also agreed to exempt such of those persons who undertake to execute the work from the purview of sale tax, royalty, entry tax and other related State taxes and is said to have extended to the appellant also. In this background it cannot be construed that MOU entered into between the assessee and the Government of Karnataka is opposed to public policy.

to 1517/Bang/2015 M/s. The Sandur Manganese & Iron Ores Ltd., Sandur

Page 14 of 19 31. For the reasons afore stated, we are of the considered view that substantial question law formulated herein is to be answered in the negative i.e., against the revenue and in favour of the assessee.”

7.7 The Ld A.R submitted that, in the instant case also, the assessee has contributed funds to BATF at the direction of local administration, which is meant to be used for the benefit of public. As observed in the above said case, the assessee would also be required to approach the appropriate Government and its authorities for grant of permits, licenses. Hence it is a prudent decision of the assessee to oblige to the appeal made by the local administration and incurred the expenses for public purposes. Hence the assessee has incurred expenses not only on account of social responsibility, but also keeping in mind the goodwill and benefit it would yield in the long run in earning profit. Hence this expenditure would be in the realm of “business expenditure”. We also notice that the payments made to BATF has been held to be allowable expenditure by co-ordinate benches in the following cases:-

(a) Shri Hirehal gavippa Rangan Goud vs. ACIT (ITA No.610/Bang/2018 dated 25.11.2020)

(b) Shri Gogga Gurushantiah & Bros (ITA No.504/Bang/2014 dated 29.05.2020)

For the reasons discussed supra, we hold this expenditure is allowable as deduction. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this disallowance.

8.0 Other grounds urged by the assessee are either general in nature or consequential. to 1517/Bang/2015 M/s. The Sandur Manganese & Iron Ores Ltd., Sandur

Page 15 of 19 ASSESSMENT YEAR 2010-11 9.0 Ground no. 2 & 3 relates to the disallowance of claim of “Provision for medical reimbursement expenses”. This issue has been decided against the assessee in AY 2009-10 in the preceding paragraphs. However, we have directed the AO to allow deduction of actual expenses incurred by the assessee during that year. Following the same, while upholding the disallowance, we direct the AO to allow deduction of actual expenses during the year under consideration.

10.0 Ground No.4 to 7 relates to disallowance of claim of “Provision for Leave Travel expenses”. This issue has been decided against the assessee in AY 2009-10 in the preceding paragraphs. However, we have directed the AO to allow deduction of actual expenses incurred by the assessee during that year. Following the same, while upholding the disallowance, we direct the AO to allow deduction of actual expenses during the year under consideration.

11.0 Ground No.8 relates to disallowance of incidental expenses. Identical issue has been considered by us in AY 2009-10 in the preceding paragraphs and we have confirmed the disallowance in the absence of details relating to incidental expenses. Following the said decision, we confirm the disallowance in this year also.

12.0 Ground No.9 to 13 relate to disallowance of contribution to Bellary Agenda Task Force. Identical issue has been considered by us in AY 2009-10 in the preceding paragraphs and we have deleted the disallowance for the detailed reasons discussed above. Following the same, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this disallowance. to 1517/Bang/2015 M/s. The Sandur Manganese & Iron Ores Ltd., Sandur 13.0 Other grounds are either general in nature or consequential.

ASSESSMENT YEAR: 2011-12 14.0 Ground no. 2 & 3 relates to the disallowance of claim of “Provision for medical reimbursement expenses”. This issue has been decided against the assessee in ay 2009-10 in the preceding paragraphs. However, we have directed the AO to allow deduction of actual expenses incurred by the assessee during that year. Following the same, while upholding the disallowance, we direct the AO to allow deduction of actual expenses during the year under consideration.

15.0 Ground No.4 to 7 relates to disallowance of claim of “Provision for Leave Travel expenses”. This issue has been decided against the assessee in AY 2009-10 in the preceding paragraphs. However, we have directed the AO to allow deduction of actual expenses incurred by the assessee during that year. Following the same, while upholding the disallowance, we direct the AO to allow deduction of actual expenses during the year under consideration.

16.0 Ground No.8 relates to disallowance of incidental expenses of Rs.4,54,439/-. Identical issue has been considered by us in AY 2009-10 in the preceding paragraphs and we have confirmed the disallowance in the absence of details relating to incidental expenses. Following the said decision, we confirm the disallowance in this year also.

17.0 Ground No.9 relates to the disallowance of Rs.10.00 lakhs, being contribution to Bhagyalakshmi Yojana. The AO disallowed to 1517/Bang/2015 M/s. The Sandur Manganese & Iron Ores Ltd., Sandur

Page 17 of 19 the same on the reasoning that the assessee could not establish the nexus of the payment with the business of the assessee. The Ld CIT(A) also confirmed the same.

17.1 Before us, the Ld A.R submitted that the above said payment has been made to the Deputy Commissioner, Bellary and hence there is business connection. On the contrary, the Ld D.R supported the order passed by Ld CIT(A) on this issue.

17.2 We notice that the assessee has not furnished any detail to show that there is nexus between the impugned payment and the business of the assessee. Accordingly, following the decision rendered by the jurisdictional Hon'ble Karnataka High Court in the case of Wipro Ltd (supra), we confirm the disallowance.

18.00 Ground No. 9 to 15 relate to disallowance of contribution to Chief Minister’s Relief Fund amounting to Rs.9.65 crores. The assessee submitted that the above said payment was given to the District Commissioner, Bellary towards construction of houses for flood victims in Siruguppa Taluka under AASARE YOJANE. The AO disallowed the claim on the reasoning that there is no nexus between the payment and the business of the assessee. The Ld CIT(A) also confirmed the disallowance.

18.1 Before us, the Ld A.R placed his reliance on the decision rendered by the jurisdictional High Court in the case of Kanhaiyalal Dudheria (supra) and submitted that the assessee before the High Court also constructed 169 houses and delivered them to the Karnataka Government. The expenditure incurred on construction of houses was claimed as deduction and the same was allowed by Hon'ble Karnataka High Court. to 1517/Bang/2015 M/s. The Sandur Manganese & Iron Ores Ltd., Sandur 18.2 The ld D.R, on the contrary, submitted that there is no parity of facts between the case of the assessee and the case of Kanhaiyalal dudheria (supra).

18.3 We heard the parties on this issue and perused the record. We notice that the assessee before the Hon'ble Karnataka High Court had entered in a MOU with the Karnataka Government for construction of houses. The assessee also proved the existence of commercial expediency in incurring these expenses. However, in the instant case, relevant details are not available on record. Accordingly, we are of the view that this issue requires fresh examination at the end of the assessing officer in the light of decision rendered by Hon'ble Karnataka High Court in the case of Kanhaiyalal Dudheria (supra). Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore this issue to the file of AO for examining it afresh.

19.0 Other grounds urged by the assessee are either general or consequential.