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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI CHANDRA POOJARI & SHRI GEORGE GEORGE K.
Per Chandra Poojari, Accountant Member These are two appeals by the assessee against the separate orders, both dated 30.01.2020 for the assessment years 2015-16 & 2016-17.
The first common ground in these appeals is with regard to disallowance of Rs.43,55,905 and Rs.16,73,153 on account of community welfare expenses incurred by the assessee for the AYs 2015-16 & 2016-17 respectively.
The facts are that the assessee incurred this expenditure on upkeep of road as per the direction of Deputy Commissioner, Bellary. The AO treated the expenditure as capital expenditure. The assessee contended
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that expenditure is revenue in nature allowable u/s. 37(1) of the Act. It was the submission of the assessee that assessee while doing his busines undertook social activities which may directly or indirectly help his business. The ld. AR submitted that incurring of the expenditure has facilitated to carry on its day to day business activity and such contribution was allowed as expenditure u/s. 37 of the Income-tax Act, 1961 [the Act].
It was submitted that there are certain obligations on the mining companies to improve the living conditions of local communities in order to reduce negative impacts of mining projects on the local community by taking sufficient precautionary measures. the business of the Appellant is closely associated with the society. As the Appellant is into mining, it has to enjoy goodwill of the people in the area in which it operates. It was submitted that an assessee while doing his business may also undertake some social activities which may directly or Indirectly or even remotely help his business. Reliance is placed on the decision of the Hon’ble Karnataka High Court in CIT v. Karnataka Financial Corporation [2010] 326 ITR 355 (Kar. - HC). The relevant extract reads as under: "5. The appeal is admitted to consider the following substantial questions of law : "(i) Whether the appellate authorities were correct in holding that the assessee which carries on the business of financing industrial undertakings in Karnataka is under a social obligation in lieu of the directions issued by the State Government to make contributions towards the development of various programmes of the State Government, which would facilitate to carry on its day-to-day business activity and thus such contribution would be an allowable expenditure under section 37 of the Act? (ii) Whether the expenditure claimed by the assessee towards contributions made to Swasthi Grama Yojana can be claimed as exempt from tax only if it satisfies the various conditions stipulated
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under the income tax provisions to grant such exemption, as the Act is a self-contained code and since such contribution was not allowable as a deduction exempt from tax and the same cannot be allowed as an expenditure ?" 6. We have heard the learned counsel for the parties. 7. We are of the opinion that the amount of Rs. 15 lakhs spent by the assessee has to be considered towards its business promotion. Since the Zilla Panchayath under a scheme known as "Swasthi Grama Yojana" was trying to develop model villages by providing facilities like developing roads to new markets, organizing self-help groups, community centres and development of infrastructural facilities. According to us, if the assessee has spent amount towards the development of infrastructural facilities of villages and construction of a new market to organize self-help groups that would certainly promote the business of the assessee as the assessee can lend the loan only if such establishments are there in villages. We are also of the opinion that if the assessee can spread its activities to rural parts of the State, it would cater to the needs of the people and would satisfy the purpose for which it is created by the State. Therefore, we are of the opinion that the questions of law framed in this appeal have to be answered against the Revenue.” 5. The ld. AR further submitted that there are certain obligations on the mining companies to improve the living conditions i.e. economic, social environmental conditions of the local communities in order to reduce negative impacts of mining projects on the local communities by taking sufficient precautionary measures, etc. Therefore, it was necessary for the Appellant to incur the aforesaid expenses in order to gain the goodwill of the local community. The Appellant is engaged in the business of mines on the land leased by the government, consuming enormous amount of natural resources in the surrounding area. Any support or contribution given by the Appellant for the welfare of the said locality is to be regarded as expenditure incurred wholly and exclusively for the purposes of the business. The Appellant incurred expenditure as part of ‘Corporate Social
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Responsibility' in order to support the social cause by providing financial assistance/ aid to the people residing around the Appellant's mining area. The assessee has incurred this expenditure so as to win the goodwill of the local community. Thus, it was submitted that the said expenditure is an admissible business expenditure under section 37 of IT Act. He relied on the following case laws:- (1) Sri Venkata Satyanarayana Rice Mill Contractors Co. [1997] 223 ITR 101 (SC) (2) CIT v. Infosys Technologies Ltd. [2014] 360 ITR 714 (Kar) (3) Mysore Kirloskar Ltd. v. CIT [1987] 30 Taxman 467 (Kar) (4) CIT v. Madras Refineries Ltd. [2004] 266 ITR 170 (Mad) (5) CIT v. Cheran Transport Corpn. Ltd. [1996] 219 ITR 203 (Mad) (6) CIT v. Madura Coats Ltd. [2009] 24 DTR (Mad) 24 (7) CIT v. Velumanickam Lodge [2009] 317 ITR 338 (Mad) (8) CIT v. Jayendra Kumar Hiralal [2010] 327 ITR 147 (Guj.) (9) Mahindra & Mahindra Ltd. v. CIT [2003] 261 ITR 501 (Bom) (10) CIT v. Rajasthan Spinning & Weaving Mils Ltd. [2005] 274 ITR 465 (Raj) (11) CIT (LTU) v. Gail (India) Ltd. 2017-TIOL-1296-HC-DEL-IT
(12) MOIL Ltd. v. CIT [2017] 396 ITR 244 (Bom) (13) CIT v. DLF Universal Ltd. [2017] 396 ITR 244 (Bom) (14) Karnataka State Industrial Infrastructure Development Corporation Ltd. v. DCIT [2017] 54 ITR (Trib) 425 (Bang. Trib) (15) Sasson J. David & Co. P. Ltd. v. CIT (1979) 118 ITR 261 (SC) (16) S.A. Builders Ltd. v. CIT [2007] 288 ITR 1 (SC) (17) CIT v. Walchand and Co. (P) Ltd. [1967] 65 ITR 381 (SC)
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(18) CIT v. Panipat Woollen & General Mills Co. Ltd. [1976] 103 ITR 66 (SC) (19) Mysore Minerals Ltd. v. CIT (ITA No.464/Bang/2014 dtd. 25.1.2019) (20) CIT v. Chandulal Keshavlal & Co. [1960] 38 ITR 601 (SC) (21) CIT v. Dalmia Cement P. Ltd. [2002] 254 ITR 377 (Del) (22) Salgaocar Mining Industries (P.) Ltd. [2019] 108 taxmann.com 116 (Bom)
Further it is submitted that the above expenditure incurred by the assessee is for welfare and cannot be construed as opposed to public policy so as to invoke the Explanation 2 to section 37 of the Act and applied to the present issue. It is submitted that the amount expended by the Appellant is for the welfare of the society and the said deed of the Appellant cannot be construed as opposed to public policy. The AO has not doubted the genuineness as to the amount expended by the Appellant. The said expenditure incurred by the Appellant in its commercial expediency is for the purpose of business.
Without prejudice to above, the ld. AR submitted that the lower authorities have erred in law by failing to appreciate that the Explanation 2 to section 37 introduced by Finance (No.2) Act 2014 barring the allowability of CSR applies only to the companies and not to others. A reference is made to Explanation 2 to section 37(1) inserted by the Finance (No.2) Act, 2014. Prior to amendment by Finance (No.2) Act, 2014 there was no restriction as to the allowability of CSR expenditure incurred wholly and exclusively for the purposes of the business as deduction in computing the taxable business income. From the above provision it is evident that the Explanation refers to CSR as referred in section 135 of Companies Act,
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2013. Thus, the said restriction is applicable only to Companies and not to others. Therefore, the Appellant being an individual the restriction imposed under Explanation 2 to section 37 is not applicable in the instant case. Therefore, it is submitted that the impugned expenses incurred for the purpose of business are an admissible expenditure under Section 37.
On the other hand, the ld. DR submitted that the finance minister has announced some tax incentives in the Budget to encourage companies to participate in 'Swachh Bharat Abhiyan' and 'Clean Ganga campaign'. It is announced that the donations (other than the corporate social responsibility or CSR contributions) made to 'Swachh Bharat Kosh' (both by resident and non-resident) and Clean Ganga Fund (by resident) shall be eligible for 100 per cent deduction under section 80G of the Income Tax Act. As per the CSR provisions, Companies have been mandated to spend 2 per cent of their three-year average net profit on CSR under the Companies Act, 2013. The companies are also required to disclose the CSR activities and the amount spent on it in their annual reports. But the Income Tax Act does not provide for any incentives for such expenditure either for companies or for any other class of assessees. The Budget for 2014-15 has clarified that the expenditure incurred on CSR activities is not for the purpose of business and hence cannot be allowed as deduction for computing tax liability of the company under the residuary provisions of section 37(1). The deduction for CSR expenditure is allowed if it falls under Section 30 to Section 36 of the Income Tax Act. Also, as per the memorandum explaining the provisions in the Finance (No. 2) Bill, 2014, it is clarified that the CSR expenditure is an application of income (which is not incurred wholly and exclusively for the purposes of carrying on business) and hence the tax benefit of the same will not be given in computing the income as per the normal provisions and also in computing book profits of the company for MAT purposes.
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We have heard both the parties. For this assessment year, the assessee incurred the above expenditure for the purpose of upkeep of roads as per the directions of Deputy Commissioner, Bellary. The lower authorities invoked the provisions of Explanation 2 to section 37 of the Act which Explanation 2 to section 37 of the Act was introduced by the Finance (No.2) Act, 2014 w.e.f. 1.4.2015 as follows:- “Explanation 2. — For the removal of doubts, it is hereby declared that for the purposes of sub-section (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.” 10. The Memorandum to Finance (No. 2) Bill, 2014 explaining provisions relating to direct taxes on Corporate Social Responsibility is extracted below:- “CORPORATE SOCIAL RESPONSIBILITY (CSR) Under the Companies Act, 2013 certain companies (which have net worth of Rs.500 crore or more, or turnover of Rs.1000 crore or more, or a net profit of Rs.5 crore or more during any financial year) are required to spend certain percentage of their profit on activities relating to Corporate Social Responsibility (CSR). Under the existing provisions of the Act expenditure incurred wholly and exclusively for the purposes of the business is only allowed as a deduction for computing taxable business income. CSR expenditure, being an application of income, is not incurred wholly and exclusively for the purposes of carrying on business. As the application of income is not allowed as deduction for the purposes of computing taxable income of a company, amount spent on CSR cannot be allowed as deduction for computing the taxable income of the company. Moreover, the objective of CSR is to share burden of the Government in providing social services by companies having net worth/turnover/profit above a threshold. If such expenses are allowed as tax deduction, this would
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result in subsidizing of around one-third of such expenses by the Government by way of tax expenditure. The existing provisions of section 37(1) of the Act provide that deduction for any expenditure, which is not mentioned specifically in section 30 to section 36 of the Act, shall be allowed if the same is incurred wholly and exclusively for the purposes of carrying on business or profession. As the CSR expenditure (being an application of income) is not incurred for the purposes of carrying on business, such expenditures cannot be allowed under the existing provisions of section 37 of the Income-tax Act. Therefore, in order to provide certainty on this issue, it is proposed to clarify that for the purposes of section 37(1) any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to have been incurred for the purpose of business and hence shall not be allowed as deduction under section 37. However, the CSR expenditure which is of the nature described in section 30 to section 36 of the Act shall be allowed deduction under those sections subject to fulfilment of conditions, if any, specified therein. This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent years.” 11. The amendment introduced w.e.f. 1.4.2015 cannot be construed as disadvantageous to the assessee and it cannot cover the impugned expenditure incurred by the assessee in these two assessment years. We have gone through the amended provisions including Note on Clauses and explanatory notes and note that as per the Companies Act, 2013, certain companies (which have net worth of Rs.500 crores or more, or turnover of 1000 crore or more or net profit of 5 crores or more during any financial year) are required to spend certain percentage of their profit on activities relating to Corporate Social Responsibility (CSR). Under the existing provisions of the Act, expenditure incurred wholly and exclusively for the purpose of business is only allowed as deduction for computing taxable
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business income. CSR expenditure being an application of income is not incurred wholly and exclusively for the purpose of carrying on business. As application of income is not allowed as deduction for the purpose of taxable income of a company, the amount spent on CSR cannot be allowed as a deduction for computing taxable income of the company. The object of the CSR expenditure is to share the burden of the Govt. in providing social service by companies having import/turnover/profit above a threshold. If such expenses are allowed as deduction, it will result in subsidizing the amount of one-third of such expenses by Govt. by way of tax expenditure. The provisions of section 37(1) provide that deduction for any expenditure which is not mentioned specifically in section 30 to 36 of the Act, shall be allowed if the same is incurred wholly and exclusively for the purpose of carrying on business or profession. As CSR expenditure being application of income is not incurred for the purpose of carrying on of business, such expenditure cannot be allowed under the provisions of section 37 of the Act. Therefore, in order to provide certainty on this issue, the said section 37 has been amended to clarify that for the purpose of sub-section (1) of section 37 any expenditure by an assessee on the activities relating to CSR referred to in section 135 of the Companies At, 2013 should not be allowed as deduction under sub-section 37. However, CSR expenditure which is of nature described sections 30 to 36 of the Act, shall be allowed as deduction under this section, subject to fulfillment of conditions, if any, specified therein. But this amendment takes effect from 1.4.2015 and will be applicable in relation to AY 2015-16 and subsequent years.
Now the issue before us is whether the department is justified in invoking this Explanation 2 to section 37 to disallow above expenditure incurred by the assessee. Explanation (2) to section 37 reads as follows:-
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“Explanation 2. — For the removal of doubts, it is hereby declared that for the purposes of sub-section (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.” 13. A reading of the above Explanation makes it clear that it only refers to corporate social responsibility as referred in Section 135 of the Companies Act, 2013. Corporate social responsibility which is mentioned in Section 135 of the Companies Act, 2013 is applicable to company only, which is as follows:- “[135. (1) Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during 3[the immediately preceding financial year] shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director. [Provided that where a company is not required to appoint an independent director under sub-section (4) of section 149, it shall have in its Corporate Social Responsibility Committee two or more directors.] (2) The Board's report under sub-section (3) of section 134 shall disclose the composition of the Corporate Social Responsibility Committee. (3) The Corporate Social Responsibility Committee shall,— (a) formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company [in areas or subject, specified in Schedule VII]; (b) recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and
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(c) monitor the Corporate Social Responsibility Policy of the company from time to time. (4) The Board of every company referred to in sub-section (1) shall,— (a) after taking into account the recommendations made by the Corporate Social Responsibility Committee, approve the Corporate Social Responsibility Policy for the company and disclose contents of such Policy in its report and also place it on the company's website, if any, in such manner as may be prescribed; and (b) ensure that the activities as are included in Corporate Social Responsibility Policy of the company are undertaken by the company. (5) The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two per cent. of the average net profits of the company made during the three immediately preceding financial years [or where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years], in pursuance of its Corporate Social Responsibility Policy: Provided that the company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities: Provided further that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount [and, unless the unspent amount relates to any ongoing project referred to in sub-section (6), transfer such unspent amount to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year]. [Provided also that if the company spends an amount in excess of the requirements provided under this sub-section, such company may set off such excess amount against the requirement to spend under this sub-section for such number of succeeding financial years and in such manner, as may be prescribed.]
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[Explanation.—For the purposes of this section "net profit" shall not include such sums as may be prescribed, and shall be calculated in accordance with the provisions of section 198.] [6) Any amount remaining unspent under sub-section (5), pursuant to any ongoing project, fulfilling such conditions as may be prescribed, undertaken by a company in pursuance of its Corporate Social Responsibility Policy, shall be transferred by the company within a period of thirty days from the end of the financial year to a special account to be opened by the company in that behalf for that financial year in any scheduled bank to be called the Unspent Corporate Social Responsibility Account, and such amount shall be spent by the company in pursuance of its obligation towards the Corporate Social Responsibility Policy within a period of three financial years from the date of such transfer, failing which, the company shall transfer the same to a Fund specified in Schedule VII, within a period of thirty days from the date of completion of the third financial year. [(7) If a company is in default in complying with the provisions of sub-section (5) or sub-section (6), the company shall be liable to a penalty of twice the amount required to be transferred by the company to the Fund specified in Schedule VII or the Unspent Corporate Social Responsibility Account, as the case may be, or one crore rupees, whichever is less, and every officer of the company who is in default shall be liable to a penalty of one-tenth of the amount required to be transferred by the company to such Fund specified in Schedule VII, or the Unspent Corporate Social Responsibility Account, as the case may be, or two lakh rupees, whichever is less.] (8) The Central Government may give such general or special directions to a company or class of companies as it considers necessary to ensure compliance of provisions of this section and such company or class of companies shall comply with such directions.] [(9) Where the amount to be spent by a company under sub-section (5) does not exceed fifty lakh rupees, the requirement under sub- section (1) for constitution of the Corporate Social Responsibility Committee shall not be applicable and the functions of such Committee provided under this section shall, in such cases, be discharged by the Board of Directors of such company.]
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Schedule VII to the Companies Act, 2013 is extracted hereunder:- “SCHEDULE VII (See Section 135) Activities which may be included by companies in their Corporate Social Responsibility Policies Activities relating to:— [(i) Eradicating hunger, poverty and malnutrition, [‘‘promoting health care including preventive health care’’] and sanitation [including contribution to the Swach Bharat Kosh set-up by the Central Government for the promotion of sanitation] and making available safe drinking water. (ii) promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly and the differently abled and livelihood enhancement projects. (iii) promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups. (iv) ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and water 4[including contribution to the Clean Ganga Fund set-up by the Central Government for rejuvenation of river Ganga]. (v) protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional art and handicrafts; (vi) measures for the benefit of armed forces veterans, war widows and their dependents, 9[ Central Armed Police Forces (CAPF) and Central Para Military Forces (CPMF) veterans, and their dependents including widows]; (vii) training to promote rural sports, nationally recognised sports, paralympic sports and olympic sports
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(viii) contribution to the prime minister's national relief fund 8[or Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES Fund)] or any other fund set up by the central govt. for socio economic development and relief and welfare of the schedule caste, tribes, other backward classes, minorities and women; [(ix) (a) Contribution to incubators or research and development projects in the field of science, technology, engineering and medicine, funded by the Central Government or State Government or Public Sector Undertaking or any agency of the Central Government or State Government; and (b) Contributions to public funded Universities; Indian Institute of Technology (IITs); National Laboratories and autonomous bodies established under Department of Atomic Energy (DAE); Department of Biotechnology (DBT); Department of Science and Technology (DST); Department of Pharmaceuticals; Ministry of Ayurveda, Yoga and Naturopathy, Unani, Siddha and Homoeopathy (AYUSH); Ministry of Electronics and Information Technology and other bodies, namely Defense Research and Development Organisation (DRDO); Indian Council of Agricultural Research (ICAR); Indian Council of Medical Research (ICMR) and Council of Scientific and Industrial Research (CSIR), engaged in conducting research in science, technology, engineering and medicine aimed at promoting Sustainable Development Goals (SDGs).] (x) rural development projects] [(xi) slum area development. Explanation.- For the purposes of this item, the term `slum area' shall mean any area declared as such by the Central Government or any State Government or any other competent authority under any law for the time being in force.] [(xii) disaster management, including relief, rehabilitation and reconstruction activities.]” 15. By going through the provisions of Explanation 2 to section 37, it is evident that the said Explanation refers to CSR expenditure as referred in
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section 135 of the Companies Act, 2013. Thus said restriction is applicable only to the companies, not others.
The ld. DR submitted that Explanation to s. 37 is applicable to assesses including individual assesses like the present assessee. We are not in agreement with the above contention of the ld. DR. While interpreting the word in the section, particularly in the Explanation 2 to s. 37, which are enacted under beneficial legislation, the basic principle that has to be kept in mind is the object and intention of the Legislature for enactment of the Act. If that is kept in mind, then strict technical interpretation of the terms used in the section, detrimental to the main object, can easily be avoided. Further if a harmonious interpretation is given to all the provisions, keeping in view the object, then the intention of the Legislature for enacting this legislation, will be fulfilled and the economic and social justice aimed by the Legislature will be reached to one and all. When in a statute there are general words following particular and "specified words", the general words are some times construed as limited to things of the same kind as those specified. This rule of interpretation generally known as ejusdem generis rule has been pressed into service on behalf of the assessee. This rule reflects an attempt to reconcile incompatibility between the specified and general words, in view of the other rules of interpretation, that all words in a statute are given effect if possible, that a statute is to be construed as a whole and that no words in a statute are presumed to be superfluous. Ejusdem Generis rule being one of the rules of interpretation, only serves, like all such rules, as an aid to discover the legislative intent; it is neither final nor conclusive and is attracted only when the specific words enumerated, constitute a class, which is not exhausted and are followed
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by general words and when there is no manifestation of intent to give broader meaning to the general words. Being so, the word “assessee” used in this Explanation 2 to s. 37 (1) is with regard to the companies for which section 135 of the Companies Act is applicable, not to other assesses which is not covered by the Companies Act.
In the present case, the assessee being an individual, the restriction imposed under Explanation (2) to section 37 is not applicable to assessee’s case. At this stage, it is appropriate to draw support from the judgment of Hon’ble Gujarat High Court in the case of Pr. CIT v. Gujarat Narmada Valley Fertilizers & Chemicals Ltd., 422 ITR 164 (Guj). In that case, the following question was before the Hon’ble High Court :- “Whether in the facts and in circumstances of the case, the learned ITAT has erred in law and on facts in deleting disallowance u/s 37(1) of the Act in respect of expenses being contribution/donation to educational institutions, trust, local bodies?”
The Hon’ble Gujarat High Court held as under:- “8.10 We have also noted that the amendment in the scheme of section 37(1) is not specifically stated to be retrospective and the said Explanation is inserted only with effect from 1st April 2015. In this view of the matter also, there is no reason to hold this provision to be retrospective in application. As a matter of fact, the amendment in law, which was accompanied by the statutory requirement with regard to discharging the corporate social responsibility, is a disabling provision which puts an additional tax burden on the assessee in the sense that the expenses that the assessee is required to incur, under a statutory obligation, in the course of his business are not allowed deduction in the computation of income. This disallowance is restricted to the expenses incurred by the assessee under a
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statutory obligation under section 135 of Companies Act 2013, and there is thus now a line of demarcation between the expenses incurred by the assessee on discharging corporate social responsibility under such a statutory obligation and under a voluntary assumption of responsibility. As for the former, the disallowance under Explanation 2 to section 37(1) comes into play, but, as for latter, there is no such disabling provision as long as the expenses, even in discharge of corporate social responsibility on voluntary basis, can be said to be "wholly and exclusively for the purposes of business". There is no dispute that the expenses in question are not incurred under the aforesaid statutory obligation. For this reason also, as also for the basic reason that the Explanation 2 to section 37(1) comes into play with effect from 1st April 2015, we hold that the disabling provision of Explanation 2 to section 37(1) does not apply on the facts of this case.” 19. Thus, it is evident that the disallowance is restricted to the expenses incurred by the assessee under a statutory obligation u/s. 135 of the Companies Act, 2013 and there is thus now a line of demarcation between the expenses incurred by the assessee on discharging corporate social responsibility under such a statutory obligation and under a voluntary assumption of responsibility. As for the former, the disallowance under Explanation 2 to section 37(1) comes into play, but as for latter, there is no such disabling provision as long as the expenses, even in discharge of corporate social responsibility on voluntary basis, can be said to be “wholly and exclusively for the purposes of business”. There is no dispute that the expenses in question are not incurred under the aforesaid statutory obligation. In the present case, the said expenditure is incurred by the assessee on discharging social responsibility so as to earn the goodwill of the society and it is wholly and exclusively for the purpose of business.
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Therefore, the provisions of Explanation to section 37 of the Act cannot be applied. Further, in the present case, the assessee being an individual, and not a corporation under the Companies Act, 2013, Explanation 2 to section 37 cannot be applied so as to deny the voluntary expenditure incurred by assessee towards community welfare. Accordingly, we are of the opinion that the expenditure incurred is wholly and exclusively for the purpose of business of assessee and has to be allowed as business expenditure. Accordingly, this ground of appeal is allowed.
The next ground in these appeals is with regard to additions on account of withheld amount by MC towards Reclamation & Rehabilitation of mining area as per the direction of Hon’ble Supreme Court vide order dated 18.4.2013.
The facts are that the AO noted that in the P&L Account assessee claimed major indirect expenses on Afforestation & Environmental expenses of Rs.8,87,62,584 which contained a sum of Rs.8,34,53,792 & Rs. 15,74,62,445 for the AYs 2015-16 & 2016-17 respectively towards ‘Special Purpose Vehicle’ (SPV) charges being 10% of the net sale of iron ore pad to the Monitoring Committee appointed by the Hon’ble Supreme Court. The said amount was paid to the Monitoring Committee as per the directions of the Supreme Court out of sale proceeds for the purpose of taking various ameliorative and mitigative measures as a compensatory payment towards damaged caused due to the environment and forest due to illegal iron ore mining activities done in Bellary, Chitradurga and Tumkur District. The AO observed that prima facie the said payment found to be in the nature of appropriation of profit and compensatory payment due to contravention of laws and hence he was of the view that such payment
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cannot be said to be incurred wholly and exclusively for the purpose of business within the meaning of section 37 of the Act. After considering the explanation filed by the assessee, the AO was of the view that the amount retained by CEC/Monitoring Committee as per the directions of the Supreme Court for the purpose of SPV is on account of damages and loss caused to the environment by contravention of laws. The said amount cannot be allowed as a deduction out of sale proceeds even after accrual of such liability which is compensation and penalty in nature of contravention of laws. Therefore the AO disallowed the same and made addition. The CIT(Appeals) confirmed the addition made by the AO.
The ld. AR submitted that the Supreme Court directed the Monitoring Committee (MC) to sell the stock of iron ore through e-auction by an order dated 18.4.2013. Accordingly MC sold the stock of iron ore through e- auction. As per the order, in respect of mining leases falling under Category ‘A’, 90% of the sale proceeds were given to the respective lessees and 10% was retained by MC towards SPV. This amount towards SPV is utilized for the purpose of reclamation & rehabilitation for mining area. The mining license of assessee is classified under Category A by the MC. The sale proceeds retained by MC would constitute diversion of income overriding title. As held by the Supreme Court in Kahchanganga Sea Foods Ltd. v. CIT [2010] 325 ITR 540 (SC), to constitute ‘income’, the recipient must have control over it. He also relied on various judicial pronouncements as follows:- (1) Dy. CIT v. Dipesh Chandak [2007] 10 TTJ (Pat) 366 (2) CIT v. Sitaldas Tirathdas [1961] 41 ITR 367 (SC) (3) CIT v. United Breweries Ltd. [2010] 321 ITR 547 (Karn)
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(4) CIT v. Pandavapura Sahakara Sakkare Karkhane Ltd. (1988) 174 ITR 475 (Kar) approved by Supreme Court in 400 ITR 1 (SC). (5) CIT v. Nagarbail Salt Owners Co-op Society Ltd. [2017] 390 ITR 415 (Kar) (6) Pr. CIT v. Gyan Enterprises Pvt. LTd. in ITA No.940/2016 dt. 17.5.2018 (Delhi HC). Supreme Court dismissed the SLP by department in SLP No.17347/2019 dated 3.7.2019. (7) Moti Lal Chhadami Lal Jain v. CIT [1991] 190 ITR 1 (SC) (8) CIT v. Sunil J. Kinariwala [2003] 259 ITR 10 (SC) (9) Poddar Projects Ltd. v. CIT, 28 taxmann.com 94 (Cal) (10) CIT v. A. Tosh & Sons (P) Ltd. [1987] 166 ITR 867 (Cal) (11) F.R. Sabu P Thomas v. UOI, 2015-TIOL-514-HC-Kerala-IT (12) CIT v. DTTDC Ltd. [2013] 350 ITR 1 (Del) (13) Shroff Eye Centre v. ACIT in ITA No.1560/Del/2012 (14) DCIT v. Sri T. Jayachandran [2018] 406 ITR 1 (SC) (15) A F Ferguson & Co. v. ACIT, Mumbai 2011-TIOL-604-ITAT- MUM. (16) RSM & Co. v. ACIT, 125 ITD 243 (Mum)
The ld. AR submitted that from all the aforesaid judicial pronouncements the following principles may be discerned:- • Where by the obligation, receipt is diverted before it reaches the assessee, it does not form ‘income’ of an assessee. • Where the receipt is required to be applied to discharge an obligation after it reaches the assessee, it forms ‘income’ of an assessee. • Nature of the obligation is the criteria to determine the receipt as ‘income’ or not.
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• When a third person becomes entitled to receive the amount under an obligation of assessee even before he could lay a claim to receive it as his income, there would be diversion of income by overriding title. • Where the obligation is self imposed or gratuitous, it is only a case of an application of income. • It is only such income which dissipates midway and will never reach the assessee that can be characterized as not income accruing or arising to an assessee and not because even though the assessee gets a right to claim that, the amount in reality does not reach the assessee for any reason. • To constitute diversion of income by overriding title, the obligation imposed should be absolute and not conditional. 25. The ld. AR submitted that the process of sale of minerals was under the control of MC through e-auction and assessee did not possess any right over the amount retained by MC. The said sale proceeds never reached the assessee as the same was diverted to MC towards SPV for the purpose of reclamation & rehabilitation of mining area. Therefore 10% of the amount deducted by the MC towards SPV does not constitute income in the hands of the assessee.
Further it was submitted that the contribution to SPV has become a necessary incident of assessee’s perfectly legal business. It is submitted that the lower authorities have failed to appreciate that for the impugned assessment year there is no restriction as regards the admissibility of the amount expended towards Corporate Social Responsibility incurred in the course of business. Thus, the amount expended towards Corporate Social Responsibility for the purpose of business is an admissible expense for the impugned assessment year. It is submitted that the AO has taken a conflicting position on the issue by taking multiple stands. While on the one
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hand, he alleges that the expenditure is by way of Corporate Social Responsibility, on the other hand, he is terming the expenditure as penal. In the following decisions the Courts have held that the department cannot adopt double standards:- New Delhi Television Ltd vs. DCIT, [2020] 116 taxmann.com 151 (SC) [Para 34]; CIT vs. Woodward Governor India (P.) Ltd., [2009] 312 ITR 254 (SC) [Para 10]; ACIT vs Vijay Gopal Jindal [2008] 24 SOT 296 (DELHI) [Para 25] Balmukund Acharya vs. DCIT, (2009) 310 ITR 310 (Bom); Basant Poddar vs. CIT (2019) 412 ITR 529 (Kar); Girish Bansal v. UOI (2016) 384 ITR 161 (Delhi); Y. Rathiesh vs. CIT, (2015) 372 ITR 73 (AP); Raja Malwinder Singh vs. CWT [2011] 334 ITR 115 (P 86 HI; Azimganj Estates (P.) Ltd. vs. CIT, [2015] 372 ITR 243 (Cal)(Mag.); 27. Without prejudice to the above, it was submitted that Explanation 2 to section 37 introduced by Finance Act, 2015 barring the allowability of CSR applies only to the companies and not to other assessees. It is evident that the Explanation refers to CSR as referred in section 135 of Companies Act, 2013. Thus, the said restriction is applicable only to Companies and not to others. It is pertinent to note that the Appellant being an individual the restriction imposed under Explanation 2 to section 37 is not applicable in the instant case. There is no restriction as to the allowability of CSR expenditure incurred wholly and exclusively for purposes of the business as deduction under section 37 computing the taxable business income in the hands of an assessee other than Company.
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Thus, it is submitted that the amount expended towards Corporate Social Responsibility for the purpose of business is an admissible expense for the impugned assessment year. Accordingly, 10% of the sale proceeds deducted by MC towards SPV is allowable under Section 37(1).
Without prejudice to the above, the amount deducted by MC represents business loss. The sum retained by MC represents a loss in so far as the assessee is concerned and is deductible under section 28 itself while computing his profits and gains from business. There is no dispute with respect to MC remitting 90% of the total sale proceeds from the stock taken control after deducting 10% as compensation for rehabilitation of mining area. It is to be noted that the assessee suffered a loss of 10% of the stock as a result of taking control over the physical stock and the same is claimed as business loss in computing the business income under section 28 of the Act. Explanation 1 to section 37 is applicable only for business expenditure and not for business loss. The said principle has been explained in the below mentioned decisions:- Dr. T.A. Qureshi v. CIT [2006 287 ITR 547 (SC) CIT v. S.N.A.S.A. Annamalai Chettiar [1972] 86 ITR 607 (SC) CIT v. S.C. Kothari [1971] 82 ITR 794 (SC) CIT v. Piara Singh [1980] 124 ITR 40 (SC) CIT v. T.C. Reddy [2013] 356 ITR 516 (AP) Ramachandar Shivanarayan v. CIT [1978] 111 ITR 263 (SC) Bipinchandra K. Bhatia v. DCIT, Tax Appeal No.107 of 2004 (Guj) 30. Though there is no specific provision providing for deduction of ‘business loss’ by virtue of provisions of the expression ‘profits & gains’ u/s. 28 of the Act, a business loss is to be considered while ascertaining real profits in a commercial sense. Reliance was placed on Badaridas Daga v.
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CIT, 34 ITR 10 (SC), Poona Electric Supply Co. Ltd. v. CIT, 57 ITR 521, Dr. T.A. Qureshi v. CIT, 287 ITR 547.
Therefore, it is submitted that, in the instant case, the amount of compensation and compulsory contribution is to be deducted as a business loss while computing profits and gains under Section 28 of the IT Act. The compensation and compulsory contribution are not in the nature of expenditure but in the nature of business loss, the claim for deduction is traced to Section 28 and not to section 37 (1). When the claim to deduction is found in Section 28 itself, there is no scope for application of Explanation to Section 37 (1) as held in the case of Dr. T.A. Quereshi (supra). As held in CIT v. S.C. Kothari, 82 ITR 794 (SC). It is submitted that business losses should be allowable on ordinary commercial principles in computing profits. The aforesaid loss is not in the nature of expected loss but actual loss. Even the expected loss was allowable upto AY 2017-18. The Finance Bill 2018 proposes to restrict deduction towards expected loss only as per ICDS from AY 2018-19 onwards through proposed section 36(1)(xviii) read with section 40A(13). When the expected loss itself is allowable, deduction of actual loss cannot be denied.
The liability crystalizes as soon as the MC withholds 10% of sale proceeds for the purpose of transferring to SPV. Accordingly, the expenditure of Rs.15,74,62,445/- claimed towards Reclamation & Rehabilitation of mining area as per the direction of Hon'ble Supreme. Court is wholly and exclusively for the purpose of business. It is submitted that the direction of Hon'ble Supreme Court is the law of the land and is deemed to statutory direction. There is no possibility to sell the iron-ore without deduction of 10% of sale proceeds as per the directions of Hon'ble
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Supreme Court. Therefore, the deduction of 10% of sale pr6ceeds is wholly for the purpose of business.
It is submitted that deduction made by MC towards SPV for the purpose of restoration of environment from the lessees is based on the principle of "polluter pays principle" as held in the case of Shyam Sel Ltd vs DCIT [2016] 72 taxmann.com 105 (Calcutta). Therefore, the deduction of 10% is revenue expenditure entitled for deduction under section 37(1) of the Act.
As regards treating the forfeited sale proceeds as expenses incurred towards infraction of law invoking Explanation 1 to Section 37(1) of Rs.15,74,62,445/-, it was submitted that assessee’s lease was placed in the 'Category A of clean lease' and therefore, there is absolutely no illegality associated with the Appellant's business. The Hon'ble Supreme has directed the CEC to deduct 10% of the sale proceeds as a compensation for reclamation & rehabilitation of the mining area being “ameliorative and mitigative measures” is allowable expenditure u/s. 37 of the Act.
The Explanation to the Section 37(1) provides that if any expenditure incurred by an assessee for any purpose which is an offence, or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. From the above it is clear that where an assessee has satisfied the conditions as laid down under section 37 of IT Act, he is eligible to claim the deduction in computing the income chargeable under the head profit and gains of business. Thus, as per the aforesaid Section, if the expenditure is laid out and expended only for the
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purpose of business or profession, deduction is permissible. However, such expenditure should not be incurred for any purpose which is an offence, or which is prohibited by law.
It is submitted that the amount transferred to SPV as compensation is towards conservation of ecology. The amount retained by the MC is towards the rehabilitation of mining area as per the directions of the Hon'ble Supreme Court. It is submitted that under no stretch of imagination, the amount retained by the MC in pursuance to the directions of the Supreme Court can be regarded as towards infraction of law. Therefore, any deduction in accordance with the statutory compliance cannot be construed as penalty. In the instant case, no illegality has been noticed. Therefore, there is no question of SPV contribution being regarded as infraction of law. Even otherwise, it is submitted that the expression 'marginal illegality' has to be read with the expression 'no illegality'. The fact that 'marginal illegality' has been categorised along with `no illegality' suggests that 'marginal illegality' is also a case of `no illegality'. 'Marginal illegality' is thus equated with 'no illegality'. However, it is only one-wav movement, in as much as 'no illegality' cannot be equated with 'marginal illegality'. The term 'compensation' is monetary relief paid towards the damages or loss suffered by a person. 'Penalty' is a statutory liability imposed on wrongdoer for infraction of any statutory provision.
the Hon'ble Supreme Court has cautiously used the word 'compensation' in place of `compensation/penalty' which suggests that the impugned payments are compensatory in nature. It is submitted that the imposition of compensation is emanating from the order of the Hon'ble Supreme Court and the same is not due to infraction or violation of any provision of law. It may be noted that the Hon'ble Supreme Court in its
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order has not referred any specific provision under the statute for imposition/ determination of quantum of compensation. The said compensation is determined based on the recommendation report of the CEC.
It is submitted that the compensation is charged in order to reclamation and rehabilitate the eco-system due to extensive mining activity. The Hon'ble Supreme Court based on the recommendation of CEC regarding the extent of damaged caused to eco-system, fixed the quantum of compensation towards R & R plan and the same is not based on violation of law.
It is submitted that the asse has not indulged in any offence which was prohibited by law. Subject to the payment of compensation towards R & R plan, the lease holders are allowed to carry out the mining activity. The assessee paid the compensation in order to save and protect the mining licence and in terms with the order passed by the Supreme Court, which is undoubtedly incurred for the purpose of business and same is an admissible business expenditure under section 37 of IT Act. Therefore, it is submitted that the impugned deduction of 10% of sale proceeds does not fall under Explanation to Section 37(1) of the IT Act, and hence are eligible for deduction under Section 37(1) of the IT Act.
The ld. DR submitted that in connection with the illegal mining activities in Karnataka, the Hon'ble Supreme Court has established a Monitoring Committee called Central Empowered Committee (CEC) to monitor the e-auction sales of the iron ore and other related work entrusted to it. In this regard, the Hon'ble Apex Court has passed various judgments in the case of Samaj Parivartana Samudaya & others Vs. State of
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Karnataka & others, on various dates in Writ Petition No. 562 of 2009 along with SLP No. 7366-7367. The Hon'ble Supreme Court in its order dated 18.04.2013 in the same case of Samaj Parivathana Samudaya & Others V/s. State of Karnataka & 85 Others has pronounced its important judgment on illegal mining in the state of Karnataka and accordingly, a Central Empowered Committee (CEC) has identified three category of mining cases, Category - A, B & C. As in the present case, the assessee falls under the Category-A mines, the issues pertaining to category 'A' mines is discussed. A-Category mines comprises (a) working leases wherein no illegality/marginal illegality have been found and (b) nonworking leases wherein no marginal/illegalities have been found.
Further, the ld. DR submitted that the sale of Iron Ore should be through e-auction and the same should be conducted by Monitoring Committee constituted by the CEC and the sale proceeds are to be retained / disbursed to mine owner based on certain conditions. The Hon'ble Apex Court in its order dated 23.09.2011 has described the modalities for the sale of iron ore and has clearly mentioned the procedure to be adopted for e-auction of iron ore and procedure for accounting of sale proceeds. The account of sale proceeds being maintained by the Government under double entry system of accounting which is duly being monitored by CEC.
According to the ld. DR, the Hon'ble Supreme Court India in SLP No. 7361/2010 dated 29.07.2011 had banned the activity of mining of in the districts of Bellary, Tumkur and Chitradurga of Karnataka districts. In compliance with the orders of the Hon'ble Supreme Court, mining activity had been suspended by the assessee since January, 2012. Further, the Iron Ore held in the stock was not permitted to be sold by the assessee.
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However, subsequently on 03.09.2012, the Hon'ble Supreme Court had lifted the ban and permission was given for resumption of mining operation in mines.
The ld. DR submitted that it is a General rule that, if an assessee is penalized under one Act, he cannot claim that the amount to be set off against his income under another Act, because that will be frustrating/defeating the entire object of penalizing under the other Act. If the assessee resorts to unlawful means to augment his profits or reduce his loss, then the expenditure incurred for these unlawful activities cannot be allowed to be deducted whether the business is lawful or otherwise. Even if the entire business of the assessee is illegal and income is sought to be taxed by the assessing the expenditure in the illegal activities is not deductible after the Explanation to Section 37(1) by the Finance Act, 1998.
The ld. DR submitted that it has been consistently held by the Courts that fines or penalties payable for violation of law of the land cannot be permitted as deduction under the Act. That will be against public policy to allow the benefit of deduction under one statute, of any expenditure incurred in violation of the provisions of another statute or any penalty imposed under another statute [Maddi Venkataraman & Co. (P) Ltd vs. CIT (1998) 229 ITR 534 (SC)]. Even though the need for making such payments arose out of trading operation, the payments were not wholly and exclusively for the purpose of the trade. Infraction of the law is not a normal incident of business and therefore, no expense which is paid by way of penalty for breach of the law can he said to be an amount wholly and exclusively laid for the purpose of business [Haji Aziz & Abdul Shakoor Bros. Vs. CIT (1961) 41 ITR 350 (SC)]. A payment made under a statutory obligation because the assessee was in default could not constitute
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expenditure laid out for the purpose of assessee's business [Indian Aluminium Co. Ltd Vs. CIT (SC) 79 ITR 514].
He relied on the judgment in the case of Indian Aluminium Co. Ltd Vs. CIT (SC) 79 1TR 514 it was held by the Apex Court that - a payment made under a statutory obligation because the assessee was in default could not constitute expenditure laid out for the purpose of assessee's business. He emphasized once again the judgement in the case of Maddi Venkataraman & Co. (P) Ltd vs. CIT (1998) 229 ITR 534 (SC). The fines/penalties paid for violating the law in the course of the conduct of business cannot be regarded as deductible expenditure, as the assessee is expected to carry on the business in accordance with law and not violation of law. In the instant case, the assessee has violated the law and has formed Illegal Mining Pits and Illegal Dumping of waste, whereby, the Hon'ble. Apex Court on the recommendation of CEC has directed to collect the amounts for violation of such law. The ld. DR supported the orders of lower authorities.
According to the ld. DR, Explanation (2) to section 37 is applicable to all the assesses including “individual” assesses and since Explanation 2 states that any expenditure incurred by ‘an assessee’ on the activities relating to corporate social responsibility referred to in Section 135 of the Companies Act, 2013, shall not be deemed to be an expenditure incurred by the assessee for the purpose of business or profession. According to the ld. DR, the words mentioned in Explanation 2 is “the assessee” including individual or company.
We have heard both the parties and perused the material on record. The allowability of this impugned expenditure came up for consideration
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before the coordinate Bench in the case of Ramgad Minerals & Mining Ltd. in ITA Nos.1270 & 1271/Bang/2019, order dated 4.11.2020 for the assessment years 2013-14 & 2014-15 wherein it was held as under:- “7.8.12. On careful reading of decision of Hon’ble Supreme Court dated 18/04/2013, it is clear that 15% contribution to SPV account was guarantee payment for implementing of R & R plan, which would be deducted from sale proceeds. This was one of the conditions for resuming mining operations under Category ’B’. We refer to and rely on observations by Hon’ble Supreme Court in case of CIT vs Sitaldas Tirathdas reported in (1961) 41 ITR 367. Hon’ble Supreme Court laying down following principal referred to various rulings that illustrated aspects of diversion of income by overriding title. “These are the cases which have considered the problem from various angles. Some of them appear to have applied the principle correctly and some, not. But we do not propose to examine the correctness of the decisions in the light of the facts in them. In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as its income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to pay out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Whereby the obligation income is diverted before it reaches the assessee, it is deductible but where the income is required to be applied to discharge an obligation after such income reaches the assessee the same consequence in law does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another portion of one’s own income which has been received and essence applied. The first is a case in which the income never reaches the assessee, who, even if he were to collect it, does so, not as part of his income but for and on behalf of the person to whom it was payable.” Emphasis Supplied
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7.8.13. In the present case, we note that 15% of sale proceeds was payable to SPV account after it accrued to assessee and the fact that, assessee was obliged to part with such portion of income, by virtue of directions of Hon’ble Supreme Court, as a precondition to resume mining operations under Category ‘B’. At this juncture, we also emphasise that, but for the intervention by Hon’ble Supreme Court, assessee would not have contributed 15% to SPV account for implementation of reclamation and rehabilitation scheme on its own, as there was no statutory requirement to do so under relevant statutes that regulate mining activities. 7.8.14. Hon’ble Supreme Court has been very clear regarding the types of payments that needs to be recovered from lessee’s under Category ‘B’, from the sale proceeds as well as otherwise. All the payments form part of R&R plan for recouping and rehabilitating the environment. Certain payments are onetime payment and some others are recurring depending upon the sale of iron ore sold in the name of each licensee or depending on the need for rehabilitation. 7.8.15. In our view, contributing 15% to SPV account on account of Category ‘B’, would be application of income, and therefore, should be considered as expenditure incurred for carrying out its business activity. This we hold so, for the reason that, contributions determined by Hon’ble Supreme Court are in the nature of guarantee payment necessary for resuming mining activity. We also note that, alleged sum in these grounds are for implementation of R&R Plans in respective sanctioned lease areas held by assessee, where illegal mining activities or which were used for illegal overburden dumps, roads, offices etc., beyond sanctioned lease area were carried out. Here, we also note that, Hon’ble Supreme Court directed CEC to refund any leftover guarantee money, after completion of implementation of R& R plan, subject to satisfaction of CEC and approval by Hon’ble Supreme Court. For this peculiar reason, amount so contributed towards SPV being 15% of sale proceeds, under Category B, cannot be treated as penal in nature. We, therefore, reject observations of authorities below
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that, such sum having contributed by assessee fall within ambit of explanation 1 to section 37 (1) of the Act. 7.8.16. The decisions relied upon by Ld. CIT (A) has also been perused by us. We note that those decisions deal with expenses which are in the nature of penalty. In the present situation, contribution towards SPV is a requirement to be incurred to continue its business activities. In our view, these payments in present case do not fall within the category of penalty. Hon’ble Supreme Court has quantified rate for the mass tort, that has occasioned due to illegalities committed in the operation of mines separately. We also note that assessee has suo moto disallowed the payments that fall within the category of penalty which has been computed in accordance with directions of Hon’ble Supreme Court (being Rs.5 crore per hectare for area as under illegal mining pits outside sanctioned areas and Rs.1 crore per hectare for area under illegal overburden dumps, roads, offices exception outside the sanctioned lease area). Based on above discussions and analysis, we are of opinion that contribution to SPV being 15% of sale proceeds, under category B, is an allowable expenditure for year under consideration.” 48. This issue also came up for consideration in earlier year before the Tribunal in the case of Veerabhadrappa Sangappa & Co. in ITA No.1270 & 1271/Bang/2019 for the AY 2013-14, order dated 4.11.2020 wherein the above decision was followed by Tribunal:- “7.10.1. Ld.Counsel again raised 3 prepositions before us in respect of the contribution made to SPV account from the sale proceeds. • Primarily he contended that there is diversion of income by overriding title to SPV account, and therefore such amount is not liable to tax in the hands of assessee. • Alternatively he submitted that the said sum may be treated as loss under section 28 while computing profit and loss under the head income from business and profession. Or
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• He submitted that it may be treated as an expenditure incurred by assessee for purposes of business.
7.10.2. On the contrary, Ld.CIT DR submitted that it is an application of income and therefore has to be disallowed in the hands of assessee. He submitted that Ld.AO in support of disallowing the claim of expenditure relied on following decisions: • CIT vs.KCP Ltd. reported in 245 ITR 421(SC) • G.Padnabha Chettiyar & Sons vs.CIT reported in 182 ITR 1(Mad) • ReformFlour Mills Pvt.Ltd Vs.CIT reported in 132 ITR 184,196(Cal) • CIT vs.A.Krishnaswamy Mudaliar & Ors reported in 53 ITR 122(SC) We note that these decisions are on the accrual of income, which has been considered by us in forgoing paras. We have already held that entire income accrued to assessee while deciding grounds 2.1 &2.2. In the issue of contribution towards SPV, one has to consider its correct nature. In our opinion these decisions do not assist revenue in any manner. 7.10.3. On careful reading of decision of Hon’ble Supreme Court in case of Samaj Parivartana Samudaya & Ors. Vs. State of Karnataka & Ors. (supra), it is clear that 10%/15% contribution to SPV account was guarantee payment for implementing of R & R plan, which would be deducted from sale proceeds. This was one of the conditions for resuming mining operations under categories ‘A’ and ’B’ respectively. 7.10.4. With this background, we once again refer to and rely on observations by Hon’ble Supreme Court in case of CIT vs Sitaldas Tirathdas (supra). Hon’ble Supreme Court laying down following principal referred to various rulings that illustrated aspects of diversion of income by overriding title. “These are the cases which have considered the problem from various angles. Some of them appear to have applied the principle correctly and some, not. But we do not
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propose to examine the correctness of the decisions in the light of the facts in them. In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as its income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to pay out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Whereby the obligation income is diverted before it reaches the assessee, it is deductible but where the income is required to be applied to discharge an obligation after such income reaches the assessee the same consequence in law does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another portion of one’s own income which has been received and essence applied. The first is a case in which the income never reaches the assessee, who, even if he were to collect it, does so, not as part of his income but for and on behalf of the person to whom it was payable.” Emphasis Supplied 7.10.5. Applying, thin line of difference interpreted by Hon’ble Supreme Court to present facts, we are of the opinion that, contribution to SPV account, cannot be considered to be diversion of income. This is because, we have already held while deciding ground 2.1 and 2.2 hereinabove, that entire sale proceeds accrued to assessee, and it is only due to direction of Hon’ble Supreme Court that such amount was contributed to SPV account, for which assessee was to authorise CEC/MC in relevant paragraph 11(III) refer to and relied by Ld.CIT DR. 7.10.6. In the present facts of the case, we note that 10%/15% of sale proceeds was payable to SPV account, after it accrued to assessee, and the fact that, assessee was obliged to part with such portion of income, by virtue of directions of Hon’ble Supreme Court in case of Samaj Parivartana Samudaya & Ors. Vs. State of Karnataka & Ors. (supra), as a precondition to resume mining operations under Category ‘A and ‘B’. At this juncture we also emphasise that, but for the intervention by Hon’ble Supreme Court, assessee would not have
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contributed 10%/15% to SPV account for implementation of reclamation and rehabilitation scheme on its own, as there was no statutory requirement to do so under relevant statutes that regulate mining activities. 7.10.7. In our view contributing 10%/15% to SPV account on account of Category ‘A’/ ‘B’ respectively, would be application of income, and therefore should be considered as expenditure incurred for carrying out its business activity. This we hold so, for the reason that, contributions determined by Hon’ble Supreme Court are in the nature of guarantee payment necessary for resuming mining activity. We also note that, alleged sum in these grounds are for implementation of R&R Plans in respective sanctioned lease areas held by assessee, where illegal mining activities or which were used for illegal overburden dumps, roads, offices etc., beyond sanctioned lease area were carried out. Here, we also note that, Hon’ble Supreme Court directed CEC to refund any leftover guarantee money, after completion of implementation of R& R plan, subject to satisfaction of CEC and approval by Hon’ble Supreme Court. For this peculiar reason amount so contributed towards SPV being 10%/15% of sale proceeds, under category A/B, cannot be treated as penal in nature. 7.10.8. We note that co-ordinate Hydrabad bench of Tribunal in NMDC (supra) was the case of Category ‘A’ wherein it was allowed as expenditure by observing as under: “2. Brief facts of the case are that the assessee-company, a Public Sector Undertaking, engaged in the business of 'mining of iron ore diamonds; and generation and sale of wind power', filed its return of income for the relevant Assessment Years 2013-14 and 2014-15 both under the normal provisions as well as u/s 115JB of the Act for the relevant AYs. During the assessment proceedings u/s 143(3) of the Act, the A.O. observed that the assessee- company is carrying out mining activity in India and particularly in Karnataka and that the Hon'ble Supreme Court of India took note of the large scale illegal mining activity carried on by various companies in Karnataka at the cost or detriment of environment and delivered their judgment on 18.04.2013 levying appropriate charges on the leaseholders. A.O. also observed that the Hon'ble Supreme Court, based on the extent of illegal mining,
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classified the mining leases into three categories viz., Category "A", "B" and "C" and that the assessee is falling in Category-B in respect of Donimali Complex and that in their order, the Apex Court observed that before consideration of any resumption of mining operations by Category-B leaseholders, each of the lease holder must pay compensation for the areas under illegal mining pits outside the sanctioned area at the rate of Rs. 5 Crs per hectare and for illegal overburden for at the rate of Rs. 1 Cr per hectare. Further, A.O. observed that the said direction of the Apex Court was subject to the final determination of the notional loss caused by the illegal mining and illegal use of the land; and that the Hon'ble Supreme Court had directed that each of the leaseholder should pay a sum equivalent to 15% of the sale proceeds of its iron ore sold through the Monitoring Committee. In accordance with the said direction, the assessee made payment of Rs. 337.13 Crs towards contribution for the Special Purpose Vehicle and the sum of Rs. 68.66 Crs towards penalty / compensation for encroachment of the mining area beyond the sanctioned / leased area. The A.O. observed that the total of the above payment of Rs. 405.79 Crs was punitive in nature and accordingly sought to disallow the same by issuance of a show-cause notice. …………… 4. The A.O. however did not accept the assessee's explanation and held that the assessee, being a Category-B leaseholder, has been directed to make the payment for infringement of MMDR Act and other allied laws. Therefore, he observed that the payment of Rs. 405.79 Crs is punitive in nature and brought it to tax. …………….. 10. Thus, from the table reproduced above, it is seen that the assessee has been classified as Category-'A' whereas the Assessing Officer has considered the assessee as Category-'B' company. The Hon'ble Supreme Court has clearly indicated that Category-A comprises of (i) 'working” leases' wherein no illegality / marginal illegality have been found and (ii) 'non-working leases' wherein no marginal / illegalities have been found, whereas Category- B comprises of (i) mining leases wherein illegal mining is
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10% to 15% of the sanctioned lease areas. However, CEC had recommended that both "A" and "B" categories may be allowed to resume the mining activity subject to the payment of penalty / compensation decided by the Court. Thus, according to the assessee, the said expenditure is nothing but a payment which was required to be made without which the assessee could not have carried on the mining activities and therefore, it is a 'business expenditure'. Since the CEC had categorised the assessee as a Category-A company and the Hon'ble Supreme Court has accepted the said categorization, there would have been marginal illegalities committed by the assessee and the compensation / penalty as directed by the Hon'ble Supreme Court is only to compensate the Government for the loss of revenue from such mining or marginal illegalities and not as a penalty. Though the nomenclature given is "penalty" it is not for infraction or violation of any law to hold it to be punitive in nature, as presumed by the Assessing Officer. Learned Counsel for the Assessee placed reliance on various case law, particularly the decision of the Coordinate Bench of the ITAT, Kolkata in the case of Essel Mining & Industries Ltd vs. Addl. CIT (ITA No. 352/Kol/2011 and others, dated 20.05.2016); ACIT vs. Freegade & Co. Ltd (ITA No.934/Kol/2009, dated 05.08.2011) and also the decision of the Hon'ble Calcutta High Court in the case of ShyamSel Ltd vs. DCIT (72 Taxmann.com 105) (Cal.). On going through the said decisions, we find that the Hon'ble Calcutta High Court has considered the case of an assessee who failed to install Pollution Control Device within factory premise within prescribed time and that the assessee had to pay Rs. 12.50 lakh for compensating damage to environment and the same was recovered by State Pollution Control Board on the principle of 'polluter pays' and the A.O. had treated it as penalty and did not allow the same as business expenditure. The Hon'ble High Court had taken note of the fact that the assessee's business was not illegal and that compensation was paid because of its failure to install pollution control device within prescribed time and therefore, such payment was undoubtedly for the purpose of business and in consequence of business carried on by the assessee and was thus covered by section 37 of the Act. For coming to this conclusion, Hon'ble High Court has
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also considered the judgment of the Hon'ble National Green Tribunal in the case of State Pollution Control Board vs. Swastik Ispat (P.) Ltd wherein at para 38 of the judgment the Tribunal held as under:- "Being punitive is the essence of 'penalty'. It is in clear contradistinction to 'remedial' and / or 'compensatory'. 'penalty ' essentially has to be for result of a default and imposed by way of punishment. On the contrary, 'compensatory' may be resulting from a default for the advantage already taken by that person and is intended to remedy or compensate the consequences of the wrong done. For instance, if a unit has been granted conditional consent and is in default of compliance, causes pollution by polluting a river or discharging sludge, trade affluent or trade waste into the river or on open land causing pollution, which a Board has to remove essentially to control and prevent the pollution, then the amount spent by the Board, is thus, spent by encashing the bank guarantee or is adjusted thread and this exercise would fall in the realm of compensatory restoration and not a penal consequence. In gathering the meaning of the word 'penalty' in reference to a law, the context in which it is used is significant." 11. Applying this ratio to the facts of the case before us, we find from para 43 of the Hon'ble Supreme Court's order reproduced above that the condition of payment for resuming the mining activity by Categories 'A' & 'B' companies is to not to punish the companies for any violation of law but is to ensure scientific and planned exploitation of mineral resources in India. Further the Hon'ble Supreme Court had directed as under:- "(X) Out of the 20% of sale proceeds retained by the Monitoring Committee in respect of the cleared mining leases falling in "Category- A", 10% of the sale proceeds may be transferred to the SPV while the balance 10% of the sale proceeds may be reimbursed to the respective lessees. In respect of the mining
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leases falling in "Category-B", after deducting the penalty / compensation, the estimated cost of the implementation of the R & R Plan, and 10% of the sale proceeds to be retained for being transferred to the SPV, the balance amount, if any may be reimbursed to the respective lessees;" 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 u/s 37(1) of the Act. Thus, Grounds No.2 and 3 raised by the assessee are allowed.” 7.10.9. We also notice that the co-ordinate Bangalore bench of Tribunal has also considered identical issue in the case of Ramgad Minerals & Mining Ltd (ITA No.1270 & 1271/B/2019 dated 04-11- 2020) being Category ‘B’, an identical addition made by Ld.AO was held to be allowable as expenditure with following observations:- “7.8.9. In present appeals, only issue raised for our consideration is in respect of 15% contribution made to SPV for assessment year 2013-14 and 2014-15; and issue in respect of R&R expenses incurred during assessment year 2013 – 14. First of all, we summarise objections of Ld.AO as in respect of SPV expenses as under:- (a) This is one of the objections of the AO that the SPV Expenses is not allowable because it is not compensation but it is penal in nature for contravention of law as observed by him in para 4.3 of the assessment order for AY:2013-14. (b) Second objection of the Ld.AO is contained in para 4.9 of the assessment order for AY:2013-14 and as per the same, this is the objection of Ld.AO that
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the said SPV is nothing but CSR Expenses only and therefore not allowable.
(c) Third objection of Ld.AO is also contained in para 4.9 of the assessment order for AY:2013-14 and as per the same, this is the objection of the Ld.AO that the said SPV is not allowable u/s 37 (1) as it was not incurred by the assessee wholly and exclusively for the purpose of business.
(d) In para 4.8 of the assessment order for AY:2013-14, Ld.AO is stating this that SPV rate is 10% in category ‘A’ Mines but 15% in Category ‘B’ Mines and this extra 5% in Category ‘B’ Mines is for various violations and illegal mining and even after this observation, he finally held in the same para that whole SPV Expenses of 15% is not allowable.
7.8.10. Ld.AO observed that, these SPV were deducted pursuant to directions of Hon’ble Supreme Court (supra) by order dated 18/04/2013, wherein, it was directed that, sum so paid towards SPV charges should be exhaustively and exclusively used to undertake socio economic and infrastructure development, afforestation, soil and biodiversity conservation and for ensuring inclusive growth of the area surrounding mining leases.
7.8.11. Ld.AO further observed that these payments are nothing but appropriation of profits earned by assessee that cannot be said to have incurred for purpose of business or earning profits. Accordingly, entire amount adjusted towards SPV was disallowed by Ld.AO. Ld.AO was of opinion that entire sale proceeds as per E auction bid Sheets/invoices were to be assessed as trading receipts. The amount retained by CEC/monitoring committee as per directions of Hon’ble Supreme Court, on behalf of assessee for SPV purposes, was on account of damages and loss caused to environment due to contravention of law, and therefore, cannot be allowed as deduction
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out of sale proceeds, even after accrual of such liability. Ld.AO was of opinion that, even in Category ‘A’ mines, there was marginal illegality found by CEC, because of which 10% of contribution was attributed out of sale proceeds to the SPV.
7.8.12. On careful reading of decision of Hon’ble Supreme Court dated 18/04/2013, it is clear that 15% contribution to SPV account was guarantee payment for implementing of R & R plan, which would be deducted from sale proceeds. This was one of the conditions for resuming mining operations under Category ’B’.
We refer to and rely on observations by Hon’ble Supreme Court in case of CIT vs Sitaldas Tirathdas reported in(1961) 41 ITR 367.Hon’ble Supreme Court laying down following principal referred to various rulings that illustrated aspects of diversion of income by overriding title.
“These are the cases which have considered the problem from various angles. Some of them appear to have applied the principle correctly and some, not. But we do not propose to examine the correctness of the decisions in the light of the facts in them. In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as its income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to pay out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Whereby the obligation income is diverted before it reaches the assessee, it is deductible but where the income is required to be applied to discharge an obligation after such income reaches the assessee the same consequence in law does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another portion of one’s own income which has been received and essence applied. The first is a case in which
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the income never reaches the assessee, who, even if he were to collect it, does so, not as part of his income but for and on behalf of the person to whom it was payable.” Emphasis Supplied
7.8.13. In the present case, we note that 15% of sale proceeds was payable to SPV account after it accrued to assessee and the fact that, assessee was obliged to part with such portion of income, by virtue of directions of Hon’ble Supreme Court, as a precondition to resume mining operations under Category ‘B’. At this juncture, we also emphasise that, but for the intervention by Hon’ble Supreme Court, assessee would not have contributed 15% to SPV account for implementation of reclamation and rehabilitation scheme on its own, as there was no statutory requirement to do so under relevant statutes that regulate mining activities.
7.8.14. Hon’ble Supreme Court has been very clear regarding the types of payments that needs to be recovered from lessee’s under Category ‘B’, from the sale proceeds as well as otherwise. All the payments form part of R&R plan for recouping and rehabilitating the environment. Certain payments are onetime payment and some others are recurring depending upon the sale of iron ore sold in the name of each licensee or depending on the need for rehabilitation.
7.8.15. In our view, contributing 15% to SPV account on account of Category ‘B’, would be application of income, and therefore, should be considered as expenditure incurred for carrying out its business activity. This we hold so, for the reason that, contributions determined by Hon’ble Supreme Court are in the nature of guarantee payment necessary for resuming mining activity. We also note that, alleged sum in these grounds are for implementation of R&R Plans in
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respective sanctioned lease areas held by assessee, where illegal mining activities or which were used for illegal overburden dumps, roads, offices etc., beyond sanctioned lease area were carried out. Here, we also note that, Hon’ble Supreme Court directed CEC to refund any leftover guarantee money, after completion of implementation of R& R plan, subject to satisfaction of CEC and approval by Hon’ble Supreme Court. For this peculiar reason, amount so contributed towards SPV being 15% of sale proceeds, under Category B, cannot be treated as penal in nature. We, therefore, reject observations of authorities below that, such sum having contributed by assessee fall within ambit of explanation 1 to section 37 (1) of the Act.”
7.10.10. We note that the CEC, vide its report dated 3-2-2012 and 13-3- 2012 made recommendations with regard to setting up of SPV, transfer of funds collected from all lease holders under various heads, manner of utilisation of said funds etc., to Hon’ble Supreme Court, which is incorporated in Paragraph 7 at Page 164 to 171 as under:
“(IX) A Special Purpose Vehicle (SPV) under the Chairmanship of Chief Secretary, Government Karnataka and with the senior officers of the concerned Departments of the State Government as Members may be directed to be set up for the purpose of taking various ameliorative and mitigative measures in Districts Bellary, Chitradurga and Tumkur. The additional resources mobilized by (a) allotment/ assignment of the cancelled mining leases as well as the mining leases belonging to M/s. MML, (b) the amount of the penalty/ compensation received/ receivable from the defaulting lessee, (c) the amount received/
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receivable by the Monitoring Committee from the mining leases falling in “Category- A” and “Category-B”, (d) amount received/ receivable from the sale proceeds of the confiscated material etc., may be directed to be transferred to the SPV and used exclusively for the socio- economic development of the area/local population, infrastructure development, conservation and protection of forest, developing common facilities for transportation of iron ore (such as maintenance and widening of existing road, construction of alternate road, conveyor belt, railway siding and improving communication system, etc.). A detailed scheme in this regard may be directed to be prepared and implemented after obtaining permission of this Hon’ble Court;”
7.10.11. Hon’ble Supreme Court at 176 of its order made following observations with regard to SPV:-
“By order dated 28-09-2012, this Court had constituted a Special Purpose Vehicle (for short “SPV”) on the suggestion of the learned amicus curiae. The purpose of constitution of the SPV, it may be noticed, is for taking of ameliorative and mitigative measures as per the “Comprehensive Environment Plans for Mining Impact Zone (CPEMIZ) around mining leases in Bellary, Chitradurga and Tumkur. By order dated 28-09-2012, the Monitoring Committee was to make available the payments received by it under different heads of receivables to the SPV”
7.10.12. 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
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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.
7.10.13. Based on above discussions and analysis, we are of opinion that contribution to SPV being 10%/15% of sale proceeds, under category A/B, is to be allowable as expenditure for year under consideration. Thus, alternative plea raised by assessee in ground 2.3.6 and 2.3.7 does not arise. In any event, such payment cannot be considered to be loss in the hands of assessee.
Accordingly we allow grounds 2.3.8-2.3.9 and dismiss grounds 2.3.1-2.3.7.”
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The above two decisions of the Tribunal were followed by the coordinate Bench of the Tribunal in the case of Muneer Enterprises in ITA No.696/Bang/2018 dated 9.3.2021 for the AY 2013-14 wherein it was held as follows:- “13. On careful reading of decision of Hon’ble Supreme Court dated 18/04/2013, it is clear that 15% contribution to SPV account was guarantee payment for implementing of R & R plan, which would be deducted from sale proceeds. This was one of the conditions for resuming mining operations under Categories ’B’. We refer to and rely on observations by Hon’ble Supreme Court in case of CIT vs Sitaldas Tirathdas reported in (1961) 41 ITR 367. Hon’ble Supreme Court laying down following principal referred to various rulings that illustrated aspects of diversion of income by overriding title. “These are the cases which have considered the problem from various angles. Some of them appear to have applied the principle correctly and some, not. But we do not propose to examine the correctness of the decisions in the light of the facts in them. In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as its income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to pay out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Whereby the obligation income is diverted before it reaches the assessee, it is deductible but where the income is required to be applied to discharge an obligation after such income reaches the assessee the same consequence in law does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another portion of one’s own income which has been received and essence applied. The first is a case in which the income never reaches the assessee, who, even if he were to collect it, does so, not as part of his income but for and on behalf of the person to whom it was payable.”
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Emphasis Supplied 14. In the present facts of the case, we note that 15% of sale proceeds was payable to SPV account, after it accrued to assessee, and the fact that, assessee was obliged to part with such portion of income, by virtue of directions of Hon’ble Supreme Court, as a precondition to resume mining operations under Category ‘B’. At this juncture we also emphasise that, but for the intervention by Hon’ble Supreme Court, assessee would not have contributed 15% to SPV account for implementation of reclamation and rehabilitation scheme on its own, as there was no statutory requirement to do so under relevant statutes that regulate mining activities. 15. Hon’ble Supreme Court has been very clear regarding the types of payments that needs to be recovered from lessee’s under Catagory ‘B’, from the sale proceeds as well as otherwise. All the payments forms part of R&R plan for recouping and rehabilitating the environment. Certain payments are one time payment and some others are recurring depending upon the sale of iron ore sold in the name of each licensee or depending on the need for rehabilitation. 16. In our view contributing 15% to SPV account on account of Category ‘B’, would be application of income, and therefore should be considered as expenditure incurred for carrying out its business activity. This we hold so, for the reason that, contributions determined by Hon’ble Supreme Court are in the nature of guarantee payment necessary for resuming mining activity. We also note that, alleged sum in these grounds are for implementation of R&R Plans in respective sanctioned lease area held by assessee, where illegal mining activities or which were used for illegal overburden dumps, roads, offices etc., beyond sanctioned lease area were carried out. Here, we also note that, Hon’ble Supreme Court directed CEC to refund any leftover guarantee money, after completion of implementation of R& R plan, subject to satisfaction of CEC and approval by Hon’ble Supreme Court. For this peculiar reason amount so contributed towards SPV being 15% of sale proceeds, under Category B, cannot be treated as penal in nature. We, therefore, reject observations of authorities below that, such sum having contributed by assessee fall within ambit of explanation to section 37 (1) of the Act.
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The decisions relied upon by Ld. CIT (A) has also been perused by us. We note that those decisions deal with expenses which are in the nature of penalty. In the present situation, contribution towards SPV is a requirement to be incurred to carry continue its business activities. In our view, these payments in present facts do not fall within the category of penalty. 18. We note that identical issue has been considered and decided in the light of observations by Hon’ble Supreme Court in case of referred by the Ld.AR mentioned herein above. For sake of convenience we reproduce the observations of this Tribunal in case of Veerbhadrappa Sangappa (supra) as under: “8.12.3. On careful reading of decision of Hon’ble Supreme Court dated 18/04/2013, it is clear that 10%/15% contribution to SPV account was guarantee payment for implementing of R & R plan, which would be deducted from sale proceeds. This was one of the conditions for resuming mining operations under Categories ‘A’ and ’B’ respectively. In this background, we once again refer to and rely on observations by Hon’ble Supreme Court in case of CIT vs Sitaldas Tirathdas (supra). Hon’ble Supreme Court laying down following principal referred to various rulings that illustrated aspects of diversion of income by overriding title. “These are the cases which have considered the problem from various angles. Some of them appear to have applied the principle correctly and some, not. But we do not propose to examine the correctness of the decisions in the light of the facts in them. In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as its income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to pay out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Whereby
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the obligation income is diverted before it reaches the assessee, it is deductible but where the income is required to be applied to discharge an obligation after such income reaches the assessee the same consequence in law does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another portion of one’s own income which has been received and essence applied. The first is a case in which the income never reaches the assessee, who, even if he were to collect it, does so, not as part of his income but for and on behalf of the person to whom it was payable.” Emphasis Supplied 8.12.4. Applying, thin line of difference interpreted by Hon’ble Supreme Court to present facts, we are of the opinion that, contribution to SPV account, cannot be considered to be diversion of income. This is because, we have already held while deciding ground 2.1 and 2.2 hereinabove, that entire sale proceeds accrued to assessee, and it is only due to direction of Hon’ble Supreme Court that such amount was contributed to SPV account, for which assessee was to authorise CEC/MC in relevant paragraph 11(III) referred to and relied by Ld.CIT DR. 8.12.5. In the present facts of the case, we note that 10%/15% of sale proceeds was payable to SPV account, after it accrued to assessee, and the fact that, assessee was obliged to part with such portion of income, by virtue of directions of Hon’ble Supreme Court, as a precondition to resume mining operations under Category ‘A and ‘B’. At this juncture we also emphasise that, but for the intervention by Hon’ble Supreme Court, assessee would not have contributed 10%/15% to SPV account for implementation of reclamation and rehabilitation scheme on its own, as there was no statutory requirement to do so under relevant statutes that regulate mining activities. 8.12.6. In our view contributing 10%/15% to SPV account on account of Category ‘A’/ ‘B’ respectively, would be application of income, and therefore should be considered as expenditure incurred for carrying out its business
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activity. This we hold so, for the reason that, contributions determined by Hon’ble Supreme Court are in the nature of guarantee payment necessary for resuming mining activity. We also note that, alleged sum in these grounds are for implementation of R&R Plans in respective sanctioned lease areas held by assessee, where illegal mining activities or which were used for illegal overburden dumps, roads, offices etc., beyond sanctioned lease area were carried out. Here, we also note that, Hon’ble Supreme Court directed CEC to refund any leftover guarantee money, after completion of implementation of R& R plan, subject to satisfaction of CEC and approval by Hon’ble Supreme Court. For this peculiar reason amount so contributed towards SPV being 10%/15% of sale proceeds, under category A/B, cannot be treated as penal in nature. We, therefore, reject observations of authorities below that, such sum having contributed by assessee do not fall within ambit of explanation to section 37 (1) of the Act. 8.12.7. Based on above discussions and analysis, we are of opinion that contribution to SPV being 10%/15% of sale proceeds, under category A/B, is to be allowable expenditure for year under consideration.”
Facts leading to the disallowance is in the present case is similar and identical to the facts in the case of Veerbhadrappa Sangappa & Co. (Supra), we note that same is the view taken by Co-ordinate Bench in case of M/s Ramgad Minerals & Mining Ltd. (Supra). 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. Accordingly grounds raised by assessee stands allowed.” 50. Moreover, CSR expenses have been incurred by the assessee on the direction of the Government of India and identical issue has been
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decided by the coordinate Bench of the Tribunal in case of M/s. HLL Lifecare Ltd. vs. ACIT in ITA No.123/Coch/2017 for AY 2012-13 order dated 11.06.2018 with the following findings :- “9.5 The CSR expenses has been incurred as per the directions of Government of India. The Hon'ble Kerala High Court in the case of Travancore Titanium Products Ltd. (supra) had held that a Government Undertaking is duty bound to comply with Governmental orders. The relevant findings of the Hon'ble jurisdictional High Court reads as follows :- "Being a company under the control of the Government, it is bound to comply with all the Government orders and the Board of Directors itself is constituted with the Government secretaries and other nominees as members. Therefore, the claim of deduction has to be considered with reference to the peculiar circumstances of the company which has no discretion in regard to the payment of the service charges to the government as it is bound to comply with the government orders. So much so, we are of the view that the parameters applicable in the case of a private company that too with respect to the claim for business expenditure, are exactly not applicable in the case of Public Sector Company whether it is under the control of the State Government or Central Government. In fact, many public sector companies are not formed just to make profit alone but are supposed to achieve larger objectives for the society and the State. By making payment of service charge, the respondent company has discharged only the obligation under Government orders. It cannot carryon business by violating Government orders and remain as a defaulter to the Government. 9.6 The ITAT Mumbai bench in the case of Hindustan Petroleum Corporation Ltd. (96 ITD 186) had held CSR expenditure incurred by Government Undertaking is an allowable deduction. The relevant finding of the ITAT Mumbai Benches reads as follows:-
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"Expenditure incurred by assessee, a company owned by the Government of India and working under its control and directions, towards implementation of 20 point programme as per specific directions of the Government though voluntary in nature and not forced by any statutory obligation, is allowable as business expenditure. Merely because an expenditure is in the nature of donation, it does not cease to be an expenditure deductible under s. 37(1)." 9.7 The Commissioner of Income tax had mentioned in his order that "the Apex Court (313 ITR 334 SC) CIT Vs Madras Refineries Ltd., while hearing the allowability of CSR expenses observed that neither the High Court nor the Tribunal concerned had given specific finding to the effect that the said CSR expenditure is allowable as business expenditure ". In the above mentioned case, the Apex court has not given any decision on merits of the case. It had only given an observation and remitted the issue back to the Tribunal to give specific finding to the effect that the said CSR expenditure is allowable as business expenditure. 9.8 Since, the assessee had incurred CSR expenses to comply with the directions of Govt. of India, following the above observations made by High Court of Kerala and ITAT, Mumbai Bench, the expenditure incurred is incidental to the assessee's business and ought to be allowed as deduction u/s 37 of the I.T. Act.” 51. Identical issue has also been decided by the coordinate Bench of the Tribunal in Hindustan Petroleum Corporation Ltd. vs. DCIT (2005) 96 ITD 186 (Mum.) wherein it was observed as under:- “It had been held by the Karnataka High Court in the case of Mysore Kirloskar Ltd. v. CIT [1987J 166 ITR 836/ 30 Taxman 467. that while 'the basic requirements for invoking sections 37(/) and 80G are quite different', but nonetheless the two sections are not mutually exclusive. Thus, there are overlapping areas between the donations given by the assessee and the business expenditure incurred by the assessee. In other words, there can be certain amounts. though in the nature of donations, and nonetheless, these amounts may be deductible under section 37(1) as well. Therefore, merely because the expenditure in
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question was in the nature of donation, or, as per the words of the Commissioner (Appeals), 'prompted by altruistic motives', it did not cease to be an expenditure deductible under section 37(1). In the case of Mysore Kirloskar Ltd. (supra), the High Court had observed that even if the contribution by the assessee is in the form of donations, but if it could be termed as expenditure of the category falling in section 37(/), then the right of the assessee to claim the whole of it as a deduction under section 37(1) cannot be declined. What is material in this context is whether the expenditure in question was necessitated by business considerations or not. Once it is found that the expenditure was dictated by commercial expediencies, the deduction under section 37(1) cannot be declined. [Para 7] In the instant case, the expenditure on 20-Point Programme was incurred in view of specific directions of the Government of India. It could not but be in the business interest of the assessee to abide by the directions of the Government of India which also owned the assessee. Further, the expenditure incurred for the implementation of 20-Point Programme was solely for the welfare of the oppressed classes of society, for which even the Constitution of India sanctions positive discrimination and for contribution to all around development of villages, which has always been the central theme of Government's development initiatives. An expenditure of such a nature cannot but be, 'a concrete expression of care and concern for the society at large and an expenditure to discharge the responsibilities of a 'good corporate citizen which brings goodwill of with the regulatory agencies and society at large, thereby creating an atmosphere in which the business can succeed in a greater measure with the aid of such goodwill'. [Para 9] Just because the expenditure was voluntary in nature and was not forced on the assessee by a statutory obligation, it could not cease to be a business expenditure. Therefore, the authorities below indeed erred in law in declining deduction of the expenditure incurred on 20- Point Programme which was, beyond dispute or controversy, at the instance of the Government, and was to discharge the assessee s obligations towards society as a responsible corporate citizen. [Para 10]”
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Now the applicability of Explanation 1 to section 37 is already covered by the above decisions as it was held that the expenditure is allowable as business expenditure. In view of this, we are of the opinion that the AO cannot disallow expenditure by invoking Explanation 1 to section 37 of the Act.
Further as discussed in paras 9 to 20 of this order, we take support from the decision of Hon’ble Gujarat High Court in the case of Pr.CIT v. Gujarat Narmada Fertilizers & Chemicals Ltd. (supra) wherein it was held that there is no obligation to this assessee u/s. 135 of the Companies Act, 2013 to incur this kind of expenditure and the assessee incurred this expenditure without any statutory obligation under the Companies Act and it is incurred wholly and exclusively for the purpose of business.
Being so, in our opinion, the assessee being an individual and not a company, it is not governed by Section 135 of the Companies Act, 2013 and the impugned expenditure incurred by the assessee is not in the nature of CSR expenditure as mentioned in that section and it cannot be disallowed by invoking the provisions of Explanation 2 to section 37 of the I.T. Act. Accordingly, we allow this ground of appeals of the assessee.
The next ground in ITA No.315/Bang/2020 is with regard to treating loss from derivatives – F&O of Rs.9,43,60,600 as assessable under the head ‘capital gains’ instead of business loss thereby not allowing set off of the same.
The ld. AR submitted that the lower authorities were of the view that assessee has agreed to the additions made by the AO during assessment proceedings, when no such acceptance/ consent has been given by the assessee. Relying on Apex Court judgment in M/ s Goetze (India) Ltd. V.
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CIT 284 ITR 323 (SC), the lower authorities observed that the assessee cannot make additional claim during assessment proceedings other than the claim made in the return of income under section 139; and that the assessee himself has declared the profit and gain on sale of F & 0 under the head capital gains. Since, loss on Trading in F & 0 is not disclosed as Turnover arising from business loss, thus claim not made in return of income cannot be allowed otherwise than revised return of income.
Thus, the ld. AR submitted that, the basis of the impugned addition is that the assessee's new claim cannot be entertained by the AO. However, there is no whisper in the impugned order as regards it being an agreed addition. On the contrary, it is a case of outright "rejection of a specific claim made by the assessee. The assessee contended before the lower authorities to treat the loss on F&0 derivative under the head business income and allow set off of losses from F&0 derivative against business income of mining; and there cannot be estoppel against assessee and the claim should be allowed in accordance with law, which was rejected by the lower authorities. He submitted that the CIT(Appeals) on the erroneous premise that the Appellant has accepted/agreed the additions made by the AO during the assessment proceeding. The CIT(A)’s view that the assessee has not made out a case that the addition was not made on agreed basis is perverse as there is no whisper in the impugned assessment order as regards the agreed addition. The Appellant cannot be expected to prove the negative. Reliance is placed on the following decisions which have held that an assessee cannot be expected to prove the negative:- CIT v. T. Ahobala Rao, 221 Taxman 39 (Kar) K.P. Varghese v. ITO, 7 Taxman 13 (SC)
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CIT v. Divine Leasing & Finance Ltd. 299 ITR 268 (Del) CIT v. Kapsons Associates, 381 ITR 204 (P&H) CIT v. Bhartesh Jain, 310 ITR 82 (Del)
It was further submitted that the decisions on which the CIT(A) relied in the impugned order to reject the assessee’s contentions do not have any relevance to the facts of the instant case. Therefore, the CIT(A) was not justified in rejecting the contentions of the assessee.
The ld. AR submitted that in the original return of income filed on 15.10.2016 assessee had declared short term capital loss of Rs.13,98,32,906 as follows:- Particulars Amount Loss from Future & Options (F&O) 9,43,60,600 Short Term Capital Loss 4,54,72,306 Total 13,98,32,906
The assessee inadvertently declared the loss of F&O transaction as capital loss in his return. Having realized the mistake, the assessee made a claim during the assessment proceedings to treat the loss from F&O transaction as business loss. In this regard, it was submitted that assessee is trading in F&O derivative through Karvy Stock Broking Ltd. and booked a loss of Rs. 9,43,60,600 during the year. Trading in F&O derivatives being non-speculative, any profits or gains arising therefrom has to be taxed under the head ‘business income’. He referred to section 28 of the Act and submitted that in order to construe that an income under the head profits & gains of business or profession or capital gains, the intention of the parties and the systematic way of dealing in order to make
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profit are to be seen. In this regard, reliance was placed on the following decisions:- Raja Bahadur Kamakhya Narain Singh v. CIT, 77 ITR 253 (SC) Janab Abubucker Salt v. CIT, 45 ITR 37 State of Gujarat v. Raipur Mfg. Co. Ltd., 19 STC 1 (SC) Tash Investment (P.) Ltd. v. ACIT 106 taxmann.com 190 (Ahd.Trib) Maanraj Trading (P) Ltd. v. DCIT, 23 taxmann.com 458 (Mum.Trib) CIT v. Smt. Minal Rameshchandra, 167 ITR 507 (Guj) Circular No.6/2016 dated 29.2.2016 Press Release dated 24.8.2019
Thus it was submitted that in the instant case, trading in F & 0 derivative has to be treated as business income for the following reasons:- - The intention of the Appellant is clear to trade in F & 0 to make profits with a shorter holding period; - The risk involved in trading F & 0 is higher and there is uncertainty of making profits which is usually associated with trading; - Appellant is doing systematic business by engaging the services of professionals; 62. The ld. AR further submitted that derivative is a kind of trading instrument. Futures and Options (F&0) are types of derivatives available for the trading in India in recognized stock exchange. They are special contracts whose value derives from an underlying security. The lower authorities having not disputed the genuineness of the transaction in F & 0 derivative, the lower authorities are not justified in failing to treat the income/ loss from trading in F & 0 derivative as business income/ loss. The
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AO has treated similar activity for the preceding previous year 2015-16 as trading under similar circumstances. The appellant only continued the aforesaid activity during the impugned previous year. Therefore, it is axiomatic that the activity of the appellant remains trading activity even for the current year.
He further referred to the provisions of section 43(5) of the Act. Section 2(ac) of the Securities (Contracts) Regulation Act, 1956 and drew attention to Memorandum to Finance Bill, 2005 and Circular No.3/2006 dated 27.2.2006 and Circular No.14/2006 dated 28.12.2006. He submitted that section 43(5) of the Act was amended by the Finance Act, 2005. Prior to amendment, section 43(5) defined ‘speculative transaction’ to mean a transaction in which a contract for the purchase or sale of any commodity including stocks and shares is settled otherwise than by the actual delivery or transfer of the commodity or scrips. The impact of the amendment by the Finance Act, 2005 was that an eligible transaction on a recognized stock exchange in respect of trading in derivatives was deemed not to be a speculative transaction. Thus, w.e.f. 1st April, 2006, trading in derivative of F&O is not regarded as a speculative transaction which it is carried out on a recognized stock exchange. It was submitted that F&0 transaction being non-speculative transaction is to be treated as normal business transaction. In this regard reliance was placed on the following decisions, wherein the courts have considered the F & 0 transactions in derivatives as regular business transactions and not speculative transactions:- Snowtex Investment Ltd. v. CIT, 414 ITR 227 (SC). Deepak Sogani vs. DCIT, [2016] 68 taxmann.com 332 (Mum) [Para 6, 10]; DCIT vs. Aishwarya & Co. (P.) Ltd., [2015] 60 taxmann.com 258 (Chennai) [Para 7 & 8];
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Asian Financial Services Ltd. vs. CIT, [2016] 240 Taxman 192 (Cal) [Para 11]; DCIT vs. Paterson Securities (P.) Ltd. [2010] 127 ITD 386 (Chennai) [Para 3,4]; R.B.K. Securities (P.) Ltd. vs. ITO [2008] 118 TTJ 465 (Mum) [Para 4 & 5]; DCIT vs. Madanlal Ltd. [2012] 51 SOT 188/21 taxmann.com 444 (Ko1.)(URO) [Para 4, 5] CIT vs. SSKI Investors Services (P.) Ltd. [2008] 113 TTJ 511 (Mumbai) [Para 3]; Rikeen P. Dalal vs. DCIT, [2014] 62 SOT 49 (Mum)(URO.) [Para 2 & 6]; 64. Therefore, it was submitted that trading in F & 0 derivative is taxable under section 28(i). The same is not a speculative transaction under section 43(5) of IT Act.
The ld. AR further submitted that the assessment has to be completed in accordance with the provisions of the IT Act, as per Circular No. 14 (XI- 35) of 1955, dated 11.04.1955 and there is no estoppel against the Appellant to make correct claim in accordance with the law. It is submitted that merely because the Appellant had declared the loss from F & 0 derivative as STCL in the original return of income there is no estoppel against the Appellant in making the correct claim in accordance with provisions of law. It was reiterated that the Appellant inadvertently declared the loss on F & 0 transaction as capital loss. Having realised the mistake he made a claim during the assessment proceedings with a plea to treat the loss from F & 0 transaction as business loss.
The CBDT Circular casts obligation on the Assessing Officer to assist the assesses in every reasonable way in the matter of claiming any relief
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and should not take advantage of ignorance of the assessee. In this regard a reference is made to Circular No. 14 (XI-35) of 1955 dated 11.04.1955. He submitted that the Courts have held that there cannot be any estoppel against assessee and claim should be allowed in accordance with the provisions of law and cited the following decisions:- CIT v. Shree Rama Multi Tech Ltd., 403 ITR 426 (SC) CIT v. K. Venkatesh Dutt, 319 ITR 331 (Kar) Alapati Venkataramiah v. CIT, 57 ITR 185 (SC) CIT v. C. Parakh & Co. (I) Ltd., 29 ITR 661 (SC) CIT v. Bharat General Reinsurance Co. Ltd., 81 ITR 303 (Del) CIT v. Rewari Central Co-op. Bank Ltd., 263 ITR 598 (P&H) CIT v. S.E. Railway Employees Co-op. Credit Society Ltd., 390 ITR 524 (Cal) CIT vs. M.R.P. Firm [1965] 56 ITR 67 (SC); Sanchez Capital Services (P.) Ltd vs ITO 26 Taxmann.com 61 ITO vs Alumeco India Extrusion Ltd. TS-143-ITAT-2013(HYD)- TP [Para 16] Shell India Markets (P.) Ltd. v. Assistant Commissioner of Income-tax, LTU [2014] 369 1TR 516 (Born) [Para 10] Vodafone India Services (P.) Ltd. v. UOI and others [2014] 361 ITR 531 (Bom.-HC) [Para 40 and 45] Vodafone India Services (P.) Ltd. v. UOI and others [2014] 368 ITR 1 (Born.-HC) [Para 27] 67. Therefore, it is submitted that the Appellant cannot be tied down to an inadvisably made wrong claim without appreciating the actual facts and proposition of law.
Further, the ld. DR submitted that the CIT(Appeals) was not justified in failing to appreciate that the Appellant is permitted to make a new or
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fresh claim during the Appellate proceeding and the same is not barred by the decision of the Hon'ble Supreme Court in Goetze (India) Ltd., vs. CIT [2006] 284 ITR 323 (SC). It is not the case of the assessee that he had not declared the loss arising from trading of F&O derivative in the original return of income. The said loss was declared in the original return under the head capital gain instead of business income. The decision of the Hon’ble Supreme Court in Goetze (India) Ltd. (supra) is not applicable to the instant case for the reason that in the said case the assessee had not claimed the deduction in original return or revised return to claim deduction. But in the instant case it is not so, the assessee had declared the income/loss from F&O derivatives as capital gain instead of business income. Thus it is a case of claim under wrong head of income. For this proposition, the assessee also placed reliance on the following decisions:- Raghavan Nair v. ACIT, 402 ITR 400 (Ker) Wipro Ltd. v. DCIT in ITA No.879/2008 dated 25.3.2015 Karnataka High Court CIT v. Malayala Manorama Co. Ltd., 409 ITR 358 (Ker) Satish S. Prabhu v. ACIT 114 taxmann.com 88 (Mum. Trib) CIT v. Sam Global Securities Ltd., 360 ITR 682 (Del) EBR Enterprises v. UOI, 415 ITR 139 (Bom) CIT v. Nashik Road Deolali Vyapaari Sah. Bank Ltd., 76 taxmann.com 78 (Bom) DCIT v. CMS Securities Ltd. 82 taxmann.com 319 (Mum)
The ld. AR submitted that there is no bar under the statue to make fresh claim before the Appellate authority. In fact, Goetze's case makes it clear that it only dealt with the power of the assessing officer and not the appellate authority. For the proposition that the assessee can raise fresh
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claim before the appellate authorities, reliance was placed on the following decisions:- Bhandari Metals v. State of Karnataka, 2004 SCC Online Kar 142 (Kar) CIT v. Mahalaxmi Textile Mills Ltd., 66 ITR 710 (SC) CIT v. Mitesh Impex, 367 ITR 85 (Guj) CIT v. Indian Express (Madurai) P. Ltd., 140 ITR 705 (Mad) CIT v. Grasim Industries Ltd., 2016-TIOL-292-HC-MUM-IT (Bom) 70. Therefore, it was submitted that the lower authorities have erred in wrongly applying the ratio of Goetze case and denying the claim of Appellant.
As regards, principles of consistency, the ld. AR submitted that the lower authorities were not justified in taking double in as much as they treated income from derivatives – F&0 as business income for the AY 2015-16, and as capital loss for the impugned AY 2016-17. The lower authorities ought to have followed the principles of consistency year on year when there is no change in facts and circumstances.
It is submitted that for the AY 2015-16 the Appellant had originally declared the income from F & 0 derivative as income from capital gains. During the course of assessment proceeding the AO assessed the income from F&0 derivative as business income and the same was accepted by the Appellant. The AO having treated the profits and gains from F&0 derivative as business income, the said derivatives/ scripts held by the Appellant shall be treated as stock in trade. The closing stock as on 31.03.2015 would be opening stock as on 01.04.2015. It is evident from Karvy statement that the value of opening stock of F&0 is Rs.7,69,35,461/-.
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When the facts remain unchanged, the nature of asset as on 31.03.2015 would not change on 01.04.2015. What was stock on 31.03.2015 cannot be regarded as capital asset as on 01.04.2015. It has been held that the treatment whether the capital asset or stock in trade cannot be varied from one year to another year without change in facts in the following decisions:- Venkatesh Satyaraj v. DCIT, 88 taxmann.com 915 (Mum Trib.) Pr.CIT v. Ramniwas Ramjivan Kasat, 410 ITR 540 (Guj) Dr. Jaykumar Chhaganlal Shah v. DCIT, 2016-TIOL-1507-ITAT- AHM Smt. Sujatha Kapadia v. CIT v. JCIT, 55 taxmann.com 474 Madhuraj Foundation, 175 TTJ 25 (Chd. Trib) Shibani S. Bhojwani v. DCIT, 35 taxmann.com 35 (Mum Trib) ACIT v. Harbilas Cold Storage & Food Products, 12 taxmann.com 36 (Lucknow)
The ld. AR submitted that the there is no change in facts and circumstances with respect to trading in F & 0 derivative. The AO has not brought any material to show change in circumstance in the impugned year. The inconsistent approach of the AO in assessing income from F & 0 derivative as business income in the AY 2015-16 and as capital loss in AY 2016-17 is not permissible when there is no change in fact and circumstance of the case. The said action of the AO is against the principles of consistency and the AO is not permitted to blow hot and cold at the same time. Reliance was placed on the following decisions:- CIT vs. Woodward Governor India (P.) Ltd. [2009] 312 ITR 254 (SC) New Delhi Television Ltd vs. DCIT, [2020] 116 taxmann.com 151 (SC)
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ACIT v. Vijay Gopal Jindal, 24 SOT 296 (Del( Balmukund Acharya v. DCIT, 310 ITR 310 (Bom) Basant Poddar v. CIT, 412 ITR 529 (Kar) Girish Bansal v. UOI, 384 ITR 161 (Del) Y. Rathiesh v. CIT, 372 ITR 73 (AP) Raja Malwinder Singh v. CWT, 334 ITR 115 (P&H) Azimganj Estate (P) Ltd. v. CIT, 372 ITR 243 (Cal) CIT v. Sridev Enterprises, 192 ITR 165 (Kar) CIT v. Excel Industries, 358 ITR 295 (SC) CIT v. Plaza Hotels (P) Ltd. 107 taxmann.com 287 (Bom) BSNL v. UOI, 3 SCC 1 CIT v. Punjab Agro Industries Corporation Ltd. (P&H) CIT v. JPS Associates, 228 Taxman 367 Pr. CIT v. Quest Investment Advisors (P) Ltd. 409 ITR 545 (Bom)
The ld. AR further submitted that trading in F&O derivative being non- speculative transaction any loss arising from the said trading is entitled for set off against the income from another source under the same head. A reference is made to section 70 which provides set off of loss from one source against income from another source under the same head of income. He reiterated that the income/ loss arising from F&O derivative is taxable under the head 'Profit and Gains of Business or Profession'. As submitted earlier, trading in F&O derivative is not speculative as per section 43(5). It is submitted that the instant case is covered by section 70 and not by section 73. Therefore, the non speculative loss in F&O trading is eligible for set off against other business income in terms of section 70. He relied on the following decisions:-
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Asian Financial Services Ltd. vs. CIT, [2016] 240 Taxman 192 Magic Share Traders Ltd. v. DCIT, 174 ITD 230 (Ahd. Trib) DCIT v. Paterson Securities (P) Ltd. 127 ITR 386 (Chennai Trib) Uday Gopal Bhaskarwar v. ACIT, 113 taxmann.com 378 (Pune Trib) DCIT v. Aishwarya & Co. P. Ltd. 60 taxmann.com 258 (Chennai Trib) 75. In view of the above, the ld. AR submitted that the loss from F&O derivative being non-speculative transaction has to be set off against the income of mining business under section 70(1) of IT Act.
The ld. DR supported the order of the CIT(Appeals).
We have heard both the parties. The contention of the ld. AR is that assessee inadvertently declared the loss of F&O derivative as capital loss in his return. The assessee having realized the mistake made a claim during the assessment proceedings to treat the loss on F&O derivative as business loss. The assessee established that assessee is engaged in trading of F&O on a systematic basis and it being non-speculative, any profit and gain arising from the said transaction to be treated under the head business income. More so, similar activity was carried out in the previous AY 2015-16 which was treated as business income of assessee and the same activity has been continued during the present assessment year. Therefore, the activities remained trading activity even in the current assessment year to be considered as business activity of assessee and loss on such activity to be considered as business loss to be set off.
We have carefully gone through the assessment order dated 20.12.2017 for the AY 2015-16. In that assessment year as per discussion in para 7, 7.1, 7.2 & 7.3 of the assessment order, the income from F&O
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derivatives transaction treated as business profit at Rs.28,43,021. When the AO had accepted the income from trading in F&O derivatives as business income in earlier year, specifically in the immediate preceding AY 2015-16, the revenue cannot be allowed to change its view with regard to fundamental aspect of a transaction taken in earlier year, unless it is able to demonstrate change in circumstances in the subsequent assessment year.
In the case of CIT v. Escorts Ltd., 330 ITR 435 (Del), it was held that the principle of res judicata did not apply to income tax proceedings, the revenue cannot be allowed to change its view with regard to fundamental aspect of a transaction taken in earlier assessment year, unless it is able to demonstrate any change in the circumstances in the subsequent assessment year. It was held that as a fundamental aspect permeating through different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. Similar view has been taken by the Hon’ble Supreme Court in the case of Radhasoami Satsang v. CIT, 193 ITR 321 (SC) wherein it was held as follows:- “16. We are aware of the fact that strictly speaking res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.” 80. On these reasonings, in the absence of any material change justifying the revenue to take a different view of the matter and if there is no change,
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it was in support of assessee that the AO is precluded to reopen that issue and take a contrary view of what he has taken in earlier assessment proceedings and taking such a contrary decision should be have been avoided.
The other ground before us is whether the assessee is prevented to make such a claim without filing revised return. At this stage, it is pertinent to mention the CBDT Circular No. 14(XL-35) of 1955, dated 11.4.1955 as per which the lower authorities should have guided the assessee as to the correct proposition of the law regarding taxability of capital gain. For clarity, we reproduce the contents of the said Circular:- " Officers of the department must not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist a tax payer in every reasonable way, particularly in the matter of claiming and securing reliefs and in this regard the officers should take the initiative in guiding a tax payer where proceedings or other particulars before them indicate that some refund or relief is due to him. This attitude would, in the long run, benefit the department, for it would inspire confidence in him that he may be sure of getting a square deal from the department. Although, therefore, the responsibility for claiming refunds and reliefs rests with the assesses on whom it is imposed by law, officers should — (a) draw their attention to any refunds or reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reason or other; (b) freely advise them when approached by them as to their rights and liabilities and as to the procedure to be adopted for claiming refunds and reliefs". 82. It is pertinent to mention the ratio laid down by the various Courts which are as under:-
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(i) The Hon’ble Delhi High Court in the case of CIT v. Bharat General Reinsurance Co. Ltd., 83 ITR 303 (Del) held as follows:- “It was true that the assessee itself had included that dividend income in its return for the year in question, but there was no estoppel in the Income-tax Act and the assessee having itself challenged the validity of taxing the dividend during the year of assessment in question, it must be taken that it had resiled from the position which it had wrongly taken while filing the return. Quit apart from it, it was incumbent on the income-tax department to find out whether a particular income was assessable in the particular year or not. Merely because the assessee wrongly included the income in its return for a particular year, it could not confer jurisdiction on the department to tax that income in that year even though legally such income did not pertain to that year. Therefore the income from dividend was not assessable during the assessment year 1958-59, but it was assessable in the assessment year 1953-54. It could not, therefore, be taxed in the assessment year 1958-59.” (ii) The Hon’ble Bombay High Court in the case of Nirmala L. Mehta vs. A. Balasubramaniam, C.I.T. (2004) 269 ITR 1 (Bom) held that there cannot be any estoppel against the statute. Article 265 of the Constitution of India in unmistakable terms provides that no tax shall be levied or collected except by authority of law. Acquiescence cannot take away from a party the relief that he is entitled to where the tax is levied or collected without authority of law.
(iii) The Hon’ble Supreme Court in the case of CIT, Madras vs V. MR. P. Firm, Muar reported in 56 ITR 67(SC) held as under:- "If a particular income is not taxable under the Income-tax Act, it cannot be taxed on the basis of estoppel or any other equitable doctrine. Equity is out of place in tax law; a
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particular income is either exigible to tax under the taxing statute or it is not. If it is not, the Income-tax Officer has no power to impose tax on the said income." 83. Regarding the additional claim made during the assessment proceedings other than the claim made in the return of income u/s. 139, in our opinion, the assessee cannot make additional claim before the AO without revised return. However, as held by the Hon’ble Supreme Court in the case of Goetze (India) Ltd. (supra), the appellate authorities are not precluded in entertaining such claim without any revised return. Being so, we do not find any infirmity in making such claim by the assessee before the CIT(Appeals) with regard to treatment of loss from F&O transaction as business loss. Therefore, this ground of appeal is allowed.
In the result, the appeal is allowed.
Pronounced in the open court on this 15th day of April, 2021.
Sd/- Sd/- ( GEORGE GEORGE K. ) ( CHANDRA POOJARI ) JUDICIAL MEMBER ACCOUNTANT MEMBER Bangalore, Dated, the 15th April, 2021. /Desai S Murthy /
Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore.
By order
Assistant Registrar ITAT, Bangalore.