M/S. VEERABHADRAPPA SANGAPPA & COMPANY,SANDUR vs. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE- 1, BELLARY

per hectare for dumping of waste outside sanctioned lease area for involving illegal Act. Ld.AO observed and held as under: 4.3 DISALLOWANCE OF EXPENDITURE – i) COMPENSATION – CAT- “B” – Rs.9,69,00,000/- & ii) PROBABLE EXPENDITURE FOR R & R Rs.1,48,97,000/- Further, on going through the above table detailed in para (4) of this order at SI.No.5 & 6 of the said table, it is noticed that the assessee firm has debited an amount of Rs.9,69,OO,OOO/- under the head Compensation - Cat- "B" & Rs.1,48,97,OOO/- under the head Probable Expenditure for R & R retained/deducted by Monitoring Committee - Cat- "B" and charged the same to the Profit & Loss Nc. The said amounts have been deducted by Monitoring Committee towards Penalty/Compensation for various irregularities found by the CEC in Mining area of the assessee firm viz., Illegal Mining Pit, Illegal dumping of waste, Illegal encroachment of road & Other violations. The said amount was retained by the Central Empower Committee ( CEC ) as per the directions of the Supreme Court out of sale proceeds for the purpose of taking various ameliorative and mitigative measures as a penal payment. Further, the said retention of penal payment is towards damages caused to the forest and environment by contravention of laws. The said payment cannot be said to be incurred wholly and exclusively for the purpose of business within the meaning of the provisions of section 37 of the IT Act as the expenditure is penal in nature. Further, the Dept., of Mines and Geology, Bangalore vide its Lr.F.No.DMGIR& RlNotice/2012-13/11 Dated: 28/02/2013 in obedience to the Order of Hon'ble Supreme Court has issued notice to the assessee firm as under: The relevant portion of the letter is extracted below: " The Central Empowered Committee had noticed during the Survey by Joint Team that you, holder of Mining Lease No.2160 in PMB range, Sandur taluk, Bellary, have illegally conducted mining operations and / or illegally dumped the waste outside the lease area and committed certain other illegalities. Accordingly, in the reports dated: 03/02/2012 and 13/03/2012 submitted to the Hon'ble Supreme Court, the Central Empowered Committee had recommended imposing a penalty of Rs. 5 Crores per hectare for illegal mining and Rs.l Crore per hectare for dumping the waste outside the lease area on you for involving yourself in the above illegal act. The Hon'ble Supreme Court in its Orders dated: 13/04/2012 and 28/09/2012 referred to at Sl.No. (2) above accepted the recommendations of the Central Powered Committee.” In the circumstances, you are hereby called upon to pay immediately, by way of penalty, a total amount of Rs.9.69 Crores for committing various irregularities such as (i) illegal mining pit in 0.46 Hectares (Rs.2.30 Crores), (ii) illegal dumping of waste in 2.50 Hectares (Rs.2.50 Crores), (iii) illegal approached road 4.40 Hectares (Rs.4.40 Crores) and other violations (Rs.0.49

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Crores) in proportion to the area encroached by you outside the lease area in contravention of the relevant provisions of the MMDR Act, 1957, MC Rules, 1960 and MCD Rules, 1988 respectively. At the same time, in pursuance of the order dated: 28/09/2012 of the Hon'ble Apex Court, you are also hereby called upon to make a payment of Rs.148.97 Lakhs towards the probable expenditure indicated by ICFRE for implementation of R & R Plan in respect of your mining lease. You are hereby directed to make the above payments immediately failing which action will be initiated to recover the dues from you in accordance with law." 4.3.a. It is evident from the above Notice ( emphasis added) that the demand raised by the Dept., of Mines and Geology, Bangalore is in the nature of penalty for various irregularities committed by the assessee in the mining area like Illegal Mining, Illegal Dumping of Waste and Other Violations like Encroachments, etc., Since the said expenditure is penalty imposed by the DM&G for various violations, the same cannot be allowed as a deduction U/S 37 of the Act while computing the profits and gains of business. In view of this, it was put across to the assessee with a proposal to disallow the assessee's claim of expenditure of Rs.9,69,00,000/- vide Para No.(11) of this office Lr:F.No.55/Scr./ACIT/C-I/BLY/2015-16 Dated: 04/12/2015. Further, in the same para of the proposal the amount of Rs.l,48,97,000/- debited under the head probable expenditure for R & R referred above was also proposed to be disallowed as the said amount is a provision made by the assessee and provisions are 'not a allowable expenditure u/s 37 of the Act. Accordingly, the assessee firm was asked to file / furnish objections, if any, along with the necessary details and evidences . 4.3.b. In response to the said proposition the assessee firm filed consolidated objections in its letter dated 21/01/2016, which have already been enumerated above in para No.(4.1.a) of this order. 4.3.c. As already discussed above as per the Order of the Hon'ble Apex Court, the mine owners were placed in different category based on the illegal or marginal illegal mining done by them. The CEC had noticed during the Survey by Joint Team that the assessee holding a Mining Lease No.2160 in PMB Range, Sandur Taluk, Bellary have illegally conducted mining operations and illegally dumped the waste outside the lease area and committed certain other illegalities. In view of this, the DM&G has imposed certain penalty· on the assessee firm as per the recommendations of the Apex Court and further has called upon the assessee firm to made payment towards the probable expenditure by ICFRE for implementation of R & R Plan. Out of this, the assessee has claimed a deduction towards penalty imposed at Rs. Rs.9,69,00,000/- and probable expenditure for implementation of R & R Plan Rs.l,48,97,000/- respectively, during the previous year in question. 4.3.d. The explanation offered by the assessee firm for claiming deduction of

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said expenditure has been perused and found not acceptable. The various case laws relied on by the assessee firm have no direct nexus to the facts of the instant case, hence, fail to give support the assessee firm's stand that the expenditure incurred is Compensatory/Compounding fee and paid as a Commercial expediency. Further, the assessee's contention that, the said expenses are in nature of Compensatory/ Compounding fee paid to regularise the pending issue and by doing so the Company is allowed to commence its business operations be treated as payment made under commercial expediency cannot be considered and allowed as deduction. 4.3.e. The part of the sale proceeds retained by the CEC / Monitoring Committee are to meet the penal and other liabilities in the form of penal nature for contravention of law, is nothing but assessee firm's personal expenditure, which is not allowable as per the specific Explanation to Section 37(1) of the Act. 4.3.f. It is a General rule that, if an assessee is penalised 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 imposition of penalty. 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 Officer, the expenditure in the illegal activities is not deductible after the insertion of Explanation to Section 37(1) by the Finance Act, 1998. 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 Income-tax 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 Venkataramana & Co (P) Ltd Vs CIT (1998) 229 ITR 534 (SC)]. Even though the need for making such payments arose out of trading operations, the payments were not wholly and exclusively for the purpose of the trade. In the instant case, if the deductions claimed are allowed, the penalty provisions as per the MMDR Act, 1957, MC Rules, 1960 and MCD Rules, 1988 respectively will become meaningless. It has also to be borne in mind that evasion of law cannot be trade pursuit. The 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 in 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 the CEC has directed to collect the amounts as penalty for violation of such law. 4.3.g. Infraction of the law is not a normal incident of business and, therefore,

Page 100 of 138 ITA No. 1054/Bang/2019 A.Y:2013-14 no expense which is paid by way of penalty for breach of the law can be said to be an amount wholly and exclusively laid for the purpose of business [Haji Aziz & Abdul Shakoor Bros. Vs. CIT (1961) 41 CTR 350 (SC)J. 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 [Indian Aluminium Co. Ltd. Vs CIT (SC) 79 ITR 514]. 4.3.h. Further, probable expenditure for implementation of R & R Plan Rs.l,48,97,000/- claimed by the assessee firm is a provisional & probable one. Provisions are contingent liabilities which do not constitute expenditure and cannot be the subject matter of deduction even under the mercantile system of accounting. Further, it is well established fact that the assessee has carried out illegal mining over a period of time and hence, cannot be related and allowed in the year under consideration. Further, allowing such huge deduction though not only belongs to the previous year in question but also for earlier years is against the "Principle of Consistency" which disturbs uniform earning capacity of the firm. 4.3.i. In view: of above facts brought on record, the amount of Rs.ll,17,97,000/- (Rs.9,69,00,000/- + Rs.l,48,97,000/-) being penalty for breach of law & provisions but claimed as expenditure under the head Reclamation & Rehabilitation and debited to P & L A/c is disallowed and added back to the returned income and brought to tax. 8.2. Aggrieved by observations of Ld.AO, assessee preferred appeal before Ld.CIT(A). Assessee contested that, expenditure was incurred as compensatory/compounding fee, and paid as commercial expediency to regularise pending issues and by doing so, assessee was allowed to commence its business operations. 8.3. However, Ld.CIT(A) observed that, assessee had violated law and formed illegal mining pits and illegal dumping of waste, whereby, Hon’ble Supreme Court on recommendation of CEC directed to collect such amounts for violated of laws under relevant statutes governing miming activities in the State. Ld.CIT(A) observed and held as under:

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“5.0) The next ground is disallowance of expenditure towards compensation of "Cat - B" of Rs.9,69,00,000/- and probable expenditure for R&R of Rs. 1,48,97,000/-. The AO observed that the above two amounts were deducted by the Monitoring Committee towards penalty/ compensation for various irregularities found by the CEC in the Mining area of the assessee and retained by the CEC as per the directions of the Supreme Court out of sale proceeds for the purpose of taking various ameliorative and mitigative measures as a penalty payment. Further, the said retention for penalty payment is towards damages caused to the forest and environment by contravention of laws and hence the payment could not be said to be incurred wholly and exclusively for the purpose of business within the meaning of the provisions of section 37 of the Act, as the expenditure is penal in nature. 5.1) The assessee contested that the expenditure was incurred as compensatory/ compounding fee and paid as a commercial expediency to regularize the pending issue and by doing so the company was allowed to commence its business operations. As such the payment made under commercial expediency be considered for allowing the same as deduction. 5.2) I have gone through the facts of the case and the submissions of the appellant. As per the directions of the Supreme Court part proceeds are to be retained by the CEC/Monitoring Committee to meet the penal and other liabilities for contravention of law. Further, 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 Officer, the expenditure in the illegal activities is not deductible after the insertion of Explanation to Section 37(1) by the Finance Act, 1998. 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 Income-tax 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 Venkataramana & Co. (F) 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. 5.3) 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 be said to be an amount wholly and exclusively laid for the

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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 expenditure laid out for the purpose of assessee's business [Indian Aluminium Co. Ltd Vs. CIT (SC) 79 ITR 514].In the case of Indian Aluminum Co. Ltd Vs. CIT (SC) 79 ITR 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.It is not out of place to emphasize once again the judgment in the ,Z case of Maddi Venkataraman & Co. (P) Ltd Vs. CIT (1998) 229 ITR 534 (SC)" wherein the Hon'ble Supreme Court has held that - Even if the entire business of the assessee is illegal and income is sought to be taxed by the assessing Officer, the expenditure in the illegal activities is not deductible after the insertion of Explanation to Section 37(1) by the Finance Act, 1998. 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 Income-tax 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. 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. In view of the above, the said deduction cannot be allowed which is being compensation and penalty in nature for contravention of laws. This ground is dismissed.”

Aggrieved by order of Ld.CIT(A), assessee is in appeal before us now.

8.4. Before us, Ld.Counsel referred to breakup of Rs.9,69,00,000/- at page 201 of paper book: Compensation (mining pit) 0.4 6Ha Rs.2,30,00,000 Compensation (dump, received etc, 2.50 HA) Rs.2,50,00,000 Encroachment of road (4.40 HA) Rs.4,40,00,000 Other category (0.49 HA) Rs. 49,00,000

Page 103 of 138 ITA No. 1054/Bang/2019 A.Y:2013-14 8.5. Ld.Counsel submitted that payment advises issued by Department of Mines and Geology, clearly mentions that, above amounts retained by MC are towards R&R plan as compensation, and that, no where in the payment advise, the term, “penalty” is used. Ld.Counsel, therefore, emphasised that, lower authorities erred in treating said compensation as penalty. He thus submitted that the said amount ought to have been allowed as expenditure in the hands of assessee incurred for the purpose of business. 8.6. Alternatively, Ld.Counsel submitted that, since said amount has been diverted to SPV account by direction of Hon’ble Supreme Court, the said sum must be treated as having diverted at source by overriding title. 8.7. It was also submitted that failing the above two submissions, the said sum may be treated as business loss under section 28 as the amount retained by MC has rightly forwarded to SPV for reclamation and rehabilitation of mining area as per directions of Hon’ble Supreme Court. 8.8. On the contrary, Ld.CIT.DR submitted referred to para 20, 32- 33 of the decision of Hon’ble Supreme Court, which are reproduced hereunder: “20. Relying on the provisions of the Mines and Minerals (Development & Regulation) Act, 1957; Forest (Conservation) Act, 1980 and Environment (Protection) Act, 1986 (hereinafter referred to as “MMDR Act”, “FC Act” and “EP Act” respectively) it is argued that each of the statutes contemplate a distinct and definite statutory scheme to deal with the situations that have allegedly arisen in the present case. To resolve the said issues it is the statutory scheme that should be directed to be followed and resort to the powers of this Court under Article 32 read

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with Article 142 of the Constitution, when a statutory scheme is in existence, would be wholly uncalled for. Specifically, it has been pointed out that none of the conditions that are required to be fulfilled by Category ‘A’ leaseholders and none of the compulsory payments contemplated for Category ‘B’ leaseholders for recommencement of operation are visualized in any of the statutory schemes. Insofar as Category ‘C’ leaseholders are concerned, it is contended that cancellation, if any, has to be in accordance with the statute which would provide the lease holder with different tiers of remedial forums as compared to the finality that would be attached if any order is to be passed by this Court. In this regard, several earlier opinions of this Court, details of which will be noticed in the discussions that follow, had been cited at the bar to persuade us to take the view that we should desist from exercising our powers under the Constitution and instead relegate the parties to the remedies provided by the statute. 8.9. Ld.CIT.DR submitted that, Hon’ble Supreme Court summarised arguments advanced by leaseholders as under: 27. On the above issue the short and precise argument on behalf of the leaseholders is that the provisions of each of the statutory enactments, i.e., the MMDR Act, FC Act and EP Act prescribe a distinct statutory scheme for regulation of mining activities and the corrective as well as punitive steps that may be taken in the event mining activities are carried out in a manner contrary to the terms of the lease or the provisions of any of the statutes, as may be. The argument advanced is that as the statutes in question contemplate a particular scheme to deal with instances of illegal mining or carrying on mining operations which is hazardous to the environment, the CEC could not have recommended the taking of any step or measure beyond what is contemplated by the statutory scheme(s) in force. It is argued that it will not be proper for this Court to act under Article 32 and to accept any of the said recommendations which are beyond the scheme(s) contemplated by the Statute(s). In other words, what is sought to be advanced on behalf of the leaseholders is that no step should be taken or direction issued by this Court which will be contrary to or in conflict with the provisions of the relevant statutes. Several judgments of this Court, which are perceived to be precedents in support of the proposition advanced, have been cited in the course of the arguments made. 8.10. Ld.CIT.DR referring to paragraph 37 of the order, submitted that Hon’ble Supreme Court after considering arguments advanced by both sides observed as under:

Page 105 of 138 ITA No. 1054/Bang/2019 A.Y:2013-14 37. Even if the above observations is understood to be laying down a note of caution, the same would be a qualified one and can have no application in a case of mass tort as has been occasioned in the present case. The mechanism provided by any of the Statutes in question would neither be effective nor efficacious to deal with the extraordinary situation that has arisen on account of the large scale illegalities committed in the operation of the mines in question resulting in grave and irreparable loss to the forest wealth of the country besides the colossal loss caused to the national exchequer. The situation being extraordinary the remedy, indeed, must also be extraordinary. Considered against the backdrop of the Statutory schemes in question, we do not see how any of the recommendations of the CEC, if accepted, would come into conflict with any law enacted by the legislature. It is only in the above situation that the Court may consider the necessity of placing the recommendations made by the CEC on a finer balancing scale before accepting the same. We, therefore, feel uninhibited to proceed to exercise our constitutional jurisdiction to remedy the enormous wrong that has happened and to provide adequate protection for the future, as may be required.

8.11. It was thus been submitted by Ld.CIT.DR that, Hon’ble Supreme Court in cognizance of enormous wrong happened to the environment due to illegal mining, illegal dumping, illegal encroachment of road etc by the lessees directed such payments from lease holders. He thus relying on above categorical observations by Hon’ble Supreme Court, submitted that, sum of Rs.9,69,00,000/- should be treated as penalty for infraction of law. He thus supported order passed by authority below. 8.12 . We have perused submissions advanced by both sides, in light of records placed before us. 8.12.1. Ld.AO took the view that these payments are penal in nature as they have been levied for contravention of laws by way of damages caused to forest and environment. Ld.AO referred to the

Page 106 of 138 ITA No. 1054/Bang/2019 A.Y:2013-14 letter F.No.DMG/R & R/Notice/2012-13/11 dated 28-02-2013 issued by Department of Mines and Geology, Bangalore demanding the payment from the assessee. It is pertinent to note that the above said letter uses the expression “penalty” for these payments. Accordingly, the AO took the view that these payments are in the nature of penalty for various irregularities committed by the assessee in the mining area like illegal mining, illegal dumping of waste and other violations like encroachment etc. Ld.AO relied upon following case laws to buttress his view that the penalty is not allowable as deduction:- (a) Maddi Venkataramana& Co (P) Ltd vs. CIT (1998)(229 ITR 534)(SC) (b) Haji Azis& Abdul Shakoor Bros. Vs. CIT (1961)(41 ITR 350)(SC) (c) Indian Aluminium Co. Ltd vs. CIT (79 ITR 514)(SC) 8.12.2. Assessee claimed Rs.9,69,00,000/- as expenditure in the original return of income and excluded the same from Sales revenue in the revised return of income contending that the same is diversion by overriding title. 8.12.3. Ld.CIT.D.R placed his reliance on certain observations made by Hon'ble Supreme Court in M/s Samaj Parivartana Samudaya and Oth. Vs.State of Karnataka & Oth.(supra). First of all, there should not be any dispute that the writ petition filed by M/s Samaj Parivartana Samudaya and Others was admitted by Hon'ble Supreme Court under Article 32 of the Act. Hence the lessees, inter alia, challenged before Hon'ble Supreme Court, the necessity to invoke Article 32 and Article 142 of the Act.

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8.12.4. In the CEC report dated 3/02/2012 and 13/03/2012, following recommendations were provided in respect of Category B lease holders. Hon’ble Supreme Court extracted the same at page 166 of its order which is as under: “(V) In respect of the mining leases falling in “CATEGORY-B” (details given at Annexure-R-10 to this Report) it is recommended that: i) the R&R Plan, under preparation by the ICFRE, after incorporating the appropriate changes as per the directions of this Hon’ble Court, should be implemented in a time bound manner by the respective lessees at his cost. In the event of his failure to do so or if the quality and/or the progress of the implementation of the R&R Plan is found to be unsatisfactory by the Monitoring Committee or by the designated officer(s) of the State of Karnataka, the same should be implemented by the State of Karnataka through appropriate agency(ies) and at the cost of the lessee; ii) for carrying out the illegal mining outside the lease area, exemplary compensation/ penalty may be imposed on the lessee. It is recommended that: a) For illegal mining by way of mining pits outside the leases area, as found by the Joint Team, the compensation/ penalty may be imposed at the rate of Rs. 5.00 crore (Rs. Five Crore only) for per ha. of the area found by the Joint Team to be under illegal mining pit; and b) For illegal mining by way of over burden dump(s) road, office, etc. outside the sanctioned lease area, the compensation/ penalty may be imposed @ Rs. 1.00 crores (Rs. One Crores only) for per ha. of the area found to be under illegal over burden dump etc. iii) Mining operation may be allowed to be undertaken after (a) the implementation of the R& R Plan is physically undertaken and is found to be satisfactory based on the pre-determined parameters, (b) penalty/ compensation as decided by this Hon’ble Court is deposited and (c) the conditions as applicable in respect of “Category-A” leases are fulfilled/followed; iv) In respect of the seven mining leases located on/nearby the interstate boundary, the mining operation should presently remain suspended. The survey sketches of these leases should be finalized after the interstate boundary is decided and thereafter the individual leases should be dealt with depending upon the level of the illegality found; and v) Out of the sale proceeds of the existing stock of the mining leases, after deducting : a) The penalty/compensation payable; b) Estimated cost of the implementation of the R& R Plan; and

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c) 10% of the sale proceeds to be retained by the Monitoring Committee for being transferred to the SPV d) The balance amount, if any, may be allowed to be disbursed to the respective lessees”.

8.12.5. Hon’ble Supreme Court in para 11 at page 172 accepted the recommendation of CEC by observing as under: “11. The order of the Court dated 28.9.2012, laying down certain conditions “as the absolute first step before consideration of any resumption of mining operations by Category–‘B’ leaseholders” would also be required to be specifically noticed at this stage. “I. Compensatory Payment a) Each of the leaseholders must pay compensation for the areas under illegal mining pits outside the sanctioned area, as found by the Joint Team (and as finally held by the CEC) at the rate of Rs.5 crores per hectare, and (b) for the areas under illegal overburden dumps, roads, offices, etc. outside the sanctioned lease area, as found by the Joint Team (as might have been finally held by the CEC) at the rate of Rs.1 crore per hectare. It is made clear that the payment at the rates aforesaid is the minimum payment and each leaseholder may be liable to pay additional amounts on the basis of the final determination of the national loss caused by the illegal mining and the illegal use of the land for overburden dumps, roads, offices, etc. Each leaseholder, besides making payment as directed above, must also give an undertaking to the CEC for payment of the additional amounts, if held liable on the basis of the final determination. At the same time, we direct for the constitution of a Committee to determine the amount of compensatory payment to be made by each of the leaseholders having regard to the value of the ore illegally extracted from forest/non-forest land falling within or outside the sanctioned lease area and the profit made from such illegal extraction and the resultant damage caused to the environment and the ecology of the area. The Committee shall consist of experts/officers nominated each by the Ministry of Mines and the Ministry of Environment and Forests. The convener of the Committee will be the Member Secretary of the CEC. The two members nominated by the Ministry of Mines and the Ministry of Environment and Forests along with the Member Secretary, CEC shall co-opt two or three officers from the State

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Government. The Committee shall submit its report on the aforesaid issue through the CEC to this Court within three months from today. The final determination so made, on being approved by the Court, shall be payable by each of the leaseholders.”

8.12.6. Hon’ble Supreme Court further directed as under( page 173 clause):

“III.. In addition to the above, each leaseholder must pay a sum equivalent to 15% of the sale proceeds of its iron ore sold through the Monitoring Committee as per the earlier orders of this Court. In this regard, it may be stated that though the amicus suggests the payment @ 10% of the sale proceeds, having regard to the overall facts and circumstances of the case, we have enhanced this payment to 15% of the sale proceeds.

Here it needs to be clarified that the CEC/Monitoring Committee is holding the sale proceeds of the iron ores of the leaseholders, including the 63 leaseholds being the subject of this order. In case, the money held by the CEC/Monitoring Committee on the account of any leaseholder is sufficient to cover the payments under the aforesaid three heads, the leaseholder may, in writing, authorize the CEC to deduct from the sale proceeds on its account the amounts under the aforesaid three heads and an undertaking to make payment of any additional amount as compensatory payment. On submission of such authorization and undertaking, the CEC shall retain the amounts covering the aforesaid three heads and pay to the concerned leaseholder the balance amount, if any. It is expected that the balance amount, after making the adjustments as indicated here, would be paid to the concerned leaseholder within one month from the date of submission of the authorization and the undertaking.

In the case of any leaseholder, if the money held on his account is not sufficient to cover the aforesaid three heads, he must pay the deficit within two months from today.

8.12.7. The contentions of the lessees have been succinctly stated as under by Hon'ble Supreme Court in paragraph 20 of the order, which is extracted below:- “To resolve the said issues it is the statutory scheme that should be directed to be followed and resort to the powers of this Court under Article

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32 read with Article 142 of the Constitution, when a statutory scheme is in existence, would be wholly uncalled for.” 8.12.8. This contention was discussed in detail as “Issue 2” in paragraphs 27 to 37 (pages180 to 187) Hon’ble Supreme Court. Following are the observations of Hon’ble Supreme Court:

Page 111 of 138 ITA No. 1054/Bang/2019 A.Y:2013-14 resorted to and the recommendations made by the CEC including closure of Category- “C” mines should not commend for acceptance of this Court. 32. In Bandhua Mukti Morcha Vs. Union of India &Ors. (1984) 3 SCC 161, this Court had the occasion to consider the nature of a proceeding under Article 32 of the Constitution which is in the following terms :- “32. Remedies for enforcement of rights conferred by this Part. (1) The right to move the Supreme Court by appropriate proceedings for the enforcement of the rights conferred by this Part is guaranteed. (2) The Supreme Court shall have power to issue directions or orders or writs, including writs in the nature of habeas corpus, mandamus, prohibition, quo warranto and certiorari, whichever may be appropriate, for the enforcement of any of the rights conferred by this Part. (3) Without prejudice to the powers conferred on the Supreme Court by clause ( 1 ) and ( 2 ), Parliament may by law empower any other court to exercise within the local limits of its jurisdiction all or any of the powers exercisable by the Supreme Court under clause (2). (4)The right guaranteed by this article shall not be suspended except as otherwise provided for by this Constitution.” 33. In M.C. Mehta Vs. Union of India &Ors. (1987) 1 SCC 395, this Court not only reiterated the view adopted in Bandhua Mukti Morcha (supra) but also held that the power under Article 32 would be both injunctive as well as remedial and the power to grant remedial relief, naturally, would extend to a wide range of situations and cannot be put in a straight jacket formula. 8.12.9. In the case of M C Mehta vs. Union of India (2009)(6 SCC), it was contended that Hon'ble Supreme Court cannot exercise powers under Article 142 of the Constitution when specific provisions are made under various forest and environmental laws dealing with the manner and procedure for cancellation/determination of mining leases. This argument was rejected by Hon'ble Supreme Court with the following observations:- “44. We find no merit in the above arguments. As stated above, in the past when mining leases were granted, requisite clearances for carrying out mining operations were not obtained which have resulted in land and environmental degradation. Despite such breaches, approvals had been

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granted for subsequent slots because in the past the authorities have not taken into account the macro effect of such wide-scale land and environmental degradation caused by the absence of remedial measures (including rehabilitation plan). Time has now come, therefore, to suspend mining in the above area till statutory provisions for restoration and reclamation are duly complied with, particularly in cases where pits/quarries have been left abandoned. 45. Environment and ecology are national assets. They are subject to intergenerational equity. Time has now come to suspend all mining in the above area on sustainable development principle which is part of Articles 21, 48-A and 51-A(g) of the Constitution of India. In fact, these articles have been extensively discussed in the judgment in [M.C. Mehta case (2004) 12 SCC 118] which keeps the option of imposing a ban in future open.” 8.12.10. After considering all these judgments rendered by earlier bench, Hon’ble Supreme Court, observed as under:-

“35. The issue is not one of application of the above principles to a case of cancellation as distinguished from one of suspension. The issue is more fundamental, namely, the wisdom of the exercise of the powers under Article 32 read with Article 142 to prevent environmental degradation and thereby effectuate the Fundamental Rights under Article 21. 36. We may now take up the decisions cited on behalf of the leaseholders to contend that the power under Articles 32 and 142 ought not to be exercised in the present case and instead remedies should be sought within the relevant statutes. The sheet anchor is the case of Supreme Court Bar Association Vs. Union of India and Another reported in (1998) 4 SCC 409. We do not see how or why we should lie entrapped within the confines of any of the relevant Statutes on the strength of the views expressed in Supreme Court Bar Association (supra). The observations made in para 48 of the judgment and the use of words “ordinarily” and “are directly in conflict” as appearing in the said paragraph (underlined by us) directly militates against the view that the lease holders would like us to adopt in the present case. “48. The Supreme Court in exercise of its jurisdiction under Article 142 has the power to make such order as is necessary for doing complete justice “between the parties in any cause or matter

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pending before it”. The very nature of the power must lead the Court to set limits for itself within which to exercise those powers and ordinarily it cannot disregard a statutory provision governing a subject, except perhaps to balance the equities between the conflicting claims of the litigating parties by “ironing out the creases” in a cause or matter before it. Indeed this Court is not a court of restricted jurisdiction of only dispute-settling. It is well recognised and established that this Court has always been a law-maker and its role travels beyond merely dispute- settling. It is a “problem-solver in the nebulous areas” [see K. Veeraswami v. Union of India (1991) 3 SCC 55)] but the substantive statutory provisions dealing with the subject-matter of a given case cannot be altogether ignored by this Court, while making an order under Article 142. Indeed, these constitutional powers cannot, in any way, be controlled by any statutory provisions but at the same time these powers are not meant to be exercised when their exercise may come directly in conflict with what has been expressly provided for in a statute dealing expressly with the subject.” (Emphasis supplied) 37. Even if the above observations is understood to be laying down a note of caution, the same would be a qualified one and can have no application in a case of mass tort as has been occasioned in the present case. The mechanism provided by any of the Statutes in question would neither be effective nor efficacious to deal with the extraordinary situation that has arisen on account of the large scale illegalities committed in the operation of the mines in question resulting in grave and irreparable loss to the forest wealth of the country besides the colossal loss caused to the national exchequer. The situation being extraordinary the remedy, indeed, must also be extraordinary. Considered against the backdrop of the Statutory schemes in question, we do not see how any of the recommendations of the CEC, if accepted, would come into conflict with any law enacted by the legislature. It is only in the above situation that the Court may consider the necessity of placing the recommendations made by the CEC on a finer balancing scale before accepting the same. We, therefore, feel uninhibited to proceed to exercise our constitutional jurisdiction to remedy the enormous wrong that has happened and to provide adequate protection for the future, as may be required.”

Page 114 of 138 ITA No. 1054/Bang/2019 A.Y:2013-14 8.12.11. Ld.Counsel, during his arguments, pointed out that the CEC used the expression “Compensation/penalty” in its recommendations. But Hon’ble Supreme Court, while accepting such recommendations used the expression “Compensation” for such payments. From the observations reproduced herein above, it can be noticed that Hon’ble Supreme Court exercised its power under Article 32 and Article 142 to protect fundamental rights of public in order to prevent environmental degradation, i.e., the cost imposed on leaseholders to remedy the enormous wrong that has happened and to provide adequate protection for the future. 8.12.12. We note that Hyderabad bench of Tribunal in case of NMDC held that the above payment is not penal in nature, but a payment made for compensation. For the sake of convenience, we extract below the final decision rendered by Hyderabad bench of Tribunal:- 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.” 8.12.13. We notice that, Hyderabad bench held the compensation paid @ Rs.5 crores and Rs.1.00 crores for illegal mining and illegal overburden dumps to be in construed in the nature of

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compensation. The Ld.CIT.DR placed reliance on the letter issued by Department of Mines and Geology, wherein these payments have been referred to as “penalty”. However going by the observations of Hon’ble Supreme Court, these were payments formimg part of SPV to be used for developing ecology in the mining affected areas. 8.12.14. We note that Hon’ble Supreme Court directed that the funds so collected to be transferred to SPV. These funds were to be used for R & R Plans, which inter alia, would include following measures:- (Page 171 of Hon’ble Supreme Court’s order) “E) SOIL AND MOISTURE CONSERVATIONS, AFFORESTATION AND OTHER MEASURES 26. The R&R plan would inter alia provide for: i) broad design/specification for: b) retaining walls c) check dams d) gully plugs and/or culverts (if required) e) geo textile/geo matting of dumps f) afforestation in the safety zones g) afforestation in peripheral area, road side, over burden dumps and other areas ii) dust suppression measures at/for loading, unloading and transfer points, internal roads, mineral stacks etc. iii) covered conveyor belts (if feasible) – such as down hill conveyor, pipe conveyor etc. iv) specification of internal roads, v) details of existing transport system and proposed improvements vi) railways siding (if feasible) vii) capacity building of personnel involved in the mining and environmental management viii) rain water harvesting”

8.12.15. We note that co-ordinate bench of Tribunal considered an identical issue in the case of Mysore Minerals Ltd vs. ACIT (ITA No.679/Bang/2010 dated 2.11.2012). In this case, the assessee

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was engaged in the business of mining of iron ore, other minerals and granite. In consequence to the order passed by Hon'ble Supreme Court in the case of T.N Godavarman Tirumalpad vs. UOI, the assessee was liable to pay to Compensatory afforestation fund equal to net present value for diversion of forest land for non-forest purposes. The assessee paid a sum of Rs.5,02,59,000/- to the fund and claimed the same as expenditure. The question that arose before the Tribunal was whether the amount so paid by the assessee is deductible as expenses are not? Tribunal therein noticed that an identical issue was examined in case of M/s Ramgad Minerals & Mining P Ltd (ITA No.1012/Bang/08 dated 9.4.2009) and was decided in favour of the assessee. Accordingly, the Tribunal decided this issue, with the following observations, in favour of the assessee:-

“5.4 We have heard both parties and carefully perused the material on record and the judicial decisions cited and placed reliance upon. We have perused the decision of the co- ordinate bench of this Tribunal in the case of Ramgad Minerals & Mining Pvt Ltd Vs.ACIT in ITA No.1012/Bang/08 dt.9.4.2009 and find that in the cited case too a similar / identical issue was considered on the payments made towards contribution for compensatory afforestation as per the direction of the Hon'ble Apex Court when the mines are exploited on forest land. The Hon'ble Tribunal in para 5 of its order held that the amount expended on this count was incurred as a revenue expenditure and was directed to be allowed in the year in which it was incurred. The operative part of the order in para 5 at pages 7 and 8 is extracted and reproduced here under : " We find force in the submission of the learned counsel that payments to the government are to be paid once the mining lease is obtained and such payments are governed by various Acts along with the Apex Court making a ruling for State Governments to participate in the granting of mining lease by recovering compensation when their forests are uprooted. Therefore for this

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purpose, the funds are used for a natural regeneration which the assessee participates indirectly. Therefore at no point of time could it be said that the assessee had incurred a capital expenditure giving the assessee a benefit of enduring nature for the purpose of earning segmented income to render the same to income tax. In other words, the authorities below have not pointed out the income generated against the purported deferred Revenue expenditure so proposed by them in their impugned orders. The amount was incurred as a Revenue expenditure and is directed tobe allowed in the year it has been incurred." Respectfully following the decision of the co-ordinate bench of the Bangalore Tribunal, in the case of Ramgad Minerals & Mining P. Ltd. (supra), we hold that the entire expenditure of Rs.5,02,59,000 incurred by the assessee of net present value to CAMPA in the relevant period are to be allowed as revenue expenditure for Assessment Year 2004-05.”

8.12.16. Above decision of this Tribunal in case of M/s.Mysore Minerals(supra) was upheld by Hon’ble Karnataka High Court in the appeal filed by revenue against order of this Tribunal. Relevant extract of the view taken by Hon’ble High Court in CIT vs. M/s Mysore Minerals Ltd in ITA No.144/2013 dated 08/03/2017 is as undere:- “2. As such, in our view, the only question of law which may arise is, whether the payment made by way of compensation of Rs.5,02,59,000/- by the assessee as per the direction of the Apex Court for mining lease to the Forest Department can be said as a revenue expenditure or a capital expenditure? 3. We have heard Mr.Sanmathi, learned counsel for the appellant-revenue and Mr.A.Shankar, learned counsel for the respondent-assessee. 4. As such, the Tribunal in the impugned order has relied upon its earlier decision in case of M/s.Ramgad Minerals and Mining Pvt.Ltd., vs. ACIT in ITA 1012(BNG)/2008 dated 9.4.2009. It has been brought to our notice by the learned counsel for respondent-assessee that the very decision of the Tribunal in case of Ramgad Minerals (supra) was carried before this Court in ITA 5021/09 and this Court has dismissed the appeal of the Revenue and it has been further stated that SLP was preferred against the aforesaid decision of this Court in case of Ramgad supra and the said SLP has also been dismissed.

Page 118 of 138 ITA No. 1054/Bang/2019 A.Y:2013-14 5. We may record that in view of aforesaid decision as such, no substantial questions of law would arise for consideration. But even if it is to be examined, in view of the aforesaid decision that the decision of the Tribunal has been not interfered with by this Court and SLP is dismissed, the question has to be answered against the Revenue and in favour of Assessee.” 8.12.17. In the present fact of case, Hon’ble Supreme Court observed large scale encroachment in forest areas and illegal mining. Hon’ble Court directed collection of such amount to be used for public purposes listed above, which includes afforestation etc. Further we note that these amounts have not been collected for violation under any specific Acts applicable to Mining. It for these reasons that Hon’ble Supreme Court used the term ‘Compensation’ as against the term ‘Penalties’ recommended by CEC. However it is also noticed that subsequent to the order passed by Hon’ble Supreme Court, State Act, controlling mining activity were amended. We further notice that assessee could not have commenced its operations without paying these amounts. Hence there is commercial expediency in incurring these expenses. 8.12.18. Ld.AO invoked Explanation-1 u/s 37(1) of the Act in support of the disallowance made him. As per the provisions of Explanation 1 to sec.37(1) refers to any expenditure incurred by the assessee for any purposes 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. A careful perusal of the above said provision would show that the “purpose of

Page 119 of 138 ITA No. 1054/Bang/2019 A.Y:2013-14 expenditure” should be an offence or prohibited by law. In the instant cases, the purpose of payments is for “R & R plans” and the same cannot be considered as payment for the purposes, which is an offence or which is prohibited by law. Hence Explanation 1 to section 37 is not applicable to these payments. 8.12.19. Respectfully following Hyderabad bench of Tribunal in case of NMDC Ltd (supra) and Bangalore Tribunal M/s Mysore Minerals Ltd (supra) which has been upheld by Hon'ble Karnataka High Court, the payment of Rs.9,69,00,000/- is compensatory in nature only as these funds are meant to be used for public purposes and the assessee could not have commenced its operations without paying the same, the same is allowable as revenue expenditure. We are therefore of the view that payment made as compensation is not hit by Explanation 1 to Section 37(1) and is an allowable expenditure. Accordingly this ground raised by assessee stands allowed. 9. Ground 2.4 is in respect of addition on account of probable expenditure for R&R plan amounting to Rs.1,48,97,000/-. 9.1. Ld.AO observed that assessee has debited sum of Rs.1,48,97,000/-under the head, probable expenditure for R&R retained/deducted by monitoring committee under Category ‘B’. It was observed that assessee had charged the said sum to the profit and loss account for year under consideration. Ld.AO referred to notice dated 28/02/2013 issued by Department of Mines and Geology, wherein, assessee was called upon to make payment for

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further sum of Rs.1,48,97,000/-. Relevant observations of Ld.AO on this issue has been extracted in para 8.3 herein above. 9.1.1. Ld.AO thus disallowed provisions were holding that, these are contingent liabilities and cannot be subject matter of deduction. 9.2. On an appeal before Ld.CIT(A), said sum was disallowed by holding that, assessee has not submitted any details with regard to R&R expenditure and its nature and for what purpose the amount was spent. 9.2.1. Ld.CIT(A) observed as under: “6.0) The next ground is the amount booked by the assessee in the form of probable expenditure for implementation of R&R Plan of Rs.1,48,97,000/- in its P&L A/c. The AG held that since this is only provisional and probable one, the provision for contingent liabilities do not constitute expenditure and deduction cannot be allowed. Secondly, he has held that since the assessee has carried out illegal mining over a period of time, the same cannot be related and allowed in the year under consideration since allowing such huge deduction though not only belong to the previous year in question but also for earlier years was against the "Principle of Consistency", which disturbs the uniform earning capacity of the firm. 6.1) The assessee in course of proceedings has not submitted any details with regard to R&R expenditure and its nature and for what purpose the amount was spent. In absence of any details, the expenditure incurred is disallowed and the action of the AO is upheld. The grounds raised are dismissed. 7.0) The next ground is with regard to addition made under the head Corporate Social Responsibility (CSR) Expenses of Rs.31,27,668/-. The AG in course of assessment proceedings has noted that the assessee firm has debited an amount of Rs.31,27,668/- under the head Corporate Social Responsibility (CSR) Expenses. The assessee submitted that during the year under consideration, the amount was spent towards payment of school fees for students, providing books and also expenditure incurred in response to the appeal made by the Govt. of Karnataka. Accordingly, it sought deduction u/s 37(1) of the Act.

Page 121 of 138 ITA No. 1054/Bang/2019 A.Y:2013-14 7.1) The AG however held that the said expenditure was of personal expenditure and not a capital and accordingly denied the deduction to be allowable u/s 37(1) of the Act. 7.2) I have gone through the facts of the case and the submissions of the appellant including judicial decisions on the issue. Placing reliance on the Hon’ble Supreme Court's decision in the case of 'Indian Molasses Co (P) Ltd Vs CIT 37 ITR 66 (SC), the appellant's claim for deduction u/s 37(1) cannot be considered. Reliance is also placed in the case of CIT Vs Infosys Technologies Ltd 2013-TIOL-507 (HC)(Karn), wherein, the Hon’ble High Court of Karnataka has held that any expenditure incurred which is not a business expenditure or which is not of commercial expediency, cannot be allowed as business expenditure u/s 37 of the I.T.Act. Hence, the appellants contribution towards payment of school fees and school books cannot be considered as allowable expenditure and the same is disallowed u/s 37(1) of the Act. This ground is rejected.”

9.2.2. Ld.CIT(A) thus, in absence of details, dismissed the plea of assessee. Aggrevied by order of Ld.CIT(A) assessee is in appeal before us now. 9.3. Before us, Ld.Counsel submitted that, assessee has not recognised the revenue attributable to sale proceeds of confiscated stock by MC of Rs.1,48,97,000/- due to uncertainty of its recovery in accordance with accounting standard 9 read with section 145. 9.3.1. Ld.Counsel submitted that assessee does not have any control over the sale of iron-ore, the deductions made there from etc. It is the MC, which has made the sales and also deducted the above said amount from the sale proceeds. Since the above said amount has been deducted by MC in the payment advice dated 18.02.2014 and since the said payment advice was related to the sales effected during the year under consideration, the assessee had to account for the said deduction in the accounting year ending

Page 122 of 138 ITA No. 1054/Bang/2019 A.Y:2013-14 31.3.2013. He submitted that the assessee has to bear proportionate cost of R & R Plans for its Category-B mines, which condition was prescribed by Hon'ble Supreme Court for commencement of its business operations. Accordingly, the assessee has made a provision for the same in the books of account, as per mercantile system of accounting and claimed the same as expenditure. He submitted that some part of the “R & R Plans” was executed by SPV and hence the above said deduction was made by MC from sale proceeds. Hence, the details of R & R plans will be available with the SPV only and not with the assessee. He thus submitted that, Ld. CIT(A) was not justified in holding that the assessee has failed to furnish the details. 9.3.2. Ld.Counsel submitted that the MC refunded a sum of Rs.1,21,94,000/- out of the above amount and the assessee has also offered the same in FY 2018-19 relevant for assessment year 2019-20. He submitted that the assessee did not have any control over the amount so deducted, how it was used etc. Accordingly, he submitted that the provision so made by the assessee is allowable as deduction. 9.3.3. Ld.Counsel submitted that, amount retained by CEC/MC towards SPV is nothing but diversion of income by overriding title for following reasons: iv. MC to control of existing stock; v. MC received sale proceeds directly from buyers;

Page 123 of 138 ITA No. 1054/Bang/2019 A.Y:2013-14 vi. MC was responsible for depositing statutory levies like royalty, taxes, fees, e-auction service fee etc on behalf of assessee. 9.3.4. He thus submitted that, the said sum was not entitled to be received by assessee by virtue of an overriding title, created in favour of SPV and would get diverted at source. He thus submitted that, as alleged sum was diverted to SPV account at the threshold, it did not attain character of ‘income’ in the hands of assessee, and therefore cannot be taxed. 9.3.5. Alternatively it was submitted that the amount may be treated as expenditure in the hands of assessee under section 37 of the Act. It has been submitted by Ld.Counsel that Explanation 2 to section 37 is not applicable, as the same is introduced by Finance Act 2014, which is prospective in nature. It is also been submitted that Explanation 2 is applicable to Companies and not to partnership firms like that of assessee. Ld.Counsel placed reliance upon decision of coordinate bench of this Tribunal in case of ACIT vs Essel Mining & Industries Ltd reported in (2016)-TIOL-371-ITAT- KOL, Shyam Sel Ltd vs DCIT reported in (2016)-TIOL-1592-HC-KOL- IT, decision of Hon’ble Calcutta High Court in case of Mundial Export Import Finance (P) Ltd vs CIT reported in (2016) 238 Taxman 34 and decision of coordinate bench of this Tribunal in case of NMDC Ltd vs ACIT reported in (2019) 175 ITD 332 (HYD-ITAT).

9.4. On the contrary, Ld.CIT.DR submitted that the provision made for Probable expenditure cannot be allowed as deduction, as the

Page 124 of 138 ITA No. 1054/Bang/2019 A.Y:2013-14 same is contingent in nature. Further, the assessee is not aware of details of R & R expenditure. Further, it is in the nature of penalty for causing damage to the environment.

9.5. We have perused submissions advanced by both sides in light of records placed before us. 9.5.1. We note that, Hon’ble Supreme Court directed lease holders to give undertaking to make any additional payment. In present issue, we note that assessee was called upon to make such payment, as is evident from notice issued by Department of Mines and Geology, dated 28/02/2013. It is a fact that, assessee could not have ignored the notice and that upon making good such payments, assessee would have resumed its mining activity.

9.5.2. As per the order of Hon'ble Supreme Court, the assessee itself has to undertake “R & R Plans”, which shall be monitored by MC/CEC. In addition to the above, a SPV has been set up to which all the deductions made by MC from sale proceeds under various categories shall be contributed. The SPV, in turn, will incur expenses towards “R & R Plans”. We have also noticed earlier that the Hon'ble Supreme Court has imposed above said conditions for reopening of mines. With regard to R&R Plans, Hon'ble Supreme Court has also held that the lessees would be liable to pay additional compensation, in case of necessity. 9.5.3. Hon'ble Supreme Court in respect of R & R Plans observed as under at page 168:-

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“8. As previously noticed, the CEC in its Report dated 13.3.2012 had set out in detail the objectives of the Reclamation and Rehabilitation (R&R) plans and the guidelines for preparation of detailed R & R plans in respect of each mining lease. The origins of the idea (R & R plans) are to be found in an earlier Report of the CEC dated 28.7.2011. As the suggestions of the CEC with regard to preparations of R & R plans for each mine is crucial to scientific and planned exploitation of the mineral resources in question it will be necessary for us to notice the said objectives and the detailed guidelines which are set out below. In this connection it would be worthwhile to take note of the fact that the guidelines in question have been prepared after detailed consultation with different stakeholders including the Federation of Indian Mineral Industries (FIMI) which claims to be the representative body of the majority of the mining lessees of the present case. II. BROAD OBJECTIVES/PARAMETERS OF R&R PLANS 8. The broad objectives/parameters of the R&R Plans would be: i) to carry out time bound reclamation and rehabilitation of the areas found to be under illegal mining by way of mining pits, over burden/waste dumps etc. outside the sanctioned areas; ii) to ensure scientific and sustainable mining after taking into consideration the mining reserves assessed to be available within the lease area; iii) to ensure environmental friendly mining and related activities and complying with the standards stipulated under the various environmental/mining statutes e.g. air quality (SPM, RPM), noise/vibration level, water quality (surface as well as ground water), scientific over burden/waste dumping, stabilization of slopes and benches, proper stacking and preservation of top soil, sub grade mineral and saleable minerals, proper quality of internal roads, adequate protective measures such as dust suppression/control measures for screening and crushing plants, beneficiation plants, provision for retention walls, garland drains, check dams, siltation ponds, afforestation, safety zones, proper covering of truck, exploring possibility of back filling of part of over burden/waste dumps in the mining pits, sale/beneficiation of sub grade iron ore, water harvesting, etc. iv) for achieving (ii) and (iii) above, fixation of permissible annual production; and v) regular and effective monitoring and evaluation.

9.5.4. Hon'ble Supreme Court in para 14 recorded lease wise R & R Plans in continuation of the above said observations. We note that

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a written undertaking was directed to be given by lease holder by observing as under at page 172: “(III) a written undertaking by the leaseholders that they would fully abide by the Supplementary Environment Management Plan (SEMP) as applicable to the leasehold area and shall also abide by the Comprehensive Environment Plan for Mining Impact Zone (CEPMIZ) that may be formulated later on and comply with any liabilities, financial or otherwise, that may arise against them under the CEPMIZ.”

9.5.5. Hon’ble Supreme Court further at page 173 observed as under: “II. Guarantee money for implementation of the R&R plan in the respective sanctioned lease areas. The CEC shall make an estimate of the expenses required for the full implementation of the R&R plan in each of the 63 'Category B' mines and each of the leaseholders must pay the estimated amount as guarantee for implementation of the R&R plans in their respective sanctioned lease areas and in the areas where they carried on illegal mining activities or which were used for illegal overburden dumps, roads, offices, etc. beyond the sanctioned lease area. In case, any leaseholder defaults in implementation of the R&R plan, it will be open to the CEC to carry out the R&R plan for that leasehold through some other proper agency from the guarantee money deposited by the leaseholder. However, on the full implementation of the R&R plan to the complete satisfaction of the CEC and subject to the approval by the Court, the guarantee money would be refundable to the leaseholder. 9.5.6. Hon’ble Supreme Court while considering the acceptability of CEC recommendations at page 194 held as under: (ii) Conditions which have been suggested for opening of Category ‘A’ mines and additionally the R& R Plans for Category ‘B’ mines 52. The conditions subject to which Category ‘A’ and ‘B’ mines are to be reopened and the R&R Plans that have been recommended as a precondition for reopening of Category ‘B’ mines are essentially steps to ensure scientific and planned exploitation of the scarce mineral resources of the country. The details of the preconditions and the R&R plans have already been noticed and would not require a repetition. Suffice it would be to say that such recommendations are wholesome and in the interest not only of the environment and ecology but the mining industry as a

Page 127 of 138 ITA No. 1054/Bang/2019 A.Y:2013-14 whole so as to enable the industry to run in a more organized, planned and disciplined manner. FIMI was actively associated in the framing of the guidelines and the preparation of the R&R Plans. There is nothing in the preconditions or in the details of the R&R plans suggested which are contrary to or in conflict or inconsistent with any of the statutory provisions of the MMDR Act, EP Act and FC Act. In such a situation, while accepting the preconditions subject to which the Category ‘A’ and ‘B’ mines are to be reopened and the R&R plans that must be put in place for Category ‘B’ mines, we are of the view that the suggestions made by the CEC for reopening of Category ‘A’ and ‘B’ mines as well as the details of the R&R plans should be accepted by us, which we accordingly do.

9.5.7. From the above it is clear that assessee was directed to make such payments in order to resume the mining activity. It is also clear that payment intimations may be issued as and when found necessary by the Department of Mining. Assessee cannot ignore such intimations for its smooth functioning of business. We therefore are of the opinion that these are expenditure incurred by assessee in lieu of business. We therefore reject the argument of revenue that such payment is hit by Explanation to section 1 to Section 37.

9.5.8. Ld.Councel submitted that in lieu of above directions, assessee was refunded Rs.1,21,94,000/- out of Rs,1,48,97,000/-, during the financial year relevant to the assessment year 2019-20, which has been offered to tax. This fact supports the submission of assessee that, it did not have any control over the amount so deducted. Accordingly, demand raised by the Department of Mining in its letter would create a liability on assessee. Aassessee was therefore justified in creating provision for this expenditure. Since

Page 128 of 138 ITA No. 1054/Bang/2019 A.Y:2013-14 the provision for expenses so made is related to the business activities of assessee, the same is allowable as deduction. Accordingly, we Ld.AO to delete the disallowance of Rs.1,48,97,000/-. Accordingly, this ground raised by assessee stands allowed.

Page 129 of 138 ITA No. 1054/Bang/2019 A.Y:2013-14 10.4.1. Ld.Counsel placed reliance on page 290 of paper book, wherein, Deputy Commissioner, Bellary, directed assessee to contribute towards education of students residing/studying in schools around mining area. It has been submitted that assessee is engaged in business of mines on the land leased by government, activity consumes enormous amount of natural resources in surrounding area, and that, such amount was paid to support welfare of the locality. He also submitted that Explanation 2 to Section 37 of the Act, is introduced by Finance Act 2014, which is in relation to CSR contributed by companies, whereas, assessee is a partnership firm. 10.4.2. Ld.Counsel submitted that commercial expediency should be judged in the context of prevailing social economic condition and that business undertaking is a product of combined effort’s of all. He submitted that such expenditure incurred by assessee satisfies the requirement of commercial expediency in the present scenario. He placed reliance on order dated 31/07/2019 by Hon’ble Karnataka High Court, Dharwad Bench, in case of Kanhaiyalal Dudheria vs JCIT in ITA NO. 100016/2018 c/w. ITA NO. 100017/2018. He submitted that mining activity in the lease areas causes ecological disbalances thereby hampering inhabitation in the nearby villages. Assessee incurred expenses towards re- establishing various facilities to support livelihood of people living in nearby villages.

Page 130 of 138 ITA No. 1054/Bang/2019 A.Y:2013-14 10.4.3. On the contrary, Ld.CIT.DR placed reliance on observations of authorities below. 10.5. We have perused submissions advanced by both sides, in light of records placed before us. 10.5.1. We heard rival contentions and perused the record. We notice that an identical issue was examined by the Hon'ble Karnataka High Court in the case of Kanhaiyalal Dudheria (supra). In the case before Hon'ble High Court, the assessee was carrying on the business of extraction of iron-ore and also trading in iron-ore. Assessee had incurred expenses of Rs.1,61,30,480/- and Rs.55,90,080/- in FY 2010-11 and 2011-12 towards construction of houses in certain flood affected villages as per MOU entered with Government of Karnataka. Assessee’s claim of above said expenses were disallowed on the ground that it was not incurred in the course of business but for philanthropic purposes. Hon'ble Karnataka High Court, however, held that it is allowable as deduction. The relevant observations made by Hon’ble High Court are extracted below:- “8. It is not in dispute that an MOU came to be entered into between appellants and the Government of Karnataka, represented by jurisdictional Deputy Commissioner on 02.07.2010, a copy of which has been made available for our perusal. It would clearly indicate on account of unprecedented floods and abnormal rain which severely ravaged the North Interior Karnataka during last week of September and first week of October, 2009, which claimed more than 226 human lives and loss of nearly 8000 head of cattle, flattened about 5.41 lakhs houses and destroyed standing crops in about 25 lakh hectares of land huge destruction of infrastructure, Government of Karnataka which was facing an undaunted task of rehabilitating the persons who were in destitute and to restore the normalcy for nearly about 7.2 lakh people and to build 5.41

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lakhs houses spread over 12 affected districts, an appeal came to be made by then Hon'ble Chief Minister to all to lend their hands for restoring normalcy. ………. 13. A plain reading of Section 37 would also indicate that emphasis is on the expression "wholly and exclusively for the purposes of the business or profession". These two expressions namely, "wholly" and "exclusively" being adverb, has reference to the object or motive of the act behind the expenditure. If the expenditure so incurred is for promoting the business, it would pass the test for qualifying to be claimed as an expenditure under Section 37 of the Act. What is to be seen in such circumstances is, what is the motive and object in the mind of the two individuals namely, the person who spend and the person who receives the said amount. Thus, the purpose and intent must be the sole purpose of expending the amount as a business expenditure. If the activity be undertaken with the object both of promoting business and also with some other purpose, such expenditure so incurred would not be disqualified from being claimed as a business expenditure, solely on the ground that the activity involved for such expenditure is not directly connected to the business activity. In other words, the issue of commercial expediency would also arise. ………… 20. In fact, the Hon'ble Apex Court approving the observation of ATHERTON's case - 1926 AC 205 in the matter of EASTERN INVESTMENT LIMITED vs COMMISSIONER OF INCOME TAX reported in (1951) 20 ITR 1, held: "..a sum of money expended, none of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade", can be adopted as the best interpretation of the crucial words of Section 10(2)(xv). The imprudence of the expenditure and its depressing effect on the taxable profits would not deflect the applicability of the section. The acid test, "did the expenditure fall on the assessee in this character as trader and was it for the purpose of the business". 21. The co-ordinate Bench in the matter of CIT & ANOTHER vs INFOSYS TECHNOLOGIES LIMITED reported in (2014)360 ITR 174(Kar) while examining the claim of the assessee to treat the expenditure incurred by it for installing the traffic signals as business expenditure under Section 37(1) of the Act, had held " for purpose of business" used in Section 37(1) of the Act should not be limited to meaning of earning profit alone

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and it includes providing facility to its employees also for the efficient working . It came to be held: 24. As is clear from the case of Mysore Kirloskar Ltd, the expenditure claimed need not be necessarily spent by the assessee. It might be incurred voluntarily and without any necessity, but it must be for promoting the business. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under Section 37(1) of the Act, if it satisfies otherwise the tests laid down by law. Similarly, the words 'for the purpose of business' used in Section 37(1) of the Act, should not be limited to the meaning of earning profit alone. Business expediency or commercial expediency may require providing facilities like schools, hospitals, etc., for the employees or their children or for the children of the ex- employees. The employees of today may become the ex- employees tomorrow. Any expenditure laid out or expended for their benefit, if it satisfied the other requirements, must be allowed as deduction under Section 37(1) of the Act. Expenditure primarily denotes the idea of spending or paying out or away. It is something which is gone irretrievably, but should not be in respect of an unascertained liability of the future. Expenditure in this sense is equal to disbursement which, to use a homely phrase means something which comes out of the traders pocket." ……………. 23. In the matterof SRI VENKATASATYANARAYANARICE MILL CONTRACTORSCOMPANY vs CIT reported in (1997) 223 ITR 101 (SC), question arose as to whether contribution made to District Welfare Fund maintained by the District Collector would be against public policy or is an expenditure allowable under Section 37(1) of the Act and it came to be held that such contribution is not against public policy and would be allowable under Section 37(1) of the Act. It was also held 'any contribution made by an assessee to a public welfare fund which is directly connected or related with the carrying on the assessee's business or which results in the benefit of the assessee's business has to be regarded as an allowable deduction under Section 37(1)'. In the facts obtained in the said case, it was noticed that assessee was doing business of export of rice and contributing 50 paise per quintal to the district welfare fund maintained by the District Collector, without which contribution, he would not get permit and as such, it came to be held that expenditure so incurred by way of contribution is directly connected with the assessee's carrying on the business. It is further held: "10. From the abovesaid discussion it follows that any contribution made by an assessee to a public welfare fund which is directly

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connected or related with the carrying on of the assessee's business or which results in the benefit to the assessee's business has to be regarded as an allowable deduction under s. 37(1) of the Act. Such a donation, whether voluntary or at the instance of the authorities concerned, when made to a Chief Minister's Drought Relief Fund or a District Welfare Fund established by the District Collector or any business, cannot be regarded as payment opposed to public policy. It is not as if the payment in the present case had been made as an illegal gratification. There is no law which prohibits the making of such a donation. The mere fact that making of a donation for charitable or public cause or in public interest results in the Government giving patronage or benefit can be no ground to deny the assessee a deduction of that amount under s.37(1) of the Act when such payment had been made for the purpose of assessee's business." ………………… 28. In the light of the analysis of the case laws above referred to, it cannot be gain said by the revenue that contribution made by an assessee to a public welfare cause is not directly connected or related with the carrying on of the assessee's business. As to whether such activity undertaken and discharged by the assessee would benefit to the assessee's business has to be examined in the light of the observations made by us herein above. Tribunal committed a serious error in arriving at a conclusion that MOU entered into between the assessee and the Government of Karnataka is opposed to public policy and void under Section 23 of the Contract Act. In fact, Hon'ble Apex Court in case of SRI VENKATA SATHYANARAYANA RICE MILL CONTRACTORS COMPANY's case referred to herein supra has held that where a donation, whether voluntary or at the instance of the authorities concerned, when made to a Chief Ministers Drought Relief Fund or a District Welfare Fund established by the District Collector or any other fund for the benefit of the public and with a view to secure benefit to the assessee's business cannot be regarded as payment opposed to public policy. It came to be further held making of a donation for charitable or public cause or in the public interest results in the Government giving patronage or benefit can be no ground to deny the assessee a deduction of that amount under Section 37(1) of the Act, when such payment has been made for the purposes of assessee's business. In fact, it can be noticed under the MOU in question which came to be entered into by the assessee with Government of Karnataka was on account of the clarion call given by the then Chief Minister of Karnataka in the hour of crisis to all the Philanthropist, industrial and commercial enterprises to extended their whole hearted support and the entire logistic support has been extended by the Government of Karnataka namely, providing land and design of the

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house to be constructed, approval of layout and to take care of all local problems. In fact, the State Government had also agreed to exempt such of those persons who undertake to execute the work from the purview of sale tax, royalty, entry tax and other related State taxes and is said to have extended to the appellant also. In this background it cannot be construed that MOU entered into between the assessee and the Government of Karnataka is opposed to public policy. 29. In the facts on hand, it requires to be noticed that assessee is carrying of business of iron ore and also trading in iron ore. Thus, day in and day out the assessee would be approaching the appropriate Government and its authorities for grant of permits, licenses and as such the assessee in its wisdom and as prudent business decision has entered into MOU with the Government of Karnataka and incurred the expenditure towards construction of houses for the needy persons, not only as a social responsibility but also keeping in mind the goodwill and benefit it would yield in the long run in earning profit which is the ultimate object of conducting business and as such, expenditure incurred by the assessee would be in the realm of "business expenditure". Hence, the orders passed by the authorities would not stand the test of law and is liable to be set aside. 30. However, it requires to be noticed that while examining the claim for deduction under Section 37(1) of the Act the assessing officer would not blindly or only on the say of the assessee accept the claim. In other words, assessing officer would be required to scrutinise and examine as to whether said deduction claimed for having incurred the expenditure has been incurred and only on being satisfied that expenditure so incurred is relatable to the work undertaken by the assessee namely, only on nexus being established, assessing officer would be required to allow such expenditure under Section 37(1) of the Act and not otherwise. 31. For the reasons afore stated, we are of the considered view that substantial question law formulated herein is to be answered in the negative i.e., against the revenue and in favour of the assessee.” 10.5.3. In the instant case also, the assessee has contributed funds at the specific request of local administration, which is meant to be used for the benefit of public. As observed in the above said case, the assessee would also be required to approach the appropriate Government and its authorities for grant of permits, licenses. Hence it is a prudent decision of the assessee to oblige to the appeal

Page 135 of 138 ITA No. 1054/Bang/2019 A.Y:2013-14 made by the local administration and incurred the expenses for public purposes. Hence the assessee has incurred expenses not only on account of social responsibility, but also keeping in mind the goodwill and benefit it would yield in the long run in earning profit. Hence this expenditure would be in the realm of “business expenditure”. Accordingly, we hold this expenditure is allowable as deduction. Accordingly, we set aside the order passed by Ld.CIT(A) on this issue and direct the AO to delete this disallowance. 11. Ground No.4 is regarding addition of unaccounted receipts of Rs.21,62,803/- being the difference between books of accounts and Form No.26AS 11.1. Ld.AO added the difference cited above and it is noticed that AR of assessee who appeared before Ld.AO did not object to the said addition. Assessee challenged the same in an appeal filed before Ld.CIT(A), but the Ld.CIT(A) also confirmed the same. 11.2. We heard the parties on this issue. The difference noticed by Ld.AO has been tabulated by him as under:-

Page 136 of 138 ITA No. 1054/Bang/2019 A.Y:2013-14 11.3. Before us, the Ld.Counsel submitted that assessee has entered transactions with M/s Orris Infrastructure Ltd (Rs.4,75,540/-) and M/s Pragathi Krishna Gramin Bank (Rs.1,14,710/-) only. He submitted that the assessee has not entered into any transaction with other companies mentioned in the table. Accordingly, he submitted that the addition made in respect of other companies is not justified. He submitted that the assessee may be provided with an opportunity to reconcile the amount received from the above said two companies also. 11.4. Ld.CIT.DR submitted that the assessee did not object to his addition before Ld.AO and hence the addition should be confirmed. 11.5. We heard the parties on this issue and perused the record. 11.5.1. There is no estoppel against law. Hence, if the assessee proves that any transaction does not belong to it, then no addition is called for. Hence acceptance of any addition, which is against law, will not bar the assessee from contesting the same. However, it is the responsibility of the assessee to substantiate its claim. It is also quite possible that some of the companies might have rectified their Statement of TDS in order to correct mistakes, if any. Hence the position available in Form 26AS as on today may depict different picture. Accordingly, we are of the view that the assessee may be provided with an opportunity to reconcile the differences in respect of two companies cited above and also to prove that it did not have transactions with other companies.

Page 137 of 138 ITA No. 1054/Bang/2019 A.Y:2013-14 Accordingly, we set aside the order passed by Ld.CIT(A) on this issue and restore the same to the file of the AO for examining it afresh. After affording adequate opportunity of being heard, Ld.AO may take appropriate decision in accordance with law. Accordingly this ground raised by assessee stands allowed for statistical purposes. In the result appeal filed by assessee stands partly allowed. Order pronounced in open court on 8th December,2020.

Sd/- Sd/- (B. R. BASKARAN) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 8th December, 2020 /Vms/ Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore 6. Guard file

By order

Assistant Registrar, Income-Tax Appellate Tribunal. Bangalore

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Date Initial 1. Draft dictated on On Sr.PS Dragon 2. Draft placed before author -12-2020 Sr.PS 3. Draft proposed & placed -12-2020 JM/AM before the second member 4. Draft discussed/approved by -12-2020 JM/AM Second Member. 5. Approved Draft comes to the -12-2020 Sr.PS/PS Sr.PS/PS 6. Kept for pronouncement on -12-2020 Sr.PS 7. Signed Order comes back to -12-2020 Sr.PS Sr.PS/PS 8. Date of uploading the order -12-2020 Sr.PS on Website 9. If not uploaded, furnish the -- Sr.PS reason 10. File sent to the Bench Clerk -12-2020 Sr.PS 11. Date on which file goes to the AR 12. Date on which file goes to the Head Clerk. 13. Date of dispatch of Order. 14. Draft dictation sheets are No Sr.PS attached