THE PR COMMISSIONER OF INCOME TAX, vs. M/S JAY MINERALS

IN THE HIGH COURT OF KARNATAKA DHARWAD BENCH DATED THIS THE 19TH DAY OF JULY 2021 PRESENT THE HON’BLE MR. JUSTICE KRISHNA S.DIXIT

AND

THE HON’BLE MR.JUSTICE PRADEEP SINGH YERUR

ITA NO.100034/2018 C/W. ITA NO.100026/2018 ITA NO.100027/2018 ITA NO.100028/2018 ITA NO.100033/2018

IN ITA NO.100034/2018

BETWEEN:

AND: SHRI M. ABDUL ZAHID #310/A, SMSK PLAZA,

2 HOSAPETE, KARNATAKA-583201, PAN: AAEPZ 4485 C. …RESPONDENT. (BY SHRI VIJAY MALALI, ADVOCATE.)

THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260A OF THE INCOME TAX ACT, PRAYING THIS COURT TO SET ASIDE THE ORDERS PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, PANAJI BENCH, PANAJI IN IT(SS)A NO.22/PAN/2017, DATED 22.12.2017 AND CONFIRM THE ORDER DATED 21.3.2013 PASSED BY THE ASST. COMMISSIONER OF INCOME TAX OFFICE, CENTRAL CIRCLE-2, BELAGAVI, FOR THE A.Y. 2009-10, ETC.,.

IN ITA NO.100026/2018

BETWEEN:

AND: M/S JAY MINERALS SHOP NO.1, ANJUMAN SHADI MAHAL COMPLEX, ARVIND NAGAR, HOSPETE, KARNATAKA 583201 PAN:AAFF J 9363 C …RESPONDENT. (BY SHRI VIJAY MALALI, ADVOCATE.)

3 THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260A OF THE INCOME TAX ACT, PRAYING THIS COURT TO SET ASIDE THE ORDERS PASSED BY THE INCOME-TAX APPELLATE TRIBUNAL, PANAJI BENCH, PANAJI, IN IT(SS)A NO.17/PAN/2017, DATED 22.12.2017 AND CONFIRM THE ORDER DATED 21.03.2013 PASSED BY THE ASSISTANT COMMISSIONER OF INCOME TAX OFFICER, CENTRAL CIRCLE-2, BELAGAVI FOR THE ASSESSMENT YEAR 2008-09, ETC.,.

IN ITA NO.100027/2018

BETWEEN:

AND: M/S JAY MINERALS SHOP NO.1, ANJUMAN SHADI MAHAL COMPLEX, ARVIND NAGAR, HOSAPETE, KARNATAKA-583201, PAN: AAFF J 9363 C. …RESPONDENT. (BY SHRI VIJAY MALALI, ADVOCATE.)

THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260A OF THE INCOME TAX ACT, PRAYING THIS COURT TO SET ASIDE THE ORDERS PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, PANAJI BENCH, PANAJI, IN IT(SS)A

4 NO.18/PAN/2017, DATED 22.12.2017 AND CONFIRM THE ORDER DATED 28.3.2013 PASSED BY THE ASST. COMMISSIONER OF INCOME TAX OFFICE, CENTRAL CIRCLE-2, BELAGAVI, FOR THE A.Y. 2009-10, ETC.,.

IN ITA NO.100028/2018

BETWEEN:

AND: M/S JAY MINERALS SHOP NO.1, ANJUMAN SHADI MAHAL COMPLEX, ARVIND NAGAR, HOSAPETE, KARNATNAKA-583201, PAN: AAFF J 9363 C. …RESPONDENT. (BY SHRI VIJAY MALALI, ADVOCATE.)

THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260A OF THE INCOME TAX ACT, PRAYING THIS COURT TO SET ASIDE THE ORDERS PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, PANAJI BENCH, PANAJI, IN IT(SS)A NO.19/PAN/2017, DATED 22.12.2017 AND CONFIRM THE ORDER DATED 21.3.2013 PASSED BY THE ASST. COMMISSIONER OF INCOME TAX OFFICE, CENTRAL CIRCLE-2, BELAGAVI, FOR THE A.Y. 2010-11, ETC.,.

5 IN ITA NO.100033/2018

BETWEEN:

AND: SHRI M ABDUL ZAHID #310/A, SMSK PLAZA, HOSAPETE, KARNATAKA-583201, PAN: AAEPZ 4485 C. ...RESPONDENT. (BY SHRI VIJAY MALALI, ADVOCATE.)

THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260A OF THE INCOME TAX ACT, PRAYING THIS COURT TO SET ASIDE THE ORDERS PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, PANAJI BENCH, PANAJI, IN IT(SS)A NO.21/PAN/2017, DATED 22.12.2017 AND CONFIRM THE ORDER DATED 21.3.2013 PASSED BY THE ASST. COMMISSIONER OF INCOME TAX OFFICE, CENTRAL CIRCLE-2, BELAGAVI, FOR THE A.Y. 2008-09, ETC.,. THESE APPEALS COMING ON FOR HEARING ON INTERLOCUTORY APPLICATION THIS DAY, SHRI KRISHNA S.DIXIT, J, DELIVERED THE FOLLOWING:

6 JUDGMENT In all these appeals lodged by the Revenue, common questions of law & facts, as discussed below, arise and therefore, at the request of the Bar, they are heard together, for being disposed of by a common order. 2. Brief facts of the case: (a) The respondent is an assessee under the provisions of the Income Tax Act, 1961; it has been running the trade & business in the iron ore in the name & style of “SMSK Mineral Trading Company”, without obtaining necessary permits & licences as required under law; during Section 132 search of the business premises of the assessee, the foundational facts having surfaced, a Section 153A notice was issued; in response, the assessee filed the return of Income Tax for the relevant Assessment Years. (b) The Assessing Officer having completed the assessment u/s 143(3) r/w Section 153A disallowed purchases/expenditures in terms of Section 37(1);

7 despite notice the assessee failed to explain as to why certain purchases should not be treated as having been made in violation of the provisions of Section 40A(3); therefore, the Assessing Officer disallowed 100% of the purchases made from unregistered dealers. (c) The assessee took the matter in appeal, being aggrieved by the Assessment Orders; the Principal Commissioner of Income Tax favoured the appeals on the premise that in determining the profits of business, the expenses incurred have to be set off against the receipts from the business; this view having impressed the Income Tax Appellate Tribunal too, relief has been granted to the assessee negativing the challenge by the Revenue; that is how these appeals are presented under Section 260A of the 1961 Act. 3. In the above fact matrix, the following substantial questions of law have been framed:

8 i) In view of bar enacted under Section 37(1) read with Explanation 1 thereto of the IT Act, 1961, whether the expenditure incurred for the iron ore business carried on in contravention of law could have been discounted while determining the taxable income…? ii) Where the assessee has made payments above Rs.20,000/- otherwise than by an A/c payee cheque to unidentifiable persons from whom he has purchased the iron ore, whether the same is liable to be disallowed as expenditure incurred for the business…? 4. It is pertinent to state here itself that, regardless of the question framed by the Co-ordinate Bench at the time of admitting the appeals, we framed the above substantial questions of law as provided under Section 260A of the Act with the assistance of both the learned counsel who graciously agreed for the final hearing this day itself. 5. Having heard the learned counsel for the parties and having perused the appeal papers and the decisions cited at the Bar, we are inclined to grant

9 indulgence in the matter as under and for the following reasons: (a) The version of the Assessing Officer that the subject trade & business in iron ore during the relevant period was carried on by the assessee without the permits as required under Section 4(1A) of the Mines & Minerals (Development and Regulation) Act, 1957 and therefore, the said business was arguably being run contrary to law, cannot be faltered; Section 4(1A) prohibits transportation or storing of any mineral otherwise than by licence/permit; a business without licence/permit is made punishable under Section 21 of this Act. (b) Section 37 is in the nature of a residuary provision extending the allowance to items of business expenditure that are not covered by Sections 30 to 36 of the 1961 Act; the word ‘expenditure’ primarily denotes the idea of ‘spending’ or ‘paying out or away’; it is something which is gone irretrievably vide Indian Molasses Vs. CIT 37 ITR 66 (SC); in order to determine the profits & gains of the business, the expenses or the obligations which have been incurred necessarily have to be set off against the

10 receipts from the business as the profits & gains are the surplus by which such receipts exceed the expenditure necessary for the purpose of earning such profits or gains, vide Calcutta Company Ltd. Vs. CIT: 37 ITR 1 (SC); this proposition emerges from a plain reading of Section 37(1) of the Act which has the following text: “37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or professions shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”.

(c) The Explanation added by the Parliament to sub-section (1) of Section 37 vide Finance (No.2) Act, 1998 with retrospective effect from 01.04.1962 reads as under: Explanation 1.—For the removal of doubts, it is hereby declared that 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.

11 An Explanation to a section of the Act at times is appended to explain the meaning of words contained in the said section; the meaning to be given to an Explanation depends upon it’s terms; if the language of the explanation shows a purpose, a construction consistent with that purpose has to be placed upon it vide Bengal Immunity Co. Ltd., Vs. State of Bihar 1955(2) SCR 603; the language in which the above Explanation is couched leaves no manner of doubt that any expenditure which an assessee incurs 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 admissible in respect of such expenditure; the object of this Explanation is to discourage the businesses and professions that are tainted with illegality. Therefore, the expenditure incurred for purchasing the iron ore could not have been deducted, as being the expenditure for the business in question; this view is supported by the decision of Apex Court in Maddi Venkataraman & Co. Vs. CIT: (1998) 229 ITR 0534 (SC).

12 (d) Sub-section (3A) of Section 40A of the 1961 Act provides for the disallowance of any expenditure in respect of which payment in a sum exceeding the specified limit (Rs.20,000/-) is made otherwise than by a crossed cheque or a crossed bank draft; in the instant case, the assessee had not discharged the onus placed on him by furnishing necessary details of the persons from whom he had purchased the iron ore; arguably, they were unregistered dealers; be that as it may. (e) Learned panel counsel for the Revenue taking the Court through the orders of the Commissioner of Income Tax, more particularly, paragraph 6.7 therein points out that there is absolutely no reference to the provisions of Sections 37 & 40 of the Act; even otherwise, the said paragraph is not structured on the inarticulate norms that are enacted in these provisions; same has happened with the orders of the Tribunal as well; whether there are foundational facts warranting invocation of these provisions is a matter for the fresh consideration at the hands of the Commissioner of Income Tax, after the

13 impugned orders are set aside and matter is remitted for consideration de novo. In the above circumstances, these appeals succeed in part; the impugned orders are set at naught; the matter is remanded to the Commissioner of Income Tax (Appeals)-II for consideration afresh in accordance with law, within an outer limit of three months and after giving an opportunity of hearing to the assessee; all contentions are kept open. Costs made easy.

Sd/- JUDGE

Sd/- JUDGE Mrk/-