INCOME TAX OFFICER, WARD-1, BALLARI vs. H R GAVIAPPA AND CO, BALLARI

IN THE INCOME TAX APPELLATE TRIBUNAL “A’’ BENCH: BANGALORE BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER Assessment Year: 2015-16 H.R. Gaviappa and Co., Mine Owners 4th Floor, HRG Complex ITO HRG Circle Vs. Ward-1 Mothi Theatre Circle Ballari Ballari 583 101 Karnataka PAN No.AAAFH6251N APPELLANT RESPONDENT Appellant by : Shri D.K. Mishra, D.R. Respondent by : Shri H. Siva Prasad Reddy, A.R. Date of Hearing : 30.01.2024 Date of Pronouncement : 22.03.2024 O R D E R

PER CHANDRA POOJARI, ACCOUNTANT MEMBER:

2. "The Learned CIT(A) erred in deleting addition payment made to CEC towards Penalty for Illegal Mining Pits & Illegal Dumps holding that the amount retained by the Monitoring Committee out of the. sale proceeds is allowable as business H.R. Gaviappa and Co., Ballari Page 2 of 53 expenditure u/s 37(1) of IT Act despite the fact that such retentions were made, on account of illegal mining activities carried by the assessee beyond the sanctioned lease area and during sub grade material outside the lease area which is in violation of law and penal in nature."

3. Any other ground that may be raised subsequently.”

2. Facts of the case are that the Revenue has filed an appeal against the order of the Learned CIT(A) dated, 14-09-2023 who had allowed the appeal of the assessee following the decision of the Hon’ble Jurisdictional Tribunal in the case of M/s Co., in Veerabhadrappa Sangappa & dated, 08-12-2020. The mine of the assessee is categorized as "B" Category vide Serial No. 17 of the Annexure - R-10 of the CEC Final Report dated, 03-02-2012. The learned AO has disallowed the following amounts deducted from the sale proceeds of the iron-ore & retained towards SPV by the Monitoring Committee appointed by the Hon’ble Supreme Court: SI. Nature of disallowance Amount No. (i) SPV charges disallowed 67,53,987 (ii) 6,86,54,000 Penalty expended disallowed 2.1 The learned AO thus determined the total income of Rs.4,33,14,960/-, as against the LOSS of (-) Rs.3,20,93,032/- declared in the return of income filed on 28- 09-2015.

2.2. The learned CIT(A) of NFAC allowed the appeal of the assessee following the decision of the Hon'ble Jurisdictional Tribunal in the case of M/s Veerabhadrappa Sangappa & Co., (Supra) and other cases. Against this revenue is in appeal before us.

H.R. Gaviappa and Co., Ballari Page 3 of 53

3. The ld. DR vide WS dated 14/12/2023 & 30/01/2024 submitted as follows: a) The assessee filed its return of income on 28/09/2015 declaring total loss of Rs.3,20,93,032. b) The assessee has debited profit & loss A/c by Rs.67,53,987/- due to contribution to SPV being 10% of sale of Rs.6,57,39,866/- AO disallowed the same. c) The assessee has been levied a penalty of Rs. 6,86,54,000/-, the same was treated as business expenditure but AO disallowed it, by treating it for the infringement of law. d) The CIT(A) has allowed the assessee's appeal on the basis of the decision of this Hon'ble Bench in the case of M/s. Veerabhadrappa Sangappa Co in and the decision of this Bench in the case of M/s Gogga Gurusanthaiah and brothers in the ITA No. 3317 to 3319/Bang/2018. 3.1 The ld. DR submitted that there are SC orders/direction, which are passed before the date of filing return of income, which are as follows: a) The relevant portion of the judgment in the case of Govt. of A.P.& Ors. v. M/s Obulapuram Mining. Co. P.Ltd. & Ors. dated 29.07.2011 is reproduced below: In continuation of our earlier Orders dated 29th April, 2011, and 6th May, 2011, we are of the view that mining operations and transportation in an area ad-measuring approximately 10,868 hectares in Bellary District be immediately suspended till further orders. We are satisfied that, on account of over-exploitation, considerable damage has been done to the environment. We are taking a_ holistic view of the mailer. We have suspended these operations keeping in mind the precautionary principle, which is the essence of Article 21 of the Constitution. [See M.C, Mehta vs.^Union of India & Ors., reported in 2009 (6) S.C.C. 1421.

H.R. Gaviappa and Co., Ballari Page 4 of 53 b) The relevant portion of the judgment dated 26.08.2011 is reproduced below:

On going through the Report of Central Empowered Committee ['CEC', for short], we extend the Order passed by this Court on 29th July, 2011, to the mining leases in Districts Tumkur and Chitradurga. Consequently, pending further orders, there will be a ban on mining in Districts Tumkur and Chitradurga. c) The relevant portion of the judgment dated 23.09.2011 is reproduced below: ix) the sale price along with the royalty applicable taxes and other charges will first be deposited in the designated bank account(s) in the nationalised bank(s). Out of the above, the royalty, taxes and other charges payable on the sale price will be paid under the respective "Heads of Receipts" to the Government and the balance amount, after payment of the service charges for e-auction, will be invested in fixed deposit(s) in the nationalized bank(s). The accounting of the receipts and payments, mining lease-wise, will be maintained under double entry system; x) it is submitted that in respect of the mining leases found (by the Joint Team) to be involved in illegal mining no amount towards the sale price may presently be disbursed to them. In respect of the mining (eases where the Joint Team has not found any illegality (as per the list enclosed at ANNEXRE-R- 3 to this Report), presently 80% of the sale price may be disbursed to the respective lease holders and the balance 20% of the sale price may be retained; d) The relevant portion of the judgment dated 21.03.2017 is reproduced below: “12. We have considered the matter. We have also taken note of the previous orders of this Court particularly the final order dated 18.04.2013 {Paragraph 37); the objects behind the amendment of the Mines and Minerals (Development and Regulation) Act by inclusion of the provisions of Section 9B; and also the notifications issued from time to time including the objects of the District Mineral Foundation as provided for by Rule 3 of the District Mineral Rules, 2016 notified by the Government of Karnataka on 11.01,2016. Though, at first blush, it may appear that there is some amount of overlapping between the objects of the District Mineral Foundation and the purpose contemplated by the Court's order in setting up the SP V, the observations of this Court in Paragraph 37 of the judgment dated 18.04.2013 (supra) would make the position amply clear. The statutory enactments and exercises carried out subsequent to the Court's H.R. Gaviappa and Co., Ballari Page 5 of 53 order(s) will have to be understood to be the expression of the legislative opinion of the necessity to meet the challenges of mineral exploitation that are incidental to any mining operation. Every mining activity results in baneful effects which need to be corrected and destruction of environment that inevitably occurs in the process needs to be mitigated. This is the specific reiteration that has been made by the amendment of the provisions of the Act and the Rules framed thereunder. What had happened in Bellary, Chitradurga and Tumkur, has already been noticed by this Court in Paragraph 37 of the judgment dated 18,04.2013 Le. systematic, extraordinary and unprecedented plunder of the natural wealth and environment. This Court has specifically observed in paragraph 37 that "the situation being extraordinary the remedy, indeed, must also be extraordinary". It is to deal with such an extraordinary situation that the necessity of CEPMIZ and implementation thereof by a Special Purpose Vehicle out of funds in credit with the Monitoring Committee was contemplated. The special funds in deposit with the Monitoring Committee being the proceeds of illegal mining were meant to be deployed for recreation of what have been lost due to such illegal activities. It is for the aforesaid purpose that CEPMIZ was required to be drawn up and thereafter implemented. The state of implementation of the Scheme has not yet commenced. Funds in huge proportions would be necessary, A full and clear picture is yet to emerge. In a situation lessees who may be even remotely connected with the degradation and destruction of nature must continue to pay their share in the process of restitution by contributing to the Managing Committee from their present sale proceeds. Even the new lessees who may not have been involved with such degradation are contributing to the process of reclamation and restoration. In such a situation, we do not see how we can vary or modify our earlier orders that require all existing lessees to pay 10% of the sale proceeds and/or to depart from the requirement of payment of what has been already ordered, namely, 10% of the sale proceeds to the Monitoring Committee/SPV.” 3.2 The ld. DR submitted that the Hon'ble Supreme Court in the case Commissioner of Income Tax v. Prakash Chand Lunia [2023] 149 taxmann.com 416 (SC), held that a penalty or a confiscation is a proceeding in rem, and therefore a loss in pursuance to same is not available for deduction regardless of nature of business, as a penalty or confiscation cannot be said to be incidental to any business. 3.3. The Ld. DR again vide written submission dated 02/02/2024(a copy of which has been provided to the Ld.AR) submitted as under: 1.1. The assessee is a partnership firm and filed the return of income on 28/09/2015 as per the order of the Assessing Officer dated 22/12/2017. The AO in para 4 of the assessment order has disallowed the expenditure claimed as deduction due to SPV charges H.R. Gaviappa and Co., Ballari Page 6 of 53 amounting to Rs.67,53,987/-. This is 10% of sales value of Rs.6,75,39,866/- The Assessing Officer in its order mentioned that this compensatory payment towards damages caused to environment and forest by contravention of laws therefore the said payment cannot be said to be incurred wholly and exclusively for the purpose of business within the meaning of provision of Sec.37 of the I T Act. 1961. Further the AO has mentioned in para 4.4, a portion of decision of the Hon’ble Supreme Court to indicate that different mine owners were placed in different category based on illegal or marginal illegal mining done by them in para 4.4. Thereafter in para 4.7 the AO has not allowed the deduction so claimed. 1.2. Further, he submitted that the AO in para 5 has disallowed the penalty of Rs.6,86,54,000/- which has been claimed by debiting the P/L account under the head payment of CEC as per its direction. The AO has mentioned that the Department of Mines and Geology, Bangalore vide its Lr.F.No.DMG/R&R/Notice/2012-13/11 dated 02/03/2013 has issued notice in obedience to the order of the Hon’ble Supreme Court to make the payment of Rs.6.96 Crores by way of penalty immediately. In para 5.2 the AO has mentioned the reply of the assessee some portion of that is quoted below: “...... since our mines were categorised as ‘B’ class further mining activity would be permitted, only and if only, the penalties levied by the Hon’ble Supreme Court are paid. Though our firm has not committed nor involved in any of the illegal activities, we had no other option except to pay the amounts levied by M/s. Central Empowered Committee to restart our mining activity. Already, a sufficient time was lost during the stoppage of mining activity and in view of this, this expenditure was incurred inevitably out of commercial expediency. Since this expenditure has direct nexus to our business activities carried on by our firm, the expenditure of Rs.6,86,54,000/- paid to M/s. CEC is claimed as such by way of debit to the P/L account as per the provisions of Sec.37(1) and hence may kindly be allowed.”

The AO thereafter, after discussing the submission held that it was involved in illegal mining and the amount has been retained by CEC, H.R. Gaviappa and Co., Ballari Page 7 of 53 therefore not allowable as per the specific explanation of Sec.37(1) of the Act. The AO has also pointed out in para 5.4 that if the assessee is penalised under one act, he cannot claim that the said amount to be set off against his income under another Act. Therefore, it can be clearly stated that the AO through his own understanding of the I T Act and the decision of the Hon’ble Supreme Court has disallowed the claimed expenses for the penalty of Rs.6.86 Crores and Rs.67,53,987 claimed as contribution for SPV by the assessee. 2.1. He submitted that the learned CIT(A) in para 6.2 has allowed the appeal of the assessee with regard to SPV charges by stating that the issue raised by the learned AO was considered by the jurisdictional Bangalore ITAT in the case of M/s. Veerabhadrappa Sangappa and Co in dated 18/08/2020 and in the case of Shri B Rudrappa in ITA No.314 & 315/Bang/2020 dated 15/04/2021, wherein it is held that the contribution to SPV being 10% /15% of sale proceeds under category ‘A/B’ is to be allowable as expenditure for the year under consideration. The learned CIT(A) quoted the decision of the Hon’ble Bangalore Tribunal in the case of M/s. Gogga Gurunathaiah Gurusanthaiah & Bros., in ITA No.3317 to 3319/Bang/2018 for A.Y.2013-14 to 2015-16 and it has mentioned that the facts and circumstances involved in this case are the same as the cases cited above. Therefore, the learned CIT(A) directed the AO to delete the addition. 2.2. The learned CIT(A) in para 7.2 has considered another issue which is penalty of Rs.6.86 Crores levied by the Monitoring Committee. And it mentioned that the same issue was considered by the jurisdictional ITAT in the case of M/s. Veerabhadrappa Sangappa and Co in ITA No.1054/Bang/2018 dated 18/08/2020. Therefore, the CIT(A) has allowed the appeal. Secondly, in para 7.3 of the order of the learned CIT(A) it accepted the version of the assessee that it could not have commenced its operation without paying the same. Therefore, the H.R. Gaviappa and Co., Ballari Page 8 of 53 same is allowable as revenue expenditure. And in support of it, it quoted the decision of M/s. Veerabhadrappa Sangappa and M/s. Gogga Gurunathaiah Gurusanthaiah & Bros. 3.0. The order of the learned CIT(A) is not correct not only on the basis of facts but also on the application of the ITAT decisions on the given facts. The correct order which is supposed to be followed is a constitutional order passed by the Hon’ble Supreme Court in WP 562/2009 in the case of Samaj Parivarthan & Others Vs. State of Karnataka with SLPs quoted therein. There are two issues. One relating to the contribution to the SPV claimed by the assessee and other one is compensation termed as penalty levied by the Monitoring Committee as claimed by the assessee. Since these two issues are in connection with the decision of the Hon’ble Supreme Court, few points are necessary to be quoted/mentioned from the order of the Hon’ble Supreme Court, to prove the order of the CIT(A) is not correct on the facts as well as on the law also. 3.1. In the judgement dated 18/4/2013 while admitting the WP under Article 32 of the Constitution it mentioned: “1. What should be appropriate contours of this Court’s jurisdiction while dealing with allegations of systematic plunder of natural resources by a handful of opportunists seeking to achieve immediate gains? This is the core question that arises in the present proceedings in the context of mining of Iron ore and allied minerals in the State of Karnataka.”

H.R. Gaviappa and Co., Ballari Page 9 of 53 "(A) To issue a Writ of mandamus or any other appropriate writ, order or direction, directing immediate steps be initiated by both the Respondent States and the Union of India to stop all mining and other related activities in forest areas of Andhra Pradesh and Karnataka which are in violation of the orders of this Hon’ble Court dated 12.12.1996 in W.P (C) No 202 of 1995 and the Forest (Conservation) Act, 1980.”

H.R. Gaviappa and Co., Ballari Page 10 of 53 The order on this WP is a constitutional order and has been passed due to the violation of the fundamental right and therefore it is unique in nature. It is important to mention here that this order is not passed under any IT Act, MMDR Act or Environmental Protection Act or under Forest Conservation Act. Therefore this constitutional order has to be implemented and not interpreted in relation to these Acts because the Constitution is Supreme and over and above these Acts. In this context this order itself is a law and it does not require any other Authority to support it, be it Parliament or any executive order/circular/notice etc or any Act.

The order of the Hon’ble Supreme Court may be considered here if anyone wants to understand in simple language then it may be taken as a code itself. Therefore, if any line or any word from this order is interpreted under I T Act or any other Act, then it must be ensured that such interpretation should not be in contradiction with this order itself. If this order says that illegal mining is happening, then it should be construed as illegal mining has happened. It cannot be said that, it not illegal mining under IT Act but only under MMDR Act or Environmental Protection Act or under Forest Conservation Act. In this context the observation of the Hon’ble Supreme Court in these orders are quoted below: 3.3.1. Para 14 of the order dated 18/04/2013; “The second supplementary issue that can be conveniently dealt with at this stage is with regard to sale of the existing stock of iron ore which is mainly the yield of illegal mining.........”

It can be therefore inferred that existing stock lying after the ban imposed by the Hon’ble Supreme Court was extracted illegally. Therefore, since it belongs to category ‘A’ category ‘B’ and category ‘C’ lease holders, therefore Hon’ble Supreme Court has held that all lease holders were doing illegal mining previously.

H.R. Gaviappa and Co., Ballari Page 11 of 53 3.3.2. In para 33, while dealing with the issue no.2, i.e. exercise of jurisdiction under Article 32/142 of the Constitution on the basis of the facts revealed by the report of the CEC i.e. large scale damage to the forest wealth of the country due to illegal mining on an unprecedented scale vis-a-vis resort to remedies under the provisions of Mines and Minerals (Development and Regulation) Act, 1957, Forest (Conservation) Act, 1980 and Environment (Protection) Act, 1986. It has been mentioned “ 33 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.”

3.3.3. In para 41of the order dated 18/4/2013 it has been mentioned “41 In the light of the discussions that have preceded sanctity of the procedure of laying information and materials before the Court with regard to the extent of illegal mining and other specific details in this regard by means of the Reports of the CEC cannot be in doubt. Inter- generational equity and sustainable development have come to be firmly embedded in our constitutional jurisprudence as an integral part of the fundamental rights conferred by Article 21 of the Constitution. In enforcing such rights of a large number of citizens who are bound to be adversely affected by environmental degradation, this Court cannot be constrained by the restraints of procedure. The CEC which has been assisting the Court in various environment related matters for over a decade now was assigned certain specified tasks which have been performed by the said body giving sufficient justification for the decisions H.R. Gaviappa and Co., Ballari Page 12 of 53 arrived and the recommendations made. If the said recommendations can withstand the test of logic and reason which issue is being examined hereinafter we will have no reason not to accept the said recommendations and embody the same as a part of the order that we will be required to make in the present case.”

3.3.4. In para 44 it has been mentioned: “ 44 The precise extent of illegal mining that took place in the three districts of Karnataka have been noted in detail in an earlier part of this order (para 23). The same, therefore, will not require any repetition. Illegal mining apart from playing havoc on the national economy had, in fact, cast an ominous cloud on the credibility of the system of governance by laws in force. It has had a chilling and crippling effect on ecology and environment. It is evident from the compilation submitted to the Court by the CEC that several of the Category ’C’ mines were operating without requisite clearances under FC Act or even in the absence of a mining lease for a part of the area used for mining operations. The satellite imageries placed before the Court with regard to environmental damage and destruction has shocked judicial conscience. It is in the light of the above facts and circumstances that the future course of action in respect of the maximum violators/polluters, i.e., Category ’C’ mines has to be judged. While doing so, the Court also has to keep in mind the requirement of Iron Ore to ensure adequate supply of manufactured steel and other allied products.”

3.3.5. The relevant portion of the judgment of the Hon’ble Supreme Court in WP (Civil) No.562 of 2009 on 28/09/2012 in the case of Samaj Parivartana Samudaya & Ors Vs. State of Karnataka & Ors as below: Setting up of Special Purpose Vehicle (SPV) In paragraph 10(vi) of the amicus’s note, it is stated as under: "(vi) the State of Karnataka be directed to set up Special Purpose Vehicle (SPV) for the purpose of ameliorative and mitigative measures as per the "Comprehensive Environment Plans for the Mining Impact Zone" (CPEMIZ) around mining leases in Bellary, Chitradurga and Tumkur. The SPV would be under the Chairmanship of the Chief Secretary, Government of Karnataka and would have senior officers of the concerned departments of the State Government as Members. The SPV would function in a transparent manner and the accounts of the SPV would be subject to an annual audit by the CAG. A detailed scheme containing the details of the works to be undertaken, process of selection of implementing agencies, accounting procedure and other details of CEPMIZ may be directed to be prepared and submitted to this Hon’ble Court by the State of Karnataka, in consultation with the CEC within four weeks. The amounts received/retained by the Monitoring Committee towards (a) 10% of the sale proceeds, (b) compensation, (c) other receivable be directed to be H.R. Gaviappa and Co., Ballari Page 13 of 53 transferred to the SPV (after its formation) for implementation of the provisions/ prescriptions of CEPMIZ." The formation of the Special Purpose Vehicle and the drawing up and implementation of the Comprehensive Environment Plans for Mining Impact Zone is perhaps the most essential part in the process of reclamation and rehabilitation of the area devastated by illegal mining.

All these above paras indicate that all the lease holders were indulged in illegal mining before imposition of the ban and category ‘C’ mine lease holders were maximum violators/polluters indicating category ‘A’ and category ‘B’ lease holders were less violators/polluters. Further the Monitoring Committee was given a job to transfer the money to the SPV. SPV was directed to implement comprehensive environment plans for mining impact zone for the reclamation of and rehabilitation of the area devastated by illegal mining. This also shows that all the lease holders before the ban devastated the environment earlier and therefore money collected from them by way of fine was part of the profit from the illegal mining. 3.3.6. The above point in para 3.3.5 is supported by the clarification in the order of the Hon’ble Supreme Court later on. The relevant portion of the judgment of Hon’ble Supreme Court in WP(Civil) No.562 of 2009 on 21.03.2017 in the case of Samaj Parivartana Samudaya & Ors Vs. State of Karnataka & Ors is reproduced below: 12. We have considered the matter. We have also taken note of the previous orders of this Court particularly the final order dated 18.04.2013 (Paragraph 37); the objects behind the amendment of the Mines and Minerals (Development and Regulation) Act by inclusion of the provisions of Section 9B; and also the notifications issued from time to time including the objects of the District Mineral Foundation as provided for by Rule 3 of the District Mineral Rules, 2016 notified by the Government of Karnataka on 11.01.2016. Though, at first blush, it may appear that there is some amount of overlapping between the objects of the District Mineral Foundation and the purpose contemplated by the Court’s order in setting up the SPV, the observations of this Court in Paragraph 37 of the judgment dated 18.04.2013 (supra) would make the position amply clear. The statutory enactments and exercises carried out subsequent to the Court’s order(s) will have to be understood to be the expression of the legislative opinion of the necessity to meet the challenges of mineral exploitation that are incidental to any mining operation. Every mining activity results in H.R. Gaviappa and Co., Ballari Page 14 of 53 baneful effects which need to be corrected and destruction of environment that inevitably occurs in the process needs to be mitigated. This is the specific reiteration that has been made by the amendment of the provisions of the Act and the Rules framed there under. What had happened in Bellary, Chitradurga and Tumkur, has already been noticed by this Court in Paragraph 37 of the judgment dated 18.04.2013 i.e. systematic, extraordinary and unprecedented plunder of the natural wealth and environment. This Court has specifically observed in paragraph 37 that “the situation being extraordinary the remedy, indeed, must also be extraordinary”. It is to deal with such an extraordinary situation that the necessity of CEPMIZ and implementation thereof by a Special Purpose Vehicle out of funds in credit with the Monitoring Committee was contemplated. The special funds in deposit with the Monitoring Committee being the proceeds of illegal mining were meant to be deployed for recreation of what have been lost due to such illegal activities. It is for the aforesaid purpose that CEPMIZ was required to be drawn up and thereafter implemented. The state of implementation of the Scheme has not yet commenced. Funds in huge proportions would be necessary. A full and clear picture is yet to emerge. In a situation lessees who may be even remotely connected with the degradation and destruction of nature must continue to pay their share in the process of restitution by contributing to the Managing Committee from their present sale proceeds. Even the new lessees who may not have been involved with such degradation are contributing to the process of reclamation and restoration. In such a situation, we do not see how we can vary or modify our earlier orders that require all existing lessees to pay 10% of the sale proceeds and/or to depart from the requirement of payment of what has been already ordered, namely, 10% of the sale proceeds to the Monitoring Committee/SPV. These conclusions show that illegal mining in entire Bellary District etc were going on. The observation in above paras indicates the existing stock belonging to category ‘A’ ‘B’ and ‘C’ is due to the illegal mining done by them. Therefore, the Hon’ble Supreme Court while passing the various observation as mentioned above clearly indicate all mine lease holders are engaged in illegal mining before the ban on 29/7/2011. 3.4. In view of the above facts mentioned from the decision of the Hon’ble Supreme Court the claim of the assessee that they were not engaged in the illegal mining before the imposition of ban is not correct. Therefore, contribution to the SPV claimed by the assessee is not incidental to the business. But was due to the fine imposed by the H.R. Gaviappa and Co., Ballari Page 15 of 53 Hon’ble Supreme Court for the illegal mining done previously and not in F.Y. pertaining to this assessment year. Therefore, the decision of the learned CIT(A) for allowing the appeal of the assessee regarding the contribution to SPV is not in accordance with the decision of the Hon’ble Supreme Court. Secondly, the learned CIT(A) has assumed here that assessee has made the contribution to the SPV which is factually incorrect. It is the collected fine by the Monitoring Committee and the Monitoring Committee on the order of the Hon’ble Supreme Court has transferred to the SPV. The learned CIT(A) has not appreciated this aspect. 4.0. On the issue of compensation which has been claimed by the assessee as expenditure in this assessment year, the executive portion of the order of the Hon’ble Supreme Court on various dates are important and those are required to be elaborated not only for the accounting purpose but also for applicability of I T Act on those expenditures. Therefore following portion of the order of the Hon’ble Supreme Court are quoted in the subsequent paragraphs in relation to it. 4.1. The Hon’ble Supreme Court in para 50 of the order dated 18/4/2013 in WP 562/2009 in the case of in the case of Samaj Parivarthana & Others Vs. State of Karnataka has mentioned that:

1. 1. The categorization of the mines ("A", "B" and "C") on the basis of the parameters adopted by the CEC as indicated in its Report dated 3.2.2012 is approved and accepted.

2. The order of the Court dated 13.4.2012 recommendations dated 13.3.2012 of the CEC (in modification of the recommendations of the CEC dated 3.2.2012) in respect of the items (A) to (I) is reiterated. Specifically, the earmarked role of the Monitoring Committee in the said order dated 13.4.2012 is also reiterated.

3. The order of the Court dated 3.9.2012 in respect of reopening of 18 Category "A" mines subject to the conditions mentioned in the said order is reiterated.

4. The order of the Court dated 28.9.2012 in all respects is reiterated.

5. The recommendations of the CEC contained in the Report dated 15.2.2013 for reopening of remaining Category “A” mines and H.R. Gaviappa and Co., Ballari Page 16 of 53 Category "B" mines (63 in number) and sale of sub-grade iron ore subject to the conditions mentioned in the said Report approved.

4.3. It is relevant to quote the following from the order of the Hon’ble Supreme Court in WP(Civil) No.562 of 2009 on 18/04/2013 in the case of Samaj Parivartana Samudaya & Ors Vs. State of Karnataka & Ors: “8. The next significant event that had occurred in the catalogue of relevant occurrences is the order of the Court dated 3.9.2012 permitting reopening of 18 category ’A’ mines subject to the conditions spelt out in the said order which broadly were to the effect that mining shall be to the extent of the annual production as applicable to each mine determined by the CEC in its Report dated 29.8.2012 and further subject to the following conditions: "(I) compliance with all the statutory requirements; (II) the full satisfaction of the Monitoring Committee, expressed in writing, that steps for implementation of the R & R Plan in the leasehold areas are proceeding effectively and meaningfully, and (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. (IV) The CEC shall, upon inspection, submit a report to this Court that any or all the stated 18 "Category A" mine owners have fully satisfied the above-mentioned conditions. Further, it shall be reported that the H.R. Gaviappa and Co., Ballari Page 18 of 53 mining activity is being carried on strictly within the specified parameters and without any violation."

H.R. Gaviappa and Co., Ballari Page 19 of 53 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. 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. IV. The R&R plans for the aforesaid 63 ’Category B’ mines may be prepared as early as possible, as directed by orders of this Court dated April 13, April 20 and May 05, 2012, and in case where the R&R plan is already prepared and ready, the leaseholder may take steps for its comprehensive implementation, both within and outside the sanctioned lease area, without any delay."

H.R. Gaviappa and Co., Ballari Page 20 of 53 The Hon’ble Supreme Court has clearly mentioned that on submission of such authorisation and undertaking, the CEC shall retain the amount covering the aforesaid three heads and pay to the concerned lease holder the balance amount if any. It is expected that balance amount after making the adjustment as indicated here would be paid to the concerned lease holder within one month from the date of submission of the authorisation and the undertaking. Therefore, it is incorrect to say for starting the business these payments were necessary to be made by the assessee while the fact is that it is only for release of the balance amount. The detailed para in the order of the Hon’ble Supreme Court dated 28/09/2012 is as follows: 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 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.

H.R. Gaviappa and Co., Ballari Page 21 of 53 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. 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. 4.4. The relevant portion of the judgment of Hon’ble Supreme Court in WP(Civil) No.562 of 2009 on 28.09.2012 in the case of Samaj Parivartana Samudaya & Ors Vs. State of Karnataka & Ors as below:

H.R. Gaviappa and Co., Ballari Page 22 of 53 Setting up of Special Purpose Vehicle (SPV) In paragraph 10(vi) of the amicus’s note, it is stated as under: "(vi) the State of Karnataka be directed to set up Special Purpose Vehicle (SPV) for the purpose of ameliorative and mitigative measures as per the "Comprehensive Environment Plans for the Mining Impact Zone" (CPEMIZ) around mining leases in Bellary, Chitradurga and Tumkur. The SPV would be under the Chairmanship of the Chief Secretary, Government of Karnataka and would have senior officers of the concerned departments of the State Government as Members. The SPV would function in a transparent manner and the accounts of the SPV would be subject to an annual audit by the CAG. A detailed scheme containing the details of the works to be undertaken, process of selection of implementing agencies, accounting procedure and other details of CEPMIZ may be directed to be prepared and submitted to this Hon’ble Court by the State of Karnataka, in consultation with the CEC within four weeks. The amounts received/retained by the Monitoring Committee towards (a) 10% of the sale proceeds, (b) compensation, (c) other receivable be directed to be transferred to the SPV (after its formation) for implementation of the provisions/ prescriptions of CEPMIZ." The formation of the Special Purpose Vehicle and the drawing up and implementation of the Comprehensive Environment Plans for Mining Impact Zone is perhaps the most essential part in the process of reclamation and rehabilitation of the area devastated by illegal mining. 4.5. In para 5 of the order of the Hon’ble Supreme Court dated 18/04/2013 it has been mentioned regarding the recommendation of the CEC under sub para 5 F) 90% of the sale price (excluding the royalty and the applicable taxes) received during the e-auction may be paid by the buyer directly to the respective lease holders and the balance 10% may be deposited with the Monitoring Committee along with the royalty, FDT and other applicable taxes/charges; This 10% figure has been approved by the Hon’ble Supreme Court as per the order indicated in para 50 of the order dated 18/4/2013 in sub para 3 and this is for the sale after the implementation of R&R plan and when the mines of category ‘A’ and category ‘B’ are opened. 4.6. In para 43 of the order dated 18/4/2013 the following has been mentioned. “ 43 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 H.R. Gaviappa and Co., Ballari Page 23 of 53 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 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. This will bring us to the most vital issue of the case, i.e., the future of the Category ’C’ mines.”

4.7. In para sub para 8 of para 50 it has been mentioned “The proceeds of the sales of the Iron Ore of the 'C' Category mines made through the Monitoring Committee will stand forfeited to the State. The Monitoring Committee will remit the amounts held by it on this account to the SPV for utilization in connection with the purposes for which it had been constituted.” Recommendation of CEC and its acceptance does not become the order of the SC. SC passed the order taking holistic view. Recommendation is based on certain parameters selected by CEC. To prove the point it can be seen that SC did not accept 10 percent deduction from sale of existing stock in B category recommended by CEC but increased to 15 percent in 28.9.2012 order and accepted 10 percent deduction in A category mine. Also in 2017 order it has not accepted CEC recommendation. Meaning thereby acceptance of the argument of CEC does not mean that CEC recommendation becomes order. Order of SC is the what is finally ordered for implementation and that mentions A and B category Mine lease holders have indulged in illegal mining. In view of the executive portion of the order quoted above, the compensation for ‘B’ category mine is from illegally extracted existing stock when ban was imposed. So it is related to the sales in those H.R. Gaviappa and Co., Ballari Page 24 of 53 financial year i.e. F.Y.2011-12 and F.Y.2012-13. Further, the Hon’ble Supreme Court has observed in para 15 of the order dated 18/04/2013: “15. The above facts would have relevance to the future of the mining operations in the State as the continuance of this Court’s orders for sale of the Iron Ore by the process of e-auction by the Monitoring Committee after recommencement of mining operations on the same terms and conditions and also the continuance of the SPV would be required to be considered by us. It would also be convenient to take note of the fact that as per the CEC’s Report dated 15.2.2013 sale of almost the entire quantity of illegally extracted Iron Ore has been effected through the Monitoring Committee and the sub-grade Iron Ore lying in dumps in and around several lease areas may not have adequate commercial potential.” This indicates mining operation in category ‘B’ mines started properly after R&R plan was placed and only when old existing stock was sold through e-auction by Monitoring Committee as per CEC report dated 15/02/2013. Ssecondly, the said notice for seeking Rs.6.96 crores (copy attached) as penalty is dated 02/03/2013. The said notice also stated that it has been approved by the Hon’ble Supreme Court. It further stated that in case of non payment it would be recovered in accordance with law. In the current assessment year i.e. 2015-16 the mining operation started as per statute and it was legal mining. While this compensation is related to the yield of illegal mining in the form of existing stock lying after the ban and which has been sold prior to the order of the Hon’ble Supreme Court dated 18/4/2013. So it is important to place on record whether the sales of equivalent amount has been shown in that financial year or not. There is no such record or details on the record. From the record it is clear that the assessee is claiming this compensation in financial year 2014-15 which is not the relevant financial year in which the said notice was issued. Thirdly the Monitoring Committee has been directed by the Hon’ble Supreme Court to deduct this compensation from the sale amount of H.R. Gaviappa and Co., Ballari Page 25 of 53 the existing stock as mentioned above. And also it is important to mention that Monitoring Committee has never mentioned that legal mining will be stopped if this compensation amount is not paid rather it stated that it will be recovered. So in view of these facts, not only this compensation has been claimed in the wrong financial year and also this is not an allowable expenditure because this is being paid due to the violation of the law which is the writ order of the Hon’ble Supreme Court. Therefore, the learned CIT(A) has erred in allowing the appeal on this issue also.

5. A written submission dated 30/01/2024 has been placed on record and the same may be taken into consideration. The Hon’ble Supreme Court in the case of Commissioner of Income Tax Vs. Prakash Chand Lunia (2023) 149 taxmann.com 416 (SC), held that a penalty or a confiscation is a proceedings in rem, and therefore a loss in pursuance to same is not available for deduction regardless of nature of business, as a penalty or confiscation cannot be said to be incidental to any business. Here 10% of the sale which has been deducted is for the illegal mining that is illegal business done by the assessee prior to ban and compensation is for the illegality the assessee has committed prior to ban as discussed above, therefore this cannot be allowed as an expenditure, even if it is claimed as a penalty under different Act. Here the business has been held illegal and that illegal component has been quantified by the Hon’ble Supreme Court but taking the Holistic view i.e. taking the requirement of steel industries into account etc., the Hon’ble Supreme Court has imposed fine on this illegal business. Therefore not only it is covered by the explanation under Sec.37(1) of the I T Act but also the claim of the assessee that it was not doing any illegal business is not correct.

6. The decision of this Tribunal quoted by the learned CIT(A) has not been discussed in detail reason being that same are related to different case and on different facts and circumstances in them. However, after H.R. Gaviappa and Co., Ballari Page 26 of 53 going through those orders of the Hon’ble Tribunal, the Hon’ble Tribunal in their decisions have not taken into consideration the points raised in this submission. Secondly, the decisions of the Hon’ble Tribunal have been challenged before the Hon’ble High Court of Karnataka, therefore it is not proper to comment at the stage. But as stated above the Hon’ble Tribunal in those decisions have not dealt these points as mentioned above. Therefore, he submitted that in view of the above facts and circumstances the decision of the learned CIT(A) may be set aside and may be restored back to the Assessing Officer for verification of the proper claim of the compensation with respect to relevant sales in relevant assessment year. The reason being till the assessee offers the sales to the Income Tax, any expenditure there off cannot be claimed. The assessment years 2012-13, 2013-14, and 2014-15 were not under scrutiny and it is evident that the details with regard to the same have not been filed. Further, he submitted that the Hon’ble ITAT, B-Bench, Bangalore in Para 7.8.16 of the judgement dated 04/11/2020 in the case of M/s Ramgad Minerals ( & 1271/Bang/2019) stated that “The decisions relied upon by Ld. CIT (A) has also been perused by us. We note that those decisions deal with expenses which are in the nature of penalty. In the present situation, contribution towards SPV is a requirement to be incurred to continue its business activities. In our view, these payments in present case do not fall within the category of penalty. Hon'ble Supreme Court has quantified rate for the mass tort, that has occasioned due to illegalities committed in the operation of mines separately. We also note that assessee has suo moto disallowed the payments that fall within the category of penalty which has been computed in accordance with directions of Hon'ble Supreme Court (being Rs.5 crore per hectare for area as under illegal mining pits outside sanctioned areas and Rs.1 crore per hectare for area under illegal overburden dumps, roads, offices exception outside the sanctioned lease area). Based on above discussions and analysis, we are of opinion that contribution to SPV being 15% of sale proceeds, under category B, is an allowable expenditure for year under consideration”

H.R. Gaviappa and Co., Ballari Page 27 of 53 The Hon’ble ITAT has followed in its observation that Hon’ble Supreme Court has quantified rate for mass tort, that has occasioned due to illegalities committed in the operation of mines separately. It further noted that the assessee disallowed the payments suo motu, which fall within the category of penalty and which have been computed in accordance with the direction of Hon’ble Supreme Court. Thus the submitted that compensation paid by the assessee (deducted from the sale of existing stock) is penalty in nature and therefore this may be disallowed as a expenditure, as can be seen from the noting of Hon’ble Tribunal.

4.1. At the outset, it is submitted by the Ld.AR in submission dated 29/01/2024 that these issues are covered in favour of the Respondent-Assessee vide the decision in M/s Veerabhadrappa Sangappa & Co., (Supra) as per the following details: Ground Nos. Para & Page AY Issue decided 2.3.1 to Para 7 to 2013-14 10% / 15% of sale 2.3.9 & 7.10.13 of proceeds in respect of 2.3.12 to Pages 71 to 96 Category A & B mines 2.3.15 respectively retained towards SPV allowable as business expenditure, since the same is compensatory in nature and not penalty. 2.4.4 Paras 8 to 2013-14 Amounts retained 8.12.19 of towards SPV as Pages 96 to compensation for mining 119. and dumping sub-grade material outside the leased area allowable as business expenditure u/s 37(1).

H.R. Gaviappa and Co., Ballari Page 28 of 53 4.2. The Ld.AR also submitted that the Hon’ble Jurisdictional Tribunal has followed the said decision in a number of cases and reference may be made to the following decisions: a. Sri B. Rudragouda in & 315/Bang/2020, dated, 15-04-2021 for the assessment years, 2015-16 & 2016-17. b. M/s Gogga Gurusanthaiah and Brothers, ITA Nos 3317 to 3319/Bang/2018 dated, 28-07-2021 for the assessment years, 2013-14, 2014-15 & 2015-16. c. M/s. Zeenath Transport Company, ITA Nos. 1780, 1781 & 1782/Bang/2018 dated, 18-08-2021 for the assessment years, 2012-13, 2013-14 & 2014-15.

4.3. The submissions of the respondent assessee are reproduced as under:

 Reference is made to the decision of the Hon'ble Supreme Court in the case of Govt. of A.P. & Ors. v. M/s. Obulapuram Mining Co. P. Ltd. & Ors. dated, 29-07-2011 and other decisions which are PRIOR to the decision in WP No.562/2009 dated, 18-04-2013, which has been exhaustively analysed by the Tribunal in holding that the sale proceeds of the iron-ore deducted & retained towards SPV are compensatory in nature in the case of M/s Veerabhadrappa Sangappa & Co., (Supra) and other cases.

 The written submissions of the Revenue has also referred to the subsequent judgment of the Hon'ble SC in IA No.247, IA No.250 in IA No.247 & IA No.252 in IA No.247 in WP H.R. Gaviappa and Co., Ballari Page 29 of 53 No.562/2009 dated, 21-03-2017 and para 12 is also reproduced therein. The IA was filed before the Hon'ble Supreme Court praying for modification of its earlier orders exempting the lessees from payment of 10% of sale proceeds towards SPV. The Hon'ble Court rejected the claim to modify its earlier orders observing that even the new lessees, who may not have been involved in such degradation in the past are contributing to the restoration & reclamation. The relevant portion found reproduced in the WS of the Revenue is as under: "12.................In a situation lessees who may be even remotely connected with the degradation and destruction of nature must continue to pay their share in the process of restitution by contributing to the Managing Committee from their present sale proceeds. Even the new lessees who may not have been involved with such degradation are contributing to the process of reclamation and restoration. In such a situation, we do not see how we can vary or modify our earlier orders that require all existing lessees to pay 10% of the sale proceeds and/or to depart from the requirement of payment of what has been already ordered, namely, 10% of the sale proceeds to the Monitoring Committee/SPV."

 As per the judgment of the Hon'ble Supreme Court itself, 10% of the sale proceeds are to be deducted & retained towards SPV even in respect of NEW LESSEES who were not existing during the relevant period and not involved in any degradation of environment." This fact alone shows that the amounts retained towards SPV are compensatory in nature as is already held by the Hon'ble Co-ordinate Bench in the said case bf M/s Veerabhadrappa Sangappa & Co., (Supra).

 The Revenue has also referred to the judgment of the Hon'ble Supreme Court in another case - CIT vs. Prakash Chand H.R. Gaviappa and Co., Ballari Page 30 of 53 Lunia (2023) 149 taxmann.com 416 (SC) contending that a penalty or a confiscation is a proceeding in rem and therefore the same is not allowable as business expenditure since a penalty or a confiscation cannot be said to be incidental to any business. It is nobody's case that penalty is allowable as a business expenditure. It is submitted that the Hon'ble Tribunal in M/s. Veerabhadrappa Sangappa & Co. (Supra) has held that the amounts deducted from the sale proceeds of the iron-ore and remitted to SPV are COMPENSATORY in nature and NOT PENALTY, Hence, the Revenue's reliance on this judgment is totally misplaced. It is not even the contention of the Revenue in its WS that the amounts retained towards SPV are in the nature of penalty and not in the nature of compensation. Such an argument assailing the finding of the Hon'ble Tribunal in M/s. Veerabhadrappa Sangappa & Co. (Supra) cannot be taken before this Hon'ble Tribunal/any Tribunal at all.  Be that as it may, the ld. A.R. respectfully submitted that the issues disputed in this appeal are covered in favour of the Respondent-Assessee in the lead case - M/s Veerabhadrappa Sangappa & Co., (Supra) and other cases and therefore, the Revenue's appeal is liable to be dismissed.

6. Ground No.1.: The issue contested by revenue in this ground is regarding the SPV charges retained by the CEC out of the sale proceeds as per the directions of Hon’ble Supreme Court. 6.1. Admittedly, this issue came for consideration before this Tribunal in the case of B. Rudragouda in & 315/Bang/2020 for the assessment year 2015-16 & 2016-17 vide Tribunal order dated 15.4.2021 wherein held as under: “47. We have heard both the parties and perused the material on record. The allowability of this impugned expenditure came up for consideration before the coordinate Bench in the case of Ramgad Minerals & Mining Ltd. in ITA Nos.1270 & 1271/Bang/2019, order dated 4.11.2020 for the assessment years 2013-14 & 2014-15 wherein it was held as under:- “7.8.12. On careful reading of decision of Hon’ble Supreme Court dated 18/04/2013, it is clear that 15% contribution to SPV account was guarantee payment for implementing of R & R plan, which would be deducted from sale proceeds. This was one of the conditions for resuming mining operations under Category ’B’. We refer to and rely on observations by Hon’ble Supreme Court in case of CIT vs Sitaldas Tirathdas reported in (1961) 41 ITR 367. Hon’ble Supreme Court laying down following principal referred to various rulings that illustrated aspects of diversion of income by overriding title. “These are the cases which have considered the problem from various angles. Some of them appear to have applied the principle correctly and some, not. But we do not propose to examine the correctness of the decisions in the light of the facts in them. In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as its income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to pay out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Whereby the obligation income is diverted before it reaches the assessee, it is deductible but where the income is required to be applied to discharge an obligation after such income reaches the assessee the same consequence in H.R. Gaviappa and Co., Ballari Page 32 of 53 law does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another portion of one’s own income which has been received and essence applied. The first is a case in which the income never reaches the assessee, who, even if he were to collect it, does so, not as part of his income but for and on behalf of the person to whom it was payable.” Emphasis Supplied 7.8.13. In the present case, we note that 15% of sale proceeds was payable to SPV account after it accrued to assessee and the fact that, assessee was obliged to part with such portion of income, by virtue of directions of Hon’ble Supreme Court, as a precondition to resume mining operations under Category ‘B’. At this juncture, we also emphasise that, but for the intervention by Hon’ble Supreme Court, assessee would not have contributed 15% to SPV account for implementation of reclamation and rehabilitation scheme on its own, as there was no statutory requirement to do so under relevant statutes that regulate mining activities. 7.8.14. Hon’ble Supreme Court has been very clear regarding the types of payments that needs to be recovered from lessee’s under Category ‘B’, from the sale proceeds as well as otherwise. All the payments form part of R&R plan for recouping and rehabilitating the environment. Certain payments are onetime payment and some others are recurring depending upon the sale of iron ore sold in the name of each licensee or depending on the need for rehabilitation. 7.8.15. In our view, contributing 15% to SPV account on account of Category ‘B’, would be application of income, and therefore, should be considered as expenditure incurred for carrying out its business activity. This we hold so, for the reason that, contributions determined by Hon’ble Supreme Court are in the nature of guarantee payment necessary for resuming mining activity. We also note that, alleged sum in these grounds are for implementation of R&R Plans in respective sanctioned lease areas held by assessee, where illegal mining activities or which were used for illegal overburden dumps, roads, offices etc., beyond sanctioned lease area were carried out. Here, we also note that, Hon’ble Supreme Court directed CEC to refund any leftover guarantee money, after completion of implementation of R& R plan, subject to satisfaction of CEC and approval by Hon’ble Supreme Court. For this peculiar reason, amount so contributed towards SPV being 15% of sale proceeds, under Category B, cannot be treated as penal in nature. We, therefore, reject observations of authorities below that, such sum having H.R. Gaviappa and Co., Ballari Page 33 of 53 contributed by assessee fall within ambit of explanation 1 to section 37 (1) of the Act. 7.8.16. The decisions relied upon by Ld. CIT (A) has also been perused by us. We note that those decisions deal with expenses which are in the nature of penalty. In the present situation, contribution towards SPV is a requirement to be incurred to continue its business activities. In our view, these payments in present case do not fall within the category of penalty. Hon’ble Supreme Court has quantified rate for the mass tort, that has occasioned due to illegalities committed in the operation of mines separately. We also note that assessee has suo moto disallowed the payments that fall within the category of penalty which has been computed in accordance with directions of Hon’ble Supreme Court (being Rs.5 crore per hectare for area as under illegal mining pits outside sanctioned areas and Rs.1 crore per hectare for area under illegal overburden dumps, roads, offices exception outside the sanctioned lease area). Based on above discussions and analysis, we are of opinion that contribution to SPV being 15% of sale proceeds, under category B, is an allowable expenditure for year under consideration.”

7.10.2. On the contrary, Ld.CIT DR submitted that it is an application of income and therefore has to be disallowed in the hands of assessee. He submitted that Ld.AO in support of disallowing the claim of expenditure relied on following decisions: • CIT vs.KCP Ltd. reported in 245 ITR 421(SC) • G.Padnabha Chettiyar & Sons vs.CIT reported in 182 ITR 1(Mad) • ReformFlour Mills Pvt.Ltd Vs.CIT reported in 132 ITR 184,196(Cal)

H.R. Gaviappa and Co., Ballari Page 34 of 53 • CIT vs.A.Krishnaswamy Mudaliar & Ors reported in 53 ITR 122(SC) We note that these decisions are on the accrual of income, which has been considered by us in forgoing paras. We have already held that entire income accrued to assessee while deciding grounds 2.1 &2.2. In the issue of contribution towards SPV, one has to consider its correct nature. In our opinion these decisions do not assist revenue in any manner. 7.10.3. On careful reading of decision of Hon’ble Supreme Court in case of Samaj Parivartana Samudaya & Ors. Vs. State of Karnataka & Ors. (supra), it is clear that 10%/15% contribution to SPV account was guarantee payment for implementing of R & R plan, which would be deducted from sale proceeds. This was one of the conditions for resuming mining operations under categories ‘A’ and ’B’ respectively. 7.10.4. With this background, we once again refer to and rely on observations by Hon’ble Supreme Court in case of CIT vs Sitaldas Tirathdas (supra). Hon’ble Supreme Court laying down following principal referred to various rulings that illustrated aspects of diversion of income by overriding title. “These are the cases which have considered the problem from various angles. Some of them appear to have applied the principle correctly and some, not. But we do not propose to examine the correctness of the decisions in the light of the facts in them. In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as its income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to pay out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Whereby the obligation income is diverted before it reaches the assessee, it is deductible but where the income is required to be applied to discharge an obligation after such income reaches the assessee the same consequence in law does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another portion of one’s own income which has been received and essence applied. The first is a case in which the income never reaches the assessee, who, even if he were to collect it, does so, not as part of his income but for and on behalf of the person to whom it was payable.” Emphasis Supplied 7.10.5. Applying, thin line of difference interpreted by Hon’ble Supreme Court to present facts, we are of the opinion that, contribution to SPV account, cannot be considered to be diversion of income. This is because, we have already held while deciding ground 2.1 and 2.2 hereinabove, that entire sale proceeds accrued to assessee, and it is only due to direction of Hon’ble Supreme Court that such amount was contributed to SPV account, for which assessee was to authorise CEC/MC in relevant paragraph 11(III) refer to and relied by Ld.CIT DR.

H.R. Gaviappa and Co., Ballari Page 35 of 53 7.10.6. In the present facts of the case, we note that 10%/15% of sale proceeds was payable to SPV account, after it accrued to assessee, and the fact that, assessee was obliged to part with such portion of income, by virtue of directions of Hon’ble Supreme Court in case of Samaj Parivartana Samudaya & Ors. Vs. State of Karnataka & Ors. (supra), as a precondition to resume mining operations under Category ‘A and ‘B’. At this juncture we also emphasise that, but for the intervention by Hon’ble Supreme Court, assessee would not have contributed 10%/15% to SPV account for implementation of reclamation and rehabilitation scheme on its own, as there was no statutory requirement to do so under relevant statutes that regulate mining activities. 7.10.7. In our view contributing 10%/15% to SPV account on account of Category ‘A’/ ‘B’ respectively, would be application of income, and therefore should be considered as expenditure incurred for carrying out its business activity. This we hold so, for the reason that, contributions determined by Hon’ble Supreme Court are in the nature of guarantee payment necessary for resuming mining activity. We also note that, alleged sum in these grounds are for implementation of R&R Plans in respective sanctioned lease areas held by assessee, where illegal mining activities or which were used for illegal overburden dumps, roads, offices etc., beyond sanctioned lease area were carried out. Here, we also note that, Hon’ble Supreme Court directed CEC to refund any leftover guarantee money, after completion of implementation of R& R plan, subject to satisfaction of CEC and approval by Hon’ble Supreme Court. For this peculiar reason amount so contributed towards SPV being 10%/15% of sale proceeds, under category A/B, cannot be treated as penal in nature. 7.10.8. We note that co-ordinate Hydrabad bench of Tribunal in NMDC (supra) was the case of Category ‘A’ wherein it was allowed as expenditure by observing as under: “2. Brief facts of the case are that the assessee-company, a Public Sector Undertaking, engaged in the business of 'mining of iron ore diamonds; and generation and sale of wind power', filed its return of income for the relevant Assessment Years 2013-14 and 2014-15 both under the normal provisions as well as u/s 115JB of the Act for the relevant AYs. During the assessment proceedings u/s 143(3) of the Act, the A.O. observed that the assesseecompany is carrying out mining activity in India and particularly in Karnataka and that the Hon'ble Supreme Court of India took note of the large scale illegal mining activity carried on by various companies in Karnataka at the cost or detriment of environment and delivered their judgment on 18.04.2013 levying appropriate charges on the leaseholders. A.O. also observed that the Hon'ble Supreme Court, based on the extent of illegal mining, classified the mining leases into three categories viz., Category "A", "B" and "C" and that the assessee is falling in Category-B in respect of Donimali Complex and that in their order, the Apex Court H.R. Gaviappa and Co., Ballari Page 36 of 53 observed that before consideration of any resumption of mining operations by Category-B leaseholders, each of the lease holder must pay compensation for the areas under illegal mining pits outside the sanctioned area at the rate of Rs. 5 Crs per hectare and for illegal overburden for at the rate of Rs. 1 Cr per hectare. Further, A.O. observed that the said direction of the Apex Court was subject to the final determination of the notional loss caused by the illegal mining and illegal use of the land; and that the Hon'ble Supreme Court had directed that each of the leaseholder should pay a sum equivalent to 15% of the sale proceeds of its iron ore sold through the Monitoring Committee. In accordance with the said direction, the assessee made payment of Rs. 337.13 Crs towards contribution for the Special Purpose Vehicle and the sum of Rs. 68.66 Crs towards penalty / compensation for encroachment of the mining area beyond the sanctioned / leased area. The A.O. observed that the total of the above payment of Rs. 405.79 Crs was punitive in nature and accordingly sought to disallow the same by issuance of a show-cause notice. …………… 4. The A.O. however did not accept the assessee's explanation and held that the assessee, being a Category-B leaseholder, has been directed to make the payment for infringement of MMDR Act and other allied laws. Therefore, he observed that the payment of Rs. 405.79 Crs is punitive in nature and brought it to tax. ……………..

(c) Third objection of Ld.AO is also contained in para 4.9 of the assessment order for AY:2013-14 and as per the same, this is the objection of the Ld.AO that the said SPV is not allowable u/s 37 (1) as it was not incurred by the assessee wholly and exclusively for the purpose of business.

(d) In para 4.8 of the assessment order for AY:2013-14, Ld.AO is stating this that SPV rate is 10% in category ‘A’ Mines but 15% in Category ‘B’ Mines and this extra 5% in Category ‘B’ Mines is for various violations and illegal mining and even after this observation, he finally held in the same para that whole SPV Expenses of 15% is not allowable.

7.8.10. Ld.AO observed that, these SPV were deducted pursuant to directions of Hon’ble Supreme Court (supra) by order dated 18/04/2013, wherein, it was directed that, sum so paid towards SPV charges should be exhaustively and exclusively used to undertake socio economic and infrastructure development, afforestation, soil and biodiversity conservation and for ensuring inclusive growth of the area surrounding mining leases.

7.8.11. Ld.AO further observed that these payments are nothing but appropriation of profits earned by assessee that cannot be said to have incurred for purpose of business or earning profits. Accordingly, entire amount adjusted towards SPV was disallowed by Ld.AO. Ld.AO was of opinion that entire sale proceeds as per E auction bid Sheets/invoices were to be assessed as trading receipts. The amount retained by CEC/monitoring committee as per directions of Hon’ble Supreme Court, on behalf of assessee for SPV purposes, was on account of damages and loss caused to environment due to contravention of law, and therefore, cannot be allowed as deduction out of sale proceeds, even after accrual of such liability. Ld.AO was of opinion that, even in Category ‘A’ mines, there was marginal illegality found by CEC, because of which 10% of contribution was attributed out of sale proceeds to the SPV.

7.8.12. On careful reading of decision of Hon’ble Supreme Court dated 18/04/2013, it is clear that 15% contribution to SPV account was guarantee payment for implementing of R & R plan, which would be deducted from sale H.R. Gaviappa and Co., Ballari Page 40 of 53 proceeds. This was one of the conditions for resuming mining operations under Category ’B’.

We refer to and rely on observations by Hon’ble Supreme Court in case of CIT vs Sitaldas Tirathdas reported in(1961) 41 ITR 367.Hon’ble Supreme Court laying down following principal referred to various rulings that illustrated aspects of diversion of income by overriding title.

These are the cases which have considered the problem from various angles. Some of them appear to have applied the principle correctly and some, not. But we do not propose to examine the correctness of the decisions in the light of the facts in them. In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as its income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to pay out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Whereby the obligation income is diverted before it reaches the assessee, it is deductible but where the income is required to be applied to discharge an obligation after such income reaches the assessee the same consequence in law does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another portion of one’s own income which has been received and essence applied. The first is a case in which the income never reaches the assessee, who, even if he were to collect it, does so, not as part of his income but for and on behalf of the person to whom it was payable.

Emphasis Supplied 7.8.13. In the present case, we note that 15% of sale proceeds was payable to SPV account after it accrued to assessee and the fact that, assessee was obliged to part with such portion of income, by virtue of directions of Hon’ble Supreme Court, as a precondition to resume mining operations under Category ‘B’. At this juncture, we also emphasise that, but for the intervention by Hon’ble Supreme Court, assessee would not have contributed 15% to SPV account for implementation of reclamation and rehabilitation scheme on its own, as there was no statutory requirement to do so under relevant statutes that regulate mining activities.

7.8.14. Hon’ble Supreme Court has been very clear regarding the types of payments that needs to be recovered from lessee’s under Category ‘B’, from the sale proceeds as well as otherwise. All the payments form part of R&R plan for recouping and rehabilitating the environment. Certain payments are onetime payment and some others are recurring depending upon the sale of H.R. Gaviappa and Co., Ballari Page 41 of 53 iron ore sold in the name of each licensee or depending on the need for rehabilitation.

7.8.15. In our view, contributing 15% to SPV account on account of Category ‘B’, would be application of income, and therefore, should be considered as expenditure incurred for carrying out its business activity. This we hold so, for the reason that, contributions determined by Hon’ble Supreme Court are in the nature of guarantee payment necessary for resuming mining activity. We also note that, alleged sum in these grounds are for implementation of R&R Plans in respective sanctioned lease areas held by assessee, where illegal mining activities or which were used for illegal overburden dumps, roads, offices etc., beyond sanctioned lease area were carried out. Here, we also note that, Hon’ble Supreme Court directed CEC to refund any leftover guarantee money, after completion of implementation of R& R plan, subject to satisfaction of CEC and approval by Hon’ble Supreme Court. For this peculiar reason, amount so contributed towards SPV being 15% of sale proceeds, under Category B, cannot be treated as penal in nature. We, therefore, reject observations of authorities below that, such sum having contributed by assessee fall within ambit of explanation 1 to section 37 (1) of the Act.” 7.10.10. We note that the CEC, vide its report dated 3-2-2012 and 13-32012 made recommendations with regard to setting up of SPV, transfer of funds collected from all lease holders under various heads, manner of utilisation of said funds etc., to Hon’ble Supreme Court, which is incorporated in Paragraph 7 at Page 164 to 171 as under:

“(IX) A Special Purpose Vehicle (SPV) under the Chairmanship of Chief Secretary, Government Karnataka and with the senior officers of the concerned Departments of the State Government as Members may be directed to be set up for the purpose of taking various ameliorative and mitigative measures in Districts Bellary, Chitradurga and Tumkur. The additional resources mobilized by (a) allotment/ assignment of the cancelled mining leases as well as the mining leases belonging to M/s. MML, (b) the amount of the penalty/ compensation received/ receivable from the defaulting lessee, (c) the amount received/ receivable by the Monitoring Committee from the mining leases falling in “Category- A” and “Category-B”, (d) amount received/ receivable from the sale proceeds of the confiscated material etc., may be directed to be transferred to the SPV and used exclusively for the socio- economic development of the area/local population, infrastructure development, conservation and protection of forest, developing common facilities for transportation of iron ore (such as maintenance and widening of existing road, construction of alternate road, conveyor belt, railway siding and improving H.R. Gaviappa and Co., Ballari Page 42 of 53 communication system, etc.). A detailed scheme in this regard may be directed to be prepared and implemented after obtaining permission of this Hon’ble Court;”

7.10.11. Hon’ble Supreme Court at 176 of its order made following observations with regard to SPV:-

“By order dated 28-09-2012, this Court had constituted a Special Purpose Vehicle (for short “SPV”) on the suggestion of the learned amicus curiae. The purpose of constitution of the SPV, it may be noticed, is for taking of ameliorative and mitigative measures as per the “Comprehensive Environment Plans for Mining Impact Zone (CPEMIZ) around mining leases in Bellary, Chitradurga and Tumkur. By order dated 28-09-2012, the Monitoring Committee was to make available the payments received by it under different heads of receivables to the SPV”

7.10.12. It is noticed that amounts collected from assessee are directed to be given to the SPV, which will in turn take various types of ameliorative and mitigative steps in the interest not only of the environment and ecology but the mining industry as a whole so as to enable the industry to run in a more organized, planned and disciplined manner. Under these set of facts, it cannot be said that these amounts are penal in nature. We notice that the Hyderabad bench of Tribunal in the case of NMDC Ltd (supra) and Co- ordinate bench of Bangalore Tribunal in Ramgad Minerals (supra) came to the same conclusion. We note that in NMDC case (supra), Hon’ble Hydrabad Tribunal followed decision of Hon'ble Kolkatta High Court in the case of ShyamSel Ltd (supra) and State Pollution Control Board vs. Swastik Ispat (P) Ltd (supra), wherein identical types of payments made to remedy the river pollution caused by the parties were held to be compensatory in nature. Hence the provisions of Explanation 1 to sec.37 will not apply to these payments. We also note that Hon’ble Supreme Court at page 171 observed that, these payments are necessary to be made by the mining lease holders. Hence there is merit in the submission of Ld.Counsel that, without making these payments, assessee could not have resumed the mining operations. Hence, these expenses are incidental to carrying on the business and hence allowable u/s 37(1) of the Act.

7.10.13. Based on above discussions and analysis, we are of opinion that contribution to SPV being 10%/15% of sale proceeds, under category A/B, is to be allowable as expenditure for year under consideration. Thus, alternative plea raised by assessee in ground 2.3.6 and 2.3.7 does not arise. In any event, such payment cannot be considered to be loss in the hands of assessee.

H.R. Gaviappa and Co., Ballari Page 43 of 53 Accordingly we allow grounds 2.3.8-2.3.9 and dismiss grounds 2.3.1-2.3.7.”

13. On careful reading of decision of Hon’ble Supreme Court dated 18/04/2013, it is clear that 15% contribution to SPV account was guarantee payment for implementing of R & R plan, which would be deducted from sale proceeds. This was one of the conditions for resuming mining operations under Categories ’B’. We refer to and rely on observations by Hon’ble Supreme Court in case of CIT vs Sitaldas Tirathdas reported in (1961) 41 ITR 367. Hon’ble Supreme Court laying down following principal referred to various rulings that illustrated aspects of diversion of income by overriding title. “These are the cases which have considered the problem from various angles. Some of them appear to have applied the principle correctly and some, not. But we do not propose to examine the correctness of the decisions in the light of the facts in them. In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as its income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to pay out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Whereby the obligation income is diverted before it reaches the assessee, it is deductible but where the income is required to be applied to discharge an obligation after such income reaches the assessee the same consequence in law does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another portion of one’s own income which has been received and essence applied. The first is a case in which the income never reaches the assessee, who, even if he were to collect it, does so, not as part of his income but for and on behalf of the person to whom it was payable.

Emphasis Supplied 14. In the present facts of the case, we note that 15% of sale proceeds was payable to SPV account, after it accrued to assessee, and the fact that, assessee was obliged to part with such portion of income, by virtue of directions of Hon’ble Supreme Court, as a precondition to resume mining operations under Category ‘B’. At this juncture we also emphasise that, but for the intervention by Hon’ble Supreme Court, assessee would not have contributed 15% to SPV account for implementation of reclamation and rehabilitation scheme on its own, as there was no statutory requirement to do so under relevant statutes that regulate mining activities.

H.R. Gaviappa and Co., Ballari Page 44 of 53 15. Hon’ble Supreme Court has been very clear regarding the types of payments that needs to be recovered from lessee’s under Catagory ‘B’, from the sale proceeds as well as otherwise. All the payments forms part of R&R plan for recouping and rehabilitating the environment. Certain payments are one time payment and some others are recurring depending upon the sale of iron ore sold in the name of each licensee or depending on the need for rehabilitation.

H.R. Gaviappa and Co., Ballari Page 45 of 53 “These are the cases which have considered the problem from various angles. Some of them appear to have applied the principle correctly and some, not. But we do not propose to examine the correctness of the decisions in the light of the facts in them. In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as its income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to pay out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Whereby the obligation income is diverted before it reaches the assessee, it is deductible but where the income is required to be applied to discharge an obligation after such income reaches the assessee the same consequence in law does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another portion of one’s own income which has been received and essence applied. The first is a case in which the income never reaches the assessee, who, even if he were to collect it, does so, not as part of his income but for and on behalf of the person to whom it was payable.” Emphasis Supplied 8.12.4. Applying, thin line of difference interpreted by Hon’ble Supreme Court to present facts, we are of the opinion that, contribution to SPV account, cannot be considered to be diversion of income. This is because, we have already held while deciding ground 2.1 and 2.2 hereinabove, that entire sale proceeds accrued to assessee, and it is only due to direction of Hon’ble Supreme Court that such amount was contributed to SPV account, for which assessee was to authorise CEC/MC in relevant paragraph 11(III) referred to and relied by Ld.CIT DR. 8.12.5. In the present facts of the case, we note that 10%/15% of sale proceeds was payable to SPV account, after it accrued to assessee, and the fact that, assessee was obliged to part with such portion of income, by virtue of directions of Hon’ble Supreme Court, as a precondition to resume mining operations under Category ‘A and ‘B’. At this juncture we also emphasise that, but for the intervention by Hon’ble Supreme Court, assessee would not have contributed 10%/15% to SPV account for implementation of reclamation and rehabilitation scheme on its own, as there was no statutory requirement to do so under relevant statutes that regulate mining activities.

H.R. Gaviappa and Co., Ballari Page 46 of 53 8.12.6. In our view contributing 10%/15% to SPV account on account of Category ‘A’/ ‘B’ respectively, would be application of income, and therefore should be considered as expenditure incurred for carrying out its business activity. This we hold so, for the reason that, contributions determined by Hon’ble Supreme Court are in the nature of guarantee payment necessary for resuming mining activity. We also note that, alleged sum in these grounds are for implementation of R&R Plans in respective sanctioned lease areas held by assessee, where illegal mining activities or which were used for illegal overburden dumps, roads, offices etc., beyond sanctioned lease area were carried out. Here, we also note that, Hon’ble Supreme Court directed CEC to refund any leftover guarantee money, after completion of implementation of R& R plan, subject to satisfaction of CEC and approval by Hon’ble Supreme Court. For this peculiar reason amount so contributed towards SPV being 10%/15% of sale proceeds, under category A/B, cannot be treated as penal in nature. We, therefore, reject observations of authorities below that, such sum having contributed by assessee do not fall within ambit of explanation to section 37 (1) of the Act. 8.12.7. Based on above discussions and analysis, we are of opinion that contribution to SPV being 10%/15% of sale proceeds, under category A/B, is to be allowable expenditure for year under consideration.”

by assessee stands allowed.” 6.2. In the present facts of the case, the assessee was obliged to part with such portion of income, by virtue of directions of Hon’ble Supreme Court, as a precondition to resume mining operations under Category ‘B’. The entire sale proceeds accrued to the assessee in the year of sale, however, the 10% was retained by the CEC/MC as per the direction of Hon’ble Supreme Court. There is no statutory requirement to do so by H.R. Gaviappa and Co., Ballari Page 47 of 53 the lease holders under relevant statutes that regulate mining activities. In our view, contributing 10% to SPV account on behalf of the assessee, therefore amounts to application of income, and therefore is to be considered as expenditure incurred for carrying out its business activity. This we hold so, for the reason that, contributions determined by Hon’ble Supreme Court are in the nature of guarantee payment necessary for resuming mining activity. Thus in our considered opinion, SPV charges @10% retained by the CEC/MC out of the sale proceeds as per the directions of Hon’ble Supreme Court cannot be treated as penal in nature. We therefore reject the arguments advanced by the Ld.DR on this issue and uphold the order of the Ld.CIT(A). Accordingly Ground No.2 raised by the revenue stands dismissed.

7. Ground no.3 raised by revenue is against allowing the claim of assessee by holding that Rs. 6,86,54,000/- paid by the assessee towards illegal mining pit, illegal dumping waste and other violations in proportion to the area encroached outside the lease area are compensatory in nature. 7.1. We have perused the written submissions advanced by both sides and the arguments advanced, based on the records placed before us. 7.2. Identical issue has been considered by coordinate bench of this Tribunal in case of Veerabhadrappa Sangappa & Co. (Supra). Relevant extract of the said decision are as under: 9.15. On perusal of above notice, it is clear that, Department of Mines and Geology, levied penalty amounting to Rs.9.69 crores for various irregularities committed by assessee towards, illegal mining pits in 0.46 Ha (Rs.2.30 crores), illegal dumping of waste in 2.50 Ha (Rs.2.50 crores), illegal approach road 4.40 ha (Rs.4.40 crores) and other violations (Rs.0.49 crores) in proportion to area encroached by assessee outside sanctioned lease area. It H.R. Gaviappa and Co., Ballari Page 48 of 53 is also noted that such illegal mining pit, illegal dumping of waste and other violations are in contravention of relevant provisions of MMDR Act, 1957, MC Rules, 1960 and MCD Rules, 1988 respectively. 9.16. Further, on a careful perusal of observations by Hon’ble Supreme Court reproduced hereinabove, it is apparently clear that, Hon’ble Court was conscious enough that, mechanism provided by relevant statutes in question, would neither be effective nor efficacious to deal with extraordinary situation that arose on account of large scale illegalities committed in operation of mines in question. Such activities has resulted in grave and irreparable loss to the forest wealth besides colossal loss caused to national exchequer. Hon’ble Court also opines that, for such extraordinary situation, remedy indeed must also be extraordinary. In that backdrop, recommendations of CEC were accepted by Hon’ble Supreme Court. 9.17. When clarification was sought on this issue, Ld.Counsel placed before us relevant Acts and Rules, that govern mining activities. We note that, penalties mentioned in these relevant Acts are insufficient to meet illegalities caused by all lessee’s in such large proportion. We also note that, Government of Karnataka, amended Mines and Minerals (Development and Regulation) Act 1957, pursuant to order passed by Hon’ble Supreme Court. Section 21 of the Act has been amended to increase Penalties, punishable with imprisonment and/or fine for various contraventions towards illegal mining/dumping/transportation etc. 9.18. While this issue was being argued before Hon’ble Supreme Court, leaseholders have not denied illegalities committed under these relevant Acts. Therefore consequential penalty would automatically be imposed on such admitted violations and is of law. Under such circumstances, on a joint reading of observations by Hon’ble Supreme Court and subsequent amendment of relevant Acts, along with notice of demand raised by Mining and Geology Department, we cannot agree with submissions of Ld.Counsel that, alleged sum partakes character of compensation. In our view, there is a clear indication in decision of Hon’ble Supreme Court that, such amount forfeited by CEC/MC are in the nature of penalty levied for various infractions of law by assessee. We also make it clear that in present case assessee has been penalised for illegalities in caused Category ‘B’.

H.R. Gaviappa and Co., Ballari Page 49 of 53 We therefore, do not find any infirmity in the order of Ld.CIT(A) in disallowing sum of Rs.9.69 crores. Accordingly this ground raised by assessee stands dismissed. 7.3. The above observations are based on the notice issued by the mining and Geology department issued to the assessee therein, levying penalty for illegalities committed by the assessee therein towards illegal mining pits, illegal dumping of waste and other violations in the portion of area encroached by the assessee therein outside the sanctioned lease area. 7.4. In the present facts of the case, the assessee before us has also received notice from the Mining and Geology department that is scanned and reproduced as under:

H.R. Gaviappa and Co., Ballari Page 50 of 53 7.5. On perusal of the same we note that the Department of Mining and Geology has levied penalty of Rs. 6.96 Crores for following illegalities: (i) For illegal mining pit 0.66 Ha Rs.3,30,00,000 (ii) For illegal dumping of waste in 2.53 HA Rs.2,53,00,000 (iii) Other violations Rs.1,13,00,000 7.6. At this juncture, we refer to para 20, 27, 32-33 of the decision of Hon’ble Supreme Court, in case of Samaj Parivartana Samudaya & Ors vs. State of Karnataka(supra) 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 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.

7.7. Hon’ble Supreme Court summarised arguments advanced by leaseholders as under:

H.R. Gaviappa and Co., Ballari Page 51 of 53 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.

7.8. Hon’ble Supreme Court after considering arguments advanced by both sides and after considering various constitutional provisions observed in paragraph 37 as under: 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 H.R. Gaviappa and Co., Ballari Page 52 of 53 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. 7.9. Hon’ble Supreme Court in cognizance of enormous wrong caused to the environment due to illegal mining, illegal dumping, by the lessees directed a minimum payment @ Rs.5 Crores per hectare towards illegal mining pits outside the sanctioned area and Rs.1 Crore per hectare towards illegal overburden dumps and other violation by the lease holders. Such payments were only for category B lease holders. 7.10. We further note that in case of M/s Ramgad Minerals & Mining Ltd. (Supra), this Tribunal has recorded a finding of fact that the assessee therein had suo moto disallowed similar payments. Relevant extract of the said order is as under: 7.8.16. The decisions relied upon by Ld. CIT (A) has also been perused by us. We note that those decisions deal with expenses which are in the nature of penalty. In the present situation, contribution towards SPV is a requirement to be incurred to continue its business activities. In our view, these payments in present case do not fall within the category of penalty. Hon’ble Supreme Court has quantified rate for the mass tort, that has occasioned due to illegalities committed in the operation of mines separately. We also note that assessee has suo moto disallowed the payments that fall within the category of penalty which has been computed in accordance with directions of Hon’ble Supreme Court (being Rs.5 crore per hectare for area as under illegal mining pits outside sanctioned areas and Rs.1 crore per hectare for area under illegal overburden dumps, roads, offices exception outside the sanctioned lease area).

7.11. We note that the Ld. CIT(A) while allowing the claim of the assessee followed the decision of coordinate bench of this Tribunal in case of Veerabhadrappa Sangappa & Co. (Supra). However, has not read the decision in toto. We therefore reverse the view taken by the Ld. CIT(A) in treating the above payment as compensatory in nature.

H.R. Gaviappa and Co., Ballari Page 53 of 53 7.12. The Ld.AR has also not referred to the relevant observation of coordinate bench of this Tribunal in case of Veerabhadrappa Sangappa & Co. (Supra). The paras referred by the ld. A.R. in the written submissions reproduced herein above pertains to the issue of allowability of SPV contribution. Respectfully following the view taken by this coordinate bench in case of Veerabhadrappa and Sangappa & Co. reproduced in para 7.2 and the discussions herein above, we hold the payment of Rs.6.96 crore to be penal in nature, not eligible for deduction under section 37(1), by virtue of Explanation 1 to Section 37(1) of the Act. Accordingly Ground No.2 raised by the revenue stands allowed.

8. Ground No.1,3 are general in nature that do not require adjudication.