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M/S Gogga Gurusanthaiah And … vs The Assistant Commissioner Of … on 28 July, 2021 IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES “C”, BANGALORE Before Shri Chandra Poojari, AM & Shri George George K, JM ITA No.3317/Bang/2018: Asst.Year 2013-2014 ITA No.3318/Bang/2018: Asst.Year 2014-2015 ITA No.3319/Bang/2018: Asst.Year 2015-2016 M/s.Gogga Gurusanthaiah and The Asst.Commissioner of Brothers, Mine Owners, P.B.No.4, v. Income-tax, Circle – 1 Nehru Co-operative Colony Bellary – 583 103. Hosapete – 583 201. PAN : AACFG6895M. (Appellant) (Respondent) Appellant by : Sri.Sivaprasad Reddy, Advocate Respondent by :Sri.Pradeep Kumar, CIT-DR Date of Date of Hearing : 27.07.2021 Pronouncement : 28.07.2021 ORDER

Per Bench :

These appeals at the instance of the assessee are directed against 3 orders of the CIT(A), all dated 25.10.2018. The relevant assessment years are 2013-2014, 2014-2015 and 2015-2016.

2. Some common issues are raised in these appeals, hence, they were heard together and are being disposed of by this consolidated order. The details of the issue arising in each of the assessment years, the relevant grounds, etc. are given in a tabulated form below:-
Issue Issue Ground Assessment Year No. Nos. 2013-2014 2014-2015 2015-2016 1. SPV deduction 10% / 2.1 to 2.4 Issue Issue Issue 15% raised raised raised 2. Compensation for 3.1 to 3.3 Issue Issue N.A. mining and dumping raised raised sub-grade material
2 ITA Nos.3317-3319/Bang/2018. M/s.Gogga Gurusanthaiah and Brothers. outside the leased area.
3. Sales accounted in the 4.1 to 4.2 Issue N.A. N.A. following year )AY raised 2014-15) but added as income of the year.
4. Difference in receipts 5 Issue N.A. N.A. as per 26AS treated as raised unaccounted receipts
5. Contribution to the 3 N.A. N.A. Issue Deputy Commissioner raised. Government of Karnataka for Hampi Utsav We shall adjudicate the appeal issue-wise as under. 3. Sale proceeds at 15% retained through SPV (Asst.Years 2013-2014, 2014-2015 and 2015-2016) 3.1 The assessee is into the business of mining. All the area
minted by the assessee was categorized as per the Central
Empowering Committee (CEC) / order of the Hon’ble Supreme
Court in B Category. As per the Supreme Court order, all the
mining activities in the State of Karnataka was stopped vide
judgment dated 29.07.2011 in WP No.562 of 2009 dated
29.07.2011. Later CEC was constituted under the direction
and supervision of the Hon’ble Supreme Court, which took
control of mining, processing, production and sale of iron ore.
The CEC sold the iron ore through e-Auction and retained
10% / 15% of the sale proceeds and remitted to a separate
account with the Special Purpose Vehicle (SPV) under the
Chairmanship of the Chief Secretary of Government of
Karnataka. The CEC released the balance amount of 85% of
sale proceeds to the assessee. The amount so withheld and
retained was to be used exclusively for socio-economic
development of the area / local population, infrastructure
3 ITA Nos.3317-3319/Bang/2018. M/s.Gogga Gurusanthaiah and Brothers.

development, conservation and protection of forest, etc. The
assessee contended that the amount retained by CEC at 15%
of the sale proceeds was an allowable expenditure in
computing the total income in the manner laid down in the
Income-tax Act. It was further contended that the amount
retained by CEC at 15% of sale proceeds was not for violation
of any law in force or towards any penalty and accordingly not
covered by Explanation 1 of section 37 of the I.T.Act. The
contentions of the assessee was rejected by the Assessing
Officer and 15% retained by CEC was not allowed as a
deduction. The view taken by the A.O. was confirmed by the
CIT(A).

3.2 Aggrieved, the assessee has filed these appeals before
the Tribunal. The learned Counsel for the assessee submitted
that the issue of allowability of 15% of sale proceeds remitted
to the SPV is decided in favour of the assessee by the Co-
ordinate Bench order of the Tribunal in the following cases:-
(i) M/s.Veerabhadrappa Sangappa & Co. in ITA No.1054/Bang/2019 order dated 08.12.2020.

(ii) Sri B.Rudragouda in ITA Nos.314 & 315/Bang/20 order dated 15.04.2021 for the assessment years 2015-16 and 2016-17.

3.3 The learned Departmental Representative filed a brief
written submission, supporting the order of the A.O. and the
CIT(A).

3.4 We have heard rival submission and perused the
material on record. The Co-ordinate Bench order of the
Tribunal in the case of M/s.Veerabhadrappa Sangappa & Co.
4 ITA Nos.3317-3319/Bang/2018.
M/s.Gogga Gurusanthaiah and Brothers.

(supra), on identical facts had allowed deduction of 15% of
sale proceeds in respect of B mines retained towards SPV as
an allowable business expenditure. The relevant finding of the
Tribunal in the case of M/s.Veerabhadrappa Sangappa & Co.,
reads as follow:-
“7. Ground No.2.3.1-2.3.9, 2.3.12-2.3.15 have been raised in respect of addition on account of Category A-10% of confiscated sale proceeds utilised towards SPV amounting to Rs.13,10,94,826/- and addition on account of Category B- 15% of confiscated sale proceeds, utilised towards SPV, amounting to Rs.3,18,41,886/-. Assessee debited Rs.16,29,36,712/- to profit and loss account, under the head SPV charges.

Facts relating to this issue are as under:

7.1. Hon’ble Supreme Court in case of Samaj Parivartana Samudaya & Ors. Vs. State of Karanataka & Ors. (supra), approved the recommendation of CEC for deducting and retaining part of sale proceeds for purpose of taking various ameliorative and mitigative measures. CEC recommended retaining of 10% of sale proceeds. Hon’ble Supreme Court accepted 10% for Category “A” mines and increased deduction to 15% for Category “B” mines. These amounts were directed by Hon’ble Supreme Court to be used to implement R & R plans, for taking ameliorative and mitigative measures. During the year under consideration, amount deducted from sale proceeds as per Ld.AO was Rs.16,29,36,712/- and Rs.17,05,60,822/- as per the assessee. However the fact remains that the amount of Rs.16,29,36,712/- has been included in aggregate amount of Rs.77,71,82,153/-, which was claimed as expenditure in the original return of income and excluded from the sales revenue in the revised return of income contending that the same is diversion by overriding title. Hence, what was claimed/excluded in the returns of income and what was assessed by Ld.AO was Rs.16,29,36,712/- as per the assessment order.

7.2. Ld.AO called for information/detail in respect of the claim of deduction of Rs.16,29,36,712/-. Assessee vide letter dated 21/01/2016 filed detailed submissions. Ld.AO after considering the submissions held as under:

“4.2.b. The assessee’s Consolidated submissions on deductions made by the monitoring committee mentioned in above table 3, 4, 5 and 6 in para (4) have been carefully perused and the same are not found acceptable for following reasons detailed below. However, the disallowance on the above deduction will be dealt with separately. In respect of explanation for allowability of expenditure claimed under the head SPV charges of Rs.16,29,36,712/-(Rs.131094826 + Rs.3018041886), the submissions are not acceptable for the following reasons. Entire sale proceeds as per the E auction bid sheets/invoices has to be assessed as trading receipts. The amount retained by the CEC/monitoring committee, as per the directions of the Supreme Court on behalf of the assessee, for SPV purposes is on account of damages and loss caused to the environment by contravention of loss. The said amount cannot be allowed as deduction out of
5 ITA Nos.3317-3319/Bang/2018. M/s.Gogga Gurusanthaiah and Brothers.

sale proceeds even after accrual of such liability which is being compensation
and penalty in nature for contravention of loss. As observed by the Supreme
Court, category “A” mines comprises of mines where there is marginal illegality
as found by CEC.

4.2.c. The following observations were made by Honorable Supreme Court in its
order dated 18/0412013, in the case of WRIT PETITION (CIVIL) NO. 562 of
2009 Samaj Parivartana Samudaya & Ors …. Petitioner (s) Versus State of
Karanataka & Ors. . .. Respondent(s) WITH SLP (C) Nos.7366-7367 of 2010,
SLP (C) Nos.32690-32691 of 2010, WP (CrI.) No.66 of 2010, SLP (C)
Nos.17064-17065 of 2010, SLP (C) No (CC No.16829 of 2010), SLP (C)No
……(CC No. 16830 of 2010), WP (C) No.411 of 2010, SLP (C) No.353 of 2011
and WP (C) No.76 of2012: “5. We may now proceed to notice the relevant part
of the two Reports of the CEC dated 3.2.2012 and 13.3.2012, as referred to
herein above. “IV’ CLASSIFICATION OF LEASES IN DIFFERENT
CATEGORIES ON THE BASIS OF THE LEVEL OF ILLEGALITIES FOUND.

27. The CEC, based on the extent of illegal mining found by the Joint Team and
as appropriately modified by the CEC in its Proceeding dated 25th January,
2012 and after considering the other relevant information has classified the
mining leases into three categories namely “Category-A “, “Category-B” and “Category-C”.

28. The “Category-A” comprises of (a) working leases wherein no
illegality/marginal illegality have been found and (b) nonworking leases wherein
no marginal/illegalities have been found. The number of such leases comes to 21
& 24 respectively.

29. “Category-B” comprises of (a) mining leases wherein illegal mining by way
of (i) mining pits outside the sanctioned lease areas have been found to be up to
10% of the lease areas and/ or (ii) over burden/waste dumps, outside the
sanctioned lease areas have been found to be up to 15% of the lease areas and
(b) leases falling on interstate boundary between Karnataka and Andhra
Pradesh and for which survey sketches have not been finalized. The numbers of
such leases in “Category-B” comes to 72.

30. The “Category-C” comprises of leases wherein (i) the illegal mining by way
of (a) mining pits outside the sanctioned lease area have been found to be more
than 10% of the lease area and/or (b) over burden/waste dumps outside the
sanctioned lease areas have been found to be more than 15% of the lease areas
and/or (ii) the leases found to be involved in flagrant violation of the Forest
(Conservation) Act and/or found to be involved in illegal mining in other lease
areas. The number of such leases comes to 49. RECOMMENDATIONS (as
modified by CEC by its Report dated 13.3.2012. Items 1 to IV of the Report dated
3.2.2012 stood replaced by Items A to I of the Report dated 13.3.2012 which are
reproduced below along with Items V to XIV of the initial Report dated
3.2.2012). (E) the sale of the iron ore should continue to be through e-auction
and .the same should be conducted by the Monitoring Committee constituted by
this Hon’ble Court. However, the quantity to be put up for e-auction, its grade,
lot size, its base / floor price and the period of delivery will be decided / provided
by the respective lease holders. The Monitoring Committee may permit the lease
holders to put up for e-auction the quantities of the iron ore planned to be
produced in subsequent months. The system of sale through the Monitoring
6 ITA Nos.3317-3319/Bang/2018. M/s.Gogga Gurusanthaiah and Brothers.

Committee may be reviewed after say two year; (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; (V) In respect of the mining leases
falling in “CATEGORY-B” (details given at Annexure-R-10 to this Report) it is
recommended that: . ii) for carrying out the illegal mining outside the lease area,
exemplary compensation/penalty may be imposed on the lessee. It is
recommended that: a) For illegal mining by way of mining pits outside the leases
area, as found by the Joint Team, the compensation/ penalty may be imposed at
the rate of Rs. 5.00 Crore (Rs.FiveCrore only) for per ha. of the area found by
the Joint Team to be under illegal mining pit; and b) For illegal mining by way
of over burden dump(s) road, office, etc. outside the sanctioned lease area, the
compensation/penalty may be imposed @ is. 1.00 crores (Rs. One Crores only)
for per ha. of the area found to be under illegal over burden dump etc. v) Out of
the sale proceeds of the existing stock of the mining leases, after deducting: a)
The penalty/compensation payable; b) Estimated cost of the implementation of
the R& R Plan; and c) 10% of the sale proceeds to be retained by the Monitoring
Committee for being transferred to the SPV d) The balance amount, if any, may
be allowed to be disbursed to the respective lessees. (VI) In respect of the mining
leases falling in “CATEGORY-C” (details are given at annexure-R-11 to this
Report) it is recommended that (a) such leases should be directed to be cancelled
/ determined on account of these leases having been found to be involved
insubstantial illegal mining outside the sanctioned lease areas (b) the entire sale
proceeds of the existing stock of the iron ore of these leases should be retained
by the Monitoring Committee and (c) the implementation of the R&R Plan
should be at the cost of the lessee; (IX) A Special Purpose Vehicle (SPV) under
the Chairmanship of Chief Secretary, Government Karnataka and with the
senior officer 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 MIs. 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 areal local population, infrastructure development,
conservation and protection of forest, developing common facilities for
transportation of iron ore (such as maintenance and widening of existing road,
construction of alternate road, conveyor belt, railway siding and improving
communication system,. (X) Out of the 20% of sale proceeds retained by the
Monitoring Committee in respect of the cleared mining leases falling in “Category-A “, 10% of the sale proceeds may be transferred to the SPV while the
balance 10% of the sale proceeds may be reimbursed to the respective lessees. In
respect of the mining leases falling in “Category-B”, after deducting the
penalty/compensation, the estimated cost of the implementation of the R&R Plan,
and IO% of the sale proceeds to be retained for being transferred to the SPV, the
balance amount, if any, may be reimbursed to the respective lessees; (XIII) the
confiscated iron ore pertaining to the cancelled stock yards will be sold by the
Monitoring Committee and the sale proceeds will be retained by the Monitoring
Committee,’ … (XIV) the Monitoring Committee may be authorized to utilize up
7 ITA Nos.3317-3319/Bang/2018. M/s.Gogga Gurusanthaiah and Brothers.

to 25% of the interest received by it for engaging reputed agencies for the
monitoring of the various parameters relating to mining. ” … 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 lease holders,
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.”

4.2.d. As could be seen from the above observations of the Hon’ble Supreme
Court the mine owners were placed in different category based on the illegal or
marginal illegal mining done by them. The CEC was established to monitor the
e-auction sale of the Iron-ore belonging to the mine-owners. The CEC is
authorized to retain the portion of sale proceeds of the Ores collected from
successful bidders. Further, the amount retained out of sale proceeds by the CEC
has to be adjusted against penalty and compensation for illegal mining
depending on Category of the mine owners i.e., 10% or 15% of the amount has
to be deposited under Spy “for the purpose of taking various ameliorative and
mitigative measures in Districts of Bellary, Chitradurga and Tumkur”

4.2.e. The amount to be retained out of sale proceeds after e-auction on behalf of
the assessee against its penal liabilities is a part of sale proceeds and hence, the
said amount is liable to be assessed to tax as trading receipts during the
financial year of e-auction in view of the mercantile method of accounting
followed by the assessee. In other words, the retention money is a part of the
sale. proceeds and it ought to be recognized as a revenue. There are only two
recognized methods of accounting namely the cash method of accounting and the
mercantile method of accounting. In mercantile method of accounting, entries
are posted in the books of accounts on the date of transaction when the rights
accrue or liabilities are incurred, irrespective of the date of payment. The right
to receive the said retained amount has accrued to the assessee and it cannot be
diverted on the plea contrary to the accounting practice, since the assessee firm
is following accrual method of accounting, a part of receipt cannot be taken on
piecemeal receipt basis. Hence, the assessee’s contention that, the said amount
do not even constitute the income of the assessee, cannot be accepted.

4.2.f. The part of the sale proceeds to be retained by the CEC / Monitoring
Committee for SPV and for adjusting penalty and other liabilities, is nothing but
appropriation of the profit of the assessee. As per doubly entry system of
accounting, the assessee should have accounted the entire sales consideration in
its P & L Account and balance of sale amount should have been shown as
receivable from Government. The balance of the sale amount will be reflecting
as payable to seller-assessee in the accounts of the Government.

4.2.g. Further, the said SPV is Special Purpose Vehicle for social economic
development of the mining area which is nothing but relating to corporate social
8 ITA Nos.3317-3319/Bang/2018. M/s.Gogga Gurusanthaiah and Brothers.

responsibility only. The deduction claimed towards SPY vis-a-vis against the
amount retained by the Monitoring Committee is not allowable under section
37(1) of the Income Tax Act, 1961 as it was not incurred by the assessee wholly
and exclusively for the purpose of business. The said part of the proceeds are
retained to meet the penal and other liabilities for contravention of law and
therefore, the said amount retained by the CEC/Monitoring Committee cannot be
allowed as deduction in view of the specific Explanation to section 37(1) of the
Act.

4.2.h. The Hon’ble Supreme Court thought on the lines of ‘Corporate Social
Responsibility’ much before its actual introduction in the Act and wanted to
improve the lives of people & environment affected by the mining activities. On
this line of thought, the Apex Court wanted the CEC/MC to collect certain
amount of profit from the beneficiaries of mining lease and use the same
exclusively for the socio-economic development of the area / local population,
infrastructure development, conservation and protection of forest, developing
common facilities for transportation of iron ore (such as maintenance and
widening of existing road, construction of alternate road, conveyor belt, railway
siding and improving communication system, etc.), From this, it is evident that
the amount recovered towards SPV is nothing but an appropriation of profits
earned by the mine owners and cannot be said to have incurred for the purpose
of business or earning the profits. Hence, the assessee’s claim of deduction
towards SPY Charges cannot be allowed. Accordingly, the entire sale proceeds
are assessed as trading receipts on accrual basis keeping in view the mercantile
method of accounting followed by the assessee and no deduction is allowed in
respect of amount retained for SPV purpose keeping in view the provisions of
section 37 of the Act.

4.2.i. Reliance is placed on the decision of the Hon’ble Supreme Court in the
case of CIT Vs K.C.P Limited (SC) 245ITR 421 Dated: 0910812000. Wherein, “the assessee transferred the excess realization to fund in 1997. It was held that
the excess amount was realized in the ordinary course of its business activity as
price of sugar sold by the assessee. Accordingly, the Hon’ble Supreme Court has
rightly held that excess collected is income in the year of collection even if it is
retained in separate a/c and subsequently transferred to Sugar Equalization
Fund of the Government.”

4.2.j. Further, Reliance may be placed on the following decisions wherein, it is
held that the transaction cannot be split in to Mercantile and Cash method of
accounting – G. Padmanabha Chattiyar & Sons Vs CIT 182 ITR 1,5 (Mad.), –
Reform Flour Mills Pvt. Ltd., Vs CIT 132 ITR 184, 196 (Cal), – CIT Vs A
Krishnaswamy Mudaliar & Others 53 ITR 122 (SC).

4.2.k. In view of above facts brought on record, the amount of Rs.16,29,36,712/-
(Rs.13,10,94,826+Rs.3,18,41,886) claimed as expenditure under SPY Charges
and debited to P & L A/c is disallowed and added back to the returned income
and brought to tax.

Aggrieved by addition made by Ld.AO, assessee preferred appeal before Ld.CIT
(A).

7.3. Ld.CIT(A) observed and held as under:
9 ITA Nos.3317-3319/Bang/2018.
M/s.Gogga Gurusanthaiah and Brothers.

“4.4) The facts of the case, submissions made by the assessee and the assessment
order passed by the AO has been carefully considered. In connection with the
illegal mining activities in Karnataka, the Hon’ble Supreme Court has
established a Monitoring Committee called Central Empowered Committee
(CEC) to monitor the e-auction sales of the iron ore and other related work
entrusted to it. In this regard, the Hon’ble Apex Court has passed various
judgments in the case of Samaj Parivarthana Samudaya &others Vs. State of
Karnataka & Others, on various dates in Writ Petition No. 562 of 2009 along
with SLP No. 7366-7367. The Hon’ble Supreme Court in its order dated
18.04.2013 in the same case of Samaj Parivarthana Samudaya & Others V/s.
State of Karnataka & Others has pronounced its important judgment on illegal
mining in the state of Karnataka and accordingly, a Central Empowered
Committee (CEC)has identified three category of mining cases, Category – A, B
& C. The assessee falls under the Category-B mines, the issues pertaining to
category ‘B’ mines is discussed. B-Category mines comprises (a) mining leases
wherein illegal mining by way of (i) mining pits outside the sanctioned lease
areas have been found to be upto 10% of the lease areas and/or (ii) over
burden/waste dumps outside the sanctioned lease areas have been found to be
upto 15% of the lease areas and (b) leases falling on interstate boundary
between Karnataka and Andhra Pradesh and for which survey sketches have not
been finalized.

4.5) Further, the sale of Iron Ore should be through e-auction and the same
should be conducted by Monitoring Committee constituted by the CEC and the
sale proceeds are to be retained / disbursed to mine owner based on certain
conditions.

4.6) The Hon’ble Apex Court in its order dated 23.09.2011 has described the
modalities for the sale of iron ore and has clearly mentioned the procedure to be
adopted for e-auction of iron ore and procedure for accounting of sale proceeds.
The account of sale proceeds is being maintained by the Government under
double entry system of accounting which is duly being monitored by CEC.

4.7) The Hon’ble Supreme Court of India in SLP No. 7366 to 7361/2010 dated
29.07.2011 had banned the activity of mining of Iron Ore in the districts of
Bellary, Tumkur and Chitradurga of Karnataka districts. In compliance with the
orders of theHon’ble Supreme Court of India, the mining activity had been
suspended by the appellant. It may be further stated that the Iron Ore held in the
stock was not permitted to be sold by the appellant. However, subsequently, i.e.,
on 03.09.2012, the Hon’ble Supreme Court had lifted the ban and permission
was given for resumption of mining operation in category B’ mines.

4.8) The assessee is in Category ‘B’ where illegal mining was found to have been
done in the manner described above. In respect of category “B” mines the
Supreme Court ordered that compensation/ penalty has to be imposed on the
lessee and accordingly it was observed by the court as under :

“(V) In respect of the mining leases falling in “CATEGORY-B” (details given at
Annexure R-10 to this Report) it is recommended that : ……….(ii) for carrying
out the illegal mines out the lease area, exemplary compensation/penalty may be
imposed on the lessee. It is recommended that: a) For illegal mining by way of
mining pits outside the leases area, as found by Joint Team, the
compensation/penalty may be imposed at the rate of Rs. 5.00 Crore (Rs. Five
10 ITA Nos.3317-3319/Bang/2018. M/s.Gogga Gurusanthaiah and Brothers.

Crore only) for per ha. Of the area found by the Joint Team to be under illegal
mining pit; and b) For illegal mining by way of over burden dump(s) road,
office, etc. outside the sanctioned lease area, the compensation/penalty may be
imposed @Rs. 1.00 crores (Rs. One Crore only) for per ha. Of the area found to
be under illegal over burden dump etc. ….. v) Out of the sale proceeds of the
existing stock of the mining leases, after deducting : a) The penalty/
compensation payable; b) Estimated cost of the implementation of the R&R
Plan; and c) 10% of the sale proceeds to be retained by the Monitoring
Committee for being transferred to the SPV d) The balance amount, if any, may
be allowed to be disburses to the respective lessees.

4.9) A perusal of the directions of the Supreme Court shows that the part
proceeds are retained to meet the penal and other liabilities for contravention of
law and therefore the said amount was retained by the CEC/Monitoring
Committee. The Hon’ble Supreme Court wanted the CEC/MC to collect certain
amount of profit from the beneficiaries of mining lease and use the same
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 etc. Hence, it is evident that the
amount recovered towards SPV is nothing but appropriation of profits earned by
the mine owners and cannot be said to have incurred for the purpose of business
or earning the profits.

4.10) In view of the above, the AO was correct in adding the amount of
Rs.16,29,36,712/- under SPV Charges. Further, the entire sale proceeds are
assessed as trading receipts on accrual basis keeping in view the mercantile
method of accounting followed by the assessee and no deduction is allowed in
respect of the amount retained for SPV for the purpose in view of the provisions
of section 37 of the Act. This ground fails.

7.4. Aggrieved by observations of Ld.CIT(A), assessee is in appeal before us
now. Before us, Ld.Counsel submitted that, amount retained by CEC/MC
towards SPV is nothing but diversion of income by overriding title for following
reasons: i. MC to control of existing stock; ii. MC received sale proceeds
directly from buyers; iii. MC was responsible for depositing statutory levies like
royalty, taxes, fees, e-auction service fee etc on behalf of assessee.

7.5. On the above facts, Ld.Counsel primarily contended that, such sale proceeds
since were retained by MC as per directions of Page 80 of 138 ITA No.
1054/Bang/2019 A.Y:2013-14 Hon’ble Supreme Court in case of Samaj
Parivartana Samudaya & Ors. Vs. State of Karanataka & Ors. (supra), ought to
have been regarded as having been diverted at source by overriding title towards
SPV for R & R plans of mining areas. Ld.Counsel placed reliance on following
decisions in support: (a) CIT vs. SitaldasTirathdas (1961)(41 ITR 367)(SC) (b)
Motilal Chhadami Lal Jain vs. CIT (1991)(190 ITR 1)(SC) (c) CIT vs. Sunil J
Kinariwala (2003)(259 ITR 10)(SC) (d) CIT vs. Karnataka State Agricultural
Produce Processing & Export Corporation Ltd (2015)(377 ITR 496)(Kar) (e)
CIT vs. United Breweries Ltd (2010)(321 ITR 546)(Kar) (f) CIT vs. A Tosh &
Sons (P) Ltd (1987)(166 ITR 867)(Kol) (g) Shroff Eye Centre vs. ACIT (h) Sri T
Jayachandran vs. DCIT (2012-TIOL-977-HC-MAD-IT) (i) FR Sabu P Thomas
vs. UOI (2015-TIOL-514-HC-Kerala-IT) (j) A F Ferguson & Co vs. ACIT (2011-
TIOL-604-ITAT-Mum) (k) CIT vs. PandavapuraSahakaraSakkareKarkhane Ltd
11 ITA Nos.3317-3319/Bang/2018. M/s.Gogga Gurusanthaiah and Brothers.

(1988)(174 ITR 475)(Kar) (l) CIT vs. PandavapuraSahakaraSakkareKarkhane
Ltd (198 ITR 690 (Kar)) 7.6. Ld.Councel submitted that the amount retained by MC for contribution to
SPV is not taxable in the hands of the assessee, as the same has been diverted at
source by overriding title as per the orders of Hon’ble Supreme Court. He
submitted that there is no principal and agent relationship between the assessee
and MC. Hence it cannot be said that the MC was acting on behalf of the
assessee. In fact, the MC is acting as per the directions given by Hon’ble
Supreme Court. It was submitted that assessee did not have absolute command,
control and right of disposition of this receipt. Ld.Counsel thus submitted that
this receipt has been diverted at source and cannot constitute income of the
assessee.

7.7. Alternatively, he also proposed that, such receipts could be considered as
business loss under Section 28 of the Act, since such proceeds were utilised by
SPV towards reclamation and rehabilitation of mining areas, as per direction of
Hon’ble Supreme Court. Ld.Counsel placed reliance on following decisions in
support: (a) Dr. T.A. Quereshi vs. CIT (2006)(287 ITR 547)(SC) (b) CIT vs.
S.N.A.S.A. Annamalai Chettiar (1972)(86 ITR 607)(SC) (c) CIT vs. S.C.Kothari
(1971)(82 ITR 794)(SC) (d) CIT vs. Piara Singh (1980)(124 ITR 40)(SC) (e) CIT
vs. T.C. Reddy (2013)(356 ITR 516)(AP) (f) RamachandarShivnarayan vs. CIT
(1978)(111 ITR 263)(SC) (g) Bipinchand K Bhatia vs. DCIT (Tax appeal No.107
of 2004 dated 16.10.2014) (h) BadridasDaga vs. CIT (1958)(34 ITR 10)(SC) (i)
Poona Electric Supply Co Ltd vs. CIT (1965)(57 ITR 521)(SC) 7.7.1. Ld.Counsel, thus, submitted that the amount deducted by MC may also be
taken as business loss and hence the same is deductible u/s.28 of the Act.
Ld.Counsel placed reliance on decision of Hon’ble Supreme Court in the case of
Dr.T.A.Quereshi vs. CIT (Supra) and also the decision rendered in the case of
CIT vs. S C Kothari (1971)(82 ITR 794)(SC).

7.8. Without prejudice to the above arguments, Ld.Counsel proposed that, such
proceeds utilised by SPV, should be allowed as expenses under section 37(1) of
the Act. Ld.Counsel submitted that amount deducted by MC is meant to be used
for socio economic development and hence Explanation 1 to Section 37 will not
apply. It was submitted that Explanation 1 to Section 37 would cover only such
payments which is an offence or which is prohibited by law. He placed reliance
on following decision in support: (a) Jai Surgicals Ltd vs. ACIT (2014)(33 ITR
(Trib) 86)(Del) (b) Prakash Cotton Mills (P) Ltd vs. CIT (1993)(201 ITR
684)(SC) (c) M P Gupta vs. ITO (2014-TIOL-957-ITAT-Mum) 7.8.1. Ld.Counsel submitted that Hon’ble Supreme Court directed MC to deduct
such amount in order to resume the mining activity. Hence it was incurred
wholly and exclusively for the purpose of business and hence the same is
allowable u/s.37 of the Act. Ld.Counsel, inter alia, placed reliance on following
decisions:- (a) ACIT vs. Essel Mining &Inds. Ltd (2016-TIOL-371-ITAT-Kol) (b)
NMDC Limited vs. ACIT (ITA No.1823 and 182/Hyd/2017) (c) Obulapuram
Mining Company (P) Ltd (160 ITD 224)(Bang) 7.8.2. He submitted that deduction made by MC towards contribution to SPV for
the purpose of restoration of environment is based on the principle, “Polluter
pays principle” held by Hon’ble Clacutta High Court in the case of Shyam Sel
12 ITA Nos.3317-3319/Bang/2018. M/s.Gogga Gurusanthaiah and Brothers.

Ltd vs. DCIT reported in (2016) 72 taxmann.com 105. Ld.Counsel submitted
that, Ld.AO was not justified in invoking Explanation 1 to sec. 37(1), which
relates to the expenses incurred towards infraction of law. He submitted that the
deduction was made by MC as per the directions of Hon’ble Supreme Court and
the same cannot be equated with infraction of law. He submitted that MC
deducted 10% of sale proceeds from Category “A” mine (Lease No.2296), where
no illegality was found. He submitted that, the amount so deducted was
contributed to the SPV for taking ameliorative measures and hence it is in the
nature of compensation and not penal in nature. Further Explanation 1 shall
apply only if the purpose of expenditure is for an offence or prohibited by law.
Hence, Explanation 1 to sec.37 is not applicable to this payment. Ld.Counsel
relied on following decisions in this regard:- (a) ITO vs. Reliance Share and
Stock Brokers Ltd (ITA No.274/Mum/2013) (b) CIT vs. Ajanta Pharma Ltd
(2017)(85 taxmann.com 252)(Bom) (c) CIT vs. Regalia Apparels (P) Ltd
(2013)(352 ITR 71)(Bom) (d) CIT vs. Vikas Chemicals (2015)(53 taxmann.com
171)(Delhi) 7.8.3. He submitted that Hon’ble Hyderabad Tribunal examined identical issue
in the case of NMDC Ltd (supra) and the deductions made by MC have been
allowed as business expenditure.

7.9. Ld.CIT.DR supported orders passed by authorities below. According to
Ld.CIT DR, Hon’ble Supreme Court in case of Samaj Parivartana Samudaya &
Ors. Vs. State of Karanataka & Ors. (supra), directed assessee to contribute
10%/15% under category ‘A’/’B’ towards SPV account. Referring to paragraph
10 for Catagory ‘A’ and paragraph 11(III) for Category ‘B’ at page 171-173 of
decision by Hon’ble Supreme Court (supra), Ld.CIT.DR submitted that, assessee
was also directed to give authorisation letter to CEC/MC for contributing such
sum of sale proceeds equivalent to 10% and 15% of its iron ore sold through
MC, towards SPV account, which would be utilised for rehabilitation and
reclamation activities. It was submitted that, subject to such contributions,
assessee would be granted permission to resume its business of extracting of iron
ore. He thus submitted that, such payment therefore cannot be treated as
diversion of income, but has to be taxed in the hands of assessee. Ld.CIT.DR
submitted that decision of Hon’ble Supreme Court, is clear regarding
categorization that is drawn based on percentage of violations carried by mining
lessees. It was thus submitted that, payments have been attributed for infraction
of law committed by assessee.

7.9.1. Ld.CIT.DR once again emphasised on true nature of obligation attached to
the alleged sum, which is the factor, to decide whether, such sum has been
diverted before it reached assessee as held by Hon’ble Supreme Court in case of
CIT vs Sitaldas Tirathdas (supra). Ld.CIT.DR. 7.10. We have perused
submissions advanced by both sides in light of records placed before us.

7.10.1. Ld.Counsel again raised 3 prepositions before us in respect of the
contribution made to SPV account from the sale proceeds. • Primarily he
contended that there is diversion of income by overriding title to SPV account,
and therefore such amount is not liable to tax in the hands of assessee. •
Alternatively he submitted that the said sum may be treated as loss under section
28 while computing profit and loss under the head income from business and
profession. Or • He submitted that it may be treated as an expenditure incurred
by assessee for purposes of business.
13 ITA Nos.3317-3319/Bang/2018.
M/s.Gogga Gurusanthaiah and Brothers.
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: Page 85 of 138 ITA No. 1054/Bang/2019 A.Y:2013-14 • CIT vs.KCP
Ltd. reported in 245 ITR 421(SC) • G.Padnabha Chettiyar & Sons vs.CIT
reported in 182 ITR 1(Mad) • ReformFlour Mills Pvt.Ltd Vs.CIT reported in 132
ITR 184,196(Cal) • CIT vs.A.Krishnaswamy udaliar & 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 assesee 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 Karanataka & 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.
14 ITA Nos.3317-3319/Bang/2018.
M/s.Gogga Gurusanthaiah and Brothers.

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 Karanataka & 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: Page 88 of 138 ITA No. 1054/Bang/2019 A.Y:2013-14 “2. Brief facts
of the case are that the assessee-company, a Public Sector Undertaking, engaged
in the business of ‘mining of iron ore diamonds; and generation and sale of wind
power’, filed its return of income for the relevant Assessment Years 2013-14 and
2014-15 both under the normal provisions as well as u/s 115JB of the Act for the
relevant AYs. During the assessment proceedings u/s 143(3) of the Act, the A.O.
observed that the assessee-company is carrying out mining activity in India and
particularly in Karnataka and that the Hon’ble Supreme Court of India took note
of the large scale illegal mining activity carried on by various companies in
Karnataka at the cost or detriment of environment and delivered their judgment
on 18.04.2013 levying appropriate charges on the leaseholders. A.O. also
observed that the Hon’ble Supreme Court, based on the extent of illegal mining,
classified the mining leases into three categories viz., Category “A”, “B” and “C”
and that the assessee is falling in Category-B in respect of Donimali Complex
and that in their order, the Apex Court observed that before consideration of any
resumption of mining operations by Category-B leaseholders, each of the lease
holder must pay compensation for the areas under illegal mining pits outside the
sanctioned area at the rate of Rs. 5 Crs per hectare and for illegal overburden
for at the rate of Rs. 1 Cr per hectare. Further, A.O. observed that the said
direction of the Apex Court was subject to the final determination of the notional
loss caused by the illegal mining and illegal use of the land; and that the Hon’ble
Supreme Court had directed that each of the leaseholder should pay a sum
equivalent to 15% of the sale proceeds of its iron ore sold through the
Monitoring Committee. In accordance with the said direction, the assessee made
payment of Rs. 337.13 Crs towards contribution for the Special Purpose Vehicle
15 ITA Nos.3317-3319/Bang/2018. M/s.Gogga Gurusanthaiah and Brothers.

and the sum of Rs. 68.66 Crs towards penalty / compensation for encroachment
of the mining area beyond the sanctioned / leased area. The A.O. observed that
the total of the above payment of Rs. 405.79 Crs was punitive in nature and
accordingly sought to disallow the same by issuance of a show-cause notice.
…… 4. The A.O. however did not accept the assessee’s explanation and held that
the assessee, being a Category-B leaseholder, has been directed to make the
payment for infringement of MMDR Act and other allied laws. Therefore, he
observed that the payment of Rs. 405.79 Crs is punitive in nature and brought it
to tax. ………. 10. Thus, from the table reproduced above, it is seen that the
assessee has been classified as Category-‘A’ whereas the Assessing Officer has
considered the assessee as Category-‘B’ company. The Hon’ble Supreme Court
has clearly indicated that Category-A comprises of (i) ‘working leases’ wherein
no illegality / marginal illegality have been found and (ii) ‘non-working leases’
wherein no marginal / illegalities have been found, whereas Category-B
comprises of (i) mining leases wherein illegal mining is 10% to 15% of the
sanctioned lease areas. However, CEC had recommended that both “A” and “B”
categories may be allowed to resume the mining activity subject to the payment
of penalty / compensation decided by the Court. Thus, according to the assessee,
the said expenditure is nothing but a payment which was required to be made
without which the assessee could not have carried on the mining activities and
therefore, it is a ‘business expenditure’. Since the CEC had categorised the
assessee as a Category-A company and the Hon’ble Supreme Court has accepted
the said categorization, there would have been marginal illegalities committed
by the assessee and the compensation / penalty as directed by the Hon’ble
Supreme Court is only to compensate the Government for the loss of revenue
from such mining or marginal illegalities and not as a penalty. Though the
nomenclature given is “penalty” it is not for infraction or violation of any law to
hold it to be punitive in nature, as presumed by the Assessing Officer. Learned
Counsel for the Assessee placed reliance on various case law, particularly the
decision of the Coordinate Bench of the ITAT, Kolkata in the case of Essel
Mining & Industries Ltd vs. Addl. CIT (ITA No. 352/Kol/2011 and others, dated
20.05.2016); ACIT vs. Freegade& Co. Ltd (ITA No.934/Kol/2009, dated
05.08.2011) and also the decision of the Hon’ble Calcutta High Court in the case
of ShyamSel Ltd vs. DCIT (72 Taxmann.com 105) (Cal.). On going through the
said decisions, we find that the Hon’ble Calcutta High Court has considered the
case of an assessee who failed to install Pollution Control Device within factory
premise within prescribed time and that the assessee had to pay Rs. 12.50 lakh
for compensating damage to environment and the same was recovered by State
Pollution Control Board on the principle of ‘polluter pays’ and the A.O. had
treated it as penalty and did not allow the same as business expenditure. The
Hon’ble High Court had taken note of the fact that the assessee’s business was
not illegal and that compensation was paid because of its failure to install
pollution control device within prescribed time and therefore, such payment was
undoubtedly for the purpose of business and in consequence of business carried
on by the assessee and was thus covered by section 37 of the Act. For coming to
this conclusion, Hon’ble High Court has also considered the judgment of the
Hon’ble National Green Tribunal in the case of State Pollution Control Board
vs. Swastik Ispat (P.) Ltd wherein at para 38 of the judgment the Tribunal held
as under:- “Being punitive is the essence of ‘penalty’. It is in clear
contradistinction to ‘remedial’ and / or ‘compensatory’. ‘penalty’ essentially has
to be for result of a default and imposed by way of punishment. On the contrary, ‘compensatory’ may be resulting from a default for the advantage already taken
by that person and is intended to remedy or compensate the consequences of the
16 ITA Nos.3317-3319/Bang/2018. M/s.Gogga Gurusanthaiah and Brothers.

wrong done. For instance, if a unit has been granted conditional consent and is
in default of compliance, causes pollution by polluting a river or discharging
sludge, trade affluent or trade waste into the river or on open land causing
pollution, which a Board has to remove essentially to control and prevent the
pollution, then the amount spent by the Board, is thus, spent by encashing the
bank guarantee or is adjusted thread and this exercise would fall in the realm of
compensatory restoration and not a penal consequence. In gathering the
meaning of the word ‘penalty’ in reference to a law, the context in which it is
used is significant.” 11. Applying this ratio to the facts of the case before us, we
find from para 43 of the Hon’ble Supreme Court’s order reproduced above that
the condition of payment for resuming the mining activity by Categories ‘A’ & ‘B’
companies is to not to punish the companies for any violation of law but is to
ensure scientific and planned exploitation of mineral resources in India. Further
the Hon’ble Supreme Court had directed as under:- “(X) Out of the 20% of sale
proceeds retained by the Monitoring Committee in respect of the cleared mining
leases falling in “Category- A”, 10% of the sale proceeds may be transferred to
the SPV while the balance 10% of the sale proceeds may be reimbursed to the
respective lessees. In respect of the mining leases falling in “Category-B”, after
deducting the penalty / compensation, the estimated cost of the implementation of
the R & R Plan, and 10% of the sale proceeds to be retained for being
transferred to the SPV, the balance amount, if any may be reimbursed to the
respective lessees;” The fact that the compensation is proportionate to area of
illegal mining outside the leased area and that the assessee has paid the
proportionate compensation for mining in the areas outside the sanctioned area
allotted to it and that 10% of sum is to be transferred to SPV and the balance
10% is to be reimbursed to the respective lessees, according to us, proves that it
is a payment made as ‘compensation’ for extra mining, without which the
assessee could not have resumed its activities. Therefore, we are inclined to
accept the contention of the assessee that it is compensatory in nature and is a ‘business expenditure’ and is allowable u/s 37(1) of the Act. Thus, Grounds No.2
and 3 raised by the assessee are allowed.”

7.10.9.We also notice that the co-ordinate Bangalore bench of Tribunal has also
considered identical issue in the case of Ramgad Minerals & Mining Ltd (ITA
No.1270 & 1271/B/2019 dated 04-11- 2020) being Category ‘B’, an identical
addition made by Ld.AO was held to be allowable as expenditure with following
observations:- “7.8.9. In present appeals, only issue raised for our consideration
is in respect of 15% contribution made to SPV for assessment year 2013-14 and
2014-15; and issue in respect of R&R expenses incurred during assessment year
2013 – 14. First of all, we summarise objections of Ld.AO as in respect of SPV
expenses as under:- (a) This is one of the objections of the AO that the SPV
Expenses is not allowable because it is not compensation but it is penal in nature
for contravention of law as observed by him in para 4.3 of the assessment order
for AY:2013-14. (b) Second objection of the Ld.AO is contained in para 4.9 of
the assessment order for AY:2013-14 and as per the same, this is the objection of
Ld.AO that the said SPV is nothing but CSR Expenses only and therefore not
allowable. (c) Third objection of Ld.AO is also contained in para 4.9 of the
assessment order for AY:2013-14 and as per the same, this is the objection of the
Ld.AO that the said SPV is not allowable u/s 37 (1) as it was not incurred by the
assessee wholly and exclusively for the purpose of business. (d) In para 4.8 of the
assessment order for AY:2013-14, Ld.AO is stating this that SPV rate is 10% in
category ‘A’ Mines but 15% in Category ‘B’ Mines and this extra 5% in
Category ‘B’ Mines is for various violations and illegal mining and even after
17 ITA Nos.3317-3319/Bang/2018. M/s.Gogga Gurusanthaiah and Brothers.

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
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 SitaldasTirathdasreported 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
18 ITA Nos.3317-3319/Bang/2018. M/s.Gogga Gurusanthaiah and Brothers.

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 contributed by assessee fall within ambit of
explanation 1 to section 37 (1) of the Act.”

7.10.10. We note that the CEC, vide its report dated 3-2-2012 and 13-3-2012
made recommendations with regard to setting up of SPV, transfer of funds
collected from all lease holders under various heads, manner of utilisation of
said funds etc., to Hon’ble Supreme Court, which is incorporated in Paragraph 7
at Page 164 to 171 as under: “(IX) A Special Purpose Vehicle (SPV) under the
Chairmanship of Chief Secretary, Government Karnataka and with the senior
officers of the concerned Departments of the State Government as Members may
be directed to be set up for the purpose of taking various ameliorative and
mitigative measures in Districts Bellary, Chitradurga and Tumkur. The
additional resources mobilized by (a) allotment/ assignment of the cancelled
mining leases as well as the mining leases belonging to M/s. MML, (b) the
amount of the penalty/ compensation received/ receivable from the defaulting
lessee, (c) the amount received/ receivable by the Monitoring Committee from
the mining leases falling in “Category- A” and “Category-B”, (d) amount
received/ receivable from the sale proceeds of the confiscated material etc., may
be directed to be transferred to the SPV and used exclusively for the socio-
economic development of the area/local population, infrastructure development,
conservation and protection of forest, developing common facilities for
transportation of iron ore (such as maintenance and widening of existing road,
construction of alternate road, conveyor belt, railway siding and improving
communication system, etc.). A detailed scheme in this regard may be directed to
be prepared and implemented after obtaining permission of this Hon’ble Court;”
19 ITA Nos.3317-3319/Bang/2018.
M/s.Gogga Gurusanthaiah and Brothers.

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. Accordingly we allow grounds 2.3.8-2.3.9 and dismiss grounds 2.3.1-2.3.7.”
3.5 In the light of the above order of the Co-ordinate Bench
of the Tribunal, we hold that 15% retained in the case of
assessee by CEC is an allowable business expenditure. It is
ordered accordingly.

3.6 In the result, ground Nos.2.1 to 2.4 for assessment years
2013-2014 to 2015-2016 are allowed.
20 ITA Nos.3317-3319/Bang/2018.
M/s.Gogga Gurusanthaiah and Brothers.

4. Amount retained towards SPV for mining and dumping sub-grade material outside the leased area (Asst. Years 2013-2014 and 2014-2015) 4.1 The above issue is also covered in favour of the assessee
by the order of the Co-ordinate Bench of the Tribunal in the
case of M/s.Veerabhadrappa Sangappa & Co. (supra). The
relevant finding of the Co-ordinate Bench order reads as
follow:-
“8. Ground No.2.5 has been raised against the disallowance of Rs.9,69,00,000/-, by treating it as penalty. Ld.AO observed that, for year under consideration, assessee debited sum of Rs.9,69,00,000/- under the head, compensation for Category ‘B’. It was observed that, the said amount have been deducted by MC towards penalty/compensation for various irregularities found by CEC being illegal mining pit, illegal dumping of waste, illegal encroachment of wrote and other violations by assessee. It was also noted by Ld.AO that, said amount has been retained by CEC as per directions of Hon’ble Supreme Court, out of sale proceeds for purpose of taking various ameliorative and mitigate of measures as penal payment. Ld.AO noted that, said retention was towards damages caused to Forest and Environment by contravention of law and cannot be said to have incurred wholly and exclusively for purpose of business within the meaning of provisions of section 37 of the Act as expenditure.

8.1. Ld.AO also noted that, Department of Mines and Geology, Bangalore, vide notice dated 28/02/2013, in obedience to order of Hon’ble Supreme Court, directed assessee to make immediate payment of Rs.5 crore per hectare for illegal mining and Rs.1 crore per hectare for dumping of waste outside sanctioned lease area for involving illegal Act. Ld.AO observed and held as under:

4.3 DISALLOWANCE OF EXPENDITURE – i) COMPENSATION – CAT- “B”
– Rs.9,69,00,000/- & ii) PROBABLE EXPENDITURE FOR R & R Rs.1,48,97,000/- Further, on going through the above table detailed in para (4) of this order at SI.No.5 & 6 of the said table, it is noticed that the assessee firm has debited an amount of Rs.9,69,OO,OOO/- under the head Compensation – Cat- “B” & Rs.1,48,97,OOO/- under the head Probable Expenditure for R & R retained/deducted by Monitoring Committee – Cat- “B” and charged the same to the Profit & Loss Nc. The said amounts have been deducted by Monitoring Committee towards Penalty/Compensation for various irregularities found by the CEC in Mining area of the assessee firm viz., Illegal Mining Pit, Illegal dumping of waste, Illegal encroachment of road & Other violations. The said amount was retained by the Central Empower Committee ( CEC ) as per the directions of the Supreme Court out of sale proceeds for the purpose of taking various ameliorative and mitigative measures as a penal payment. Further, the said retention of penal payment is towards damages caused to the forest and environment by contravention of laws. The said payment cannot be said to be
21 ITA Nos.3317-3319/Bang/2018. M/s.Gogga Gurusanthaiah and Brothers.

incurred wholly and exclusively for the purpose of business within the meaning
of the provisions of section 37 of the IT Act as the expenditure is penal in nature.
Further, the Dept., of Mines and Geology, Bangalore vide its Lr.F.No.DMGIR&
RlNotice/2012-13/11 Dated: 28/02/2013 in obedience to the Order of Hon’ble
Supreme Court has issued notice to the assessee firm as under: The relevant
portion of the letter is extracted below: ” The Central Empowered Committee
had noticed during the Survey by Joint Team that you, holder of Mining Lease
No.2160 in PMB range, Sandur taluk, Bellary, have illegally conducted mining
operations and / or illegally dumped the waste outside the lease area and
committed certain other illegalities. Accordingly, in the reports dated:
03/02/2012 and 13/03/2012 submitted to the Hon’ble Supreme Court, the Central
Empowered Committee had recommended imposing a penalty of Rs. 5 Crores
per hectare for illegal mining and Rs.l Crore per hectare for dumping the waste
outside the lease area on you for involving yourself in the above illegal act. The
Hon’ble Supreme Court in its Orders dated: 13/04/2012 and 28/09/2012 referred
to at Sl.No. (2) above accepted the recommendations of the Central Powered
Committee.” In the circumstances, you are hereby called upon to pay
immediately, by way of penalty, a total amount of Rs.9.69 Crores for committing
various irregularities such as (i) illegal mining pit in 0.46 Hectares (Rs.2.30
Crores), (ii) illegal dumping of waste in 2.50 Hectares (Rs.2.50 Crores), (iii)
illegal approached road 4.40 Hectares (Rs.4.40 Crores) and other violations
(Rs.0.49 Crores) in proportion to the area encroached by you outside the lease
area in contravention of the relevant provisions of the MMDR Act, 1957, MC
Rules, 1960 and MCD Rules, 1988 respectively. At the same time, in pursuance
of the order dated: 28/09/2012 of the Hon’ble Apex Court, you are also hereby
called upon to make a payment of Rs.148.97 Lakhs towards the probable
expenditure indicated by ICFRE for implementation of R & R Plan in respect of
your mining lease. You are hereby directed to make the above payments
immediately failing which action will be initiated to recover the dues from you in
accordance with law.”

4.3.a. It is evident from the above Notice ( emphasis added) that the demand
raised by the Dept., of Mines and Geology, Bangalore is in the nature of penalty
for various irregularities committed by the assessee in the mining area like
Illegal Mining, Illegal Dumping of Waste and Other Violations like
Encroachments, etc., Since the said expenditure is penalty imposed by the
DM&G for various violations, the same cannot be allowed as a deduction U/S 37
of the Act while computing the profits and gains of business. In view of this, it
was put across to the assessee with a proposal to disallow the assessee’s claim of
expenditure of Rs.9,69,00,000/- vide Para No.(11) of this office
Lr:F.No.55/Scr./ACIT/C-I/BLY/2015-16 Dated: 04/12/2015. Further, in the same
para of the proposal the amount of Rs.l,48,97,000/- debited under the head
probable expenditure for R & R referred above was also proposed to be
disallowed as the said amount is a provision made by the assessee and
provisions are ‘not a allowable expenditure u/s 37 of the Act. Accordingly, the
assessee firm was asked to file / furnish objections, if any, along with the
necessary details and evidences .

4.3.b. In response to the said proposition the assessee firm filed consolidated
objections in its letter dated 21/01/2016, which have already been enumerated
above in para No.(4.1.a) of this order.
22 ITA Nos.3317-3319/Bang/2018.
M/s.Gogga Gurusanthaiah and Brothers.

4.3.c. As already discussed above as per the Order of the Hon’ble Apex Court,
the mine owners were placed in different category based on the illegal or
marginal illegal mining done by them. The CEC had noticed during the Survey
by Joint Team that the assessee holding a Mining Lease No.2160 in PMB Range,
Sandur Taluk, Bellary have illegally conducted mining operations and illegally
dumped the waste outside the lease area and committed certain other illegalities.
In view of this, the DM&G has imposed certain penalty· on the assessee firm as
per the recommendations of the Apex Court and further has called upon the
assessee firm to made payment towards the probable expenditure by ICFRE for
implementation of R & R Plan. Out of this, the assessee has claimed a deduction
towards penalty imposed at Rs. Rs.9,69,00,000/- and probable expenditure for
implementation of R & R Plan Rs.l,48,97,000/- respectively, during the previous
year in question.

4.3.d. The explanation offered by the assessee firm for claiming deduction of said
expenditure has been perused and found not acceptable. The various case laws
relied on by the assessee firm have no direct nexus to the facts of the instant
case, hence, fail to give support the assessee firm’s stand that the expenditure
incurred is Compensatory/Compounding fee and paid as a Commercial
expediency. Further, the assessee’s contention that, the said expenses are in
nature of Compensatory/ Compounding fee paid to regularise the pending issue
and by doing so the Company is allowed to commence its business operations be
treated as payment made under commercial expediency cannot be considered
and allowed as deduction.

4.3.e. The part of the sale proceeds retained by the CEC / Monitoring Committee
are to meet the penal and other liabilities in the form of penal nature for
contravention of law, is nothing but assessee firm’s personal expenditure, which
is not allowable as per the specific Explanation to Section 37(1) of the Act.

4.3.f. It is a General rule that, if an assessee is penalised under one Act, he
cannot claim that the amount to be set off against his income under another Act,
because that will be frustrating / defeating the entire object of imposition of
penalty. If the assessee resorts to unlawful means to augment his profits or
reduce his loss, then the expenditure incurred for these unlawful activities cannot
be allowed to be deducted whether the business is lawful or otherwise. Even if
the entire business of the assessee is illegal and income is sought to be taxed by
the Assessing Officer, the expenditure in the illegal activities is not deductible
after the insertion of Explanation to Section 37(1) by the Finance Act, 1998. It
has been consistently held by the Courts that fines or penalties payable for
violation of law of the land cannot be permitted as deduction under the Income-
tax Act. That will be against public policy to allow the benefit of deduction under
one statute, of any expenditure incurred in violation of the provisions of another
statute or any penalty imposed under another statute [Maddi Venkataramana &
Co (P) Ltd Vs CIT (1998) 229 ITR 534 (SC)]. Even though the need for making
such payments arose out of trading operations, the payments were not wholly
and exclusively for the purpose of the trade. In the instant case, if the deductions
claimed are allowed, the penalty provisions as per the MMDR Act, 1957, MC
Rules, 1960 and MCD Rules, 1988 respectively will become meaningless. It has
also to be borne in mind that evasion of law cannot be trade pursuit. The
penalties paid for violating the law in the course of the conduct of business
cannot be regarded as deductible expenditure, as the assessee is expected to
carry on the business in accordance with law and not in violation of law. In the
23 ITA Nos.3317-3319/Bang/2018. M/s.Gogga Gurusanthaiah and Brothers.

instant case, the assessee has violated the law and has formed Illegal Mining
Pits and Illegal Dumping of waste, whereby, the Hon’ble Apex Court on the
recommendation of the CEC has directed to collect the amounts as penalty for
violation of such law.

4.3.g. Infraction of the law is not a normal incident of business and, therefore, no
expense which is paid by way of penalty for breach of the law can be said to be
an amount wholly and exclusively laid for the purpose of business [Haji Aziz &
Abdul Shakoor Bros. Vs. CIT (1961) 41 CTR 350 (SC)J. A payment made under
a statutory obligation, because the assessee was in default could not constitute
expenditure laid out for the purpose of assessee’s business [Indian Aluminium
Co. Ltd. Vs CIT (SC) 79 ITR 514].

4.3.h. Further, probable expenditure for implementation of R & R Plan
Rs.l,48,97,000/- claimed by the assessee firm is a provisional & probable one.
Provisions are contingent liabilities which do not constitute expenditure and
cannot be the subject matter of deduction even under the mercantile system of
accounting. Further, it is well established fact that the assessee has carried out
illegal mining over a period of time and hence, cannot be related and allowed in
the year under consideration. Further, allowing such huge deduction though not
only belongs to the previous year in question but also for earlier years is against
the “Principle of Consistency” which disturbs uniform earning capacity of the
firm.

4.3.i. In view: of above facts brought on record, the amount of Rs.ll,17,97,000/-
(Rs.9,69,00,000/- + Rs.l,48,97,000/-) being penalty for breach of law &
provisions but claimed as expenditure under the head Reclamation &
Rehabilitation and debited to P & L A/c is disallowed and added back to the
returned income and brought to tax.

8.2. Aggrieved by observations of Ld.AO, assessee preferred appeal before
Ld.CIT(A). Assessee contested that, expenditure was incurred as
compensatory/compounding fee, and paid as commercial expediency to
regularise pending issues and by doing so, assessee was allowed to commence
its business operations.

8.3. However, Ld.CIT(A) observed that, assessee had violated law and formed
illegal mining pits and illegal dumping of waste, whereby, Hon’ble Supreme
Court on recommendation of CEC directed to collect such amounts for violated
of laws under relevant statutes governing miming activities in the State.
Ld.CIT(A) observed and held as under:

“5.0) The next ground is disallowance of expenditure towards compensation of “Cat – B” of Rs.9,69,00,000/- and probable expenditure for R&R of Rs.
1,48,97,000/-. The AO observed that the above two amounts were deducted by
the Monitoring Committee towards penalty/ compensation for various
irregularities found by the CEC in the Mining area of the assessee and retained
by the CEC as per the directions of the Supreme Court out of sale proceeds for
the purpose of taking various ameliorative and mitigative measures as a penalty
payment. Further, the said retention for penalty payment is towards damages
caused to the forest and environment by contravention of laws and hence the
payment could not be said to be incurred wholly and exclusively for the purpose
24 ITA Nos.3317-3319/Bang/2018. M/s.Gogga Gurusanthaiah and Brothers.

of business within the meaning of the provisions of section 37 of the Act, as the
expenditure is penal in nature.

5.1) The assessee contested that the expenditure was incurred as compensatory/
compounding fee and paid as a commercial expediency to regularize the pending
issue and by doing so the company was allowed to commence its business
operations. As such the payment made under commercial expediency be
considered for allowing the same as deduction.

5.2) I have gone through the facts of the case and the submissions of the
appellant. As per the directions of the Supreme Court part proceeds are to be
retained by the CEC/Monitoring Committee to meet the penal and other
liabilities for contravention of law. Further, if an assessee is penalized under one
Act, he cannot claim that the amount to be set off against his income under
another Act, because that will be frustrating/ defeating the entire object of
penalizing under the other Act. If the assessee resorts to unlawful means to
augment his profits or reduce his loss, then the expenditure incurred for these
unlawful activities cannot be allowed to be deducted whether the business is
lawful or otherwise. Even if the entire business of the assessee is illegal and
income is sought to be taxed by the Assessing Officer, the expenditure in the
illegal activities is not deductible after the insertion of Explanation to Section
37(1) by the Finance Act, 1998. It has been consistently held by the Courts that
fines or penalties payable for Violation of law of the land cannot be permitted as
deduction under the Income-tax Act. That will be against public policy to allow
the benefit of deduction under one statute, of any expenditure incurred in
violation of the provisions of another statute or any penalty imposed under
another statute[Maddi Venkataramana & Co. (F) Ltd vs. CIT (1998) 229 ITR
534 (SC)]. Even though the need for making such payments arose out of trading
operation, the payments were not wholly and exclusively for the purpose of the
trade.

5.3) Infraction of the law is not a normal incident of business and therefore, no
expense which is paid by way of penalty for breach of the law can be said to be
an amount wholly and exclusively laid for the purpose of business [Haji Aziz &
Abdul Shakoor Bros. Vs. CIT (1961) 41 ITR 350 (SC)]. A payment – made under
a statutory obligation because the assessee was in default could not constitute
expenditure laid out for the purpose of assessee’s business [Indian Aluminium
Co. Ltd Vs. CIT (SC) 79 ITR 514].In the case of Indian Aluminum Co. Ltd Vs.
CIT (SC) 79 ITR 514 it was held by the Apex Court that – A payment made under
a statutory obligation because the assessee was in default could not constitute
expenditure laid out for the purpose of assessee’s business.It is not out of place
to emphasize once again the judgment in the ,Z case of Maddi Venkataraman &
Co. (P) Ltd Vs. CIT (1998) 229 ITR 534 (SC)” wherein the Hon’ble Supreme
Court has held that – Even if the entire business of the assessee is illegal and
income is sought to be taxed by the assessing Officer, the expenditure in the
illegal activities is not deductible after the insertion of Explanation to Section
37(1) by the Finance Act, 1998. It has been consistently held by the Courts that
fines or penalties payable for Violation of law of the land cannot be permitted as
deduction under the Income-tax Act. That will be against public policy to allow
the benefit of deduction under one statute, of any expenditure incurred in
violation of the provisions of another statute or any penalty imposed under
another statute. The fines/penalties paid for violating the law in the course of the
conduct of business cannot be regarded as deductible expenditure, as the
25 ITA Nos.3317-3319/Bang/2018. M/s.Gogga Gurusanthaiah and Brothers.

assessee is expected to carry on the business in accordance with law and not
violation of law. In the instant case, the assessee has violated the law and has
formed Illegal Mining Pits and Illegal Dumping of waste, whereby, the Hon’ble
Apex Court on the recommendation of CEC has directed to collect the amounts
for violation of such law. In view of the above, the said deduction cannot be
allowed which is being compensation and penalty in nature for contravention of
laws. This ground is dismissed.” Aggrieved by order of Ld.CIT(A), assessee is in
appeal before us now.

8.4. Before us, Ld.Counsel referred to breakup of Rs.9,69,00,000/- at page 201 of
paper book:
Compensation (mining pit) 0.4 6Ha Rs.2,30,00,000
Compensation (dump, received etc, 2.50 HA) Rs.2,50,00,000
Encroachment of road (4.40 HA) Rs.4,40,00,000
Other category (0.49 HA) Rs. 49,00,000 8.5. Ld.Counsel submitted that payment advises issued by Department of Mines
and Geology, clearly mentions that, above amounts retained by MC are towards
R&R plan as compensation, and that, no where in the payment advise, the term, “penalty” is used. Ld.Counsel, therefore, emphasised that, lower authorities
erred in treating said compensation as penalty. He thus submitted that the said
amount ought to have been allowed as expenditure in the hands of assessee
incurred for the purpose of business.

8.6. Alternatively, Ld.Counsel submitted that, since said amount has been
diverted to SPV account by direction of Hon’ble Supreme Court, the said sum
must be treated as having diverted at source by overriding title.

8.7. It was also submitted that failing the above two submissions, the said sum
may be treated as business loss under section 28 as the amount retained by MC
has rightly forwarded to SPV for reclamation and rehabilitation of mining area
as per directions of Hon’ble Supreme Court.

8.8. On the contrary, Ld.CIT.DR submitted referred to para 20, 32- 33 of the
decision of Hon’ble Supreme Court, which are reproduced hereunder:

“20. Relying on the provisions of the Mines and Minerals (Development &
Regulation) Act, 1957; Forest (Conservation) Act, 1980 and Environment
(Protection) Act, 1986 (hereinafter referred to as “MMDR Act”, “FC Act” and “EP Act” respectively) it is argued that each of the statutes contemplate a
distinct and definite statutory scheme to deal with the situations that have
allegedly arisen in the present case. To resolve the said issues it is the statutory
scheme that should be directed to be followed and resort to the powers of this
Court under Article 32 read 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
26 ITA Nos.3317-3319/Bang/2018. M/s.Gogga Gurusanthaiah and Brothers.

Court, details of which will be noticed in the discussions that follow, had been
cited at the bar to persuade us to take the view that we should desist from
exercising our powers under the Constitution and instead relegate the parties to
the remedies provided by the statute.

8.9. Ld.CIT.DR submitted that, Hon’ble Supreme Court summarised arguments
advanced by leaseholders as under:

27. On the above issue the short and precise argument on behalf of the
leaseholders is that the provisions of each of the statutory enactments, i.e., the
MMDR Act, FC Act and EP Act prescribe a distinct statutory scheme for
regulation of mining activities and the corrective as well as punitive steps that
may be taken in the event mining activities are carried out in a manner contrary
to the terms of the lease or the provisions of any of the statutes, as may be. The
argument advanced is that as the statutes in question contemplate a particular
scheme to deal with instances of illegal mining or carrying on mining operations
which is hazardous to the environment, the CEC could not have recommended
the taking of any step or measure beyond what is contemplated by the statutory
scheme(s) in force. It is argued that it will not be proper for this Court to act
under Article 32 and to accept any of the said recommendations which are
beyond the scheme(s) contemplated by the Statute(s). In other words, what is
sought to be advanced on behalf of the leaseholders is that no step should be
taken or direction issued by this Court which will be contrary to or in conflict
with the provisions of the relevant statutes. Several judgments of this Court,
which are perceived to be precedents in support of the proposition advanced,
have been cited in the course of the arguments made.

8.10. Ld.CIT.DR referring to paragraph 37 of the order, submitted that Hon’ble
Supreme Court after considering arguments advanced by both sides observed as
under:

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

8.11. It was thus been submitted by Ld.CIT.DR that, Hon’ble Supreme Court in
cognizance of enormous wrong happened to the environment due to illegal
mining, illegal dumping, illegal encroachment of road etc by the lessees directed
such payments from lease holders. He thus relying on above categorical
27 ITA Nos.3317-3319/Bang/2018. M/s.Gogga Gurusanthaiah and Brothers.

observations by Hon’ble Supreme Court, submitted that, sum of Rs.9,69,00,000/-
should be treated as penalty for infraction of law. He thus supported order
passed by authority below.

8.12 . We have perused submissions advanced by both sides, in light of records
placed before us.

8.12.1. Ld.AO took the view that these payments are penal in nature as they have
been levied for contravention of laws by way of damages caused to forest and
environment. Ld.AO referred to the Page letter F.No.DMG/R & R/Notice/2012-
13/11 dated 28-02-2013 issued by Department of Mines and Geology, Bangalore
demanding the payment from the assessee. It is pertinent to note that the above
said letter uses the expression “penalty” for these payments. Accordingly, the
AO took the view that these payments are in the nature of penalty for various
irregularities committed by the assessee in the mining area like illegal mining,
illegal dumping of waste and other violations like encroachment etc. Ld.AO
relied upon following case laws to buttress his view that the penalty is not
allowable as deduction:- (a) Maddi Venkataramana& Co (P) Ltd vs. CIT
(1998)(229 ITR 534)(SC) (b) Haji Azis& Abdul Shakoor Bros. Vs. CIT (1961)(41
ITR 350)(SC) (c) Indian Aluminium Co. Ltd vs. CIT (79 ITR 514)(SC) 8.12.2.
Assessee claimed Rs.9,69,00,000/- as expenditure in the original return of
income and excluded the same from Sales revenue in the revised return of
income contending that the same is diversion by overriding title.

8.12.3. Ld.CIT.D.R placed his reliance on certain observations made by Hon’ble
Supreme Court in M/s Samaj Parivartana Samudaya and Oth. Vs.State of
Karnataka & Oth.(supra). First of all, there should not be any dispute that the
writ petition filed by M/s Samaj Parivartana Samudaya and Others was admitted
by Hon’ble Supreme Court under Article 32 of the Act. Hence the lessees, inter
alia, challenged before Hon’ble Supreme Court, the necessity to invoke Article
32 and Article 142 of the Act.

8.12.4. In the CEC report dated 3/02/2012 and 13/03/2012, following
recommendations were provided in respect of Category B lease holders. Hon’ble
Supreme Court extracted the same at page 166 of its order which is as under:

“(V) In respect of the mining leases falling in “CATEGORY-B” (details given at
Annexure-R-10 to this Report) it is recommended that: i) the R&R Plan, under
preparation by the ICFRE, after incorporating the appropriate changes as per
the directions of this Hon’ble Court, should be implemented in a time bound
manner by the respective lessees at his cost. In the event of his failure to do so or
if the quality and/or the progress of the implementation of the R&R Plan is found
to be unsatisfactory by the Monitoring Committee or by the designated officer(s)
of the State of Karnataka, the same should be implemented by the State of
Karnataka through appropriate agency(ies) and at the cost of the lessee; ii) for
carrying out the illegal mining outside the lease area, exemplary compensation/
penalty may be imposed on the lessee. It is recommended that: a) For illegal
mining by way of mining pits outside the leases area, as found by the Joint Team,
the compensation/ penalty may be imposed at the rate of Rs. 5.00 crore (Rs. Five
Crore only) for per ha. of the area found by the Joint Team to be under illegal
mining pit; and b) For illegal mining by way of over burden dump(s) road,
office, etc. outside the sanctioned lease area, the compensation/ penalty may be
imposed @ Rs. 1.00 crores (Rs. One Crores only) for per ha. of the area found to
28 ITA Nos.3317-3319/Bang/2018. M/s.Gogga Gurusanthaiah and Brothers.

be under illegal over burden dump etc. iii) Mining operation may be allowed to
be undertaken after (a) the implementation of the R& R Plan is physically
undertaken and is found to be satisfactory based on the pre-determined
parameters, (b) penalty/ compensation as decided by this Hon’ble Court is
deposited and (c) the conditions as applicable in respect of “Category-A” leases
are fulfilled/followed; iv) In respect of the seven mining leases located on/nearby
the interstate boundary, the mining operation should presently remain
suspended. The survey sketches of these leases should be finalized after the
interstate boundary is decided and thereafter the individual leases should be
dealt with depending upon the level of the illegality found; and v) Out of the sale
proceeds of the existing stock of the mining leases, after deducting : a) The
penalty/compensation payable; b) Estimated cost of the implementation of the
R& R Plan; and c) 10% of the sale proceeds to be retained by the Monitoring
Committee for being transferred to the SPV d) The balance amount, if any, may
be allowed to be disbursed to the respective lessees”.

8.12.5. Hon’ble Supreme Court in para 11 at page 172 accepted the
recommendation of CEC by observing as under:

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

8.12.6. Hon’ble Supreme Court further directed as under( page 173 clause):
29 ITA Nos.3317-3319/Bang/2018.
M/s.Gogga Gurusanthaiah and Brothers.

“III.. In addition to the above, each leaseholder must pay a sum equivalent to
15% of the sale proceeds of its iron ore sold through the Monitoring Committee
as per the earlier orders of this Court. In this regard, it may be stated that
though the amicus suggests the payment @ 10% of the sale proceeds, having
regard to the overall facts and circumstances of the case, we have enhanced this
payment to 15% of the sale proceeds. Here it needs to be clarified that the
CEC/Monitoring Committee is holding the sale proceeds of the iron ores of the
leaseholders, including the 63 leaseholds being the subject of this order. In case,
the money held by the CEC/Monitoring Committee on the account of any
leaseholder is sufficient to cover the payments under the aforesaid three heads,
the leaseholder may, in writing, authorize the CEC to deduct from the sale
proceeds on its account the amounts under the aforesaid three heads and an
undertaking to make payment of any additional amount as compensatory
payment. On submission of such authorization and undertaking, the CEC shall
retain the amounts covering the aforesaid three heads and pay to the concerned
leaseholder the balance amount, if any. It is expected that the balance amount,
after making the adjustments as indicated here, would be paid to the concerned
leaseholder within one month from the date of submission of the authorization
and the undertaking. In the case of any leaseholder, if the money held on his
account is not sufficient to cover the aforesaid three heads, he must pay the
deficit within two months from today.

8.12.7. The contentions of the lessees have been succinctly stated as under by
Hon’ble Supreme Court in paragraph 20 of the order, which is extracted below:-

“To resolve the said issues it is the statutory scheme that should be directed to
be followed and resort to the powers of this Court under Article 32 read with
Article 142 of the Constitution, when a statutory scheme is in existence, would be
wholly uncalled for.”

8.12.8. This contention was discussed in detail as “Issue 2” in paragraphs 27 to
37 (pages180 to 187) Hon’ble Supreme Court. Following are the observations of
Hon’ble Supreme Court:

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. 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
arguments made. 29. According to Shri Divan (Amicus Curiae), the present is a
case of mass tort resulting in the abridgment of the fundamental rights of a large
number of citizens for enforcement of which the writ petition has been filed
under Article 32. Shri Divan has submitted, by relying on several decisions of
30 ITA Nos.3317-3319/Bang/2018. M/s.Gogga Gurusanthaiah and Brothers.

this Court, that in a situation where the Court is called upon to enforce the
fundamental rights and that too of an indeterminate number of citizens there can
be no limitations on the power of Court. It is the satisfaction of the Court that
alone would be material. Once such satisfaction is reached, the Court will be
free to devise its own procedure and issue whatever directions are considered
necessary to effectuate the Fundamental Rights. The only restriction that the
Court will bear in mind is that its orders or directions will not be in conflict with
the provisions of any Statute. However, if the statute does not forbid a particular
course of action it will be certainly open for the Court under Article 32 to issue
appropriate directions….. 31. The question that has been raised on behalf of the
leaseholders is whether the aforesaid provisions under the different statutes
should be resorted to and the recommendations made by the CEC including
closure of Category- “C” mines should not commend for acceptance of this
Court. 32. In Bandhua Mukti Morcha Vs. Union of India &Ors. (1984) 3 SCC
161, this Court had the occasion to consider the nature of a proceeding under
Article 32 of the Constitution which is in the following terms :- “32. Remedies
for enforcement of rights conferred by this Part. (1) The right to move the
Supreme Court by appropriate proceedings for the enforcement of the rights
conferred by this Part is guaranteed. (2) The Supreme Court shall have power to
issue directions or orders or writs, including writs in the nature of habeas
corpus, mandamus, prohibition, quo warranto and certiorari, whichever may be
appropriate, for the enforcement of any of the rights conferred by this Part. (3)
Without prejudice to the powers conferred on the Supreme Court by clause ( 1 )
and ( 2 ), Parliament may by law empower any other court to exercise within the
local limits of its jurisdiction all or any of the powers exercisable by the Supreme
Court under clause (2). (4)The right guaranteed by this article shall not be
suspended except as otherwise provided for by this Constitution.” 33. In M.C.
Mehta Vs. Union of India &Ors. (1987) 1 SCC 395, this Court not only
reiterated the view adopted in Bandhua Mukti Morcha (supra) but also held that
the power under Article 32 would be both injunctive as well as remedial and the
power to grant remedial relief, naturally, would extend to a wide range of
situations and cannot be put in a straight jacket formula.

8.12.9. In the case of M C Mehta vs. Union of India (2009)(6 SCC), it was
contended that Hon’ble Supreme Court cannot exercise powers under Article 142
of the Constitution when specific provisions are made under various forest and
environmental laws dealing with the manner and procedure for
cancellation/determination of mining leases. This argument was rejected by
Hon’ble Supreme Court with the following observations:-

“44. We find no merit in the above arguments. As stated above, in the past when
mining leases were granted, requisite clearances for carrying out mining
operations were not obtained which have resulted in land and environmental
degradation. Despite such breaches, approvals had been granted for subsequent
slots because in the past the authorities have not taken into account the macro
effect of such wide-scale land and environmental degradation caused by the
absence of remedial measures (including rehabilitation plan). Time has now
come, therefore, to suspend mining in the above area till statutory provisions for
restoration and reclamation are duly complied with, particularly in cases where
pits/quarries have been left abandoned. 45. Environment and ecology are
national assets. They are subject to intergenerational equity. Time has now come
to suspend all mining in the above area on sustainable development principle
which is part of Articles 21, 48-A and 51-A(g) of the Constitution of India. In
31 ITA Nos.3317-3319/Bang/2018. M/s.Gogga Gurusanthaiah and Brothers.

fact, these articles have been extensively discussed in the judgment in [M.C.
Mehta case (2004) 12 SCC 118] which keeps the option of imposing a ban in
future open.”

8.12.10. After considering all these judgments rendered by earlier bench,
Hon’ble Supreme Court, observed as under:-

“35. The issue is not one of application of the above principles to a case of
cancellation as distinguished from one of suspension. The issue is more
fundamental, namely, the wisdom of the exercise of the powers under Article 32
read with Article 142 to prevent environmental degradation and thereby
effectuate the Fundamental Rights under Article 21.

36. We may now take up the decisions cited on behalf of the leaseholders to
contend that the power under Articles 32 and 142 ought not to be exercised in
the present case and instead remedies should be sought within the relevant
statutes. The sheet anchor is the case of Supreme Court Bar Association Vs.
Union of India and Another reported in (1998) 4 SCC 409. We do not see how or
why we should lie entrapped within the confines of any of the relevant Statutes
on the strength of the views expressed in Supreme Court Bar Association
(supra). The observations made in para 48 of the judgment and the use of words “ordinarily” and “are directly in conflict” as appearing in the said paragraph
(underlined by us) directly militates against the view that the lease holders would
like us to adopt in the present case. “48. The Supreme Court in exercise of its
jurisdiction under Article 142 has the power to make such order as is necessary
for doing complete justice “between the parties in any cause or matter pending
before it”. The very nature of the power must lead the Court to set limits for
itself within which to exercise those powers and ordinarily it cannot disregard a
statutory provision governing a subject, except perhaps to balance the equities
between the conflicting claims of the litigating parties by “ironing out the
creases” in a cause or matter before it. Indeed this Court is not a court of
restricted jurisdiction of only dispute-settling. It is well recognised and
established that this Court has always been a law-maker and its role travels
beyond merely disputesettling. It is a “problem-solver in the nebulous areas”
[see K. Veeraswami v. Union of India (1991) 3 SCC 55)] but the substantive
statutory provisions dealing with the subject-matter of a given case cannot be
altogether ignored by this Court, while making an order under Article 142.
Indeed, these constitutional powers cannot, in any way, be controlled by any
statutory provisions but at the same time these powers are not meant to be
exercised when their exercise may come directly in conflict with what has been
expressly provided for in a statute dealing expressly with the subject.”
(Emphasis supplied) 37. Even if the above observations is understood to be laying down a note of
caution, the same would be a qualified one and can have no application in a case
of mass tort as has been occasioned in the present case. The mechanism
provided by any of the Statutes in question would neither be effective nor
efficacious to deal with the extraordinary situation that has arisen on account of
the large scale illegalities committed in the operation of the mines in question
resulting in grave and irreparable loss to the forest wealth of the country besides
the colossal loss caused to the national exchequer. The situation being
extraordinary the remedy, indeed, must also be extraordinary. Considered
against the backdrop of the Statutory schemes in question, we do not see how
32 ITA Nos.3317-3319/Bang/2018. M/s.Gogga Gurusanthaiah and Brothers.

any of the recommendations of the CEC, if accepted, would come into conflict
with any law enacted by the legislature. It is only in the above situation that the
Court may consider the necessity of placing the recommendations made by the
CEC on a finer balancing scale before accepting the same. We, therefore, feel
uninhibited to proceed to exercise our constitutional jurisdiction to remedy the
enormous wrong that has happened and to provide adequate protection for the
future, as may be required.”

8.12.11. Ld.Counsel, during his arguments, pointed out that the CEC used the
expression “Compensation/penalty” in its recommendations. But Hon’ble
Supreme Court, while accepting such recommendations used the expression “Compensation” for such payments. From the observations reproduced herein
above, it can be noticed that Hon’ble Supreme Court exercised its power under
Article 32 and Article 142 to protect fundamental rights of public in order to
prevent environmental degradation, i.e., the cost imposed on leaseholders to
remedy the enormous wrong that has happened and to provide adequate
protection for the future.

8.12.12. We note that Hyderabad bench of Tribunal in case of NMDC held that
the above payment is not penal in nature, but a payment made for compensation.
For the sake of convenience, we extract below the final decision rendered by
Hyderabad bench of Tribunal:-

The fact that the compensation is proportionate to area of illegal mining outside
the leased area and that the assessee has paid the proportionate compensation
for mining in the areas outside the sanctioned area allotted to it and that 10% of
sum is to be transferred to SPV and the balance 10% is to be reimbursed to the
respective lessees, according to us, proves that it is a payment made as ‘compensation’ for extra mining, without which the assessee could not have
resumed its activities. Therefore, we are inclined to accept the contention of the
assessee that it is compensatory in nature and is a ‘business expenditure’ and is
allowable u/s 37(1) of the Act. Thus, Grounds No.2 and 3 raised by the assessee
are allowed.”

8.12.13. We notice that, Hyderabad bench held the compensation paid @ Rs.5
crores and Rs.1.00 crores for illegal mining and illegal overburden dumps to be
in construed in the nature of compensation. The Ld.CIT.DR placed reliance on
the letter issued by Department of Mines and Geology, wherein these payments
have been referred to as “penalty”. However going by the observations of
Hon’ble Supreme Court, these were payments formimg part of SPV to be used
for developing ecology in the mining affected areas.

8.12.14. We note that Hon’ble Supreme Court directed that the funds so
collected to be transferred to SPV. These funds were to be used for R & R Plans,
which inter alia, would include following measures:- (Page 171 of Hon’ble
Supreme Court’s order) “E) SOIL AND MOISTURE CONSERVATIONS, AFFORESTATION AND
OTHER MEASURES 26. The R&R plan would inter alia provide for: i) broad
design/specification for: b) retaining walls c) check dams d) gully plugs and/or
culverts (if required) e) geo textile/geo matting of dumps f) afforestation in the
safety zones g) afforestation in peripheral area, road side, over burden dumps
and other areas ii) dust suppression measures at/for loading, unloading and
33 ITA Nos.3317-3319/Bang/2018. M/s.Gogga Gurusanthaiah and Brothers.

transfer points, internal roads, mineral stacks etc. iii) covered conveyor belts (if
feasible) – such as down hill conveyor, pipe conveyor etc. iv) specification of
internal roads, v) details of existing transport system and proposed
improvements vi) railways siding (if feasible) vii) capacity building of personnel
involved in the mining and environmental management viii) rain water
harvesting”

8.12.15. We note that co-ordinate bench of Tribunal considered an identical
issue in the case of Mysore Minerals Ltd vs. ACIT (ITA No.679/Bang/2010 dated
2.11.2012). In this case, the assessee was engaged in the business of mining of
iron ore, other minerals and granite. In consequence to the order passed by
Hon’ble Supreme Court in the case of T.N Godavarman Tirumalpad vs. UOI, the
assessee was liable to pay to Compensatory afforestation fund equal to net
present value for diversion of forest land for non-forest purposes. The assessee
paid a sum of Rs.5,02,59,000/- to the fund and claimed the same as expenditure.
The question that arose before the Tribunal was whether the amount so paid by
the assessee is deductible as expenses are not? Tribunal therein noticed that an
identical issue was examined in case of M/s Ramgad Minerals & Mining P Ltd
(ITA No.1012/Bang/08 dated 9.4.2009) and was decided in favour of the
assessee. Accordingly, the Tribunal decided this issue, with the following
observations, in favour of the assessee:-

“5.4 We have heard both parties and carefully perused the material on record
and the judicial decisions cited and placed reliance upon. We have perused the
decision of the co- ordinate bench of this Tribunal in the case of Ramgad
Minerals & Mining Pvt Ltd Vs.ACIT in ITA No.1012/Bang/08 dt.9.4.2009 and
find that in the cited case too a similar / identical issue was considered on the
payments made towards contribution for compensatory afforestation as per the
direction of the Hon’ble Apex Court when the mines are exploited on forest land.
The Hon’ble Tribunal in para 5 of its order held that the amount expended on
this count was incurred as a revenue expenditure and was directed to be allowed
in the year in which it was incurred. The operative part of the order in para 5 at
pages 7 and 8 is extracted and reproduced here under : ” We find force in the
submission of the learned counsel that payments to the government are to be
paid once the mining lease is obtained and such payments are governed by
various Acts along with the Apex Court making a ruling for State Governments
to participate in the granting of mining lease by recovering compensation when
their forests are uprooted. Therefore for this purpose, the funds are used for a
natural regeneration which the assessee participates indirectly. Therefore at no
point of time could it be said that the assessee had incurred a capital expenditure
giving the assessee a benefit of enduring nature for the purpose of earning
segmented income to render the same to income tax. In other words, the
authorities below have not pointed out the income generated against the
purported deferred Revenue expenditure so proposed by them in their impugned
orders. The amount was incurred as a Revenue expenditure and is directed tobe
allowed in the year it has been incurred.” Respectfully following the decision of
the co-ordinate bench of the Bangalore Tribunal, in the case of Ramgad
Minerals & Mining P. Ltd. (supra), we hold that the entire expenditure of
Rs.5,02,59,000 incurred by the assessee of net present value to CAMPA in the
relevant period are to be allowed as revenue expenditure for Assessment Year
2004-05.”
34 ITA Nos.3317-3319/Bang/2018.
M/s.Gogga Gurusanthaiah and Brothers.

8.12.16. Above decision of this Tribunal in case of M/s.Mysore Minerals(supra)
was upheld by Hon’ble Karnataka High Court in the appeal filed by revenue
against order of this Tribunal. Relevant extract of the view taken by Hon’ble
High Court in CIT vs. M/s Mysore Minerals Ltd in ITA No.144/2013 dated
08/03/2017 is as undere:-

“2. As such, in our view, the only question of law which may arise is, whether the
payment made by way of compensation of Rs.5,02,59,000/- by the assessee as per
the direction of the Apex Court for mining lease to the Forest Department can be
said as a revenue expenditure or a capital expenditure?

3. We have heard Mr.Sanmathi, learned counsel for the appellant-revenue and
Mr.A.Shankar, learned counsel for the respondent-assessee.

4. As such, the Tribunal in the impugned order has relied upon its earlier
decision in case of M/s.Ramgad Minerals and Mining Pvt.Ltd., vs. ACIT in ITA
1012(BNG)/2008 dated 9.4.2009. It has been brought to our notice by the
learned counsel for respondent-assessee that the very decision of the Tribunal in
case of Ramgad Minerals (supra) was carried before this Court in ITA 5021/09
and this Court has dismissed the appeal of the Revenue and it has been further
stated that SLP was preferred against the aforesaid decision of this Court in case
of Ramgad supra and the said SLP has also been dismissed.

5. We may record that in view of aforesaid decision as such, no substantial
questions of law would arise for consideration. But even if it is to be examined,
in view of the aforesaid decision that the decision of the Tribunal has been not
interfered with by this Court and SLP is dismissed, the question has to be
answered against the Revenue and in favour of Assessee.”

8.12.17. In the present fact of case, Hon’ble Supreme Court observed large scale
encroachment in forest areas and illegal mining. Hon’ble Court directed
collection of such amount to be used for public purposes listed above, which
includes afforestation etc. Further we note that these amounts have not been
collected for violation under any specific Acts applicable to Mining. It for these
reasons that Hon’ble Supreme Court used the term ‘Compensation’ as against
the term ‘Penalties’ recommended by CEC. However it is also noticed that
subsequent to the order passed by Hon’ble Supreme Court, State Act, controlling
mining activity were amended. We further notice that assessee could not have
commenced its operations without paying these amounts. Hence there is
commercial expediency in incurring these expenses.

8.12.18. Ld.AO invoked Explanation-1 u/s 37(1) of the Act in support of the
disallowance made him. As per the provisions of Explanation 1 to sec.37(1)
refers to any expenditure incurred by the assessee for any purposes which is an
offence or which is prohibited by law shall not be deemed to have been incurred
for the purpose of business or profession and no deduction or allowance shall be
made in respect of such expenditure. A careful perusal of the above said
provision would show that the “purpose of expenditure” should be an offence or
prohibited by law. In the instant cases, the purpose of payments is for “R & R
plans” and the same cannot be considered as payment for the purposes, which is
an offence or which is prohibited by law. Hence Explanation 1 to section 37 is
not applicable to these payments.
35 ITA Nos.3317-3319/Bang/2018.
M/s.Gogga Gurusanthaiah and Brothers.

8.12.19. Respectfully following Hyderabad bench of Tribunal in case of NMDC Ltd (supra) and Bangalore Tribunal M/s Mysore Minerals Ltd (supra) which has been upheld by Hon’ble Karnataka High Court, the payment of Rs.9,69,00,000/- is compensatory in nature only as these funds are meant to be used for public purposes and the assessee could not have commenced its operations without paying the same, the same is allowable as revenue expenditure. We are therefore of the view that payment made as compensation is not hit by Explanation 1 to Section 37(1) and is an allowable expenditure.

Accordingly this ground raised by assessee stands allowed.”
4.2 In view of the Co-ordinate Bench order of the Tribunal,
we hold that the amount retained towards SPV for mining and
dumping sub-grade material outside the leased area is an
allowable expenditure. It is ordered accordingly.

4.3 In the result, ground Nos.3.1 to 3.3 for assessment years
2013-2014 and 2014-2015 are allowed.

5. Sales accounted in Asst.Year 2014-2015, but added as income of the year.

5.1 The learned AR fairly submitted that the above issue is
decided against the assessee by the Tribunal in the case of
M/s.Veerabhadrappa Sangappa & Co. (supra), wherein it was
held that income in respect of sales did accrue in the subject
assessment year itself, and therefore, the recognition of
income cannot be deferred to the subsequent assessment
year. However, the learned AR submitted that the Tribunal
was pleased to direct to the authorities below to exclude the
sale proceeds in the subsequent assessment year, wherein it
is offered to tax.

5.2 The learned Departmental Representative present was
duly heard.
36 ITA Nos.3317-3319/Bang/2018.
M/s.Gogga Gurusanthaiah and Brothers. 5.3 We have heard rival submissions and perused the
material on record. The Tribunal in the case of
M/s.Veerabhadrappa Sangappa & Co. (supra), had decided
that the sale proceeds from disclosed stock accrued to the
assessee during the year under consideration and has to be
considered for determining income under the head profits and
gains of business for the year under consideration. In other
words, the Tribunal held that the income accrued in the
relevant assessment year and the taxability cannot be
deferred to the subsequent assessment year. The Tribunal
also held that the same income cannot be taxed twice and the
assessee if moves an appropriate petition, the A.O. shall
consider such an application. The relevant finding of the
Tribunal in the case of M/s.Veerabhadrappa Sangappa & Co.
(supra), reads as follow:-

“A. Recognition of sale proceeds from declared stock received by assessee Ld.Counsel impugned sale proceeds from sale of declared stock were accounted by assessee in subsequent assessment years, when it was received. He submitted that, Hon’ble Supreme Court in case of Samaj Parivartana Samudaya vs State of Karnataka, (supra) authorised MC to take control of stock, and sell the same through E-auction, depending on demand in the market. Subsequently, sale proceeds received by MC are to be deposited in nationalised bank account, after adjusting towards royalty, taxes and expenditure. Ld.Counsel submitted that, in instant case, right and control over stock was with MC, and till such time MC parts with sale proceeds, assessee had no right to receive the same. He submitted that, sale of stock by MC cannot be regarded as sale of stock by assessee. He submitted that assessee thus accounted the sale proceeds from declared stock in subsequent assessment year, when it was actually received.

A.1. Ld.Counsel submitted that, though assessee followed mercantile system of accounting, revenue on sale proceeds of stock by MC, could be recognised and assessed to tax only on actual receipt, as assessee did not possess right to receive such income during the year under consideration. He submitted that, MC could not be considered as agent of assessee as there was no agreement between assessee and MC, for principle agent relationship to exist. Ld.Counsel submitted that, MC was acting in accordance with direction of Hon’ble Supreme Court vis- à-vis assessee. He also submitted that, assessee had not appointed MC to act on its behalf in order to constitute an ‘Agent’ under section 182 of Indian Contract Act, 1872. He thus submitted that, it is settled rule that, contract is not
37 ITA Nos.3317-3319/Bang/2018. M/s.Gogga Gurusanthaiah and Brothers.

assignable without consent of both parties thereto, where, personal acts and
qualities of one of the parties, form material and ingredient part of the contract.

A.2. Ld.Counsel argued that, revenue from declared stock was not recognised
during the year under consideration due to existence of uncertainty in realisation
of said amount. It has been submitted that, Section 5 of the Act, manifests that,
an income can be said to have accrued, only when a person has legal right to
receive such income, and its recognition is on such accrual, which is tempered
by section 145 read with AS-9 of ICAI. Ld.Counsel submitted that, in order to
charge an income to tax, it is necessary that such income should fall within the
scope of total income, as defined under section 2(45) of the Act, and that, such
income shall be charged to tax under section 5, if such income shall be received
or deemed to have been received or accrue or arises or deemed to accrue or
arise to a person in India, during the previous year. Ld.Counsel, thus submitted
that, assessee had not derived any legal right to receive sale proceeds during
previous year relevant to assessment year under consideration, and therefore,
the sale proceeds cannot be construed as income in the hands of assessee for
year under consideration.

A.3. Ld.Counsel submitted that, to constitute an ‘income ‘, assessee should have
absolute command, control and right of disposition of such receipts. He
submitted that, in the present facts of the case, assessee has no control over the
stock and sale proceeds, as sale was carried out by MC through E auction. He
submitted that, revenue from sale of declared stock therefore was uncertain.

A.4. Ld.Counsel thus contended that, assessee had not acquire any right to
receive income, in as much as, such right was dependent on MC disbursing such
payments. He thus submitted that, sale proceeds therefore, had not received, or
even deemed to have been received or accrued or arisen, or deemed to have
arisen to assessee. It has been contended by Ld.Counsel that, necessary
requirement under Section 5 of the Act, stands unsatisfied for recognising sale
proceeds during year under consideration.

A.5. In support of his contentions he placed reliance upon following decisions: •
ED.Sasoon & CO Ltd vs CIT reported in (1954) 26 ITR 27 (SC) • CIT vs Balbir
Singh Maini reported in (2017) 398 ITR 531 (SC) • CIT vs Excel industries Ltd
reported in (2013) 358 ITR 295 • Prakashan leasing Ltd vs DCIT reported in
(2012) 208 Taxmann 464 (Kar) A.6. Ld.Counsel also relied on CBDT Notification No.9949 (F.NO.132/7/95-
TPL)/SO 69(E), Dated 25/01/1996, superseded by Notification No.32/2015
(F.N.134/48/2010-TPL)/S0 892 (E), Dated 31/03/2015, regarding AS-I, relating
to disclosure of accounting policies.

A.7. Ld.Counsel submitted that, disclosure standards applicable for computation
of income chargeable to tax are to be considered for recognition of revenue,
arising during relevant year. He submitted that, as per disclosure standards,
revenue shall be recognised when there is reasonable uncertainty of its ultimate
collection. Referring to AS 9, Ld.Counsel submitted that, recognition of revenue
requires that it is measurable, and that at the time of sale or rendering of
services, it would not be unreasonable to expect ultimate collection. He relied on
AS-9, paragraph 9.1 and 9.2, where ability to assess ultimate collection with
reasonable uncertainty is lacking at the time of raising any claim. He thus
38 ITA Nos.3317-3319/Bang/2018. M/s.Gogga Gurusanthaiah and Brothers.

submitted that revenue recognition is to be postponed to the extent of uncertainty
involved. In such circumstances, it was appropriate to recognise such revenue,
only when it is reasonably certain that ultimate collection will be made. He
referred to decision of Hon’ble Supreme Court in case of CIT vs Woodward
Governor India Pvt.Ltd., reported in (2009) 312 ITR 254, wherein, Hon’ble
Court held that, profits and gains of previous year are required to be computed
in accordance with relevant accounting standard. Referring to decision of
Hon’ble Supreme Court in case of JK industries Ltd vs UOI, reported in (2008)
297 ITR 176, Ld.Counsel submitted that, rules by which inventories are to be
valued are laid down in accounting standards , and are to be followed in
determination of accounting income mandatorily. He submitted that Hon’ble
Court also held that; “8. Finally, adoption of accounting standards and of
accounting income as ‘taxable income’ would avoid distortion of accounting
income which is the real income.”

A.8. He thus submitted that it is therefore appropriate to recognise revenue only
when there is a reasonable certainty, that, ultimate realisation will be made.
Ld.Counsel submitted that, there is no denial by authorities below that sale
proceeds were received by assessee in subsequent financial years i.e; financial
year 2013-14 to 2015-16, has been offered to tax by assessee. Ld.Counsel also
submitted that, assessee received following amount in subsequent financial years
which has been offered to tax as and when they were received:
Particulars Amount Offered to tax in FY Payment advice dated 8.02.2014 13,60,77,524 2013-14 Payment advice dated 2.05.2014 22,48,13,763 2014-15 Release of 10% material value 2,50,81,553 2015-16 retained by the MC Total 38,59,72,840 A.9. Ld.Counsel submitted that, entire amount of Rs.38,59,72,840/- includes
Rs.25,59,99,429/-being sale proceeds from declared stock considered by Ld.AO
as income of assessee for year under consideration. Taking support from
assessment order, referring to para 4.1.b.,Ld.Counsel submitted that, Ld.AO
himself records that, sum of Rs.25,59,99,429/- received in subsequent assessment
years being assessment years 2014-15 and 2015-16, was offered to tax, during
relevant assessment year. He submitted that having noted the fact that revenue
received from declared stock has been offered to tax in subsequent years, making
addition during the year under consideration would amount to double taxation in
the hands of assessee. It has been submitted by Ld.Counsel that, right to receive
sale proceeds, accrued to assessee by virtue of directions of Hon’ble Supreme
Court by order dated 18/04/2013 (supra), which was in succeeding financial
year, relevant to year under consideration, and has also been offered to tax on
receipt basis.

A.10. Alternatively, Ld.Counsel submitted that, entire exercise is revenue neutral
as assessee is assessed at uniform rate of tax over the years.
39 ITA Nos.3317-3319/Bang/2018.
M/s.Gogga Gurusanthaiah and Brothers.

A.10.1 Ld.Counsel submitted that, principle of matching between revenue receipt
and expenditure to be incurred is to be applied. Reference was made to decision
of Hon’ble Supreme Court in CIT vs. Bilahari Investment (P) Ltd. reported in
(2008) 299 ITR 1, wherein referring to concept of matching Hon’ble Court
observed that: “82. Matching Concept is based on the accounting period
concept. The paramount object of running a business is to earn profit. In order to
ascertain the profit made by the business during a period, it is necessary that “revenues” of the period should be matched with the costs (expenses) of that
period. In other words, income made by the business during a period can be
measured only with the revenue earned during a period is compared with the
expenditure incurred for earning that revenue. However, in cases of mergers and
acquisitions, companies sometimes undertake to defer revenue expenditure over
future years which brings in the concept of Deferred Tax Accounting. Therefore,
today it cannot be said that the concept of accrual is limited to one year. 83. It is
a principle of recognizing costs (expenses) against revenues or against the
relevant time period in order to determine the periodic income. This principle is
an important component of accrual basis of accounting. As stated above, the
object of AS 22 is to reconcile the matching principle with the Fair Valuation
Principles. It may be noted that recognition, measurement and disclosure of
various items of income, expenses, assets and liabilities is done only by
Accounting Standards and not by provisions of the Companies Act.”

A.10.2 Ld.Counsel submitted that, Ld.AO in subsequent year has not undone levy
of tax of such sale proceeds. It was also been submitted that entire exercise is
revenue neutral as applicable rate of tax remain the same in the relevant year
and the subsequent years.

A.11. On the contrary, Ld.CIT.DR submitted that, assessee follows mercantile
system of accounting. He submitted that as per mercantile system, income
accrued to assessee in the year of sale. He submitted that right to receive sale
proceeds, accrued to assessee by virtue of directions of Hon’ble Supreme Court
in case of Samaj Parivartana Samudaya vs State of Karnataka, (supra), though
subsequently received. He submitted that, amount to be disbursed by MC was
ascertained during relevant year, being 80% of total sale proceeds. Ld.Counsel
further submitted that, assessee claimed Rs.50,24,48,441/- as expenditure being
total of declared and undeclared stock in IBM returns, which in any event
assessee could not do, had the sale not taken place. He submitted that, sale of
stock was effectuated during the year under consideration, and entire sale
proceeds were received by MC during financial year relevant to assessment year
under consideration. Ld.CIT.DR submitted that, assessee had given undertaking
for deducting Royalty and other expenses payable to MC from such sale
proceeds and the net amount that was payable to assessee by MC, which was
very well ascertainable during financial year relevant to year under
consideration. He thus submitted that, assessee was well within the knowledge of
amount that accrued from sale of stock. Ld.CIT.DR thus submitted that, assessee
was required to reflect these sales as trading receipts in the books of account in
view of mercantile system consistently followed for disclosing income. Referring
to observations of Ld.AO in para 4.1.d to 4.1.f, Ld.CIT.DR submitted that,
auction of declared stock took place during the year under consideration, and
assessee had right to receive 80% of total sale proceeds as on the date of sale by
virtue of directions of Hon’ble Supreme Court in case of Samaj Parivartana
Samudaya vs State of Karnataka, (supra). Merely because MC disbursed
payments in subsequent financial year, would not postpone revenue recognition
40 ITA Nos.3317-3319/Bang/2018. M/s.Gogga Gurusanthaiah and Brothers.

in the hands of assessee to subsequent years. He vehemently opposed argument
of Ld.Counsel that, income received by assessee was un-ascertainable and
hypothetical. Ld.CIT.DR submitted that, accrual of income must be judged on ‘Principle of real income theory’, and that, what is necessary to be considered is
the true nature of transaction. Ld.CIT.DR submitted that, what has really
accrued to assessee has to be found out and what has accrued must be
considered from the point of view of real income, taking the probability or
improbability of realisation in a realistic manner. He also submitted that, merely
because receipt takes place of such accrued income by conduct of parties in
subsequent year, income which has accrued for year under consideration, cannot
be made as ‘no income’.

A.12. Ld.CIT.DR emphasised that, admittedly, in subsequent years, assessee
received 80% of total sale proceeds from E auction carried out by MC. It has
been contended that income has arisen/accrued to assessee during the year
under consideration, and therefore has been rightly taxed in the hands of
assessee for year under consideration.

A.13. We have perused submissions advanced by both sides in light of records
placed before us. We also have perused various decisions relied upon by
Ld.Counsel referred to herein above, as well as in the paper book filed before.

A.13.1. The issue that arises before us, is in respect of accrual of sale proceeds
from declared stock, during the year under consideration. Following is the
summary of what has been proposed by Ld.Counsel.

A.13.2. Ld.Counsel opposed for treatment of sale proceeds from disclosed stock
as income in the hands of assessee for year under consideration on the ground
that, it never had the ‘right to accrue’, due to uncertainty of the amount. It was
contended that in view of uncertinity, assessee need not account for the same
even under mercantile system of accounting. It was submitted that sales revenue
accrued to assessee only in the year in which payment advice was issued by MC.

A.13.3. Income tax is a levy on income. It takes into account the point of time at
which liability to tax is attracted, i.e; accrual of income or its receipt. Hon’ble
Supreme Court in case of CIT vs Shoorji Vallabhdas & Co reported in (1962) 46
ITR 144 held that: “…………. If income does not result at all, there cannot be a
tax, even though in book keeping and entries made about a ‘hypothetical
income’, which does not materialise. Where income has, in fact, been received
and subsequently given up in such circumstances that it remains the income of
the recipient, even though given up, the tax may be payable. Where, however the
income can be said not to have resulted at all, there is obviously neither accrual
nor receipt of the income, even though an entry to that effect might, in certain
circumstances, have been made in the books of account.”

A.13.4. In CIT vs Kerala State Drugs & Pharmaceuticals Ltd., reported in
(1991) 192 ITR 1, Hon’ble Kerala High Court observed and held as under: “In
order to tax on income, one has to see whether it is the real income or whether
the income has materialised. What is necessary to be considered is the true
nature of the transaction and whether in fact the transaction has resulted in
profit or loss to the assessee. Once accrual takes place and income accrues, the
same cannot be defeated. Even under the mercantile system of accounting, it is
only the accrual of real income which is chargeable to tax. The income should
41 ITA Nos.3317-3319/Bang/2018. M/s.Gogga Gurusanthaiah and Brothers.

not be hypothetical income, but real income. If income is given up unilaterally by
the assessee after it had accrued, it could not escape liability to tax. When
income is in fact received but subsequently given up it remains the income of the
recipient and taxes payable. When income is not resulted at all, there is neither
accrual nor receipt of income even if there is an entry to that effect in the books
of account. Mere postponing of an entry in the account books would not always
supply conclusive evidence on the question whether the disputed amount has
accrued to the assessee or not. Mere effort on the part of the assessee to realise
the amount by sending a bill or making a claim or filing a suit for recovery
would not in law make it an income which has accrued in the year in question.
The transfer of the amount to the profit and loss account is bereft of any
significance.”

A.13.5. We also refer to decision by Hon’ble Bombay High Court on concept of
real income, emphasised in case of Kashiparekh and Co Ltd (HM) vs. CIT,
reported in (1960) 39 ITR 706. Hon’ble Court held that, surrender of income
even after closure of accounting year may make no difference to the concept of
real income. Hon’ble Bombay High Court, relied on view expressed by Hon’ble
Supreme Court in case of CIT vs Birla Gwalior (P) Ltd reported in (1973) 89
ITR 266 as under: “The principle of real income is not to be subordinated as to
amount virtually to a negation of it when a surrender or concession or rebate in
respect of managing agency commission is made, agreed to or given on grounds
of commercial expediency, simply because it takes place sometime after the close
of an accounting year. In examining any transaction and situation of this nature
the court would have more regard to the reality and speciality of the situation
rather than the purely theoretical or doctrinaire aspect of it. It will lay greater
emphasis on the business aspect of the matter viewed as a whole when that can
be done without disk regarding statutory language.” From the above ratios laid
down by Hon’ble Supreme Court and many High Courts, it could be construed
that, accrual of income must be judged, depending facts and circumstances of
each case.

A.13.6. It has been vehemently contended by Ld.Counsel that, assessee did not
have right to accrue such income, since its receipt was hypothetical in the year
of sale. And, though assessee followed mercantile system of accounting, it had to
postponed its accrual to subsequent years, when sale proceed were actually
received. It was submitted by assessee that, income did not materialise during
the year under consideration. It was contended that in view of uncertainty,
assessee need not account for the same even under mercantile system of
accounting. It was submitted that sales revenue accrued to assessee only in the
year in which payment advice was issued by MC.

A.13.7. The present facts of the case, we note that, total sale proceeds as on the
date of sale by virtue of directions of Hon’ble Supreme Court in case of Samaj
Parivartana Samudaya vs State of A.Y:2013-14 Karnataka, (supra) approved
sale of iron ore through e-auction conducted by MC. It is also observed that
Hon’ble Court directed that, the quantity to be put for e-auction, its grade, lot
sizes, its base/flow price and the period of delivery would be decided/provided by
the respective leaseholders. It is also noted that, MC may permit the leaseholders
to put up for e-auction the quantities of iron ore planned to be produced in
subsequent months. Hence, we cannot agree that, assessee was unaware
regarding total quantity of iron ore sold and total sale proceeds received
towards total quantities sold during the year.
42 ITA Nos.3317-3319/Bang/2018.
M/s.Gogga Gurusanthaiah and Brothers.
A.13.8. On perusal of documents placed on record, we are of the view that,
assessee was aware of total quantity of iron ore sold and dispatched, total sale
proceeds received towards total quantity sold during the year and value of stock
that was not considered for release. This is evident from page 178, 180-181 of
paper book, wherein, date of sale, for both mining leases and amount realised
are placed. Under such circumstances, assessee cannot escape from incident of
accrual of such income during financial year relevant to assessment year under
consideration.

A.13.9. There is no dispute with regard to the fact that, declared stock belongs to
assessee and assessee has to recognise revenue arising on sale of such stock. We
have already noted that the role of MC was to carry out the e-auction of the
stock and sell the stock on behalf of assessee as per the directions of total sale
proceeds as on the date of sale by virtue of directions of Hon’ble Supreme Court
in case of Samaj Parivartana Samudaya vs State of Karnataka, (supra).
Therefore, the risk in such stock stood transferred from assessee to the buyer as
on the date of sale. Further, assessee was vested with legal right to receive sale
proceeds from stocks sold by MC. Therefore, income became due to assessee as
on date of sale of stock, and it became due to assessee, when sale proceeds were
received by MC. We also note that under VAT, the sales have been recognised
for year under consideration by assessee which further strengthens our view. In
our opinion, under such circumstances, date of payment does not affect accrual
of income.

A.13.10. In support, we refer to decision of Hon’able Supreme Court in case of
CIT vs Excel Industries Ltd (supra) . Hon’ble Court while deciding the case
referred to its coordinate bench decision in case of Morvi Industries Ltd vs CIT
reported in (1971) 82 ITR 835. It was observed that income can be said to
accrue, the moment it becomes due. It was further held that date of payment does
not affect the accrual of income. The moment income accrues, assessee gets
vested with the right to claim it, even though it may not be made immediately.
Hence, receipt of the sale consideration on a later date would not postpone the
accrual of income. Under Sale of Goods Act, 1930, a key criterion for
determining when to recognise revenue from a transaction involving the sale of
goods is that the seller has transferred the property in the goods to the buyer for
a consideration. The transfer of property in goods, in most cases, results in or
coincides with the transfer of significant risks and rewards of ownership to the
buyer. Also as per ICDS-IV relating to revenue recognition, sale is completed
when property in the goods transferred from the buyer to the seller for a price
and further the seller retains no effective control of the goods so transferred. In
present facts, iron ore stood transferred to the buyers as on the date of sale
through E auction by MC. We note that assessee was aware about the amount to
be received as sale consideration and the details regarding deduction is towards
SPV as per the directions of Hon’ble Supreme Court.

A.13.11. We therefore do not find any force in the submissions made by
Ld.Counsel that there is no necessity to assess the impugned sale proceeds
during the year since it has been already offered to tax in subsequent assessment
year and the exercise is tax neutral. Under Income tax Act, total income of each
year is to be determined separately and hence income has to be assessed in the
right assessment year. Considering totality of facts in the present case, we are of
the view that, sale proceeds of assessee’s stock accrued to assessee during
43 ITA Nos.3317-3319/Bang/2018. M/s.Gogga Gurusanthaiah and Brothers.

financial year relevant to assessment year under consideration. Based on above discussions and observations, in our view, we are of opinion that, sale proceeds from disclosed stock accrued to assessee during the year under consideration and has to be considered for determining income under the head ‘profits and gains from business for year under consideration. We have already noted that assessee has offered the above sale consideration on subsequent assessment years, and income tax act does not permit to assess same income twice. Hence in our view assessee may move appropriate petition before the authorities below for exclusion of above sale proceeds from declared stock in the relevant assessment year. Ld.AO is directed to consider such application liberally by granting proper opportunity of being heard to assessee.”
5.4 In view of the above order of the Co-ordinate Bench of
the Tribunal, we dispose of the above issue with similar
directions.

5.5 In the result, ground No.3 raised by the assessee for
assessment year 2013-2014 is rejected.
6. Difference in receipts as per 26AS treated as unaccounted receipts. (Asst.Year 2013-2014) 6.1 The Assessing Officer had added a sum of Rs.4,49,334
for the reason that there is a difference in receipt / sales
account in the books of account and receipts as per Form
No.26AS. The learned AR before the Tribunal submitted that
M/s.MSPL had made TDS twice on the same payment, first
time when paying the advance and subsequently in final
payment. The TDS already made on the advance was omitted
to be noticed while making the final payment on raising the
invoice. It was submitted that the assessee had filed a
reconciliation statement clearly explaining how TDS was
made on the same amount twice.

6.2 The learned Departmental Representative present was
duly heard.
44 ITA Nos.3317-3319/Bang/2018.
M/s.Gogga Gurusanthaiah and Brothers.
6.3 We have heard rival submissions and perused the
material on record. We direct the A.O. to consider the
assessee’s reconciliation statement, provided the assessee
moves an application that there is no difference in the income
disclosed and receipts as per Form No.26AS. With these
directions, we dispose of ground No.4 for assessment year
2013-2014.

7. Contribution to the Deputy Commissioner, Government of Karnataka, for Hampi Utsav (Asst.
Year 2015-2016) 7.1 The assessee had paid an amount of Rs.10,00,000 as
contribution towards Humpi Utsav to the Deputy
Commissioner, Government of Karnataka. This issue we
noticed is covered in favour of the assessee in assessee’s own
case for assessment year 2009-2010 in ITA No.504/Bang/
2014 (order dated 29.05.2020), wherein it was held that the
contribution made towards Hampi Utsav is an allowable
expenditure u/s 37(1) of the I.T.Act. The relevant finding of
the Tribunal reads as follow:-

“6. We have considered the rival submissions. We find that in para 2 on page 4 of this order, it is noted by learned CIT(A) that in the present case, the payment is not only made by the assessee firm but similar payments have also been made by all the business / industrial houses situated in Bellary and nearby districts depending upon the scale of business. It is also noted by CIT(A) that the present payment has helped the firm in getting goodwill of local citizens, bureaucrats, politicians, press and others. In our considered opinion, when this is admitted by learned CIT(A) that this payment in question will help the firm in getting goodwill of local citizens, bureaucrats, politicians, press and others, this will definitely benefit the assessee firm’s business also, may at a later date. Therefore, in our considered opinion, this expenditure is an allowable expenditure under section 37(1) of the Income Tax Act, 1961. We respectfully follow the judgment of Hon’ble Karnataka High Court rendered in the case of M/s. Kanhaiyalal Dudheria Vs. JCIT (supra) and decide the issue in favour of the assessee.”
45 ITA Nos.3317-3319/Bang/2018. M/s.Gogga Gurusanthaiah and Brothers. 7.2 Since facts of this assessment year is identical to the
facts considered by the ITAT for Asst.Year 2009-2010,
following the Co-ordinate Bench order of ITAT in assessee’s
own case for A.Y. 2009-2010, we direct the A.O. to allow a
sum of Rs.10 lakh as an allowable business expenditure. It is
ordered accordingly.

7.3 Therefore, ground No.3 raised for assessment year 2015-
2016 is allowed.

8. In the result, the appeals filed by the assessee are partly
allowed as indicated above.

Order pronounced on this 28th day of July, 2021.

Sd/- Sd/- (Chandra Poojari) (George George K) ACCOUNTANT MEMBER JUDICIAL MEMBER Bangalore; Dated : 28th July, 2021.
Devadas G* Copy to :
1. The Appellant.
2. The Respondent.
3. The CIT(A), Gulbarga
4. The Pr.CIT, Gulbarga.
5. The DR, ITAT, Bengaluru.
6. Guard File. Asst.Registrar/ITAT, Bangalore

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