Penalty imposed by Supreme Court for illegal mining held compensatory in nature and allowed as business expenditure u/s 37(1) of the Income Tax Act
ABCAUS Case Law Citation:
ABCAUS 2600 (2018) (10) ITAT
Important Case Laws Cited/relied upon:
Essel Mining & Industries Ltd vs. Addl. CIT
ACIT vs. Freegade & Co. Ltd
Shyam Sel Ltd vs. DCIT (72 Taxmann.com 105) (Cal.).
The Assessee was aggrieved by the order of the CIT(A) in upholding the action of the Assessing Officer (AO) in making disallowance of payments under the directions of the Hon’ble Supreme Court towards penalty / compensation for illegal mining.
The assessee-company was a Public Sector Undertaking (PSU), engaged in the business of mining. It filed its return of income for the relevant Assessment Year(s) under the normal provisions as well as u/s 115JB of the Act.
During the assessment proceedings u/s 143(3) of the Act, the AO observed that the Hon’ble Supreme Court taking note of the large scale illegal mining activity carried on by various companies in the State at the cost or detriment of environment imposed appropriate charges on the leaseholders.
The AO 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 was falling in Category-B.
It was noted that the Apex Court had directed 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, AO observed that the Hon’ble Supreme Court had also 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 had made payment of Rs. 337.13 Crs towards contribution for the Special Purpose Vehicle (SPV) and the sum of Rs. 68.66 Crs towards penalty / compensation for encroachment of the mining area beyond the sanctioned / leased area.
The AO observed that the total of the above payment of Rs. 405.79 Crs was punitive in nature and accordingly he sought to disallow the same by issuance of a show-cause notice.
The assessee stated that the above amounts had been accounted for under “sales” and subsequently 10% of the sales booked under ‘contribution to SPV’ was an allowable business expenditure. It was also submitted that the tax had been paid on the amount of Rs. 268.47 Crs which was still receivable at the end of the year and that based on the judgment of the Hon’ble Supreme Court, both the expenses i.e., contribution to SPV and compensation to Statutory Agencies were provided in its books which had already been withheld by Monitoring Committee appointed by the Apex Court and therefore, the disallowance again would amount to double taxation. It was also argued that the payment made by company was ‘compensatory’ in nature and it cannot be construed as ‘punitive’ in nature and hence it is an allowable expenditure.
The AO however did not accept the assessee’s explanation and held that the assessee, had been directed to make the payment for infringement of Mining Act and other allied laws. Therefore, he observed that the payment of Rs. 405.79 Crs was punitive in nature and brought it to tax.
The CIT(A) confirmed the addition made.
The Tribunal noted that the Hon’ble Supreme Court had formed a Committee viz., Central Empowered Committee (CEC) to examine and suggest the remedial action towards illegal mining. The 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.
The Tribunal was of the view that based on the category allotted to the assessee by the CEC which the Hon’ble Supreme Court had accepted, the illegalities committed by the assessee was marginal and the compensation / penalty as directed by the Hon’ble Supreme Court was only to compensate the Government for the loss of revenue from such mining or marginal illegalities and not as a penalty.
The Tribunal opined that though the nomenclature given was “penalty” it was not for infraction or violation of any law to hold it to be punitive in nature, as presumed by the Assessing Officer. Learned
Accordingly, the Tribunal accepted the contention of the assessee that it was compensatory in nature and was a ‘business expenditure’ and allowable u/s 37(1) of the Act.
