Salitho Ores Pvt. Ltd. Vs ACIT (ITAT Panaji)
Royalty Liability Crystallised During Year Allowable; Delayed Payment Interest Compensatory: ITAT Panaji
The Income Tax Appellate Tribunal, Panaji Bench, in Salitho Ores Pvt. Ltd. v. ACIT, ITA No. 135/PAN/2025, allowed deductions for royalty relating to earlier financial years and interest on its delayed payment. The Tribunal held that the royalty liability crystallised during the relevant year, when the mining authorities raised the demand. It further held that the interest was compensatory, making it deductible as business expenditure under Section 37(1) of the Income-tax Act, 1961.
The order, pronounced on 22 October 2026, concerned Assessment Year 2010–11. The Bench comprised Dr. Manish Borad, Accountant Member, and Shri Vinay Bhamore, Judicial Member.
Background of the Dispute
The assessee, a private limited company engaged in mining, processing and sale of iron ore, filed its return declaring a loss of Rs. 1,68,26,007. Following scrutiny, an assessment under Section 144 was completed on 19 March 2013, determining income at Rs. 5,13,38,353.
After appellate proceedings, the Tribunal restored the matter to the Assessing Officer. A fresh assessment was completed on 14 December 2018 under Section 143(3) read with Section 254.
During these proceedings, the Assessing Officer examined royalty payable on the sale of rejections or waste dumps for financial years 2007–08 to 2009–10, together with interest. While royalty attributable to the current year was allowed, royalty of Rs. 1,59,22,685 relating to the preceding two years was disallowed as prior-period expenditure.
The officer also disallowed Rs. 78,73,785 paid as interest on delayed royalty payment, treating it as penal in nature.
Why the CIT(A) Confirmed the Disallowances
The CIT(A)-2, Panaji, upheld both disallowances through an order dated 20 March 2025.
According to the appellate authority, non-payment of royalty on the sale of rejections or waste dumps resulted from a decision taken by the assessee. There was no ambiguity regarding the statutory provisions governing the liability.
The CIT(A) therefore rejected the argument that the liability crystallised during the year under consideration. Allowing the earlier years’ royalty, in the authority’s view, would be inconsistent with the matching principle and the mercantile system of accounting followed by the assessee.
Aggrieved, the company challenged the royalty and interest disallowances before the Tribunal.
Assessee’s Explanation on Crystallisation of Liability
The assessee explained that it regularly paid royalty on lumps and fines excavated during mining. However, it held a bona fide belief that royalty was not payable on the sale of rejections or waste dumps.
Consequently, no provision for such royalty had been made in the earlier years. The mining authorities had also not previously raised a demand for royalty on these sales.
During the relevant year, the Director of Mines and Geology called upon the assessee to pay royalty on rejections sold in earlier years. The assessee submitted that this demand caused the liability to crystallise during the year, justifying the deduction.
Regarding interest, it argued that the expenditure was neither capital nor personal and had been incurred wholly and exclusively for business purposes.
Tribunal Allows Royalty Relating to Earlier Years
The Tribunal noted that the demand covering the preceding two financial years and the current year had been raised during the year under consideration. The Assessing Officer had accepted the current year’s royalty but rejected the earlier years’ component solely because it related to past periods.
The Bench relied on the Gujarat High Court’s decision in CIT v. Indian Petrochemicals Corporation Limited (2016) 74 taxmann.com 163. As explained in the order, expenditure quantified and paid during a year could be allowed in that assessment year despite the assessee following mercantile accounting.
Applying that reasoning, the Tribunal held that the royalty liability for Financial Years 2007–08 and 2008–09 crystallised during the relevant year. Since the payment represented business expenditure, the deduction of Rs. 1,59,22,685 was allowed.
Interest Was Compensatory, Not Penal
The Tribunal separately examined the character of the interest payment. It found that royalty itself was genuine business expenditure and that the interest arose from delayed payment associated with the demand raised during the relevant year.
Relying on CIT v. Ahmedabad Cotton Manufacturing Company Ltd. (1993) 71 Taxman 56 (SC), the Bench considered whether the payment involved a breach or infraction of law or instead arose in the course of business.
On the facts, the interest was payable for delay in paying royalty, rather than for violating the law. The Tribunal also observed that the payment was connected with the assessee’s mining operations and was made to ensure that its business was not stopped.
Accordingly, it characterised the interest as compensatory expenditure incurred wholly and exclusively for business and allowed Rs. 78,73,785 under Section 37(1).
Final Decision
The Tribunal allowed the assessee’s appeal, reversing the CIT(A)’s findings on both issues. The ruling turns on the year of crystallisation of the royalty liability and the compensatory character of the interest, as established by the circumstances recorded in the order.
Cases Discussed
- CIT Vs. Indian Petrochemicals Corporation Limited, (2016) 74 taxmann.com 163 (Gujarat High Court) — relied on for the year in which a liability crystallises.
- CIT Vs. Ahmedabad Cotton Manufacturing Company Ltd., (1993) 71 Taxman 56 (Supreme Court) — relied on for the distinction between compensatory business payments and payments for legal infractions.
FULL TEXT OF THE ORIGINAL JUDGMENT/ORDER
The captioned appeal at the instance of assessee pertaining to A.Y. 2010-11 is directed against the order dated 20.03.2025 of ld. CIT(A)-2, Panaji emanating out of Assessment Order dated 14.12.2018 passed u/s.143(3) r.w.s.254 of the Income Tax Act, 1961 (in short ‘the Act’).
2. The only issue for consideration is disallowance of Royalty expenditure at Rs.1,59,22,685/- and the interest paid on delayed payment of Royalty at Rs.78,73,785/-.
3. Brief facts of the case are that the assessee is a Private Limited Company and engaged in the business of Mining, Processing and Sale of Iron ore. Assessee declared loss of (-) Rs.1,68,26,007/- in the return of income for A.Y. 2010-11 e-filed on 15.10.2010. Case selected for scrutiny through CASS and assessment framed u/s.144 of the Act on 19.03.2013 assessing the income at Rs.5,13,38,353/-.
Thereafter, the matter travelled before ld.CIT(A) where assessee got part relief and then it reached before this Tribunal which restored the matter to the file of ld. Assessing Officer. In compliance thereto, assessment u/s.143(3) r.w.s.254 of the Act carried out. Ld.Assessing Officer noticed that assessee had to pay Royalty on rection/ waste dumps for the financial years from F.Y. 2007-08 to F.Y. 2009-10 along with interest. Ld. Assessing Officer allowed the claim for the current year but for the amount paid for the F.Y. 2007-08 and F.Y. 2008-09 ld. Assessing Officer disallowed the sum at Rs.1,59,22,685/- as prior period expenditure. Ld. Assessing Officer further disallowed the interest expenditure of Rs.78,73,785/- observing that such interest payment is of penal nature and therefore cannot be allowed as business expenditure u/s.37(1) of the Act. After giving set off of the loss for the year) assessing the income at Rs.69,70,463/-.
4. Aggrieved assessee preferred appeal before ld.CIT(A) but could not succeed as ld.CIT(A) held that non payment of Royalty on sale of rejection/waste dump was a decision taken by the assessee and there is no ambiguity of the applicability of the statutory provisions and therefore one cannot say that the liability to pay Royalty crystallised during the year and therefore the stand adopted by the assessee is against the principle of matching concept and not in accordance with Mercantile system of account and accordingly disallowed the Royalty payment as well as interest on delayed payment.
5. Aggrieved assessee is now in appeal before this Tribunal against the .
6. Ld. Counsel for the assessee vehemently argued referring to the written submissions filed before ld.CIT(A) as well as before this Tribunal forming part of the paper book running into 240 pages. He submitted that the assessee is into business of Mining, Processing and Sale of Iron ore and in the course of mining excavated lumps and fines and Royalty was paid on lumps and fines. As regards rejection of waste dumps which were sold, the assessee was under Bonafide belief that Royalty was not payable on rejections and therefore no provisions of Royalty on rejection was made in the earlier years. He submitted that during the year under consideration, the Mining Department called upon the assessee to pay Royalty on rejections and therefore the liability crystallised during the year. As regards the interest expenditure is concerned, it is neither a capital expenditure nor of personal in nature and is actually incurred wholly and exclusively incurred for the business and therefore allowable u/s.37(1) of the Act.
7. On the other hand, ld. DR supported the order of ld.CIT(A).
8. We have heard the rival submissions and perused the record placed before us. The only issue for our consideration is disallowance of Royalty expenditure paid towards the rejection/waste dumps sold by the assessee in the preceeding two financial years along with interest for late payment of Royalty. We observe that assessee is into Mining business and is regularly paying the Royalty on the mining excavated lumps and fines. During the year under consideration, the Director of Mines, Geology called upon the assessee to pay Royalty on rejection sold in the earlier years. Assessee is under the bonafide belief that for selling the rejections/waste dumps, Royalty is not payable. No demand was raised in the past on account of Royalty payable on such rejections/waste dumps. It is not in dispute that during the year under consideration itself, the demand has been raised for paying the Royalty on rejection in lumps for the preceeding two financial years as well as this year. Ld. Assessing Officer has allowed the claim for the Royalty paid for the rejections/waste dumps sold during the year but has denied the alleged Royalty payment for preceeding two financial years on the ground that they are prior period in nature.
9. We observe that Hon’ble High Court of Gujarat in the case of CIT Vs. Indian Petrochemicals Corporation Limited (2016) 74 taxmann.com 163 has held that the expenses quantified and paid during the year would be allowed as business expenditure in relevant assessment year even though the assessee follows Mercantile system of account. We find that facts are identical in the instant case also and that the liability to pay the alleged Royalty amount for F.Y. 2007-08 and F.Y. 2008-09 initiated by the Director of Mines, Geology crystallised during the year and the same being a business expenditure deserves to be allowed. Therefore, finding of ld.CIT(A) is reversed and the payment of Royalty for rejection of waste dumps for F.Ys. 2007-08 and 2008-09 at Rs.1,59,22,685/- is hereby allowed.
10. As regards the delayed interest of Royalty payment of Rs.78,73,785/- is concerned, ld. Assessing Officer has disallowed treating it as penal in nature and invoked the provisions of section 37(1) of the Act. We however find that expenditure incurred towards Royalty is a genuine business expenditure and the interest has been levied for the delay in payment and such delay is on account of demand being raised during the year under consideration. Hon’ble Apex Court in the case of CIT Vs. Ahmedabad Cotton Manufacturing Company Ltd. (1993) 71 Taxman 56 (SC) has held that “if a payment is made by the assessee during the relevant accounting year without any breach or infraction of any law or any public policy sought to be achieved by it and infact in obedience to provisions of such law as a measure of business expediency, there could be no valid reason not to allow such payment as deductible expenditure u/s.37 of the Act”. In light of the above judgment, we find that in the instant case also, the interest paid is not for any breach or infraction of law but is only for the delayed payment of Royalty. The payment of interest for delayed payment of Royalty is akin to the business carried out by the assessee and such payment has been made by the assessee to ensure that the business is not stopped and therefore the interest expenditure incurred on delayed payment of Royalty being compensatory in nature is wholly and exclusively for the purpose of business and therefore is allowable u/s.37(1) of the Act. Thus, finding of ld.CIT(A) is set aside and the interest on delayed payment of Royalty at Rs.78,73,785/- is allowed as business expenditure. Grounds of appeal raised by the assessee are allowed.
11. In the result, the appeal of the assessee is allowed.
Order pronounced on 22nd October 2026 under Rule 34(5) of the Income Tax (Appellate Tribunal) Rules, 1963.
