Zeenath Transport Company Vs ACIT (ITAT Bangalore)
The assessee during the year made payment of Rs.10 lakhs and 20 lakhs towards membership fee and legal fund respectively to Federation of Indian Mineral Industries. The federation of Indian Mineral Industries is an association of industries i.e engaged in the business of minerals and is a non profit corporate body registered under the Companies Act 1956 to promote the interest of the mining and mineral processing, metal making and other mineral based industries and to attend to the problems faced by them in lease grants, tenure, production, taxation, trade export labour etc. The Ld.AO restricted the claim to 50% of expenditure incurred on account of legal fees u/s 80G of the Act.
We note that the legal payment incurred by assessee is towards representing case filed of FIMI against which TDS has been deducted as observed by the Ld.CIT(A). It is also an admitted fact that this organization has been formed to safeguard the rights of mine owners and to protect interest of industries, present in this spear of mineral exploration and production. In our opinion the said amount does not qualify to be considered as donation. It is an expenditure incurred to safe-guard assessee’s business interests and has to be considered under the provisions of sec.37(1) of the Act. In our view the decision of coordinate bench of this Tribunal reproduced herein above squarely covers the issue under consideration.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
Present appeals are field by the assessee against orders dated 22/03/2018 passed separately by the Ld.LCIT(A), Gulbarga for assessment year 2012-13 to 2014-15 on following grounds mentioned of appeal.
ITA No.1780/Bang/2018
“1. The impugned assessment order is opposed to the acts of the case and the law and therefore, it is liable to be set-aside.
10% OF THE SALE PROCEEDS WITHHELD & RETAINED.
2.1. The Learned Assessing Officer as well as the Learned Commissioner of Income-tax (Appeals) ought to have appreciated that the amount of Rs.1,22,93,688/-, withheld and retained by the Central Empowered Committee (CEC) constituted by the Hon’ble Supreme Court as a percentage (10%) of sale proceeds, is not income of the assessee-appellant as it never reached the appellant at any point of time, and it was diversion of income by overriding title.
2.2. Without prejudice to the Ground No.2.1 above, the Authorities below failed to appreciate that the expenditure in question has acquired the character of statutory deduction, since it is withheld and retained by the CEC on the directions of the Hon’ble Supreme Court and as such, it is allowable expenditure wholly and exclusively laid out and expended for the purposes of business.
2.3. Without prejudice to the Ground Nos.2.1 & 2.2 above, the Authorities below failed to appreciate that the expenditure in question is not prohibited by Law, and on the contrary, it is mandated by Law, since it is withheld and retained by the CEC on the directions of the Hon’ble Supreme Court, and as such, Explanation-1 under subsection (1) of section 37 of the Act has no application.
2.4. Without prejudice to the Grounds in Nos.2.1, 2.2 & 2.3 above, the Learned Assessing Officer as well as the Learned Commissioner of Income-tax (Appeals) ought to have appreciated that the Explanation-2 in section 37(1) of the Act is not retrospective in operation and therefore, the expenditure being contribution towards SVP could not be disallowed applying the said Explanation for the present assessment year, which is a pre-amendment assessment year.
2.5. The Learned CIT(A) failed to appreciate that the assessee/appellant is a partnership firm, and not a company, and accordingly the restrictive clause in Explanation-2 of section 37(1) of the Act, relating to expenditure on Corporate Social Responsibility (CSR) was not applicable to the amount withheld and retained by the CEC.
2.6. The Learned CIT(A) ought to have appreciated that the amount in question retained by the CEC was not set apart as per section 135 of the Companies Act, 2013 and therefore, the restriction in the said Explanation-2 is not attracted, even if the said Explanation is ultimately held to be retrospective in operation and as applicable to non-corporate assessees also.
CONTRIBUTION TOWARDS FLOOD RELIEF.
3.1. The Authorities below ought to have appreciated that the contribution of Rs.2,40,00,000/- towards Flood Relief as per the MOU executed with the Government of Karnataka is an eligible expenditure of business u/s 37 of the Act, since it is expended wholly and exclusively for the purpose of the business.
3.2. The Learned AO and the Learned CIT(A) have failed to appreciate that the amount of Rs.2,40,00,000/- towards flood relief was contributed under an element of compulsion, at the instance of Government of Karnataka, and accordingly, it is an expenditure incurred wholly and exclusively for the purpose of the business, and allowable u/s 37(1) of the Act.
3.3. The Authorities below ought to have appreciated that Explanation-2 u/s 37(1) of the Act was inserted by the Finance Act, 2014, w.e.f. 01-042015, cannot be applied retrospectively for the present assessment year to disallow, the expenditure towards flood relief.
3.4. The Learned CIT(A) failed to appreciate that the assessee/appellant is a partnership firm, and not a company, and accordingly the restrictive clause in Explanation-2 of section 37(1) of the Act, relating to expenditure on Corporate Social Responsibility (CSR) was not applicable.
3.5. The Learned CIT(A) ought to have appreciated that the expenditure in question was not set apart as per section 135 of the Companies Act, 2013 and therefore, the restriction in the said Explanation-2 is not attracted, even if the said Explanation is ultimately held to be retrospective in operation and as applicable to non-corporate assessees also. CONTRIBUTION TO FIMI TOWARDS LEGAL EXPENSES.
4.1. The Authorities below failed to appreciate that payments made to FIMI towards legal expenses amounting to Rs.20,00,000/- are expended wholly and exclusively for the purpose of business and therefore, allowable as business expenditure under section 37(1) of the Act.
4.2. The Authorities below ought not to have restricted the payment of Rs.20,00,000/- to FIMI towards legal expenses under section 50G of the Act, failing to appreciate that the entire expenditure is allowable under section 37(1) of the Act.
TRAVELLING EXPENSES.
5. The Learned CIT(A) ought to have appreciated that there is no defect in claiming the expenditure on foreign travel as per his own finding and therefore, ordered deletion of the entire addition of Rs.4,68,259/-consistent with his own finding.
6. The Appellant denies the liability to pay the interest u/s 234B and 234C of the Act.
7. The Grounds of Appeal are taken without prejudice to one another and the Appellant craves leave to add or delete or modify or revise any ground at the time of hearing before the Hon’ble ITAT.
For these and other grounds that may be urged at the time of hearing, it is prayed that the Hon’ble ITAT may be pleased to allow the appeal in the interest of the equity and justice.
ITA No.1781 & 1782/Bang/2018
“1. The impugned assessment order is opposed to the acts of the case and the law and therefore, it is liable to be set-aside.
10% OF THE SALE PROCEEDS WITHHELD & RETAINED.
2.1. The Learned Assessing Officer as well as the Learned Commissioner of Income-tax (Appeals) ought to have appreciated that the amount of Rs.1,22,93,688/-, withheld and retained by the Central Empowered Committee (CEC) constituted by the Hon’ble Supreme Court as a percentage (10%) of sale proceeds, is not income of the assessee-appellant as it never reached the appellant at any point of time, and it was diversion of income by overriding title.
2.2. Without prejudice to the Ground No.2.1 above, the Authorities below failed to appreciate that the expenditure in question has acquired the character of statutory deduction, since it is withheld and retained by the CEC on the directions of the Hon’ble Supreme Court and as such, it is allowable expenditure wholly and exclusively laid out and expended for the purposes of business.
2.3. Without prejudice to the Ground Nos.2.1 & 2.2 above, the Authorities below failed to appreciate that the expenditure in question is not prohibited by Law, and on the contrary, it is mandated by Law, since it is withheld and retained by the CEC on the directions of the Hon’ble Supreme Court, and as such, Explanation-1 under subsection (1) of section 37 of the Act has no application.
2.4. Without prejudice to the Grounds in Nos.2.1, 2.2 & 2.3 above, the Learned Assessing Officer as well as the Learned Commissioner of Income-tax (Appeals) ought to have appreciated that the Explanation-2 in section 37(1) of the Act is not retrospective in operation and therefore, the expenditure being contribution towards SVP could not be disallowed applying the said Explanation for the present assessment year, which is a pre-amendment assessment year.
2.5. The Learned CIT(A) failed to appreciate that the assessee/appellant is a partnership firm, and not a company, and accordingly the restrictive clause in Explanation-2 of section 37(1) of the Act, relating to expenditure on Corporate Social Responsibility (CSR) was not applicable to the amount withheld and retained by the CEC.
2.6. The Learned CIT(A) ought to have appreciated that the amount in question retained by the CEC was not set apart as per section 135 of the Companies Act, 2013 and therefore, the restriction in the said Explanation-2 is not attracted, even if the said Explanation is ultimately held to be retrospective in operation and as applicable to non-corporate assessees also.
CONTRIBUTION TOWARDS FLOOD RELIEF.
3.1. The Authorities below ought to have appreciated that the contribution of Rs.2,40,00,000/- towards Flood Relief as per the MOU executed with the Government of Karnataka is an eligible expenditure of business u/s 37 of the Act, since it is expended wholly and exclusively for the purpose of the business.
3.2. The Learned AO and the Learned CIT(A) have failed to appreciate that the amount of Rs.2,40,00,000/- towards flood relief was contributed under an element of compulsion, at the instance of Government of Karnataka, and accordingly, it is an expenditure incurred wholly and exclusively for the purpose of the business, and allowable u/s 37(1) of the Act.
3.3. The Authorities below ought to have appreciated that Explanation-2 u/s 37(1) of the Act was inserted by the Finance Act, 2014, w.e.f. 01-042015, cannot be applied retrospectively for the present assessment year to disallow, the expenditure towards flood relief.
3.4. The Learned CIT(A) failed to appreciate that the assesseeappellant is a partnership firm, and not a company, and accordingly the restrictive clause in Explanation-2 of section 37(1) of the Act, relating to expenditure on Corporate Social Responsibility (CSR) was not applicable.
3.5. The Learned CIT(A) ought to have appreciated that the expenditure in question was not set apart as per section 135 of the Companies Act, 2013 and therefore, the restriction in the said Explanation-2 is not attracted, even if the said Explanation is ultimately held to be retrospective in operation and as applicable to non-corporate assessees also.
4. The Appellant denies the liability to pay the interest u/s 234B and 234C of the Act.
5. The Grounds of Appeal are taken without prejudice to one another and the Appellant craves leave to add or delete or modify or revise any ground at the time of hearing before the Hon’ble ITAT.
For these and other grounds that may be urged at the time of hearing, it is prayed that the Hon’ble ITAT may be pleased to allow the appeal in the interest of the equity and justice.”
Brief facts of the case are as under :
2. The assessee is engaged the business of mining, manufacture and sale of iron ore. The assessee filed its return of income on 30.09.2013 declaring total income of Rs.170,44,59,280/-. During the course of assessment proceedings, the Ld.AO observed that the assessee has debited an amount of Rs. 28,60,12,206/-under the head Special Purpose Vehicle (SPV) Charges. The said amount being, 10% & 15% of sales value e-auctioned Iron-ore under Category-A & Category-B Mines respectively, deducted by Monitoring Committee (ME) towards SPV Charges. The said amount was retained by the Central Empower Committee (CEC) as per the directions of the Hon’ble Supreme Court, out of sale proceeds, for the purpose of taking various ameliorative and mitigative measures. Ld.AO was of the opinion that, as the said retention of amount is in the nature of appropriation of profit and compensatory payment towards damages caused due to the environment and forest due to contravention of laws, the said payment cannot be said to be incurred wholly and exclusively for the purpose of business within the meaning of the provisions of section 37 of the IT Act. The Ld.AO thus sought for explanation towards the disallowance of the deduction claimed by the assessee.
2.3 In response, the assessee submitted that,
“As per the procedure adopted, based on the directions issued by the Hon’ble Supreme Court from time to time inclusive of the directions given while disposing the Writ Petition bearing No. CIVIL 562 of 2009 dated 18.04.2013, from sale proceeds a percentage of 10% is to be deducted from the e-auction sale proceeds in respect of ‘A’ category of Mines and 15% in respect of ‘B’ category and to spend the said amount under “Special Vehicle Purpose”. As stated in the directions, this deduction is for the purpose mitigating the effects as per “Comprehensive Environment Plans for the Mining Impact Zone”. Hence, this is a legal amount deducted as per the directions of the Hon’ble Supreme Court which is towards mitigative measures. This is nothing but an expenditure and which should be allowed as such in our hands as we do not have any right to claim from the amount earmarked for “Special Purpose Vehicle” as per the directions of Hon’ble Supreme Court.”
2.4 The Ld.AO, however determined assessed Income at Rs.203,94,98,140/- by making following additions/ disallowances in the hands of assessee;
The Ld.CIT(A) upheld the disallowance made by the Ld.AO by observing as under:
“5.6 Further 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 penalising 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 Venkataraman & Co. (P) 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.
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 Aluminium 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 emphasise once again the judgement in the 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 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 relevant ground of appeal is dismissed.
In the light of the above, the appellant’s contention that the AO is not justified in making the impugned addition of Rs. 28,60,12,206, is baseless and has no merits, stands on a weak footing and is without basis and lacks merits. The AO is justified and I do not find any need to interfere with the order. Therefore, the addition made is sustained. The relevant ground of appeal is hereby dismissed.
Therefore, the addition of Rs. 28,60,12,206/- made by the AO is sustained.”
4. Aggrieved by order of Ld.CIT(A) assessee is in appeal before us now.
Ground No.2.1 to 2.6
5. The Ld.AR submitted the details of mining leases owned by the assessee and its classifications as per the orders of the Hon’ble Supreme Court as under:
