M/s Auro Minerals , Hospet V. Joint Commissionerof Income TAx Bellary Range , Bellary

ITA 1329/BANG/2018

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 2034 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-05-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2012-2013
• Appeal Filed On: 24-04-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Business expenditure
• Section: 43B; 37(1); 207; 72; 13; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : BANGALORE BEFORE SHRI N. V. VASUDEVAN, VICE PRESIDENT AND MS. S. PADMAVATHY, ACCOUNTANT MEMBER ITA No. and Assessment Year Appellant Respondent 1543/Bang/2018 2012-13 Deputy Commissioner of Income Tax, Circle - 1, Bellary. M/s. Auro Minerals, 1. D.No.19, W. No.15, Anegundi House, AC Office Road, N. C. Colony, Hospet – 583 203. 2. Salgaocar Bhavan, Altinho, Panaji, Goa – 403 001. PAN: AAEFA 4157 A 1329/Bang/2018 2012-13 M/s. Auro Minerals, 1. D.No.19, W. No.15, Anegundi House, AC Office Road, N. C. Colony, Hospet – 583 203. 2. Salgaocar Bhavan, Altinho, Panaji, Goa – 403 001. PAN: AAEFA 4157 A Joint Commissioner of Income Tax, Bellary Range, Bellary. Assessee by :Shri. Percy Pardiwala, Sr. Advocate Revenue by:Shri. Srinivas T. Bidari, CIT(DR)(ITAT), Bengaluru. Date of hearing:28.04.2022 Date of Pronouncement:18.05.2022 O R D E R Per N. V. Vasudevan, Vice President : ITA No.1329/Bang/2018 is an appeal by the Assessee while ITA No.1543/Bang/2018 is an appeal by the Revenue. Both these appeals are ITA Nos.1543, 1329/Bang/2016 Page 2 of 38 directed against the order dated 28.02.2018 of the CIT(A), Gulbarga, relating to AY 2012-13. 2. We shall first take up for consideration, appeal by the Revenue. Ground No.1 is general. Grounds No.2 to 4 raised by the revenue is with regard to the year in which a sum of Rs.30,08,67,247/- being sale proceeds of iron ore in an e-auction is taxable. According to the revenue the said sum is taxable in AY 2012-13 or in the alternative in AY 2013-14 and not in AY 2015-16 as offered to tax by the Assessee. According to the Assessee the said sum is not taxable in AY 2012-13. 3. The facts and circumstances under which the aforesaid grounds of appeal arise for consideration are that the Assessee is a Partnership Firm engaged in the business of mining, processing and trading of iron ore in the State of Karnataka. The Assessee filed return of income for AY 2012-13 declaring total income of Rs.12,00,15,160/-. In the course of Assessment proceedings u/s.143(3) of the Income Tax Act, 1961 (Act), the AO noticed that in the Tax Audit Report in Form 3CB that there was a reference made by the Auditor regarding impounding of iron ore and sale through e-auction of impounded iron ore. The AO called upon the Assessee to furnish the required details with regard to the quantity of iron ore impounded and E- auction made between 26.8.2011 to 31.3.2012. 4. In this regard, it is necessary to understand the factual background with regard to the impounding of iron ore and sale through e-auction. Over exploitation or rampant and illegal mining in the State of Karnataka, particularly in the District of Bellary was subject matter of public interest ITA Nos.1543, 1329/Bang/2016 Page 3 of 38 litigation before the Hon’ble Supreme Court. The Hon'ble Supreme Court by order dated 29/07/2011 passed in GOI vs. Obulapuram Mining Co. Pvt. Ltd., reported in (2011) 12 SCC 491, suspended all mining and transportation activities in area admeasuring approximately 10,868 ha, pertaining to district of Bellary. 5. Subsequently, by order dated 26/08/2011 passed in Samaj Parivartana Samudaya vs state of Karnataka, reported in (2013) 8 SCC 209, Hon'ble Apex Court extended ban to Tumkur and Chitradurga mines, based upon a report filed by Central Empowered Committee (hereinafter referred to as CEC). Hon'ble Apex Court directed Ld. Amicus Curiae to submit quantity which could be released from existing stock of 25 Million Metric Ton of iron ore, subject to reclamation and rehabilitation plans being submitted. This was in pursuance to plea raised by Association of Steel Industry and other affected parties. 6. The Supreme Court on 2.9.2011 accepted the Central Empowered Committee’s (CEC) recommendation dated 1.9.2011, that out of 25 million metric ton (MMT) of iron ore stock from Bellary,Chitradurga and Tumkur in Karnataka, a quantity of 1.5 MMT per month be sold through e-auctions which will not be used for export. The CEC report was accepted by the court. The CEC had recommended that from the amount gained by sale of iron ore, nothing should be disbursed presently to mining leases which were found involved in illegal mining, whereas only 80 per cent of the amount should be advanced to other lease holders and the rest 20 per cent be retained with the government. It had said in addition to the sale price, the successful bidders will have to pay “applicable royalty at 10 per cent of ITA Nos.1543, 1329/Bang/2016 Page 4 of 38 market price”, forest department tax, sales tax, cess and other applicable charges. The total amount will be first deposited in a designated nationalized bank. The bench clarified that in addition to the CEC recommendations, the accounts to be periodically accounted by the state’s Accountant General. The committee said the e-auctioning should be conducted by the MSTC, a mini-ratna PSU specializing in e-commerce and suggested that for its services, a service charges of 0.3 per cent be fixed. It also said that physical verification of the existing stock of the iron ore will be carried out before e- auction “so as to determine the quantity of iron ore of different grades physically available.” The report had come pursuant to apex court’s direction dated August 28, 2011 to file a report charting out modalities for sale and keeping the accounts of sale proceeds of about 25 million MT of existing stock of iron ore pertaining to various mining leases in Bellary, Chitradurga and Tumkur in Karnataka. 7. On 23/09/2011 the Hon'ble Apex Court passed order formally recording the report of the CEC dated 1.9.2011 based on which the order dated 2.9.2011 was passed. A Monitoring Committee (MC) was formed to carry out sale and custody of iron ore. 8. On 9.8.2012 the Supreme Court considered the plea of Karnataka Iron & Steel Manufacturers Association regarding shortage of minerals due to suspension of mining activity and prayed for reopening of the mines. The Court directed report from parties. 9. Thereafter, by order dated 03/09/2012 Hon'ble Apex Court in case of Samaj Parivartana Samudaya vs state of Karnataka, reported in (2013) 8 ITA Nos.1543, 1329/Bang/2016 Page 5 of 38 SCC 219 approved report dated 29/08/2012 filed by CEC, Hon'ble Apex Court ordered for reopening of category 'A' mines, and vacated order dated 29/07/2011 passed in case of GOI vs. Obulapuram Mining Co. Pvt. Ltd., (supra) and order dated 26/08/2011 in case of Samaj Parivartana Samudaya vs State of Karnataka (supra). 10. Thereafter, by order dated 28/09/2012, CEC filed detailed report dated 03/02/2012, categorising mines into 'A', 'B' and 'C', depending on various types of violations by mining lessee which report was slightly modified by report dated 13.3.2012. The Report considered 63, Category 'B' mining lessee that includes Assessee's mining lease and suggested compensatory payments by leaseholders for repairing environmental deprecation brought by leaseholders to the extent of unplanned illegal mining done in their respective areas. The report suggested reclamation and rehabilitation plan by each leaseholders by constituting a special purpose vehicle by State of Karnataka, to carry out highly essential comprehensive environment plans for mining impact zone, in order to restore environmental damage, caused in such area due to illegal and reckless mining on a very large scale, and to ensure that environment in such areas may not suffer from any such type of abuse and destruction in future. 11. On 18.4.2013, the Hon’ble Supreme Court approved the categorization of mines into A, B and C categories. The Supreme Court on April 18 allowed reopening of the remaining category A mines, numbering 27, and 63 of the 72 category B mines in three districts of Karnataka— Bellary, Chitradurga and Tumkur—subject to certain conditions. Earlier on September 3 last year, the court had allowed 18 of the 45 category “A” ITA Nos.1543, 1329/Bang/2016 Page 6 of 38 mines to reopen. The court, however, cancelled all the 49 category “C” leases and two category B leases, where the leaseholders were found to have flagrantly violated the Forest Conservation Act of 1980. Mines which have been allowed to resume operations will have to get all clearances afresh. Besides, each mine will have to implement a Reclamation & Rehabilitation (R&R) plan in a time-bound manner. Indian Council for Forestry Research and Education (ICFRE) is in the process of preparing R & R plan for each mine separately. 12. Category A mines can implement the R & R along with mining. Category B mines will have to first complete R & R plan before resuming work. They have to pay fine for their illegal actions: Rs 5 crore for each hectare of forest they encroached for mining and Rs 1 crore for encroaching for dumping waste and other purposes. As per the Supreme Court order of September 28 last year, which has been reiterated in the final judgment, this is the absolute first step. CEC has to constitute a committee to determine the exact national loss from illegal mining. Category B mines will have to pay additional fines later and they have to give written undertaking that they will pay the additional amounts. 13. Pursuant to the orders of the Hon’ble Supreme Court, sale of ore was carried out by a monitoring committee consisting of the director of Karnataka Mines & Geology Department, principal chief conservator of forests and chief conservator of forests. As for category A mines, 10 per cent of the sales proceeds will be retained by the monitoring committee. In the case of category B mines, 15 per cent of sales proceeds will be retained. In the case of category C mines, the committee will retain the whole amount ITA Nos.1543, 1329/Bang/2016 Page 7 of 38 obtained through selling old stocks of ore. All these will go to a special purpose vehicle led by the chief secretary of the state, which would implement a comprehensive environment management plan for "mining affected zones". 14. The categorisation of mines into "A", "B" and "C" had following financial impact:- (A)From sale proceeds realised by MC on sale of iron-ore belonging to Category A mining leases, 10% shall be retained by the MC. Balance 90% shall be paid to the concerned lessees. The above said 10% shall be transferred to Special Purpose Vehicle (SPV). (B)From the sale proceeds realised by MC on sale of iron-ore belonging to Category B mining leases, following amounts shall be deducted retained by MC:- (a)15% of sale proceeds to be transferred to SPV. (b)Compensation for illegal mining and illegal dumping computed (i) @ Rs.5.00 crores per Ha of the area found by the Joint Team to be under illegal mining pit; and (ii) @ Rs.1.00 crore per Ha of area for illegal mining by way of over burden dump(s), road, office etc outside the sanctioned lese area. (c)The estimated cost of Reclamation and Rehabilitation Plans (R & R plans). For this purpose, a Guarantee money for implementation of R & R plans shall be collected. ITA Nos.1543, 1329/Bang/2016 Page 8 of 38 Category B lessees have to deposit a Guarantee money for implementation of R & R Plans in the respective sanctioned lease areas. On full implementation of the R & R Plans to the complete satisfaction of the CEC and subject to the approval by Hon'ble Supreme Court, the guarantee money would be refundable to the lease holder. It was also stated that the lessees shall be liable to pay additional amount, if the R & R Plan expenditure exceeded the estimates. (C) In respect of mining leases falling under Category C:- (a)such leases are cancelled/determined on account of the leases having been found to be involved in substantial 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 MC and (a)the implementation of the R & R plan should be at the cost of the lessee. Besides the above, the mine owners were also to pay Mine Pit Penalty which was based on the Pit mined by them beyond the area which they were permitted as per the lease to carry out mining operations. The mine owners were also to pay Dumping Penalty, i.e., charges for dumping mined iron ore in the area outside the area in which they were permitted to carry out mining operations. 15. Now coming back to the facts of the present case, as we have already seen, the AO called upon the Assessee to furnish details of inventory of iron- ore impounded by the MC and E-auction made from 26.8.2011 to 31.3.2012. The Assessee furnished the following details: ITA Nos.1543, 1329/Bang/2016 Page 9 of 38 . SALE BY CEC E-AUCTION 1 2 3 4 56 Buyers Grade MT Rs.5 -4 Dec 2011 JSW Steel Ltd F 55-58 17,888 22,896,192 1,280 JSW Steel Ltd F 60-62 7,999 16,557,723 2,070 Jan 2012 JSW Steel Ltd F 55-58 17,916 22,932,2111,280 Janki Corp. F 55-58 2,894 3,733,092 1,290 JSW Steel Ltd F 58-60 18,261 34,513,8951,890 Feb 2012 Janki Corp. F 55-58 5,023 6,479,128 1,290 JSW Steel Ltd F 58-60 46,067 87,065,987 1,890 MSPL Ltd., F 60-62 1,615 3,730,373 2,310 Mar 2012 Janki Corp. F 58-60 9,556 18,155,868 1,900 JSW Steel LtdF58-6042,032 79,441,4061,890 MSPL Ltd F60-62 2,321 5,361,371 2,310 TOTAL171,571 300,867,247 1,754 SPV 15% 45,130,087 255,737,160 R & R 24,982,000 Mine Pit Penalty - 1.43 Ha x 5.00 Cr 71,500,000 Dump Penalty-2.21 Ha x 1.00 Cr 22,100,000 Residual as and when CEC Pays which amount will be added to revenue in the FY if and when received 137,155,160 16. On going through the above table, the AO noticed that, Assessee has shown the aggregate sales of 1,71,571 MT for an amount aggregating to Rs.30,08,67,247/-. In the said statement, the Assessee made note that "Residual (Rs.13,71,55,160/-worked out after reducing liability against SPV, R & R, Mine Pit Penalty and Dump Penalty) as and when CEC pays which amount will be added to revenue in the FY if and when received. 17. The AO was of the view that the sale proceeds in e-auction conducted during the previous year ought to have been offered to tax. The Assessee was of the view that the sale proceeds of e-auction was with the MC/CEC ITA Nos.1543, 1329/Bang/2016 Page 10 of 38 and therefore cannot be said to have accrued or arisen to the Assessee. According to the Assessee it can be offered to tax after deduction of connected expenses only in the year in which the proceeds are realized. 18. The AO held that the sale in e-auction was done by the CEC/MC on behalf of the Assessee and in this regard referred to para-9 of the order of the Supreme Court dated 18.4.2014 wherein the Supreme Court observed : " 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 cp leaseholds being the subject of this order. In case, the money held by the CEC/Monitoring Committee on the account of any leaseholder is su icient 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." The AO therefore held that the e-auction sales took place on behalf of the assessee and the money was received from the purchaser by the CEC on account of the assessee. Hence, the assessee was required to reflect these sales as trading receipts in its books of account keeping in view the mercantile system of accounting followed by the assessee. ITA Nos.1543, 1329/Bang/2016 Page 11 of 38 19. With regard to the claim of the Assessee that if the sale proceeds of e- auction are brought to tax then out of the e-auction sales proceeds of Rs.30,08,67,247/- the following amounts are allowable as deduction viz., 1.SPV 15%-Rs. 4,51,30,087 2.R & R-Rs. 2,49,82,000 3.Mine Pit Penalty-Rs. 7,15,00,000 4.Dump Penalty-Rs. 2,21,00,000 Total - Rs.16,37,12,087 The AO held that the amount likely to be retained by the CEC/Monitoring Committee as per the directions of the Supreme Court on behalf of the Assessee in order to meet the penal and other liabilities for contravention of laws and loss caused to the environment by contravention of laws. Even the said compensatory/penal liabilities was a contingent liability as at the end of the relevant financial year and therefore the said liabilities cannot be allowed. Further, the said amount cannot be allowed as deduction out of sale proceeds even after accrual of such liability being compensation and penal liabilities for contravention of laws. 20. The AO also rejected the claim of the Assessee that contributions to SPV and R & R and pit penalty and dump charges are not in the nature of income as the Assessee’s title to the same stands overridden by the order of the Hon’ble Supreme court. Hence, the Assessee's contention that, the said amount is not liable to tax since the said amount was not actually received from the CEC/Monitoring Committee during the financial year, was not accepted. ITA Nos.1543, 1329/Bang/2016 Page 12 of 38 21. The AO also held that 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. Further, the Assessee's implicit apprehension that, the money retained by the Monitoring committee will not be returned, is not acceptable as the para (X) reproduced above clearly mentions that, the balance amount, if any, may be reimbursed to the respective lessees after adjusting the liabilities. 22. The AO also held that the deduction claimed against the said retention of amount by the Monitoring Committee is not allowable under section 37(1) of the Act, as the said liability 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 provisions of Explanation to section 37(1) of the Act. Hence, the Assessee's claim of deduction of part of sales proceeds to be retained by the CEC/Monitoring Committee was not allowed. Accordingly, entire sale proceeds of Rs. 30,08,67,247/- was assessed as trading receipts on accrual basis keeping in view the mercantile method of accounting followed by the Assessee. 23. Before CIT(A), the Assessee submitted that on 26.08.2011, the inventory of fines and iron-ore lying with the Assessee was impounded. The Assessee’s mines were categorized as “Category ‘B’”. The MC/CEC had entire control over the inventory. The MC/CEC did not give any details of ITA Nos.1543, 1329/Bang/2016 Page 13 of 38 sale by e-auction. The successful bidder would make payment to the MC directly. The Assessee was required to give No Objection Certificate at the time when the stock was to be lifted by the buyer and the stock sold was weighed in the presence of the Assessee. It was submitted that based on the details of stock lifted by the buyers, the Assessee approached the MC for claiming the e-auction sale proceeds. The Assessee came to know about the actual quantity sold by MC through e-auction only in January, 2015, and these figures were also tentative figures which the Assessee gave to the AO. It was only in February and March, 2015 when the Assessee received letters from MC dated 22.11.2014 and 16.02.2015, enclosing working of the sum payable to Assessee that the Assessee knew the exact quantity sold and price payable to the Assessee. The Assessee submitted that the data furnished by it to the AO based on the movement of stock of sales of Rs.30,08,67,247 for 171571 MT turned out to be incorrect and the actual sale value was much more. The Assessee pointed out that this was offered to tax in Assessment Year 2015-16 and taxed by the Revenue. The Assessee relied on Accounting Standard (AS)-9 of the Institute of Chartered Accountants of India (ICAI) that lays down that, if there is uncertainty in revenue being realized, such revenue need not be recognized. 24. With regard to the claim of the Assessee for deduction out of the e- auction sales proceeds of Rs.30,08,67,247/- the following amounts viz., 1.SPV 15%-Rs. 4,51,30,087 2.R & R -Rs. 2,49,82,000 3.Mine Pit Penalty -Rs. 7,15,00,000 4.Dump Penalty -Rs. 2,21,00,000 Total - Rs.16,37,12,087 ITA Nos.1543, 1329/Bang/2016 Page 14 of 38 the Assessee submitted that by an order dated 18.4.2013 passed by the Supreme Court (SC) based on the CEC's reports categorized all mines of Karnataka region into 3 categories i.e. A, B and C on the basis of the extent of encroachment in respect of mining pits and over burden dumps, the CEC recommended conditions subject to which mines would reopen and resume operations. The Supreme Court accepted the said recommendations and gave the following directions: "Out of the sale proceeds of the existing stock of the mining leases, after deducting: The penalty/ compensation payable; Estimated cost of implementation of the R&R Plan; and 10% of the sale proceeds to be retained by the Monitoring Committee for being transferred to the SPV The balance amount, if any, may be allowed to be disbursed to the respective leases." 25. Thus, according to CEC, MC was to retain the compensation/penalty, estimated cost of implementation of R&R plan and 15% of sales proceeds in a Special Purpose Vehicle (SPV)out of the sale proceeds. The Assessee pointed out that the payment for Pit Mine penalty, Dump Penalty, contribution to SPV and R & R Plan were all described by the Hon’ble Supreme Court in the aforesaid order as compensatory payment to restore the damage to ecology and therefore by no stretch of imagination, they can be termed as penalty attracting the provisions of Explanation Sec.37(1) of the Act, which lays down that any payment in the nature of a penalty cannot be said to be incurred wholly and exclusively for the purpose of business. 26. The Assessee placed reliance on the decision of ITAT Bangalore Bench in the case of M/s.M.Hanmumatha Rao, Bellary Vs. Prl.CIT ITA ITA Nos.1543, 1329/Bang/2016 Page 15 of 38 No.158/Bang/2017 for AY 2012-13 order dated 19.12.2017 wherein on identical facts the tribunal held that the stock of iron ore was under control of CEC and the order of Supreme Court was passed after the end of the previous year relevant to AY 2012-13 (reference was to order dated 18.4.2013 of Hon’ble Supreme Court) and therefore sale proceeds of e- auction arose to the Assessee only in AY 2013-14 and not in AY 2012-13. 27. The CIT(A) following the decision of the ITAT Bangalore in the case of M.Hanumantha Rao (supra), held that the sale proceeds cannot be taxed in AY 2012-13. The addition made by the AO was deleted. The CIT(A) did not go into the question whether deductions from sale proceeds claimed by the Assessee should be allowed or not. 28. Aggrieved by the order of the CIT(A), the revenue has raised grounds No. 2 to 4 which reads as follows: 2. In the facts and circumstances of the case, CIT(A) ought to have held that the sale proceeds of iron ore on account of e-auction by CEC was between December, 2011 and March 2012, and the quantum of proceeds are crystallized and known to the assessee and the amounts realized by the assessee, on 03.01,2013, were liable to be taxed for AY. 2012-13 on accrual basis, since the assessee follows mercy tile method of accounts. 3. The Ld. CIT(A) erred to place reliance on decision of ITAT in case M/s.M.Hanumantha Rao as much as the order of ITAT was not on account of correct facts to hold that receipts / income arising from sale of e-auctioned iron ore is not liable to tax in AY.2012-13, where, M/s.M.Hanumantha Rao (firm) itself had offered such, receipts for taxation on accrual basis, by filing a revised return of income for AY:2012-13. ITA Nos.1543, 1329/Bang/2016 Page 16 of 38 4. The receipts on sale of iron ore through e-auction sales by CEC, though received in subsequent year, is taxable in AY.2013-14 on actual receipt basis, but in AY.2015-16, as held by the CIT(A) in appellate order. 29. We have heard the rival submissions. The learned DR relied on the order of the AO and reiterated the stand of the revenue as reflected in grounds No.2 to 4. The learned counsel for the Assessee reiterated the stand of the Assessee as made before the CIT(A). In the course of hearing our attention was also brought to an order dated 8.12.2020 passed by the ITAT Bangalore Bench in the case of M/s. Veerabhadrappa Sangappa & Co. Vs. ACIT ITA No.1054/Bang/2019. 30. We have given a careful consideration to the rival submissions. The sequence of events prior to sale of iron ore by CEC shows that the Hon'ble Supreme Court by order dated 29/07/2011 suspended all mining and transportation activities in area admeasuring approximately 10,868 Hectares pertaining to district of Bellary. Subsequently, by order dated 26/08/2011 the Hon'ble Apex Court extended ban to Tumkur and Chitradurga mines, based upon a report filed by Central Empowered Committee (hereinafter referred to as CEC). The Hon’ble Supreme Court on 2.9.2011 accepted the Central Empowered Committee’s (CEC) recommendation dated 1.9.2011, that out of 25 million metric ton (MMT) of iron ore stock from Bellary, Chitradurga and Tumkur in Karnataka, a quantity of 1.5 MMT per month be sold through e-auctions which will not be used for export. The CEC report was accepted by the court. The CEC had recommended that from the amount gained by sale of iron ore, nothing should be disbursed presently to mining leases which were found involved in illegal mining, whereas only 80 ITA Nos.1543, 1329/Bang/2016 Page 17 of 38 per cent of the amount should be advanced to other lease holders and the rest 20 per cent be retained with the government. The report had come pursuant to apex court’s direction dated August 28, 2011 to file a report charting out modalities for sale and keeping the accounts of sale proceeds of about 25 million MT of existing stock of iron ore pertaining to various mining leases in Bellary, Chitradurga and Tumkur in Karnataka. It is pursuant to this order of the Hon’ble Supreme Court that e-auctioning of extracted iron ore lying in the Assessee’s leasehold sites came to be made through E-auction. The Assessee pleads complete ignorance of the sale by the CEC and pleads that it came to know about the exact details of sale only CEC gave break up details vide its letter dated 22.11.2014 and therefore offered to tax the sale proceeds as detailed in those letters. In the course of assessment proceedings, the Assessee in a letter dated 17.1.2015 gave a statement of sale of iron ore by CEC through e-auction. The quantity of iron ore sold in e-auction and the sale proceeds as given in this statement (extracted in the earlier part of this order) shows that 1,71,571 MT of iron ore was sold during the period December, 2011 to March 2012 and the gross sale value was Rs.30,08,67,247/-. The actual quantity and gross sale value as given by MC in the letter dated 22.11.2014 was 2,04,000 MT with a gross sale value of Rs.36,46,40,720/-. The sale value was declared by the Assessee in the return of income filed for AY 2015-16 and the revenue has accepted the said return of income. As per the enclosure to the letter dated 22.11.2014 of the MC, 85% of the gross sale value of Rs.36,45,74,280/- viz., a sum of Rs.30,98,88,138/- was payable to the Assessee and 15% viz., Rs.5,46,86,142/- was retained by the MC towards SPV. The details of amount detected from the gross sale value as given by the MC is as follows: ITA Nos.1543, 1329/Bang/2016 Page 18 of 38 1)Total quantity sold (MT) 2,07,922.00 2)Total sale proceeds (Rs.) 36,45,74,1.80 Recoveries 3)15% of the sale proceeds to be retained 5,46,86.142 4)Estimated R & R expenditure to be retained 2,49,82,000 5)Compensation (Mining pit) (1.43 Ha) _______________________________________________________________________ 7,15,00,000 6)Compensation (Dump, received etc 2.21 Ha) 2,21,00,000 7)Arrears Difference Royalty for the period 2009-10, 2010- 11 & 2011-12 1,17,95.020 8)The value of 16951 MT of material produced in excess of limits fixed by KSPCB during the year 2009-10 1,69.51,000 9 )TOTAL RECOVERIES 20,20,14,162 8) Balance amount (2-9) 16,25,60,118 1)Less: MSTC commission payable 18,82.913 Balance amount payable to the lessee. 16,06,77,205 31. The Assessee’s claim for deduction from the gross sale value as given by the Assessee in the letter dated 17.1.2015 before the AO is different and it reads thus: Gross sale value of 171,571 MT of Rs.30,08,67,247 from which the Assessee sought to deduct Rs.4,51,30,087 towards SPV at 15% of gross sale value and Rs.2,49,82,000/- towards R & R, Rs.7,15,00,000/- towards Mine Pit Penalty and Rs.2,21,00,000/- towards Dump Penalty. 32. The letter of the Assessee dated 17.1.2015 is admittedly after the MC’s letter dated 22.11.2014 but yet the Assessee is unable to explain the basis on which it gave details in its letter dated 17.1.2015. The Assessee’s claim has been that the MC had control over the inventory of the Assessee and it was not aware of the sales being made through e-auction. The Assessee however admits that it had to give no objection certificate (NOC) at the time stocks was to be lifted by the buyer and the stock sold was weighed in the presence of the Assessee’s representative. The Assessee remains silent on when it gave NOC to the buyer and when the stocks were ITA Nos.1543, 1329/Bang/2016 Page 19 of 38 lifted by the buyer. The Assessee claims that the figures it gave to the AO vide its letter dated 17.1.2015 were tentative figures based on the figures of sale noted by the Assessee’s representative at the time of movement of ore and the figures were only tentative. This stand of the Assessee is clearly false because as on 171.2015, it was in receipt of the letter dated 22.11.2014 by the MC wherein actual quantities were given by the MC. 33. The question is as to whether it can be said that the sale value of iron ore sold during the previous year by the MC thorugh e-auction can be said to have accrued or arisen to the Assessee and therefore the Assessee was bound to offer the sale value to tax. If the answer is in the affirmative, then whether the gross sale value or the gross sale value after reducing the amounts as claimed by the Assessee had to be accounted for by the Assessee as its sale. 34. The Assessee follows mercantile system of accounting and the moment sale is complete vis-à-vis the Assessee it had to account for sale in its books of accounts. Sale by the MC was by e auction and the sale happened during the relevant previous year. The Assessee was required to identify and appropriate the quantum of iron ore sold in e auction, which event, in the absence of any evidence to the contrary and in the light of the admission of the Assessee that it had identified the quantum of iron ore sold, has to be assumed to have happened during the relevant previous year. As we have already said, the Assessee is a privy to the process of sale through e-auction, in the sense was a participant in the process of identification and delivery of the quantity of iron ore sold through e-auction. Except a bald denial of actual knowledge of when the e-auction sale took place, the ITA Nos.1543, 1329/Bang/2016 Page 20 of 38 Assessee has not placed any facts within its knowledge. Therefore sale is deemed to be complete during the previous year relevant to AY 2012-13 when through the process of e-auction, property in the goods passed from the Assessee to the purchaser at the e-auction. The fact that some portion of the sale value has to be appropriated for specific purpose laid down by the Court in its order cannot be the basis to hold that sale value has to be accounted for only when the quantum of sum to be reduced is ascertained and the Assessee receives the net sale proceeds. Therefore, we hold that the conclusions of the AO that the sale value has accrued and arisen to the Assessee in tune with the mercantile system of accounting, during the previous year relevant to AY 2012-13. 35. The CIT(A) in coming to a contrary conclusion has placed reliance on the decision of the ITAT Bangalore Bench in the case of M.Hanumantha Rao (supra). In the said case, the facts were that the Assessee, who is also in the business of extraction of iron ore in the district of Bellary, Karnataka and in whose case also, there was a sale of iron ore through e-auction pursuant to orders of the Hon’ble Supreme Court, accounted for sale to the extent of Rs.14,68,19,400/- through e-auction. The actual sale of iron ore through e- auction was RS.17,27,28,707/-. The Assessee reduced a sum of Rs.2,59,09,307/- which was 15% contribution to SPV of the sale value, as per directions of the Supreme Court. The Assessee had offered sale value of Rs.14,68,19,400 (Rs.17,27,28,707 – Rs.2,59,09,307). The AO completed the Assessment without questioning as to how the Assessee was entitled to deduction of Rs.2,59,09,307/-. So also, the Assessee had claimed deduction of Rs.6,05,00,000 paid as penalty towards illegal mining, which was claimed and allowed as deduction by the AO. The CIT in exercise of his powers ITA Nos.1543, 1329/Bang/2016 Page 21 of 38 u/s.263 of the Act initiated proceedings for revision of the AO’s order on the ground that the sum of RS.2,59,09,307 was an application of income and therefore cannot be allowed as a deduction. He was also of the view that the sum of Rs.6,05,00,000/- being compensation paid for illegal mining was an expenditure in the nature of penalty for infraction of law and therefore cannot be allowed as deduction in view of explanation to Sec.37(1) of the Act. The order of the CIT u/s.263 of the Act was in challenge before the Tribunal. The tribunal in paragraph-8 of its order held that it was not going into merits of the case and further held that the sale through e-auction was pursuant to order of Supreme Court passed after the end of the previous year relevant to AY 2012-13 and therefore the sale proceeds itself was not assessable for the period relevant to AY 2012-13. The Tribunal held in the second part of paragraph 9 of its order that the Assessee had offered income which was not assessable for AY 2012-13 at all. The AO committed an error in not examining the claim for deduction of Rs.2,59,09,307/- being 15% contribution to SPV and deduction of Rs.6,05,00,000 paid as penalty. Since the order of the AO was not prejudicial to the interest of the revenue because the sum which was not taxable in AY 2012-13 had been offered to tax, the second condition for invoking jurisdiction u/s.263 of the Act, viz., the order of the AO should be prejudicial to the interest of the revenue was not satisfied, the order u/s.263 of the Act was quashed by the Tribunal. 36. The aforesaid decision is not applicable to the facts of the present case because the sale in the present case is admittedly pursuant to order of Supreme Court dated 2.9.2011 passed during the previous year relevant to AY 2012-13 and the sale process was also completed during the previous year relevant to AY 2012-13. Hence, we hold that the CIT(A) fell into an ITA Nos.1543, 1329/Bang/2016 Page 22 of 38 error in following the decision of the ITAT Bangalore Bench in the case of M. Hanumantha Rao (supra). 37. The reliance placed by the learned counsel on AS-9 of ICAI, in our view are not relevant in the context of accrual of income under the Act, which are governed by principles laid down by Courts. In AY 2012-13, AS- 9 of ICAI was not binding on the AO. These standards are framed to ensure disclosure of true and fair view of the state of affairs of the Assessee to the various stake holders in a limited liability company. We therefore hold that the sale proceeds of e-auction are assessable in AY 2012-13. 38. As far as the claim of the Assessee for deduction from the Gross sale value of 171,571 MT of Rs.30,08,67,247 to the following sums viz., (i)Rs.4,51,30,087 towards SPV at 15% of gross sale value and (ii)Rs.2,49,82,000/- towards R & R, (iii)Rs.7,15,00,000/- towards Mine Pit Penalty and (iv)Rs.2,21,00,000/- towards Dump Penalty. is concerned, the CIT(A) did not consider the said issue because of his conclusion that the E-auction sale value did not accrue or arise to the Assessee for AY 2012-13 and that the said sum was offered and taxed in AY 2015-16 and hence cannot be taxed twice. 39. As far as the issue whether the aforesaid sums can be claimed as deduction or not, the issue is no longer res integra and has been settled by the ITAT Bangalore Bench in the case of M/s. Veerabahadrappa Sangappa & Co. Vs. ACIT ITA No.1054/Bang/2019 for AY 2013-14 order dated 8.12.2020. ITA Nos.1543, 1329/Bang/2016 Page 23 of 38 (i) On Contribution to SPV at 15% of sale value: In paragraph 7 to 7.10.13 has elaborately discussed the question whether contribution to SPV at 15% can be allowed as deduction and held in paragraph 7.10.12 that the said payment is allowable as deduction u/s.37(1) of the Act with the following observations: “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.” (ii)On the deductibility of contributions towards R & R, the Tribunal held after elaborate discussion in paragraph 9 to 9.5.8 of its order finally concluded in para 9.5.7 that the payment in question is allowable as business expenditure with the following observations: ITA Nos.1543, 1329/Bang/2016 Page 24 of 38 “From the above it is clear that assessee was directed to make such payments in order to resume the mining activity. It is also clear that payment intimations may be issued as and when found necessary by the Department of Mining. Assessee cannot ignore such intimations for its smooth functioning of business. We therefore are of the opinion that these are expenditure incurred by assessee in lieu of business. We therefore reject the argument of revenue that such payment is hit by Explanation to section 1 to Section 37”. (iii)On the question whether mines pit penalty and dump penalty can be allowed as deduction, the Tribunal discussed the issue elaborately in paragraph 8 to 8.12.19 of its order and finally concluded in paragraph 8.12.19 that the sum can be allowed as deduction with the following observations: “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”. 40. In the light of the aforesaid decision, we direct the claim of the Assessee in this regard should be accepted. 41. The next aspect to be dealt with is as to whether the sale value of iron ore taxed in AY 2012-13 which was also offered to tax in AY 2015-16 ITA Nos.1543, 1329/Bang/2016 Page 25 of 38 should be directed to be deleted to avoid double taxation of the same income. The facts in this regard are that the same income is also assessed by the AO in A.Y. 2015-16 wherein he has accepted the Return of income filed by the assessee including e-auction sale, The break up of sales so offered to tax are as under: In February 2015, Gross sales Rs. 36,45,74,280: sales of F.Y. 11-12 Rs. 33,77,74,378 sales of F.Y. 12-13 Rs. 2,67,99,902 36,45,74,280 In March 2015, Gross sales Rs. 11,38,32,637 : sales of F.Y. 11-12 Rs. 1,65,57,723 sales in F.Y. 2012-13,13-14 Rs. 9,72,74,914 11,38,32,637 The sales year wise are as under: Gross sales of F.Y. 11-12 Rs. 35,43,32,101 F.Y. 12-13 Rs. 8,41,15,140 F.Y. 13-14 Rs. 3,99,59,676 As such for e-auction sales year wise as given by MC, sales for F.Y. 2011-12 were Rs. 35,43,32,101 42. The above sales were offered and assessed to tax in AY 2015-16 after claiming the expenses towards SPV charges, Compensation s for dump, mining pit, excess production, commission and royalty as retained by MC. The sales thus actually offered to tax are much higher than the incomplete and non accurate details of sales provided by the Assessee during the course of assessment. It was submitted that taxing the sales in A.Y. 2012-13 would amount to doubly taxing the same income which is against the cannons of taxation with regard to taxing real income. ITA Nos.1543, 1329/Bang/2016 Page 26 of 38 43. We are of the view that a direction to the AO to pass orders in AY 2015-16 to avoid double taxation of the same income, would be just and proper and meet the ends of justice. We hold and direct accordingly. 44. The next issue projected by the Revenue in ground No.5 is with regard to the addition made by the AO on account of undervaluation of closing stock to the extent of Rs.77,26,446/- which addition was deleted by the CIT(A). The facts with regard to this addition are that the Assessee consistently follows the method of valuing its closing stock of ore at the cost at ore at mine pit i.e., only the direct costs incurred are considered. Accordingly, the closing stock of the Assessee being 56,443 MT was valued at the rate of Rs. 184 ie approx. Rs. 103,86,000. This method is followed by the Assessee consistently every year and has been accepted by the Department. During the year under consideration, the Assessee was asked to furnish details of valuation of closing stock. The Assessee furnished the same giving details of direct and indirect cost. The indirect cost comprised of security service charges, Rent rates and taxes, water charges, transport charges, royalty, miscellaneous expenses and depreciation. The Assessee had valued closing stock basaed on direct costi.e. Rs. 184/- per ton however the AO for the reasons that Assessee did not furnish details to justify segregation of expenses as direct and indirect cost, chose to value the closing stock during the year at total cost including direct and indirect costs. He thus held the value of stock to be Rs. 374/MT (184 direct cost + 190 indirect cost) as against Assessee 's value of Rs. 184/MT. Thus, he added the difference of Rs. 77,26,446 i.e. [(48,249 MT closing stock*374=1,81,12,446)-(1,03,86,000: value of stock as per Assessee ). ITA Nos.1543, 1329/Bang/2016 Page 27 of 38 45. Before CIT(A), the Assessee drew attention to the details of closing stock of earlier year i.e., A.Y. 2011-12. The details of closing stock and of cost of production expense wise submitted vide letter dated 14.3.2015 during the course of assessment for AY 2011-12 was also enclosed. Based on these expense details, Assessee had arrived at direct cost being value of stock at mine pits at Rs. 286/MT. Assessee had accordingly in A.Y. 2011-12 also valued its closing stock at Rs. 286/MT based on the direct costs incurred. This method was accepted by the assessing officer. The AO had accepted the method of valuation of closing stock of the Assessee for A.Y. 2011-12 i.e. Rs. 286/MT which included direct costs only. It was submitted that the method of valuation of closing stock is followed consistently and accepted year after year the same cannot be changed by the AO in a particular year, with no change in facts. 46. Without prejudice to above submission it was submitted that if the AO revalues the closing stock as on 31.3.2012, directions need to be given for consideration of the same as opening stock in A.Y. 2013-14 and accordingly relief be given to the Assessee in A.Y. 2013-14 considering a higher value of opening stock i.e., Rs. 77,26,446. This will lead to reduction in profits of A.Y. 2013-14 by 77.26 lakhs. Also, during A.Y. 2012-13, the opening stock which is valued at Direct cost of Rs. 286/- be increased to include indirect costs. 47. The CIT(A) agreed with the submissions of the Assessee and deleted the addition made by the AO observing as follows: “The submission filed by the assessee, assessment order passed by the AO, grounds of appeal filed by the assessee and facts of the case ITA Nos.1543, 1329/Bang/2016 Page 28 of 38 has been carefully perused. The AO has valued the closing' stock of 4829 MT impounded but not sold through e-auction by the Monitoring Comthittee at Rs. 374 Per Metric Tons stating that the closing stock to be valued at the rate on which the cost of production debited in the books of accounts. However, the AO has not considered the valuation of corresponding opening stock as on 01.04.2011 and as on 01.04.2012. The valuations of closing stock and opening stock have to be done considering the same cost of production. It cannot be different for opening stock and closing stock. Hence, I hold that the AO was not justified in making the additions of Rs. 77,26,446/-. Accordingly, the appeal filed by the assessee on this account is hereby allowed and the AO is directed to delete the additions of Rs. 77,26,446/-.” 48. Aggrieved by the order of the CIT(A), the revenue has raised ground No.5 before the Tribunal. We have heard the rival submissions. The learned counsel for Assessee relied on order of CIT(A). The learned DR relied on the order of the AO. 49. We have considered the rival submissions. section 145A of the Act mandates that the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head “Profits and gains of business or profession” shall be in accordance with the method of accounting regularly employed by the Assessee. The Act mandates that the valuation of inventory should be made in accordance with the method of accounting regularly employed by the Assessee. It is also equally well settled that a method of accounting followed consistently in the matter of valuation of inventory cannot be disturbed, except when there is a change as laid down by the Hon’ble Supreme Court in the case of United Commercial Bank vs. CIT (1999) 240ITR 355 (SC). In the present case, the AO, was wrong in disturbing the method of accounting regularly employed by the ITA Nos.1543, 1329/Bang/2016 Page 29 of 38 Assesee for valuation of closing stock. The opening stock of the Assessee should also be valued in the same manner in which the closing stock of the Assessee is valued. By not valuing the opening stock of the Assessee the AO erred in disturbing only the value of closing stock. In the present case it was not in dispute that the Assessee was consistently following the same method of valuation of closing stock at cost at the mine pit, which was also followed in the year under consideration. The profit was deduced in accordance with the method adopted by the Assessee. Therefore, the AO was not justified in disturbing the consistent method of valuation. We find no grounds to interfere with the decision of the CIT(A) and accordingly reject ground No.5 raised by the Revenue. 50. The next issue that requires adjudication is ground No.6 raised by the Revenue regarding the claim of the Assessee for deduction on account of forest development tax of Rs.2,37,51,074/- which was not allowed by the AO but allowed by the CIT(A). The facts with regard to this ground of appeal are that the Assessee during the year under consideration, debited Rs. 2,37,51,074 on account of Forest Development Tax (FDT). This included arrears of payment of FDT of Rs. 1,15,04,800 paid during the year and Rs. 1,22,46,274 incurred during the year. 51. The assessing officer disallowed FDT Rs. 2,37,51,074 for want of details i.e., relevant orders and challans and nature of arrears of tax. Further the assessing officer held that FDT was paid provisionally under protest and matter was pending before the High Court. Thus, liability of FDT is not crystallized during the year and therefore disallowed the same. In this regard it may be clarified that Vide a notification dated 16.8.2008 and letter ITA Nos.1543, 1329/Bang/2016 Page 30 of 38 dated 12.9.2008, the Govt. of Karnataka had directed recovery of FDT @8% from the lease holders of mines, based on the value shown in the invoice at the time of releasing the iron ore from the forest area. This was subsequently increased to 12%. Aggrieved by this notification, the Assessee preferred a writ petition before the Hon'ble Karnataka High Court vide WP No. 31189/2008 challenging this notification which considered the produce from mining leases to be governed under the Forest Conservation Act. 52. The Hon'ble High Court vide its order dated 28th May, 2009 granted interim relief subject to the condition that the Assessee pays 50% of the FDT payable. Accordingly, the Assessee complied with the interim order of the Hon'ble High Court and paid 50% of the FDT payable. According to the AO since the Assessee challenged the levy of FDT, the liability of the Assessee had crystallized and therefore the deduction claimed cannot be allowed. 53. Before CIT(A), the Assessee submitted the relevant ledger accounts FDT Account and FDT arrears account which put together was charged to the Profit & Loss A/c. Further Dy. Conservators account was also filed, reflecting the 'bank statements/payments made by both Assessee and purchaser. Lumpsum payments are made to the Deputy Conservator of Forest, Bellary towards FDT and subsequently credit of the FDT paid is utilized for obtaining Forest permits at the time of sale/movement of ore. In some cases if ore is not sold and forest permit is obtained, the Assessee applies for cancellation of permit and receives credit of FDT to that extent. No challans are issued by the Department for payment of FDT since the payments are paid /demand adjusted from advances/credits lying with them. ITA Nos.1543, 1329/Bang/2016 Page 31 of 38 Covering letters enclosing cheques/demand drafts for payments made during the year F.Y. 2011-12 duly acknowledged by the Forest Department were also filed by the Assessee. The relevant bank statements of the Assessee reflecting payments of FDT by Assessee to Dy. Conservator of Forest, Bellary, was also filed. It was also submitted that at times when the ore is to be urgently supplied to the buyer, the buyer of ore pays FDT on behalf of Assessee and subsequently recovers the same from Assessee. Accordingly, FDT of Rs. 74,88,296 is paid by M/s. Arks Minerals to whom ore is sold by Assessee and the same was recovered from Assessee thereafter. Accordingly, Assessee has incurred an expense towards FDT of Rs. 2,37,51,074 (Rs. 162,62,778 paid by Assessee and Rs. 74,88,296 paid by Arks Minerals during the year. It was submitted that FDT is paid in compliance with the order of high court. Thus, FDT paid during the year is a deductible expenditure. It was submitted that FDT was incurred in the course of mining operations and is as such Assessee 's business expenditure. In order to move the ore sold, the Assessee had to pay the FDT and only then the stock of ore sold could be moved to the buyer. Thus, the said FDT expense was incurred wholly and exclusively for the purpose of Assessee 's business. The Assessee also claimed the said FDT expenditure u/s 37(1) read with section 43B of the Act which allows certain deductions on payment basis. It was contended that the assessing officer failed to appreciate that FDT is a statutory liability covered by provisions of section 43B of the Act. 54. The CIT(A) agreed with the submission of the Assessee and he deleted the addition made by the AO observing as follows: ITA Nos.1543, 1329/Bang/2016 Page 32 of 38 “The submission filed by the assessee, assessment order passed by the AO and facts of the case has been carefully perused and the submission filed by the assessee is acceptable, as FDT expense was incurred wholly and exclusively for the purpose of Assessee 's business which is allowable business expenditure u/s 37(1) read with section 43B of the ITA which allows certain deductions on payment basis. Further, the 'assessee has submitted the supporting documents of proof of payment credited to the forest department.” 55. Aggrieved by the order of the CIT(A), the Revenue is in appeal before the Tribunal. We have heard the rival submissions. The AO disallowed the sum in question on the ground that the required details were not filed regarding FDT. The required details regarding FDT arrears are at page 211 of the paper book and the liability for the previous year relevant to AY 2012-13 are at pages 207 to 210 of the Assessee’s paper book. The evidence of actual payment during the previous year has also been filed in the form of bank statements of the Assessee as well as payments made by the Purchasers on behalf of the Assessee to the Deputy Conservator of Forest, Bellary towards FDT. Therefore, the reason assigned by the AO for not allowing deduction on the ground of want of required details is devoid of any merits. As far as the ground of disallowance viz., that the liability was disputed by the Assessee in a Court and hence the liability has not crystallized is concerned, we find that liability in question is a statutory liability imposed by virtue of the provisions of Sec.98-A of the Karnataka Forest Act. The law is well settled that a statutory liability is incurred on a mere issuance of a demand notice against the Assessee and becomes deductible at that point of time. The factum of the Assessee raising a dispute against such a demand does not ruin the incurring of liability. In Haji Lal Mohd. Biri Works v. CIT (1997) 3 SCC 659 SC it was explained by referring ITA Nos.1543, 1329/Bang/2016 Page 33 of 38 to the decisions in Kedarnath Jute Mfg. Co. Ltd. v. CIT (1972) 3 SCC 252 and CIT v. Kalinga Tubes Ltd. (1996) 2 SCC 277 that "when the Assessee is following mercantile system of accounting, in case of sales tax payable by the Assessee, the liability to pay sales tax would accrue the moment the dealer made sales which are subject to sales tax and, at that stage, the obligation to pay the sales tax arises and the raising of the dispute in this connection before the higher authorities would be irrelevant." In Kanoria Chemicals & Industries Limited v. U.P. State Electricity Board (1997) 5 SCC 772, the Court explained the legal position that would result when there is a stay of a government order in terms of which surcharge on electricity was payable. It was held that even if the Board did not raise a demand as a result of the stay order, the obligation of the consumers to pay the charges at the enhanced rate would continue. We also find that the Panaji Bench of ITAT in the case of ACIT Vs. M/S.SB Minerals ITA No.33/PNJ/2015 for AY 2010-11 order dated 2.3.2015 on identical facts with regard to levy of FDT where the Assessee had disputed FDT levy and claimed deduction on the basis of actual payment, directed the deduction claimed by the Assessee to be allowed. In view of the aforesaid legal position, we are of the view that the order of CIT(A) does not call for any interference. Accordingly, Grd.No.6 raised by the revenue is dismissed. 56. In the result, appeal by the Revenue is partly allowed. 57. As far as the appeal of the Assessee is concerned, the only issue in Assessee appeal is with regard to addition made by the AO on account of unaccounted sales of iron ore of Rs.1,08,79,446/- which was confirmed by the CIT(A). The facts with regard to this addition are that the Assessee had ITA Nos.1543, 1329/Bang/2016 Page 34 of 38 reported sales of 150,694 MT during A.Y. 2012-13. The assessing officer has in his order re-worked this quantity of iron ore sold by the Assessee considering the difference between estimated stock of 2,20,000 MT impounded by MC (stated in Tax audit report) and the opening stock and production of the Assessee as under: M.T Opening stock 172,426 a c t u a l Add: production 205,202 a c t u a l Less: stock impounded by MC 2,20,000 approximate quantity as per Tax audit report Stock sold 1,57,628 Balancing figure 58. The Assessee reported sales of only Rs.1,50.694 MT. The AO held that the Assessee failed to disclose actual sales to the extent of 1,57,628 MT and brought the difference to tax which resulted in the addition of Rs.1,08,79,449 by the AO. 59. Before CIT(A) the Assessee submitted that as stated earlier Assessee would weigh the ore only at point of production/ sale. Thus, before the impounding of inventory i.e., upto 26.8.2011, the Assessee had produced iron ore to the extent of 205,202 MT approximately. Opening stock as on 1.4.2011 was 172,426 MT. Sales upto the date of impounding was 150,694 MT. Based on this data available, the inventory that was lying at the mines of Assessee and that would have been impounded by the MC was arrived at 226,934 MT. Since no particular details of quantity of stock impounded by MC was received by the Assessee, the auditor at the time of finalizing the ITA Nos.1543, 1329/Bang/2016 Page 35 of 38 audit in September 2012 considered approximate figure of stock impounded to be 2.20 lakhs MT. The Assessee pointed out that the quantity of sales arrived at by AO is higher due to consideration of lower quantity of stock impounded of 2,20,00.0.MT which was only an approximate figure of stock since the actual, was not known. (Quantity as per books, was 226,934 MT). The AO has proceeded an assumed figure reported and hence the entire addition based in surmises is fallacious and deserves to be deleted. The AO has not come to a conclusion that the 6934 MT has been actually sold to some party. He has merely by taking a closing balancing figure made an addition which is an adhoc addition. The Assessee submitted that courts have time and again deleted additions based on adhoc assumptions. 60. The CIT(A) however confirmed the order of the AO observing as follows: “The submission filed by the assessee, the assessment order passed by the AO, grounds of appeal filed by the assessee and the facts of the case have been carefully perused. The AO in his order has clearly mentioned the difference in stock and the assessee has not filed any specific defect / discrepancy in the computation of difference in stock done by the AO. The assessee has merely mentioned that quantity impounded by the CEC is approximate and not exact as there is no weighment of stock because of its nature. In other words, the assessee itself accepted that the stock was not exactly measured and there is no specific defect in computation done by the AO in order to compute unaccounted sale of iron ore of Rs. 1,08,79,446/-. Hence, the AO is justified in making the addition of Rs. 1,08,79,446/- and accordingly, grounds of appeal filed by the assessee from 19 to 22 are hereby dismissed.” 61. We have heard the rival submissions. The learned DR relied on the order of the AO/CIT(A). The learned counsel for the Assessee reiterated ITA Nos.1543, 1329/Bang/2016 Page 36 of 38 submissions made before the CIT(A) and further relied on the decision of the Hon’ble Jammu & Kashmir High Court in the case of International forest company Vs. CIT 101 ITR 721(J & K) wherein it was held: “22. Even if it be taken that the income-tax authorities are not bound by strict rules of evidence, the report of the Ayyangar Commission could not be referred to and relied upon by the Appellate Tribunal unless it had not only invited the attention of the assessee to the passages on which it intended to rely, but had also given an opportunity to the assessee to explain those passages and to adduce evidence against the truth of the recitals contained therein. Reference in this connection may be made to a decision of their Lordships of the Supreme Court in Commissioner of Income-tax v. East Coast Commercial Co. Ltd, [1967] 63 ITR 449 (SC) where it was held that the report of the Income-tax Investigation Commission could not be relied upon without giving an opportunity to the assessee to explain the passages of the report sought to be relied upon and to tender evidence against the truth of the recitals contained therein. 23. We are, therefore, of the opinion that the income-tax authorities, and the Appellate Tribunal erred in relying upon the aforesaid schedule of the forest department. The Appellate Tribunal also acted illegally in allowing the report of the Ayyangar Commission to be cited before it and relying on the same as expert report without giving an opportunity to the assessee to adduce evidence to controvert the recitals made therein. 24. We would also like to observe that even if the Income-tax Officer considered the material placed before him by the assessee to be unreliable keeping in view the comparative statement of accounts of the previous years, he could not proceed to make an arbitrary addition and base his conclusion purely on guess-work. He ought to have related his estimate to some evidence or material on the record as it is now well-settled that if the profits shown by the assessee in his return are not accepted, it is for the taxing authorities to prove that the assessee made more profits” . ITA Nos.1543, 1329/Bang/2016 Page 37 of 38 It was submitted that in the present case, the AO based his conclusions only on the basis of the approximate quantity of stock impounded by MC at 2,20,000 MT. as report by the tax auditor in the tax audit report, which was impermissible. 62. We have carefully considered the rival submissions. The addition has been made by the AO based on the figure of stock impounded by MC at 2,20,000 MT. This figure so reported was an approximate figure. As and when Iron ore is extracted it is kept in open mines and weighed at the point of production/sale. There is no dispute on the quantity of opening stock and actual production of iron ore and the closing stock was arrived at by the Assessee as a balancing figure by adding opening stock, production and reducing the sales. The sales reported by the Assessee was 1,50,694 MT. The AO has arbitrarily arrived at the sales figure of 1,57,628 Mt.by taking stock impounded and opening stock and reducing stock impounded by MC and arrived at the sale of 1.57.628 MT by the Assessee. We have already seen the sequence of events leading to the confiscation of stock of iron ore lying in various mines consequent to order of Hon’ble Supreme Court. There was no basis to arrive at the stock of iron ore impounded and the figures reported in the audit report were only approximation. There is no material before the AO to come to a conclusion that the Assessee sold 1,57,628 MT of iron ore as against the sales reported by the Assessee of 1,50,694 MT. In these circumstances, the addition made is arbitrary and deserves to be deleted and is hereby deleted. 63. The appeal of the Assessee is allowed. ITA Nos.1543, 1329/Bang/2016 Page 38 of 38 64. In the result, appeal of the Revenue is partly allowed and that of the Assessee allowed. Pronounced in the open court on the date mentioned on the caption page. Sd/- Sd/- (PADMAVATHY S)(N.V. VASUDEVAN) Accountant MemberVicePresident Bangalore, Dated: 18.05.2022. /NS/* Copy to: 1.Assessees2.Respondent 3.CIT4.CIT(A) 5.DR 6. Guard file By order Assistant Registrar, ITAT, Bangalore.