M/s. The Sandur Manganese & Iron Ores Ltd, Sandur V. Assistant Commissioner of Income Tax, Circle-1, Bellary

ITA 1965/BANG/2018

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 2055 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-06-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: C
• Assessment Year: 2015-2016
• Appeal Filed On: 07-06-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Gift; Business expenditure; Diversion of income; Earning of tax free income; Question of law; Commercial expediency; Revenue expenditure; Capital expenditure; TDS; Rule 8D; Set aside; Capital Gains; Bogus
• Section: 37; 234B; 14A; 115JB; 37(1); 80G; 205; 201; 43; 48; 73; 13; 22; 101; 20

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH : BANGALORE BEFORE SHRI. CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA Nos. 1964 & 1965/Bang/2018 Assessment Years : 2012-13 & 2015-16 M/s. The Sandur Manganese & Iron Ores Ltd., Sandur House, Laxmipur, Tq: Sandur. PAN: AAACT7495D Vs. The Assistant Commissioner of Income Tax, Circle – 1, Bellary. APPELLANT RESPONDENT Assessee by : Shri S. Parthasarathi, Advocate Revenue by : Shri V.S. Chakrapani, CIT- DR Date of Hearing : 01-06-2022 Date of Pronouncement : 29-06-2022 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeals are filed by assessee against separate orders passed by Ld.CIT(A)-Gulbarga dated 20/03/2018 for A.Ys. 2012- 13 & 2015-16. 2. At the outset, the Ld.AR submitted that grounds in both these years are identical and therefore for the sake of convenience, we reproduce the grounds raised by assessee for A.Y. 2012-13 which are as under: Page 2 ITA Nos. 1964 & 1965/Bang/2018 “1. The learned CIT (A) erred in passing the order in the manner which he did. 2. Construction of houses for flood victims: On the facts and in the circumstances of the case the expenses claimed under Section 37(1) of the Act were liable to be allowed in full. 3. The ld CIT(A) erred in confirming the disallowance of Rs. 3,76,09,002/- incurred on construction of houses for rehabilitation of the flood victims without appreciating the submission of the Appellant. 4. The ld. CIT(A)ought to have appreciated that the expenditure was towards noble cause for rehabilitation of the flood victim of the village in Siriguppa district of Karnataka which was in response to an appeal made by the Chief Minister of Karnataka and therefore the same was an allowable expenditure. 5. The learned CIT(A) ought to have appreciated that it is a settled position of law that expenditure incurred on the development and social welfare of the area in which the business operation is carried on is absolutely essential to exist in the business and to run it in a successful manner as held in the following cases: a) Sri Venkata Satyanarayana Rice Mill Contractors Co vs. CIT (1997) 223 ITR 101 (SC) b) CIT vs. Madras Refineries Ltd (2004) 266 ITR 170 (Mad) c) CIT 86 Anr vs. Infosys Technologies Ltd, 246 CTR 371 d) CIT vs. M.N. Swaminathan, 47 DTR 359. 6. The learned CIT(A) ought to have allowed the expenditure of Rs. 10,40,000/- incurred as Marriage Gift given to the employees as a part of staff welfare payment and accordingly the same is liable to be allowed under Section 37(1) of the Act. 7. The ld. CIT(A) ought to have allowed the payment to Sandur Residential school, Sandur education society and FIMI payments in full. 8. The ld. CIT(A) ought to have appreciated that the above expenses were incidental for running the business of the Appellant and they were incurred by way of commercial expediency and accordingly liable to be allowed under section 37(1) of the Act. Page 3 ITA Nos. 1964 & 1965/Bang/2018 9. The CIT(A) ought to have appreciated that the payment to Sandur Residential School and Sandur Education Society were essential in order to get admission to the children of the employees and the Appellant having no control over the school, the payment were essential for the purpose of running the business of the Appellant and thus liable to be allowed in full. 10. The ld CIT(A) erred in confirming the expenditure incurred towards repairs to roads as revenue expenditure. Roads are part of the mining area within its leasehold area and as part of safety measure, the roads are to be compulsorily maintained in good condition as hundreds of heavy machinery and trucks use the road. The Company has over 2000 hectares of leased land through which more 40 kilo metres of kutcha road runs and needs periodic repairs and maintenance. 11. The Id CIT(A) ought to have appreciated that no capital asset has been acquired for incurring expenditure and the payments were essential and in the course of business and accordingly liable to be allowed as revenue expenditure. 12. The Id. CIT(A) ought to have appreciated that 10% of Amount on E-auction sale retained by CEC /Monitoring Committee in accordance with direction of the supreme court did not belong to the Appellant and did not even accrue to the Appellant in the relevant assessment year and accordingly not liable to be include as part of income of the Appellant. 13. The ld. CIT(A) ought to have appreciated that entitlement of the amount would be only on sanction given by CEC/Monitoring Committee as case may be in accordance with the direction of the Supreme court and until then no accrual can be contemplated to assess the Appellant even under the mercantile system of accounting. 14. The ld CIT(A) ought to have appreciated that the supreme court judgment dt. 23.01.2017 wherein it was held that even new mining lessees are required to pay 10% of the sale proceeds which made it abundantly clear that SPV levy is not a penalty/ compensation as has been repeatedly observed by the Ld. CIT (A) in his orders and should have allowed the claim of the Appellant. The Ld. CIT(A) failed to note the fact that the leases held by the Page 4 ITA Nos. 1964 & 1965/Bang/2018 Assessee are classified as A Category Mines meaning no illegality having been committed by the assessee in its mining operations. 15. The learned CIT(A) erred in confirming the interest under Sections 234B and 234C of the Act. 16. Without prejudice the disallowances as confirmed by the learned CIT(A) are arbitrary excessive and ought to be reduced substantially. 17. For these and such other grounds that may be urged at the time of hearing, the Appellant prays that the appeal may be allowed.” Brief facts of the case are as under: 3. The assessee is a private limited company engaged in the business of mining of iron ore. 3.1 During the year under consideration, assessee had shown gross sales of manganese ore, iron ore, TMT bars, Silico manganese for Rs.181,78,45,913/-. Assessee also had shown sale of petroleum products of Rs.38,73,002/-, interest on deposits and others for Rs.4,50,86,234/-, dividend on mutual fund for Rs.1,09,70,975/-, short term capital gains of Rs.49,69,705/-, long term capital gain for Rs.2,79,00,745/-, in claim credit balance withdrawn for Rs.3,32,19,504/- and other operating income of Rs.77,20,597/- and profit on sale of assets for Rs.43,089/-. 3.2 Against the income, the assessee claimed expenditure u/s. 37 of the Act as under: Expenditure Amount Rs. Reason for disallowance CSR Flood Relief 3,76,09,002 Not wholly and exclusively for business purpose. Marriage Gift 10,40,000 Not wholly and exclusively for business purpose. Sandur Residential School 13,01,688 Not wholly and exclusively for business purpose. Restricted to 80G subject to conditions. Sandur Education 23,57,484, Not wholly and exclusively Page 5 ITA Nos. 1964 & 1965/Bang/2018 Society for business purpose. Restricted to 80G subject to conditions. FIMI 5,79,075 Not wholly and exclusively for business purpose. Restricted to 80G subject to conditions. Repairs to Roads 28,67,221 Not wholly and exclusively for business purpose. Capital Expenditure. 3.3 The Ld.AO held that the above expenditure claimed by the assessee were not wholly and exclusively for the purposes of business and therefore were not liable to be allowed. 3.4 Further, the Ld.AO also included Rs. 4,78,40,795/- out of E- auction sale by holding that the assessee was entitled to the amount which had been retained by CEC/Monitoring Committee as per the directions of Hon’ble Supreme Court, since the assessee is following mercantile system of accounting without appreciating that, the amount retained by CEC/Monitoring Committee did not accrue to the assessee in the relevant assessment year. Thus, a total addition of Rs. 9,35,95,265/- was made. Further, a deduction u/s. 80G to the extent of Rs. 29,19,124/- was given. Thus, a total income of Rs. 51,67,36,741/- was assessed to tax. Aggrieved by the order of Ld.AO, assessee preferred appeal before the Ld.CIT(A). 3.5 The Ld.CIT(A) upheld the disallowance made by the Ld.AO and dismissed the appeal filed by the assessee. 3.6 Aggrieved by the order of Ld.CIT(A), assessee is in appeal before this Tribunal. 4. Ground no. 1 is general in nature and therefore do not require adjudication. Page 6 ITA Nos. 1964 & 1965/Bang/2018 5. Ground nos. 2 to 6 is in respect of disallowance u/s. 37(1) by the Ld.AO for the reason that the expenditure was not wholly and exclusively for the purposes of business. The Ld.AR submitted that assessee constructed houses for flood victims of the village in Siriguppa district of Karnataka, in lieu of an appeal made by the then Hon’ble Chief Minister of Karnataka. It was submitted that, these expenditure are allowable as part of Corporate social responsibility. 5.1 The Ld.AR submitted that, the said expenditure was incurred in order to develop a cordial relation with the district administration as it was as per an appeal made by Hon’ble Chief Minister of Karnataka. The Ld.AR thus submitted that the expenditure was therefore related to the business carried on by the assessee, and is to be allowed as deduction. He placed reliance on the following decisions:  Sri Venkata Satyanarayana Rice Mill Contractors Co vs.  CIT (1997) 223 ITR 101 (SC)  CIT vs. Madras Refineries Ltd (2004) 266 ITR 170 (Mad)  CIT 86 Anr vs. Infosys Technologies Ltd, 246 CTR 371  CIT vs. M.N. Swaminathan, 47 DTR 359. 5.2 The Ld.AR further referred to decision of Coordinate Bench of this Tribunal in case of M/s. Veerabhadrappa Sangappa & Co. vs. ACIT in ITA No. 1054/Bang/2019 by order dated 08/12/2020 for A.Y. 2013-14. 5.3 Further, in assessee’s own case for A.Y. 2009-10 in ITA Nos. 1515 to 1517/Bang/2015 vide order dated 06.10.2021 Coordinate Bench of this Tribunal deleted the disallowance of the expenditure incurred by the assessee towards the activity relating to corporate social responsibility. Page 7 ITA Nos. 1964 & 1965/Bang/2018 5.4 On the contrary, the Ld.DR relied on the orders passed by the authorities below. 5.5 We have perused the submissions advanced by both sides in the light of records placed before us. 5.6 We note that the amount incurred by assessee towards flood relief was for construction of houses for the victims, based on an MoU signed between the Government of Karnataka and the assessee, placed at pages 13-16 of paper book filed before this Tribunal. As per the MoU, the assessee constructed and handed over 762 houses to the administration, and has also provided copies of the contractors bill in support of the expenditure incurred along with a certificate issued by the district administration for having taken over the houses constructed by the assessee. 5.7 It is noted that the Ld.AO disallowed the amount by following the decision of Hon’ble Karnataka High Court in case of CIT & Anr. Vs. Infosys Technologies Ltd. reported in (2012) 349 ITR 0588. 5.8 In contra, the Ld.AR relied on another decision of Hon’ble Karnataka High Court in case of CIT vs. M/s. Mysore Cements Ltd. reported in 183 ITR 367, wherein expenditure on construction of workers quarters, the ownership of which was vested with the Government was allowed as a revenue expenditure. Reliance was also placed on the decision of Hon’ble Karnataka High Court in case of CIT vs. Pandavapura Sahakara Sakkare Karkhane Ltd. reported in 201 ITR 56, wherein amount credited to the Molasses storage fund in accordance with the Government order was held to be deductible expenditure. Page 8 ITA Nos. 1964 & 1965/Bang/2018 5.9 We note that identically in the present facts, the assessee has incurred the expenditure for construction of house pursuant to MoU with the Govt. of Karnataka. We are therefore of the view that such expenditure incurred by assessee was for a philanthropic cause and towards maintaining a cordial relation with the administration which cannot be held to be not for the purposes of business. We therefore direct the Ld.AO to allow the claim of assessee in respect of the expenditure incurred towards the flood relief. 5.10 In ground no. 5, assessee raised issue of disallowance of Rs.10,40,000/- incurred towards marriage gift. 5.10.1 The Ld.AR submitted that Mining is a labour intensive industry, and hence, it is the responsibility of the employer to keep the work force in good morale by helping them to lead a decent and comfortable life. With this aim in view, the assessee has been engaged in various welfare measures like supply of essential food grains at 1972 prices, cloth subsidy, festival gift, gas subsidy, etc. It is submitted that, apart from these, there are certain expenses of social obligation for the employee, which assessee has to meet, like conducting the marriage of self and children. The assessee contributes portion of expenditure by giving marriage gifts and contribute towards education of children limited to two per family. This is a labour welfare expenditure of assessee's own labour and hence it is very much an expenditure for wholly and exclusively for business purpose. It is submitted that the focus of the assessee has also been the overall welfare of the employees and not limiting itself to feed him at survival level in which case the assessee need not spend on Page 9 ITA Nos. 1964 & 1965/Bang/2018 education, health, etc. aimed at improving the lot of its own employees. The Ld.AR submitted that as a model employer, it is the least the assessee can do for its employees on whose labour the operations are run. 5.10.2 The Ld.AR relied on the arguments advanced hereinabove in support of the claim. On the contrary, the Ld.DR relied on the orders passed by the authorities below. 5.11 We have perused the submissions advanced by both sides in the light of records placed before us. 5.12 We note that, the expenditure incurred by the assessee is purely connected with the business, as it was to appease the labourers who were involved in the mining activities for the assessee. These expenses were incurred to maintain a cordial relation with the labourers who are largely affected while the mining activity is carried on. In our view, these expenses are directly connected with the carrying on of the business of the assessee, and therefore, deserves to be allowed. Accordingly, ground nos. 2 to 6 raised by assessee stands allowed. 6. Ground nos. 7 to 9 – Expenses made to Sandur Residential School Rs.13,01,688/- and Sandur Education Society Rs. 23,57,484/-, FIMI – Rs.5,79,075/-. It is submitted that the assessee himself has added back the said income in computation of tax. The said disallowance amounts to double addition. 6.1 FIMI Rs 5,79,075/-:Fimi (Federation of Indian Mineral Industries) is a trade body representing mining companies in India and they take up various mining related issues with the Page 10 ITA Nos. 1964 & 1965/Bang/2018 governments and government departments concerned which cannot be taken up individually by the mining companies. The amount paid is the subscription to the trade body and it is not a donation to be shown under section 80G. It is genuine business expenditure for protecting and representing the interest of the assessee Company before govt agencies relating to a mining and same has to be allowed. 6.2 The Ld.AR submitted that payment made towards FIMI has been considered by Coordinate Bench of this Tribunal in case of M/s. Vibhutigudda Mines Pvt. Ltd. vs. ACIT in ITA No. 2843/Bang/2018 by order dated 03.07.2019. 6.3 The Ld.AR submitted that the expenditure to FIMI was incurred on the grounds of commercial expediency and therefore an allowable expenditure. 6.4 On the contrary, the Ld.DR placed reliance on orders passed by authorities below. 6.5 We have perused the submissions advanced by both sides in the light of records placed before us. 6.6 We note that identical issue was considered in case of M/s. Vibhutigudda Mines Pvt. Ltd. vs. ACIT (supra), wherein this Tribunal followed the ratio laid down by Hon’ble Delhi Bench in case of Rio Tinto India Pvt. Ltd. vs. ACIT in ITA No. 363/Del/2012 dated 22.06.2012. We note that this Tribunal held as under: “3.4.1 We have considered the rival contentions / submissions and the material on record; including the judicial pronouncement cited. The facts of the matter, as emerge from the record, are that in the year under consideration, the assessee made a contribution of Rs.25,00,000/- to FIMI by way of cheque bearing No.496968 dated 29.10.2011 and claimed it as a revenue expenditure. The authorities below disallowed the Page 11 ITA Nos. 1964 & 1965/Bang/2018 assessee's claim as they were of the view that the contribution of Rs.25 lakhs to 'FIMI' cannot be termed as expenditure incurred wholly and exclusively for the assessee's business and therefore not an allowable expenditure under section 37(1) of the Act. 3.4.2 After having heard the parties and considering the facts on record, we are of the view that the identical issue of the assessee's claim for being allowed deduction of its contribution to 'FIMI' as revenue expenditure, was considered and ITA No. 2843/Bang/2018 allowed by the ITAT - Delhi Bench in the case of Rio Tinto India Pvt. Ltd., Vs. ACIT, wherein its order in ITA No.363/Del/2012 dated 22.06.2012, at paras 13 to 17 thereof, it was held as under:- "13. Ground no.4 in the appeal relates to disallowance of an amount of Rs.50 lacs on account of contribution towards Federation of Indian Mining Industries Building Fund. To a query by the AO during the course of assessment proceedings, the assessee replied that Federation of Indian Mining Industries was engaged in liaisoning with various Government bodies on mining related issues and since it provides support to mining industries and the assessee is rendering services to the mining industries, the expenditure was wholly and exclusively incurred for the purpose of business. However, the AO did not accept the submissions of the assessee on the ground that the assessee failed to establish that expenditure was incurred wholly and exclusively for the purpose of business. Inter alia, the AO relied upon decision in CIT Vs. Chandulal Keshavlal & Co. (1960) 38 ITR 601 (SC) and distinguished the decision relied upon by the assessee in CIT Vs. Kamal and Co. 203 ITR 1038(Raj.). 14. On appeal, the Id. CIT(A) upheld the disallowance, holding as under:- "6.1 I have carefully considered the assessment order and the submission made by the learned AR. The payments of '5 . 0 lacs is towards the building fund of FIMI i.e. Federation of Indian Mineral Industries. The payment cannot be said to be for the purpose of business and revenue in nature. The appellant's plea that the payment has been made to FIMI as it provides support to the mining industries and therefore should be allowed as revenue expense is not acceptable. The expense is in the nature of donation and is capital in nature cannot be said to have been incurred wholly and exclusively for the purpose of business as required under the provisions of section 37(1) of the Act. The same is, therefore, rejected." Page 12 ITA Nos. 1964 & 1965/Bang/2018 15. The assessee is now in appeal before us against the aforesaid findings of the Id. CIT(A). The Id. AR on behalf of the assessee relied upon the decision in Chemicals & Plastics India Ltd. 292 ITR 115 (Mad): CIT Vs. Cooperative Sugars Ltd., 304 ITR 259(Kerala); ACIT Vs. Rajasthan Spinning and Weaving Mills Ltd.,274 ITR 463(Rajasthan) while contending that since activities of the FIMI are closely linked with the welfare of mining industry, the expenditure is admissible as revenue . ITA No. 2843/Bang/2018 16. On the other hand, the Id. DR supported the findings of the Id. CIT(A) on the ground that the amount conferred enduring benefit to the assessee, spread over a number of years and thus, could not be allowed as revenue expenditure. 17. We have heard both the parties and gone through the facts of the case as also the aforesaid decisions relied upon by the Id. AR.. As is apparent from the aforesaid facts, an amount of Rs.50,00,000/- has been contributed towards building fund of Federation of Indian Mineral Industries, the assessee being one of the members of the said Federation. The Id. CIT(A) treated the amount in the nature of donation and capital in nature. Whether the amount is revenue or capital in nature, Honble Apex Court in K. T. M. T. M. Abdul Kayoom v. CIT.44 ITR 689 (SC) held that each case depends on its own facts and close similarity between one case and another is not enough. even a significant detail may alter the entire aspect. It was observed that what is decisive is the nature of business, the nature of the expenditure, the nature of the right acquired, and their relation inter se, and this is the only key to resolve the issue in the light of the general principles, which are followed in such cases. In Sri Venkata Satyanarayana Rice Mill Contractors Co. v. CIT,223 ITR 101(SC),Honble Apex Court held that the correct test is that of commercial expediency. In Chemicals & Plastics India Ltd.(supra), Hon'ble Madras High Court while adjudicating as to whether or not the amount of Rs. 1.5 lakhs paid towards the construction of building of the Madras Chamber of Commerce was allowable as business expenditure, held that since the contribution made by the company is for the Chamber of Commerce, whose activities are closely linked with the welfare of the corporate entities. who are members therein and whose interest are taken care of by the Chamber of Commerce. irrespective of whether the expense incurred is compulsory or otherwise., it satisfies the commercial expediency test . In CIT vs. T. V. Sundaram lyengar And Sons Pvt. Limited.,186 ITR Page 13 ITA Nos. 1964 & 1965/Bang/2018 276(SC), Hon'ble Apex Court upheld the findings of the ITAT that the amount advanced by the assessee-employer for construction of houses under "Subsidised Industrial Scheme" for its employees would be in the nature of a revenue expenditure and the fact that the scheme was not for any temporary or particular duration makes little difference to the nature of the expenditure. In Rajasthan Spinning and Weaving Mills Ltd(supra) contribution to the export promotion fund made by the assessee for promoting its business interest by augmenting exports was held to be incurred and laid out wholly and exclusively for the purpose of the assessee's business. In L.H. Sugar Factory and Oil Mills P. Ltd. v. CIT [1980] 125 ITR 293(SC) the Hon'ble Supreme Court allowed the contribution made by a sugarcane factory for construction of a road, at the request of the District Collector. Following this decision, Hon'ble Kerala ITA No. 2843/Bang/2018 High Court in Co- operative Sugars Ltd.(supra) held that the contribution made by the company at the suggestion of the State Minister concerned, for sharing of cost incurred for cement lining of an irrigation canal serving sugarcane cultivators was allowable as revenue expenditure under section 37(1) of the Act, as it went to the advantage of the company in the form of better supply of sugarcane. 17.1 In the instant case, the assessee, rendering services to mining Industry, contributed towards building fund of Federation of Indian Mineral Industries , of which the assessee is a member . Indisputably, the assessee is rendering services to the mining industry The said federation has over 44 years of experience in mining technology solutions for the mineral Industry. In 1966, the individual mine operators and associations established an all-India federation, a non-profit corporate body under the Companies Act, 1956 to promote the interests of mining, mineral processing, metal making and other mineral-based industries and to attend to the problems faced by them in lease grants, renewals, tenures, production, taxation, trade, exports, labour, etc. The Federation envelopes in its fold mining, mineral processing, metal making, cement and other mineral- derived industries as well as granite, stone, marble and slate industries private, joint and public sectors of the country. It represents the entire non-fuel mining and mineral processing activities of the nation. Apparently, the expenditure incurred by the assessee by way of contribution towards building fund of the said federation, is for commercial consideration and it is not incurred for the purpose of securing any capital assets. In the light of Page 14 ITA Nos. 1964 & 1965/Bang/2018 view taken in the aforesaid decisions, we are of the opinion that contribution towards building fund of Federation of Indian Mineral Industries, of which the assessee is a member, has been incurred with a view to obtaining a commercial advantage and is allowable as revenue expenditure. In view thereof, ground no. 4 in the appeal is allowed." 3.4.2 Respectfully following the above cited decision of the ITAT - Delhi Bench in the case of Rio Tinto India Pvt. Ltd., Vs. ACIT (supra), we uphold the assessee's claim for the expense of Rs.25 lakhs paid as contribution to FIMI to be allowed as revenue expenditure incurred in the course and for the purposes of the assessee's business and consequently delete the disallowance made by the AO in this regard. We hold and direct accordingly.” 6.7 Respectfully following the aforesaid view, we hold that the amount paid by assessee to FIMI as contribution is allowable as revenue expenditure. 6.8 In respect of the payment expenditure incurred towards Sandur Residential School, the Ld.AR relied on identical arguments as has been recorded hereinabove. It is an admitted fact that assessee provided schooling facility for the villagers as a part of social welfare. We refer to the relevant observation of Coordinate Bench of this Tribunal in case of M/s. Veerabhadrappa Sangappa & Co. vs. ACIT (supra), wherein, a similar expenditure incurred towards social welfare was disallowed by the Ld.AO. On this Tribunal observed and held as under. “10.5.1. We heard rival contentions and perused the record. We notice that an identical issue was examined by the Hon'ble Karnataka High Court in the case of Kanhaiyalal Dudheria (supra). In the case before Hon'ble High Court, the assessee was carrying on the business of extraction of iron-ore and also trading in iron-ore. Assessee had incurred expenses of Rs.1,61,30,480/- and Rs.55,90,080/- in FY 2010-11 and 2011-12 towards construction of houses in certain flood affected villages as per MOU entered with Government of Karnataka. Assessee’s claim of above said expenses were disallowed on the ground that it was not incurred in the course of Page 15 ITA Nos. 1964 & 1965/Bang/2018 business but for philanthropic purposes. Hon'ble Karnataka High Court, however, held that it is allowable as deduction. The relevant observations made by Hon’ble High Court are extracted below:- “8. It is not in dispute that an MOU came to be entered into between appellants and the Government of Karnataka, represented by jurisdictional Deputy Commissioner on 02.07.2010, a copy of which has been made available for our perusal. It would clearly indicate on account of unprecedented floods and abnormal rain which severely ravaged the North Interior Karnataka during last week of September and first week of October, 2009, which claimed more than 226 human lives and loss of nearly 8000 head of cattle, flattened about 5.41 lakhs houses and destroyed standing crops in about 25 lakh hectares of land huge destruction of infrastructure, Government of Karnataka which was facing an undaunted task of rehabilitating the persons who were in destitute and to restore the normalcy for nearly about 7.2 lakh people and to build 5.41 lakhs houses spread over 12 affected districts, an appeal came to be made by then Hon'ble Chief Minister to all to lend their hands for restoring normalcy. ......... 13. A plain reading of Section 37 would also indicate that emphasis is on the expression "wholly and exclusively for the purposes of the business or profession". These two expressions namely, "wholly" and "exclusively" being adverb, has reference to the object or motive of the act behind the expenditure. If the expenditure so incurred is for promoting the business, it would pass the test for qualifying to be claimed as an expenditure under Section 37 of the Act. What is to be seen in such circumstances is, what is the motive and object in the mind of the two individuals namely, the person who spend and the person who receives the said amount. Thus, the purpose and intent must be the sole purpose of expending the amount as a business expenditure. If the activity be undertaken with the object both of promoting business and also with some other purpose, such expenditure so incurred would not be disqualified from being claimed as a business expenditure, solely on the ground that the activity involved for such expenditure is not directly connected to the business activity. In other words, the issue of commercial expediency would also arise. 20. In fact, the Hon'ble Apex Court approving the observation of ATHERTON's case - 1926 AC 205 in the matter of EASTERN INVESTMENT LIMITED vs Page 16 ITA Nos. 1964 & 1965/Bang/2018 COMMISSIONER OF INCOME TAX reported in (1951) 20 ITR 1, held: "..a sum of money expended, none of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade", can be adopted as the best interpretation of the crucial words of Section 10(2)(xv). The imprudence of the expenditure and its depressing effect on the taxable profits would not deflect the applicability of the section. The acid test, "did the expenditure fall on the assessee in this character as trader and was it for the purpose of the business". 27. The co-ordinate Bench in the matter of CIT & ANOTHER vs INFOSYS TECHNOLOGIES LIMITED reported in (2014)360 ITR 174(Kar) while examining the claim of the assessee to treat the expenditure incurred by it for installing the traffic signals as business expenditure under Section 37(1) of the Act, had held " for purpose of business" used in Section 37(1) of the Act should not be limited to meaning of earning profit alone 28. and it includes providing facility to its employees also for the efficient working . It came to be held: 29. 24. As is clear from the case of Mysore Kirloskar Ltd, the expenditure claimed need not be necessarily spent by the assessee. It might be incurred voluntarily and without any necessity, but it must be for promoting the business. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under Section 37(1) of the Act, if it satisfies otherwise the tests laid down by law. Similarly, the words 'for the purpose of business' used in Section 37(1) of the Act, should not be limited to the meaning of earning profit alone. Business expediency or commercial expediency may require providing facilities like schools, hospitals, etc., for the employees or their children or for the children of the ex- employees. The employees of today may become the ex-employees tomorrow. Any expenditure laid out or expended for their benefit, if it satisfied the other requirements, must be allowed as deduction under Section 37(1) of the Act. Expenditure primarily denotes the idea of spending or paying out or away. It is something which is gone irretrievably, but should not be in respect of an unascertained liability of the future. Expenditure in this sense is equal to disbursement which, to use a homely Page 17 ITA Nos. 1964 & 1965/Bang/2018 phrase means something which comes out of the traders pocket." ............ 23. In the matterof SRI VENKATASATYANARAYANARICE MILL CONTRACTORSCOMPANY vs CIT reported in (1997) 223 ITR 101 (SC), question arose as to whether contribution made to District Welfare Fund maintained by the District Collector would be against public policy or is an expenditure allowable under Section 37(1) of the Act and it came to be held that such contribution is not against public policy and would be allowable under Section 37(1) of the Act. It was also held 'any contribution made by an assessee to a public welfare fund which is directly connected or related with the carrying on the assessee's business or which results in the benefit of the assessee's business has to be regarded as an allowable deduction under Section 37(1)'. In the facts obtained in the said case, it was noticed that assessee was doing business of export of rice and contributing 50 paise per quintal to the district welfare fund maintained by the District Collector, without which contribution, he would not get permit and as such, it came to be held that expenditure so incurred by way of contribution is directly connected with the assessee's carrying on the business. It is further held: "10. From the abovesaid discussion it follows that any contribution made by an assessee to a public welfare fund which is directly connected or related with the carrying on of the assessee's business or which results in the benefit to the assessee's business has to be regarded as an allowable deduction under s. 37(1) of the Act. Such a donation, whether voluntary or at the instance of the authorities concerned, when made to a Chief Minister's Drought Relief Fund or a District Welfare Fund established by the District Collector or any business, cannot be regarded as payment opposed to public policy. It is not as if the payment in the present case had been made as an illegal gratification. There is no law which prohibits the making of such a donation. The mere fact that making of a donation for charitable or public cause or in public interest results in the Government giving patronage or benefit can be no ground to deny the assessee a deduction of that amount under s.37(1) of the Act when such payment had been made for the purpose of assessee's business." ............. 28. In the light of the analysis of the case laws above referred to, it cannot be gain said by the revenue that Page 18 ITA Nos. 1964 & 1965/Bang/2018 contribution made by an assessee to a public welfare cause is not directly connected or related with the carrying on of the assessee's business. As to whether such activity undertaken and discharged by the assessee would benefit to the assessee's business has to be examined in the light of the observations made by us herein above. Tribunal committed a serious error in arriving at a conclusion that MOU entered into between the assessee and the Government of Karnataka is opposed to public policy and void under Section 23 of the Contract Act. In fact, Hon'ble Apex Court in case of SRI VENKATA SATHYANARAYANA RICE MILL CONTRACTORS COMPANY's case referred to herein supra has held that where a donation, whether voluntary or at the instance of the authorities concerned, when made to a Chief Ministers Drought Relief Fund or a District Welfare Fund established by the District Collector or any other fund for the benefit of the public and with a view to secure benefit to the assessee's business cannot be regarded as payment opposed to public policy. It came to be further held making of a donation for charitable or public cause or in the public interest results in the Government giving patronage or benefit can be no ground to deny the assessee a deduction of that amount under Section 37(1) of the Act, when such payment has been made for the purposes of assessee's business. In fact, it can be noticed under the MOU in question which came to be entered into by the assessee with Government of Karnataka was on account of the clarion call given by the then Chief Minister of Karnataka in the hour of crisis to all the Philanthropist, industrial and commercial enterprises to extended their whole hearted support and the entire logistic support has been extended by the Government of Karnataka namely, providing land and design of the house to be constructed, approval of layout and to take care of all local problems. In fact, the State Government had also agreed to exempt such of those persons who undertake to execute the work from the purview of sale tax, royalty, entry tax and other related State taxes and is said to have extended to the appellant also. In this background it cannot be construed that MOU entered into between the assessee and the Government of Karnataka is opposed to public policy. 29. In the facts on hand, it requires to be noticed that assessee is carrying of business of iron ore and also trading in iron ore. Thus, day in and day out the assessee would be approaching the appropriate Government and its authorities for grant of permits, licenses and as such the assessee in its wisdom and as prudent business decision Page 19 ITA Nos. 1964 & 1965/Bang/2018 has entered into MOU with the Government of Karnataka and incurred the expenditure towards construction of houses for the needy persons, not only as a social responsibility but also keeping in mind the goodwill and benefit it would yield in the long run in earning profit which is the ultimate object of conducting business and as such, expenditure incurred by the assessee would be in the realm of "business expenditure". Hence, the orders passed by the authorities would not stand the test of law and is liable to be set aside. 30. However, it requires to be noticed that while examining the claim for deduction under Section 37(1) of the Act the assessing officer would not blindly or only on the say of the assessee accept the claim. In other words, assessing officer would be required to scrutinise and examine as to whether said deduction claimed for having incurred the expenditure has been incurred and only on being satisfied that expenditure so incurred is relatable to the work undertaken by the assessee namely, only on nexus being established, assessing officer would be required to allow such expenditure under Section 37(1) of the Act and not otherwise. 31. For the reasons afore stated, we are of the considered view that substantial question law formulated herein is to be answered in the negative i.e., against the revenue and in favour of the assessee.” 10.5.3. In the instant case also, the assessee has contributed funds at the specific request of local administration, which is meant to be used for the benefit of public. As observed in the above said case, the assessee would also be required to approach the appropriate Government and its authorities for grant of permits, licenses. Hence it is a prudent decision of the assessee to oblige to the appeal made by the local administration and incurred the expenses for public purposes. Hence the assessee has incurred expenses not only on account of social responsibility, but also keeping in mind the goodwill and benefit it would yield in the long run in earning profit. Hence this expenditure would be in the realm of “business expenditure”. Accordingly, we hold this expenditure is allowable as deduction. Accordingly, we set aside the order passed by Ld.CIT(A) on this issue and direct the AO to delete this disallowance.” 6.9 Respectfully following the above view, we are of the opinion that the expenditure incurred by assessee towards the residential school deserves to be allowed. Page 20 ITA Nos. 1964 & 1965/Bang/2018 Accordingly, these grounds raised by the assessee stands allowed. 7. Ground nos. 10 – 11 is towards expenditure incurred for repairs to roads amounting to Rs.28,67,221/-. It is submitted that, the mining area of assessee extends over 2000 hectares and nearly 40 kms. of kutcha road is there within the mines which needs to be maintained to ensure the safety of the mining operations which involves deployment of heavy vehicles and tippers. 7.1 It is submitted that the repairs to roads pertain to expenditure incurred on machinery hire charges paid to various contractors whose machines like excavators and wheel loaders were engaged for leveling and repairing the internal roads between the various mines to enable us to transport ores and wastes. It is submitted that these expenditure is genuine business expenditure, as roads are the basic infrastructure to undertake mining operations. The Ld.AR submitted that, as fuel is required to run machines, so is the roads for mining activities. Further, it is submitted that, the assessee has deducted TDS for the said amount and the chart were enclosed with this submission filed before Revenue. 7.2 The Ld.DR relied on the orders passed by the authorities below. 7.3 We have perused the submissions advanced by both sides in the light of records placed before us. 7.4 We note that the Ld.AO held the expenditure to be capital in nature and the Ld.CIT(A) held that the expenditure towards laying of roads would benefit enduringly to assessee. It is not the case of the revenue that these are bogus expenditure. Page 21 ITA Nos. 1964 & 1965/Bang/2018 7.5 Considering the business activity undertaken by assessee, the roads on which the heavy vehicles are deployed requires periodic maintenance and repairs. There is no dispute that assessee is the leaseholder on the land and to extract iron ore from mining lease areas assessee needs to maintain the road within the leased area, time and again, due to wear and tear. Such expenditure cannot be in any form whatsoever be termed as capital in nature. 7.6 The decision of Hon’ble Karnataka High Court in case of CIT vs. M/s. Mysore Cements Ltd. (supra) considered identical issue by observing as under: “7. Learned counsel for the Revenue and the assessee cited several decisions as to the test to be applied to find out the nature of an expenditure, namely, whether a capital expenditure or a revenue expenditure. The question is not free from difficulty. It has not been possible for any court to enunciate a fixed formula having universal application in this regard. Repeatedly, it has been pointed out that the dividing line between the two concepts is very thin; if so, a marginal treading into one area from another is inevitable. Though it may be treated as a question of law as to whether a particular expenditure, under a given set of circumstances, is revenue expenditure or capital expenditure, the answer to the question has to be found out from the realm of facts in a given case. In K. T. M. T. M. Abdul Kayoom v. CIT . Justice Hidayatullah (as he then was), speaking for himself and for Kapur J., observed in this regard (at page 703 of 44 ITR): "Further, none of the tests is either exhaustive or universal. Each case depends on its own facts, and a close similarity between one case and another is not enough, because even a single significant detail may alter the entire aspect. In deciding such cases, one should avoid the temptation to decide cases (as said by Cardozo) (The Nature of the Judicial Process, p. 20) by matching the colour of one case against the colour of another. To decide, therefore, on which side of the line a case falls, its broad resemblance to another case is not at all decisive. What is decisive is the Page 22 ITA Nos. 1964 & 1965/Bang/2018 nature of the business, the nature of the expenditure, the nature of the right acquired, and their relation inter se , and this is the only key to resolve the issue in the light of the general principles which are followed in such cases." 8. Now, to a few citations made by learned counsel for both sides: In CIT v. Associated Cement Companies Ltd. the assessee- company therein agreed to provide water pipe lines and electricity facilities to a municipal area; the company also agreed to concrete free of charge the existing main road from the factory up to the railway station. The assessee was exempted from paying municipal tax for a period of 15 years. The works to be effected by the company were to be the property of the municipality. The company claimed expenditure incurred under the agreement as a revenue expenditure. The Supreme Court referred to one of its earlier decisions in Empire Jute Co.'s case [1980] 1245 ITR 1 and observed that (at page 262 of 172 ITR): "There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefits, may, non the less, be on revenue account and the test of enduring benefit my break down. It is not every advantage of enduring nature acquired by an assessee that brings the cases within the principles laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating of the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more effectively or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future." 9. The Supreme Court, on facts, found that the company therein did not acquire any capital assets as a result of the expenditure in question and that there was not change in the capital structure; the pipelines, etc., though laid down by the company, vested in the municipality. In those circumstances, the expenditure was held to be a revenue expenditure. Page 23 ITA Nos. 1964 & 1965/Bang/2018 The decision of the Bombay High Court in Cooper Engineering Ltd. v. CIT [1988] 169 ITR 66 as summarised in the e said law report, reads: The Maharashtra Housing Board built tenements under the subsidised Industrial Housing Scheme for housing industrial workers of the assessee in accordance with a scheme sanctioned by the Government. A certain amount was required to be deposited by the assessee with the Maharashtra Housing Board as its contribution towards the scheme. The tenements belonged to the State Government. The industrial housing colony wherein the tenements were to be situated was to be run by the State Government. The cost of the services and the maintenance of the quarters were to be met by the State Government. If the occupant of the tenement ceased to be an employee of the assessee, he was required to vacate the tenement and the responsibility of evicting the employee was that of the State Government. During the relevant assessment year, the assessee claimed deduction as revenue expenditure of the contribution made by it to the State Housing Board. The income-tax Officer rejected the claim for deduction on the ground that the expenditure was of a capital nature. The Appellate Assistant Commissioner and the Tribunal affirmed the order of the Income-tax Officer. On a reference it was held: "that though the buildings in which the tenements were situated and the land upon which the buildings stood were not owned by the assessee, the assessee obtained by incurring the expenditure an advantage of enduring nature, because, by incurring the expenditure, the assessee secured the advantage of housing its employees in tenements for as long a period as the buildings in which the tenements were situated stood. The buildings would stand for a considerable period. Moreover, when the employees ceased to be in the service of the assessee, they were requireds to vacate the tenements so the at such tenements became available for allotment by the assessee to its other employees. The assessee by making the contribution to the State Housing Board derived an advantage of an enduring nature and, therefore, the expenditure incurred therefor was of a capital nature and was not deductible." 10. The High Court distinguished its earlier decision in Associated Cement Co.'s case [1974] 96 ITR 650 (which Page 24 ITA Nos. 1964 & 1965/Bang/2018 stood affirmed subsequently by the Supreme Court in , and referred to by us above), by observing that the facts therein were altogether different. The High Court observed that, in the case before it (Cooper Engineering Ltd.'s case [1988] 169 ITR 66, the advantage gained by the assessee was "not merely of an enduring nature but is also plainly in the capital field." 11. Raza Buland and Sugar Co. Ltd. v. CIT , is a decision of the Allahabad High Court. There also, a similar scheme and expenditure incurred thereunder came up for consideration. The Government introduced a scheme for construction of workmen's staff quarters. Under it, the employer company was to lease out its land near its factory to the U. P. Housing Board. The Government was to contribute some amount for construction of staff quarters for the factories and the balance was to be contributed by the factory owners and contractors. These quarters were to remain the property of the U. P. Sugar and Power Alcohol Housing Board and they were to be leased out to factory owners on the agreed terms and conditions. The assessee gave out some land and paid Rs. 32,004 towards the cost of construction of the quarters and secured the quarters for exclusive use by its workers for an unlimited time. The assessee claimed this sum of Rs. 32,004 as business expenditure. 12. The High Court held that the facts were more akin to the case of Travancore-Cochin Chemicals Ltd. , wherein the Supreme Court held that expenditure incurred for laying out a new road to facilitate the business of the assessee- company was of capital nature. 13. The cases involving road-building and expenditure incurred in connection therewith are numerous and the decisions are not quit uniform in all those cases, as is clear from the decision of this court in Hindustan Machine Tools Ltd. (No. 3) case [1989] 175 ITR 220, which will be referred to again. In CIT v. India Tobacco Co. Ltd. , the Calcutta High Court had to consider as to whether the contribution made by the assessee for the hospital taken over by the State Government under an agreement between the workmen's union, the State Government and the assessee was a revenue expenditure or a capital expenditure. The High Court found that though the Page 25 ITA Nos. 1964 & 1965/Bang/2018 workers of the assessee got free medical treatment or treatment at a concessional rate, the contribution made by the assessee would be capital in nature, by observing at page 196: "It appears to us that, broadly speaking, the question should be considered from two aspects, namely, what is got by spending the money, the nature and type of assest or the advantage or right that is obtaine by the expenditure and, secondly, the nature and the manner of the payment made. It is the real nature and quality of payment that is important." 14. Thereafter, the conclusion was arrived at, thus (at page 197): "... in this case, not only the company incurred this expenditure for getting rid of the obligation to make recurring annual expenses for meeting the treatment of its workers but also for getting an advantage or a privilege which indeed can be considered to be an asset for an indefinite period to have its workers treated at no expense or at concessional expense. If this is an asset or a benefit then, and as it endures for a considerable length of time or for an indefinite time, it can certainly be considered to be an asset or advantage of enduring benefit, enduring in the sense in which fixed capital in modern times endures. If that is the position then by making this one lump sum payment, the assessee-company not only got rid of a liability to make recurring annual payments for the treatment of its workers who are not covered by the State insurance scheme at the hospital of the Government but also obtained this advantage or privilege for an indefinite period. " These cases show the thin line that divides the two concepts and the possibility of crossing the boundary from one area to another, without being guilty of committing trespass. 15. Palani Andavar Mills Ltd. v. CIT is another decision of the Madras High Court, wherein the amount spent by the assessee (which was only a part of the total cost) on the construction of an elementary school on the land of the Employees' Housing Co-operative Society was held as not an amount spent towards a trading transaction. The court found that the nature as well as the manner in which the same were dealt with in the accounts showed that the assessee intended only in advance loans to its employees and this circumstance weighed with the court in its ultimate Page 26 ITA Nos. 1964 & 1965/Bang/2018 conclusion. The claim of the assessee was based on its writing off of these amounts as not recoverable. The court held that the writing-off of the loans was not relatable to the assessee's trading transaction. This decision is based on its peculiar facts and has no resemblance to the case before us. 16. The Tribunal, in the instant case, relied on a decision of the Andhra Pradesh High Court in CIT v. Singareni Collieries Co. Ltd. . The Coal Mines Labour Housing Board was constituted for the construction of low cost houses for persons employed in the coal mines. Under the agreement entered into between the assessee (a mine-owner) and the said Board, the Board was to pay a maximum sum of Rs. 3,100 per house to the assessee; the building were to be durable for a period of 15 years, but would vest in Board; the period of agreement was for 15 years; the assessee could collect a nominal rent of Rs. 1 form the allottees. The assessee claimed the amount sent by it, in excess of the amount paid by the Board, for the construction of the houses, as a revenue expenditure. 17. The High Court held that, in deciding whether an expenditure is of capital or revenue nature, each case has to be decided on its own merits mainly with reference to the aim, object and result of the expenditure. While negativing the contention of the Revenue that the work of the workmen to whom the houses are allotted would result in extra profit or benefit to the assessee, the Bench held at page 475: "What is necessary to classify the expenditure as capital in nature is that it should have been incurred once and for all and for bringing into existence an enduring benefit.'Enduring benefit' is a relative terms of contextual interpretation. In the light of the possible and probable long span of the company's life, the indirect profit which the assess-company may drive through contended workman for a limited period of just 15 years cannot constitute such a lasting benefit as to classify the expenditure as capital in nature. The expenditure was incurred primarily for the welfare of the employees of the assessee. Whether the expenditure was incurred primarily for the real of the employees of the assessee. Whether the expander was incurred on account of a statutory obligation as in the case of Lakshmiji Sugar Mills Co. P. Ltd. v. CIT or on a voluntary basis because of the assessee's desire to provide Page 27 ITA Nos. 1964 & 1965/Bang/2018 facilities to its employees on account of its expectations of better work from them, would not make any difference. The assessee was merely acting as an agent of the Board in the construction of the quarters. If the assessee had constructed the quarters within the maximum amount prescribed by the board, the assessee would not have incurred any expenditure from its funds. The extra expenditure had to be incurred as the assessee could not construct the quarters according to the specifications of the Board with the amount allotted by the Board. Under the circumstance, it is more than clear that the assessee incurred the expenditure not for the purpose of bringing into existence an enduring benefit for its business but for carrying on its business profitably." 18. In CIT v. Hingir Rampur Coal Co. Ltd. [1983] 140 ITR 73, the Bombay High Court had to consider the question involving almost similar facts as in the instant case. Under the agreement with the Coal Mines Labour Housing Board, the assessee which owned a colliery spent a certain sum of money on the construction of 100 tenements for its workers and staff at the colliery. The agreement was to be in force for 15 years from the date of completion of the houses; the houses constructed were to vest the Board; the rent recoverable by the assessee from the allottee was not to exceed Rs. 1 per month. The Board was to subsides the entire cost of contraction of each house, subject to a maximum of Rs. 1,600 per house. The clauses relating to maintenance and repair also were similar to the terms of the agreement involved in the case before us. 19. The Bombay High Court held that, having regard to the agreement, which limited its period of operation only for 15 years, and the amounts spent by the assessee being towards the welfare of the workmen, the expenditure should be treated as a revenue expenditure and agreed with the decision of the Andhra Pradesh High Court in Singareni Collieries Co. Ltd. [1980] 121 ITR 466; the Allahbad High Court view expressed in Raza Buland Sugar Co. Ltd. [1980] 122 ITR 817 was held to be distinguishable. 20. Before concluding, it is necessary to refer to one more decision of this court in Hindustan Machine Tools Ltd. (No. 3) v. CIT [1989] 175 ITR 220, wherein the assessee contributed towards the formation of an approach road which resulted in greater facility to its business/industrial Page 28 ITA Nos. 1964 & 1965/Bang/2018 activities. This court upheld the assessee's claim that the amount contributed for road-making was a business expenditure. It was held that (at pp. 229, 233 and 230): "The test of enduring benefit is not a conclusive test and it cannot be applied in a mechanical way without regard to the particular facts and circumstances of the case on hand. 21. In the circumstances and facts of the instant case: (a) the construction of the road which is not the property of the assessee is undoubtedly connected with and advantageous to the business activity of the assessee; (b) the contribution of Rs. 3,61,236 made by the assessee is for the construction of the road under the scheme sponsored by the State Government; (c) the cost of construction has been partly met by the assessee along with the Bangalore Development Authority and Bharat Electronics Ltd.; (d) though it conferred upon the assessee an enduring advantage for the benefit of its business, it did not secure to the assessee any tangible or intangible asset and further the enduring advantage gained by the assessee is chiefly to facilitate the assessee's business operations with greater efficiency and profitability without touching the fixed capital of the assessee; (e) there is no addition to, or expansion of, the profit-making apparatus. Following the ratio in L. H. Sugar Factory and Oil Mills (P.) Ltd. v. CIT , held that the expenditure incurred by the assessee, for the formation of the road, not belonging to the assessee, is an admissible revenue expenditure." 22. It is thus clear that the test of enduring nature applied to the purpose for which a particular expenditure is incurred is not a conclusive test; it is only one of the several factors to be considered while answering the question. Expenditure incurred which does not result in the acquisition of a permanent asset may indicate that the expenditure incurred was of a revenue nature. An expenditure attributable to a welfare scheme resulting in a permanent benefit under a given set of circumstances may be a capital expenditure, while, under another sent of circumstances where the welfare scheme is of a limited duration, it will be a revenue expenditure. We are in respectful agreement with the approach adopted by the Andhra Pradesh High Court in Singareni Collieries Co.'s case and of the Bombay High Court in Hingir Rampur Coal Co. Ltd.'s case [1983] 140 Page 29 ITA Nos. 1964 & 1965/Bang/2018 ITR 73 having regard to the facts of those cases, which, in our opinion, should equally govern the instant case.” Respectfully following the above, we direct the Ld.AO to delete the disallowance. Accordingly, these grounds raised by assessee stands allowed. 8. Ground nos. 12 to 14 are in respect of 10% disallowance by the Ld.AO on the amount of e-auction sale retained by the CEC/Monitoring Committee. 8.1 The Ld.AO observed that, the assessee has sold 162112.830 MT through e-auction conducted by the CEC/Monitoring committee during the year. The aggregate sales proceeds including royalty of e-auction amounts to Rs.52,65,48,747/- and out of the aggregate sales proceeds, the assessee has received accounted Rs.47,84,07,952/- as per sale proceeds. The balance amount of sale proceeds Rs. 4,78,40,795/- is not accounted as the said amount is not received, since the said amount was retained by the CEC/Monitoring Committee as per the direction of Hon’ble Supreme Court. As the entire sales proceeds of Rs. 52,62,48,747/- amounts to trading receipt and balance Rs. 4,78,40,795/- the Ld.AO added in to the income of the assessee. 8.2 It is submitted that, the assessee's mining leases was classified under A category, which means ‘NIL’ illegality was found in its operations, and hence no penalty was levied on the assessee. The Ld.AR submitted that CEC appointed a Monitoring Committee to oversee the sale of the ores of these mining lease through E- auction. 8.3 Vide recommendation dated 13.03.2012 by Hon’ble Supreme Court, a Special Purpose Vehicle (SPV) was directed to be Page 30 ITA Nos. 1964 & 1965/Bang/2018 constituted for purposes of taking various ameliorative and mitigative measures in Bellary, Chitradurga and Tumkur districts. In order to fund these measures, 20% of the sale proceeds of ore by A and B category leases was to be retained by the Monitoring Committee and the balance 80% was to be released to the lease holders. 8.4 Subsequently, Hon’ble Supreme Court ordered that in case of A category mines 10% of the sale proceeds was to be retained by the Monitoring Committee for purposes of SPV and the balance 90% was to be released to the lease holders. In case of B category leases the corresponding percentages were 15 and 85 respectively. Thus, the assessee being in A category, received 90% of the sale proceeds and 10% was retained by the Monitoring Committee for purposes of funding the SPV. Since the assessee was to receive only 90% of the sale proceeds from the Monitoring Committee, based on the principle of realisability, the assessee accounted only 90% of the sale proceeds in its books of accounts. 8.5 The Ld.AO categorized the assessee in Category –A and held that though E-auction sale is being monitored by the CEC / Monitoring Committee, it is the proceeds of the assessee and accordingly includible in the turnover of the assessee. Further, the Ld.AO referred to the judgment of Hon’ble Supreme Court, wherein, the Monitoring Committee was directed to retain 10% of the amount which is required to be transferred to Special Purpose Vehicle (SPV) to be used exclusively for the socio-economic development of the area/local population, infrastructure development, conservation and protection of forest, developing common facilities for transportation of iron ore (such as Page 31 ITA Nos. 1964 & 1965/Bang/2018 maintenance and widening of existing road, construction of alternate road, conveyor belt, railway siding and improving communication system etc). It is submitted that the amount retained was increased to 15% and thereafter to 20%. The Ld.AR submitted that, the Ld.AO was of the opinion that, the amount retained was appropriation out of profits and it is towards penalty and other liabilities and thus could not be allowed as a deduction in view of the specific Explanation to Section 37(1) of the Act. The Ld.CIT(A) observed that, once the assessee is penalized under one Act, the assessee cannot claim that the amount to be set off against his income under another Act, because that will be frustrating/defeating the entire object of penalizing under the other Act. Citations were referred to in this regard to uphold the disallowance. 8.6 The Ld.AR placed reliance on following decisions of Coordinate Bench of this Tribunal which have considered this issue of disallowance made due to the withholding of sale proceeds by the CEC/Monitoring Committee.  Decision of Coordinate Bench of this Tribunal in case of M/s. Veerabhadrappa Sangappa & Co. vs. ACIT in ITA No. 1054/Bang/2019 by order dated 08.12.2020  Decision of Hon’ble Hyderabad Tribunal in case of NMDC Ltd. vs. ACIT in ITA Nos. 1823 & 1824/Hyd/2017 by order dated 17.10.2018  Decision of Coordinate Bench of this Tribunal in case of Ramgad Minerals & Mining Ltd. in ITA Nos. 1270 & 1271/Bang/2019 by order dated 04/11/2020. 8.7 On the contrary, the Ld.CIT.DR relied on the orders passed by the authorities below. He by way of written submission dated 08/09/2020 submitted as under: Page 32 ITA Nos. 1964 & 1965/Bang/2018 “Submission: The Ld.CIT(A) perused have perused the submissions of the —assessee. In the instant case, it is clear that the expenditure, in fact, is a case of application of income. There is no evidence on record, establishing the nexus between the expenses incurred by the assessee towards construction of road from Sandur to Sri Kumaraswamy temple for the use of the employees of the appellant and also their children to go to school at Sandur Polytechnic and the business of the assessee. The assessee has not brought out any material evidence on record to establish this nexus. In view of the above, the Ld.CIT(A) confirmed the addition made by the Ld.A0. I agree with the decision of the Ld.CIT(A) and the same may be upheld.” 8.8 We have perused the submissions advanced by both sides in the light of records placed before us. 8.9 We refer to the observations by Coordinate Bench of this Tribunal in case of M/s. Veerabhadrappa Sangappa & Co. vs. ACIT (supra) which are as under. “7.10. We have perused submissions advanced by both sides in light of records placed before us. 7.10.1. Ld.Counsel again raised 3 prepositions before us in respect of the contribution made to SPV account from the sale proceeds.  Primarily he contended that there is diversion of income by overriding title to SPV account, and therefore such amount is not liable to tax in the hands of assessee.  Alternatively he submitted that the said sum may be treated as loss under section 28 while computing profit and loss under the head income from business and profession. Or  He submitted that it may be treated as an expenditure incurred by assessee for purposes of business. 7.10.2. On the contrary, Ld.CIT DR submitted that it is an application of income and therefore has to be disallowed in the hands of assessee. He submitted that Ld.AO in support of disallowing the claim of expenditure relied on following decisions:  CIT vs.KCP Ltd. reported in 245 ITR 421(SC)  G.Padnabha Chettiyar & Sons vs.CIT reported in 182 ITR 1(Mad)  ReformFlour Mills Pvt.Ltd Vs.CIT reported in 132 ITR 184,196(Cal) Page 33 ITA Nos. 1964 & 1965/Bang/2018  CIT vs.A.Krishnaswamy Mudaliar & Ors reported in 53 ITR 122(SC) We note that these decisions are on the accrual of income, which has been considered by us in forgoing paras. We have already held that entire income accrued to assesee while deciding grounds 2.1 &2.2. In the issue of contribution towards SPV, one has to consider its correct nature. In our opinion these decisions do not assist revenue in any manner. 7.10.3. On careful reading of decision of Hon’ble Supreme Court in case of Samaj Parivartana Samudaya & Ors. Vs. State of Karanataka & Ors. (supra), it is clear that 10%/15% contribution to SPV account was guarantee payment for implementing of R & R plan, which would be deducted from sale proceeds. This was one of the conditions for resuming mining operations under categories ‘A’ and ’B’ respectively. 7.10.4. With this background, we once again refer to and rely on observations by Hon’ble Supreme Court in case of CIT vs Sitaldas Tirathdas (supra). Hon’ble Supreme Court laying down following principal referred to various rulings that illustrated aspects of diversion of income by overriding title. “These are the cases which have considered the problem from various angles. Some of them appear to have applied the principle correctly and some, not. But we do not propose to examine the correctness of the decisions in the light of the facts in them. In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as its income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to pay out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Whereby the obligation income is diverted before it reaches the assessee, it is deductible but where the income is required to be applied to discharge an obligation after such income reaches the assessee the same consequence in law does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another portion of one’s own income which has been received and essence applied. The first is a case in which the income never reaches the assessee, who, even if he were to collect it, does so, not as part of his income but for and on behalf of the person to whom it was payable.” Emphasis Supplied Page 34 ITA Nos. 1964 & 1965/Bang/2018 7.10.5. Applying, thin line of difference interpreted by Hon’ble Supreme Court to present facts, we are of the opinion that, contribution to SPV account, cannot be considered to be diversion of income. This is because, we have already held while deciding ground 2.1 and 2.2 hereinabove, that entire sale proceeds accrued to assessee, and it is only due to direction of Hon’ble Supreme Court that such amount was contributed to SPV account, for which assessee was to authorise CEC/MC in relevant paragraph 11(III) refer to and relied by Ld.CIT DR. 7.10.6. In the present facts of the case, we note that 10%/15% of sale proceeds was payable to SPV account, after it accrued to assessee, and the fact that, assessee was obliged to part with such portion of income, by virtue of directions of Hon’ble Supreme Court in case of Samaj Parivartana Samudaya & Ors. Vs. State of Karanataka & Ors. (supra), as a precondition to resume mining operations under Category ‘A and ‘B’. At this juncture we also emphasise that, but for the intervention by Hon’ble Supreme Court, assessee would not have contributed 10%/15% to SPV account for implementation of reclamation and rehabilitation scheme on its own, as there was no statutory requirement to do so under relevant statutes that regulate mining activities. 7.10.7. In our view contributing 10%/15% to SPV account on account of Category ‘A’/ ‘B’ respectively, would be application of income, and therefore should be considered as expenditure incurred for carrying out its business activity. This we hold so, for the reason that, contributions determined by Hon’ble Supreme Court are in the nature of guarantee payment necessary for resuming mining activity. We also note that, alleged sum in these grounds are for implementation of R&R Plans in respective sanctioned lease areas held by assessee, where illegal mining activities or which were used for illegal overburden dumps, roads, offices etc., beyond sanctioned lease area were carried out. Here, we also note that, Hon’ble Supreme Court directed CEC to refund any leftover guarantee money, after completion of implementation of R& R plan, subject to satisfaction of CEC and approval by Hon’ble Supreme Court. For this peculiar reason amount so contributed towards SPV being 10%/15% of sale proceeds, under category A/B, cannot be treated as penal in nature. 7.10.8. We note that co-ordinate Hydrabad bench of Tribunal in NMDC (supra) was the case of Category ‘A’ wherein it was allowed as expenditure by observing as under: Page 35 ITA Nos. 1964 & 1965/Bang/2018 “2. Brief facts of the case are that the assessee-company, a Public Sector Undertaking, engaged in the business of 'mining of iron ore diamonds; and generation and sale of wind power', filed its return of income for the relevant Assessment Years 2013-14 and 2014-15 both under the normal provisions as well as u/s 115JB of the Act for the relevant AYs. During the assessment proceedings u/s 143(3) of the Act, the A.O. observed that the assessee- company is carrying out mining activity in India and particularly in Karnataka and that the Hon'ble Supreme Court of India took note of the large scale illegal mining activity carried on by various companies in Karnataka at the cost or detriment of environment and delivered their judgment on 18.04.2013 levying appropriate charges on the leaseholders. A.O. also observed that the Hon'ble Supreme Court, based on the extent of illegal mining, classified the mining leases into three categories viz., Category "A", "B" and "C" and that the assessee is falling in Category-B in respect of Donimali Complex and that in their order, the Apex Court observed that before consideration of any resumption of mining operations by Category-B leaseholders, each of the lease holder must pay compensation for the areas under illegal mining pits outside the sanctioned area at the rate of Rs. 5 Crs per hectare and for illegal overburden for at the rate of Rs. 1 Cr per hectare. Further, A.O. observed that the said direction of the Apex Court was subject to the final determination of the notional loss caused by the illegal mining and illegal use of the land; and that the Hon'ble Supreme Court had directed that each of the leaseholder should pay a sum equivalent to 15% of the sale proceeds of its iron ore sold through the Monitoring Committee. In accordance with the said direction, the assessee made payment of Rs. 337.13 Crs towards contribution for the Special Purpose Vehicle and the sum of Rs. 68.66 Crs towards penalty / compensation for encroachment of the mining area beyond the sanctioned / leased area. The A.O. observed that the total of the above payment of Rs. 405.79 Crs was punitive in nature and accordingly sought to disallow the same by issuance of a show-cause notice. ........ 4. The A.O. however did not accept the assessee's explanation and held that the assessee, being a Category- B leaseholder, has been directed to make the payment for infringement of MMDR Act and other allied laws. Therefore, he observed that the payment of Rs. 405.79 Crs is punitive in nature and brought it to tax. Page 36 ITA Nos. 1964 & 1965/Bang/2018 .............. 10. Thus, from the table reproduced above, it is seen that the assessee has been classified as Category-'A' whereas the Assessing Officer has considered the assessee as Category-'B' company. The Hon'ble Supreme Court has clearly indicated that Category-A comprises of (i) 'working leases' wherein no illegality / marginal illegality have been found and (ii) 'non-working leases' wherein no marginal / illegalities have been found, whereas Category-B comprises of (i) mining leases wherein illegal mining is 10% to 15% of the sanctioned lease areas. However, CEC had recommended that both "A" and "B" categories may be allowed to resume the mining activity subject to the payment of penalty / compensation decided by the Court. Thus, according to the assessee, the said expenditure is nothing but a payment which was required to be made without which the assessee could not have carried on the mining activities and therefore, it is a 'business expenditure'. Since the CEC had categorised the assessee as a Category-A company and the Hon'ble Supreme Court has accepted the said categorization, there would have been marginal illegalities committed by the assessee and the compensation / penalty as directed by the Hon'ble Supreme Court is only to compensate the Government for the loss of revenue from such mining or marginal illegalities and not as a penalty. Though the nomenclature given is "penalty" it is not for infraction or violation of any law to hold it to be punitive in nature, as presumed by the Assessing Officer. Learned Counsel for the Assessee placed reliance on various case law, particularly the decision of the Coordinate Bench of the ITAT, Kolkata in the case of Essel Mining & Industries Ltd vs. Addl. CIT (ITA No. 352/Kol/2011 and others, dated 20.05.2016); ACIT vs. Freegade& Co. Ltd (ITA No.934/Kol/2009, dated 05.08.2011) and also the decision of the Hon'ble Calcutta High Court in the case of ShyamSel Ltd vs. DCIT (72 Taxmann.com 105) (Cal.). On going through the said decisions, we find that the Hon'ble Calcutta High Court has considered the case of an assessee who failed to install Pollution Control Device within factory premise within prescribed time and that the assessee had to pay Rs. 12.50 lakh for compensating damage to environment and the same was recovered by State Pollution Control Board on the principle of 'polluter pays' and the A.O. had treated it as penalty and did not allow the same as business expenditure. The Hon'ble High Court had taken note of the fact that the assessee's business was not illegal and that compensation was paid because of its Page 37 ITA Nos. 1964 & 1965/Bang/2018 failure to install pollution control device within prescribed time and therefore, such payment was undoubtedly for the purpose of business and in consequence of business carried on by the assessee and was thus covered by section 37 of the Act. For coming to this conclusion, Hon'ble High Court has also considered the judgment of the Hon'ble National Green Tribunal in the case of State Pollution Control Board vs. Swastik Ispat (P.) Ltd wherein at para 38 of the judgment the Tribunal held as under:- "Being punitive is the essence of 'penalty'. It is in clear contradistinction to 'remedial' and / or 'compensatory'. 'penalty ' essentially has to be for result of a default and imposed by way of punishment. On the contrary, 'compensatory' may be resulting from a default for the advantage already taken by that person and is intended to remedy or compensate the consequences of the wrong done. For instance, if a unit has been granted conditional consent and is in default of compliance, causes pollution by polluting a river or discharging sludge, trade affluent or trade waste into the river or on open land causing pollution, which a Board has to remove essentially to control and prevent the pollution, then the amount spent by the Board, is thus, spent by encashing the bank guarantee or is adjusted thread and this exercise would fall in the realm of compensatory restoration and not a penal consequence. In gathering the meaning of the word 'penalty' in reference to a law, the context in which it is used is significant." 11. Applying this ratio to the facts of the case before us, we find from para 43 of the Hon'ble Supreme Court's order reproduced above that the condition of payment for resuming the mining activity by Categories 'A' & 'B' companies is to not to punish the companies for any violation of law but is to ensure scientific and planned exploitation of mineral resources in India. Further the Hon'ble Supreme Court had directed as under:- "(X) Out of the 20% of sale proceeds retained by the Monitoring Committee in respect of the cleared mining leases falling in "Category- A", 10% of the sale proceeds may be transferred to the SPV while the balance 10% of the sale proceeds may be reimbursed to the respective lessees. In respect of the mining leases falling in "Category-B", after deducting the penalty / compensation, the estimated cost of the implementation of the R & R Plan, and 10% of the sale proceeds to be retained for being transferred to the SPV, the balance amount, if any may be reimbursed to the respective lessees;" Page 38 ITA Nos. 1964 & 1965/Bang/2018 The fact that the compensation is proportionate to area of illegal mining outside the leased area and that the assessee has paid the proportionate compensation for mining in the areas outside the sanctioned area allotted to it and that 10% of sum is to be transferred to SPV and the balance 10% is to be reimbursed to the respective lessees, according to us, proves that it is a payment made as 'compensation' for extra mining, without which the assessee could not have resumed its activities. Therefore, we are inclined to accept the contention of the assessee that it is compensatory in nature and is a 'business expenditure' and is allowable u/s 37(1) of the Act. Thus, Grounds No.2 and 3 raised by the assessee are allowed.” 7.10.9.We also notice that the co-ordinate Bangalore bench of Tribunal has also considered identical issue in the case of Ramgad Minerals & Mining Ltd (ITA No.1270 & 1271/B/2019 dated 04-112020) being Category ‘B’, an identical addition made by Ld.AO was held to be allowable as expenditure with following observations:- “7.8.9. In present appeals, only issue raised for our consideration is in respect of 15% contribution made to SPV for assessment year 2013-14 and 2014-15; and issue in respect of R&R expenses incurred during assessment year 2013 – 14. First of all, we summarise objections of Ld.AO as in respect of SPV expenses as under:- (a) This is one of the objections of the AO that the SPV Expenses is not allowable because it is not compensation but it is penal in nature for contravention of law as observed by him in para 4.3 of the assessment order for AY:2013-14. (b) Second objection of the Ld.AO is contained in para 4.9 of the assessment order for AY:2013-14 and as per the same, this is the objection of Ld.AO that the said SPV is nothing but CSR Expenses only and therefore not allowable. (c) Third objection of Ld.AO is also contained in para 4.9 of the assessment order for AY:2013-14 and as per the same, this is the objection of the Ld.AO that the said SPV is not allowable u/s 37 (1) as it was not incurred by the assessee wholly and exclusively for the purpose of business. (d) In para 4.8 of the assessment order for AY:2013-14, Ld.AO is stating this that SPV rate is 10% in category ‘A’ Mines but 15% in Category ‘B’ Mines and this extra 5% in Category ‘B’ Mines is for various violations and illegal mining and even after this observation, he finally held in the same para that whole SPV Expenses of 15% is not allowable. Page 39 ITA Nos. 1964 & 1965/Bang/2018 7.8.10. Ld.AO observed that, these SPV were deducted pursuant to directions of Hon’ble Supreme Court (supra) by order dated 18/04/2013, wherein, it was directed that, sum so paid towards SPV charges should be exhaustively and exclusively used to undertake socio economic and infrastructure development, afforestation, soil and biodiversity conservation and for ensuring inclusive growth of the area surrounding mining leases. 7.8.11. Ld.AO further observed that these payments are nothing but appropriation of profits earned by assessee that cannot be said to have incurred for purpose of business or earning profits. Accordingly, entire amount adjusted towards SPV was disallowed by Ld.AO. Ld.AO was of opinion that entire sale proceeds as per E auction bid Sheets/invoices were to be assessed as trading receipts. The amount retained by CEC/monitoring committee as per directions of Hon’ble Supreme Court, on behalf of assessee for SPV purposes, was on account of damages and loss caused to environment due to contravention of law, and therefore, cannot be allowed as deduction out of sale proceeds, even after accrual of such liability. Ld.AO was of opinion that, even in Category ‘A’ mines, there was marginal illegality found by CEC, because of which 10% of contribution was attributed out of sale proceeds to the SPV. 7.8.12. On careful reading of decision of Hon’ble Supreme Court dated 18/04/2013, it is clear that 15% contribution to SPV account was guarantee payment for implementing of R & R plan, which would be deducted from sale proceeds. This was one of the conditions for resuming mining operations under Category ’B’. We refer to and rely on observations by Hon’ble Supreme Court in case of CIT vs SitaldasTirathdasreported in(1961) 41 ITR 367.Hon’ble Supreme Court laying down following principal referred to various rulings that illustrated aspects of diversion of income by overriding title. “These are the cases which have considered the problem from various angles. Some of them appear to have applied the principle correctly and some, not. But we do not propose to examine the correctness of the decisions in the light of the facts in them. In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as its income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to pay out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Page 40 ITA Nos. 1964 & 1965/Bang/2018 Whereby the obligation income is diverted before it reaches the assessee, it is deductible but where the income is required to be applied to discharge an obligation after such income reaches the assessee the same consequence in law does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another portion of one’s own income which has been received and essence applied. The first is a case in which the income never reaches the assessee, who, even if he were to collect it, does so, not as part of his income but for and on behalf of the person to whom it was payable.” Emphasis Supplied 7.8.13. In the present case, we note that 15% of sale proceeds was payable to SPV account after it accrued to assessee and the fact that, assessee was obliged to part with such portion of income, by virtue of directions of Hon’ble Supreme Court, as a precondition to resume mining operations under Category ‘B’. At this juncture, we also emphasise that, but for the intervention by Hon’ble Supreme Court, assessee would not have contributed 15% to SPV account for implementation of reclamation and rehabilitation scheme on its own, as there was no statutory requirement to do so under relevant statutes that regulate mining activities. 7.8.14. Hon’ble Supreme Court has been very clear regarding the types of payments that needs to be recovered from lessee’s under Category ‘B’, from the sale proceeds as well as otherwise. All the payments form part of R&R plan for recouping and rehabilitating the environment. Certain payments are onetime payment and some others are recurring depending upon the sale of iron ore sold in the name of each licensee or depending on the need for rehabilitation. 7.8.15. In our view, contributing 15% to SPV account on account of Category ‘B’, would be application of income, and therefore, should be considered as expenditure incurred for carrying out its business activity. This we hold so, for the reason that, contributions determined by Hon’ble Supreme Court are in the nature of guarantee payment necessary for resuming mining activity. We also note that, alleged sum in these grounds are for implementation of R&R Plans in respective sanctioned lease areas held by assessee, where illegal mining activities or which were used for illegal overburden dumps, roads, offices etc., beyond sanctioned lease area were carried out. Here, we also note that, Hon’ble Supreme Court directed CEC to refund any leftover guarantee Page 41 ITA Nos. 1964 & 1965/Bang/2018 money, after completion of implementation of R& R plan, subject to satisfaction of CEC and approval by Hon’ble Supreme Court. For this peculiar reason, amount so contributed towards SPV being 15% of sale proceeds, under Category B, cannot be treated as penal in nature. We, therefore, reject observations of authorities below that, such sum having contributed by assessee fall within ambit of explanation 1 to section 37 (1) of the Act.” 7.10.10. We note that the CEC, vide its report dated 3-2- 2012 and 13-3-2012 made recommendations with regard to setting up of SPV, transfer of funds collected from all lease holders under various heads, manner of utilisation of said funds etc., to Hon’ble Supreme Court, which is incorporated in Paragraph 7 at Page 164 to 171 as under: “(IX) A Special Purpose Vehicle (SPV) under the Chairmanship of Chief Secretary, Government Karnataka and with the senior officers of the concerned Departments of the State Government as Members may be directed to be set up for the purpose of taking various ameliorative and mitigative measures in Districts Bellary, Chitradurga and Tumkur. The additional resources mobilized by (a) allotment/ assignment of the cancelled mining leases as well as the mining leases belonging to M/s. MML, (b) the amount of the penalty/ compensation received/ receivable from the defaulting lessee, (c) the amount received/ receivable by the Monitoring Committee from the mining leases falling in “Category- A” and “Category-B”, (d) amount received/ receivable from the sale proceeds of the confiscated material etc., may be directed to be transferred to the SPV and used exclusively for the socio- economic development of the area/local population, infrastructure development, conservation and protection of forest, developing common facilities for transportation of iron ore (such as maintenance and widening of existing road, construction of alternate road, conveyor belt, railway siding and improving communication system, etc.). A detailed scheme in this regard may be directed to be prepared and implemented after obtaining permission of this Hon’ble Court;” 7.10.11. Hon’ble Supreme Court at 176 of its order made following observations with regard to SPV:- “By order dated 28-09-2012, this Court had constituted a Special Purpose Vehicle (for short “SPV”) on the suggestion of the learned amicus curiae. The purpose of constitution of the SPV, it may be noticed, is for taking of ameliorative and mitigative measures as per the “Comprehensive Environment Plans for Mining Impact Zone (CPEMIZ) Page 42 ITA Nos. 1964 & 1965/Bang/2018 around mining leases in Bellary, Chitradurga and Tumkur. By order dated 28-09-2012, the Monitoring Committee was to make available the payments received by it under different heads of receivables to the SPV” 7.10.12. It is noticed that amounts collected from assessee are directed to be given to the SPV, which will in turn take various types of ameliorative and mitigative steps in the interest not only of the environment and ecology but the mining industry as a whole so as to enable the industry to run in a more organized, planned and disciplined manner. Under these set of facts, it cannot be said that these amounts are penal in nature. We notice that the Hyderabad bench of Tribunal in the case of NMDC Ltd (supra) and Co-ordinate bench of Bangalore Tribunal in Ramgad Minerals (supra) came to the same conclusion. We note that in NMDC case (supra), Hon’ble Hydrabad Tribunal followed decision of Hon'ble Kolkatta High Court in the case of ShyamSel Ltd (supra) and State Pollution Control Board vs. Swastik Ispat (P) Ltd (supra), wherein identical types of payments made to remedy the river pollution caused by the parties were held to be compensatory in nature. Hence the provisions of Explanation 1 to sec.37 will not apply to these payments. We also note that Hon’ble Supreme Court at page 171 observed that, these payments are necessary to be made by the mining lease holders. Hence there is merit in the submission of Ld.Counsel that, without making these payments, assessee could not have resumed the mining operations. Hence, these expenses are incidental to carrying on the business and hence allowable u/s 37(1) of the Act.” Respectfully following the above view, we allow the ground raised by assessee as business expenditure. Accordingly, these grounds raised by assessee stands partly allowed. 9. Ground no. 15 is consequential in nature and therefore do not require adjudication. 10. Ground nos. 16 & 17 are general. Accordingly, the appeal filed by the assessee for A.Y. 2012-13 stands partly allowed as indicated hereinabove. Page 43 ITA Nos. 1964 & 1965/Bang/2018 Assessment Year : 2015-16 11. In respect of A.Y. 2015-16, the Ld.AR submitted that facts are identical and the disallowance made by the Ld.AO are almost similar to the disallowance considered for A.Y. 2012-13. 12. Ground no. 1 is submitted to be general in nature and therefore do not require adjudication 13. Ground nos. 2 to 5 is in respect of the disallowance made on account of e-auction towards the SPV retained by Monitoring Committee. Both sides referred to and relied on the submissions made for A.Y. 2012-13 on this issue that was considered in ground nos. 12-14. Admittedly, the facts and circumstances are identical for the year under consideration also. Therefore applying the above observations mutatis mutandis in paragraph 8.7 hereinabove, we allow the claim of assessee as business expenditure u/s. 37(1) of the Act. Accordingly, these grounds raised by the assessee stands partly allowed. 14. Ground no. 6 is general in nature and therefore do not require adjudication. 15. Ground nos. 7 – 11 are various expenditure incurred by assessee towards the CSR, road construction, pooja expenses for Diwali, Ugadi, Ramzan and Christmas festivals and expenditure incurred towards the festival gifts and marriage gifts to employees. The Ld.AR submitted that for year under consideration, the expenditure has to be considered in the light of the amendment to section 37(1) being Explanation (2) that reads as under: "Explanation 2.—For the removal of doubts, it is hereby declared that for the purposes of sub-section (1), any expenditure incurred by an assessee on the activities Page 44 ITA Nos. 1964 & 1965/Bang/2018 relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not deemed to be an expenditure incurred by the assessee for the purposes of the business or profession." 15.1 The Ld.AR submitted that undisputedly, the expenditure was incurred in the financial year 2014-15 and the said Explanation was introduced into the section by the Finance (No.2) Act, 2014 which was introduced only on 10th July, 2014 through the Finance (No.2) Bill, 2014 (reported in 365 ITR St.44). It is submitted that, though the said Act deemed to have come into force with effect from 01.04.2015, expenditure if any, having been incurred prior to the introduction of the Bill, cannot be affected by the amendment as held by Hon’ble Delhi Tribunal in the case of NTPC-SAIL Power Co.Pvt.Ltd vs. Addl.CIT. The ITAT has allowed the claim for the asst.years 2011-12 to 2013-14. It is submitted that as the assessment years involved were prior to the amendment, by introduction of Explanation 2, the expenditure incurred prior to 01.04.2015 are necessarily to be allowed as revenue expenditure. 15.2 On the contrary, the Ld.CIT.DR placed reliance on orders passed by authorities below. He by way of written submission dated 08/09/2020 submitted as under: “Submission: The appellant in his submission has stated that the above expenses were incurred for Ayudha Pooja and Ganesh Festival. Considering the nature of expenses and the quantum of the same, disallowance of 25% of the same would meet the ends of justice. The AO was directed to allow 25% of the above expenses. I agree with the decision of the Ld.CIT(A) and the same may be upheld.” 15.3 We have perused the submissions advanced by both sides in the light of records placed before us. 15.4 We note that all these expenditure have been considered by us for A.Y. 2012-13 and has to be noted that these expenditure Page 45 ITA Nos. 1964 & 1965/Bang/2018 were incurred by assessee in order to maintain a cordial relation with the employees / labourers in order to upkeep and maintain the families expenditure were incurred in the form of marriage gifts and festival gifts. It is also being noted that the expenditure incurred towards maintenance of road was for the safety and security of the labourers working in the mining field which held to be capital in nature. Undisputedly the expenditure was incurred in the financial years 2011-12 & 2014-15. The Explanation 2 was introduced by Finance (No.2) Act 2015 w.e.f. 01/04/2015. 15.5 Coming to the applicability of Explanation 2 to section 37(1), inserted w.e.f. 01.04.2015, we note that Hon’ble Delhi Tribunal in case of NTPC-SAIL Power Co. (P.) Ltd. vs. DCIT reported in (2019) 112 taxmann.com 409 has dealt with the amendment, the Hon’ble Delhi Tribunal observed as under: "4. Disallowance of expenses incurred on account of Corporate Social Responsibility : 4.1 During the course of assessment proceedings, it was observed that the assessee had claimed expenses on account of community development and welfare expenses amounting to Rs. 2,37,80,958/- and the same had been debited to Profit and Loss account for the year under consideration. Accordingly, the AR of the assessee was asked to show cause as to why Corporate Social Responsibility expenses amounting to Rs. 2,37,80,958/- may not be disallowed. 4.2 The AR of the assessee furnished reply on 03.12.2015, which is summarized as under: "It is a Public knowledge that the Government of India- through BPE( Bureau of Public Enterprises) had issued guidelines to the effect that companies should spend certain percentage of their profits( linked to quantum of profits) to discharge their ) Corporate Social responsibility(CSR) towards fulfillment of the National Plan goals and objectives as well as the Millennium Development Goals adopted by the country to ensure Page 46 ITA Nos. 1964 & 1965/Bang/2018 gender sensitivity, skill enhancement, entrepreneurship development and employment generation by co-operating value with local intuitions/people and community Development etc. In fact the same has since been made a part of the Companies Act 2013 and extended to all companies. Accordingly, the company had incurred expenditure for development of area surrounding plants of the company and it indirectly adding to business of the company, since developed area in and business place always contribute to business of company." 4.3 The reply of the assessee has been duly considered, but it was not found to be acceptable. The assessee company is engaged in the business of production of thermal power. The contention of the assessee is that expenditure incurred in respect of community development and corporate social responsibility expenditure were covered u/s 37(1) of the Income Tax Act, 1961. However, the main requirement of the provision of section 37(1) is that expenditure should have been laid out wholly and exclusively for the purpose of Page | 3 ITA No: - 2146/Del/2017 the business. The nexus between the expenditure and the business, in connection which expenditure has been incurred, has to be established before the assessee gets entitled to deduction under section 37(1) of the Act. It is duty of the assessee to discharge its onus in respect of expenditure incurred but the assessee failed to establish that these expenses have been incurred for business purpose. 4.4 Further, the assessee admitted that these expenses have been incurred as per guidelines issued by the Bureau of Public Enterprises that companies should spend certain percentage of their profits to discharge their corporate social responsibility. The intention behind these guidelines issued by Bureau of Public Enterprises can be met by the company by spending certain amount out of its surplus profit after tax and it need to claim these expenses in the books of account as expenditure before determining of taxable profit. On the other hand, if the intention is to be claim tax deduction, the Income Tax Act also provides deductions such as under section 35 AC and section 80G on certain expenditure on account of social activities after fulfillment of certain conditions. 4.5 In view of the above discussion, the expenditure claimed in the Profit and Loss account amounting of Rs. 2,37,80,958/- on account of corporate social responsibility is hereby disallowed and the same is added to assessee's total income." Page 47 ITA Nos. 1964 & 1965/Bang/2018 [D.1] The learned CIT(A), vide the aforesaid impugned Appellate Tribunal order dated 16.01.2017 upheld the aforesaid disallowance holding as under:- "It is clear from the submission of the appellant and the reason mentioned in the impugned order that the abovementioned expenses have been incurred as per the guidelines issued by the Bureau of Public Enterprises, an offshoot of the GOI- companies should spend certain percentage of their 'profits' to discharge their corporate social responsibility, and not voluntary. The principle behind the CSR expenditure in India is application of profits and not incurring social /scientific expenditure only which is otherwise deductible under various other provisions of the Act. Hence, the intention of legislature to put in place a transparent process where 'on the ground demonstration of CSR expenditure' has now been clarified. It is not prejudicial to the taxpayer, in my opinion, as the Page | 4 ITA No: - 2146/Del/2017 broad basis has travelled down from philanthropy to corporate sustainability. Secondly, under the Income tax Act, the expenditure has to be covered within the ambit of the provisions of Section 37 (1) thereof. The court decisions relied upon by the appellant deals with instances where expenditures have been incurred specifically based on the principle of commercial expediency. Thirdly, existing provisions of the Act (for e.g. Section 35AC, Section 80G, etc.) provide .for allowing such expenditures as deduction, subject to fulfillment of conditions therein. Finally, it is observed from the nature of the expenditures claimed above that the requirement u/s 37(1) is hardly fulfilled in respect of the aforementioned expenditures. Accordingly, as the expenditure is claimed to be under CSR and yet there is a claim of deduction thereof in the P&L account as any other expenditure incurred to be wholly and exclusively for the purpose of business (except capital and personal expenses), I am inclined to uphold the disallowance made on this issue in the impugned order. The appeal on this point fails." [E] As mentioned earlier, both sides have agreed before us at the time of hearing that the dispute regarding allowability of CSR expenses is covered in favour of the assessee by aforesaid orders dated 27.4.2018 and 29.11.2018 in assessee's own case, in identical facts and circumstances, in assessee's favour. Neither side has brought any distinguishable facts nor circumstances to our attention to persuade us to take a view different from the Page 48 ITA Nos. 1964 & 1965/Bang/2018 view take in the aforesaid orders dated 27.4.2018 and 29.11.2018 of co- ordinate Benches of ITAT, Delhi. The relevant portions from the aforesaid ITA Nos. 5687/Del/2014 & 4733/Del/2015 of Coordinate Benches of ITAT Delhi are reproduced as under:- Page | 5 ITA No: - 2146/Del/2017 ITA No. 5687/Del/2014 "7.1 Coming to ground no. 2 of the assessee's appeal which challenges the expenses incurred towards corporate social responsibility, we find that the Raipur Bench of ITAT in the case of ACIT vs. Jindal Power Ltd. In ITA No. 99/Del/2012 has allowed CSR expenses in assessment year 2008-09. The Raipur Bench has further held that Explanation (2) to section 37 of the Act, inserted by Finance Act, 2012 has been brought into the Statute w.e.f. 1.4.2013 and this amendment is prospective in nature and accordingly prior to 1.4.2013, CSR expenses are revenue in nature and allowable. We have gone through the details of CSR expenditure incurred by the assessee during the year under consideration i.e. assessment year 2011-12 and we find that the expenses have been incurred in respect of tree plantation/environment protection, construction of Zoology Lab in Rourkela, construction of Special Wings for cerebral palsy children in Rourkela, medical camps in Sirsa village in Bhilai, development of Dongia Pond in a village near Bhilai, construction of Bus stop shed in the city of Rourkela, creating awareness against drug abuse in Bhilai, construction of road in Durgapur etc. besides other expenses incurred under the head. It is not in dispute that these expenses have been incurred and the only reason they were disallowed by the Assessing Officer and so confirmed by the Ld. Commissioner of Income Tax (A) was that this expenditure was not expended wholly or exclusively for the purpose of business of the assessee. Although, it is undisputed that the assessee had incurred this expenditure on the basis of guidelines issued by Bureau of Public Enterprises, Govt. of India, the department was of the view that since the expenditure was not mandatory in nature, the same could not be allowed. However, we are unable to concur with the findings of the lower authorities on this issue and we hold that the disallowance under Explanation (2) to section 37(1) will not come into play and there is no such disabling provision even if the expenses in discharge of corporate social responsibility are incurred on voluntary basis. Explanation (2) to section 37(1) comes into play only w.e.f. 1.4.2015 allowable as revenue expenditure. Accordingly, Page 49 ITA Nos. 1964 & 1965/Bang/2018 we set aside the order of the Ld. Commissioner of Income Tax (A) on this issue and direct the Assessing Officer to allow the expenses incurred towards corporate social responsibilityand accordingly, expenses incurred towards corporate social responsibility incurred prior to this date will necessarily be." ITA No. 4733/Del/2015 "2. Coming to ground no. 2 of the assessee's appeal which challenges the expenses incurred towards corporate social Page | 6 ITA No: - 2146/Del/2017 responsibility, we find that the Raipur Bench of ITAT in the case of AC1T vs. Jindal Power Ltd. In ITA No. 99/Del/2012 has allowed CSR expenses in assessment year 2008-09. The Raipur Bench has further held that Explanation (2) to section 37 of the Act, inserted by Finance Act, 2012 has been brought into the Statute w.e.f. 1.4.2013 and this amendment is prospective in nature and accordingly prior to 1.4.2013, CSR expenses are revenue in nature and allowable. We have gone through the details of CSR expenditure incurred by the assessee during the year under consideration i.e. assessment year 2011-12 and we find that the expenses have been incurred in respect of tree plantation/environment protection, construction of Zoology Lab in Rourkela, construction of Special Wings for cerebral palsy children in Rourkela, medical camps in Sirsa village in Bhilai, development of Dongia Pond in a village near Bhilai, construction of Bus stop shed in the city of Rourkela, creating awareness against drug abuse in Bhilai, construction of road in Durgapur etc. besides other expenses incurred under the head. It is not in dispute that these expenses have been incurred and the only reason they were disallowed by the Assessing Officer and so confirmed by the Ld. Commissioner of Income Tax (A) was that this expenditure was not expended wholly or exclusively for the purpose of business of the assessee. Although, it is undisputed that the assessee had incurred this expenditure on the basis of guidelines issued by Bureau of Public Enterprises, Govt, of India, the department was of the view that since the expenditure was not mandatory in nature, the same could not be allowed. However, we are unable to concur with the findings of the lower authorities on this issue and we hold that the disallowance under Explanation (2) to section 37(1) will not come into play and there is no such disabling provision even if the expenses in discharge of corporate social responsibility are incurred on voluntary basis. Explanation (2) to section 37(1) comes into play only w.e.f. 1.4.2015 and accordingly, expenses incurred towards Page 50 ITA Nos. 1964 & 1965/Bang/2018 corporate social responsibility incurred prior to this date will necessarily be allowable as revenue expenditure. Accordingly, we set aside the order of the ld. CIT(A) on this issue and direct the Assessing Officer to allow the expenses incurred towards corporate social responsibility." 15.6 Respectfully following above view, we direct the Ld.AO to delete the disallowance made under various heads Accordingly, these grounds raised by assessee stands allowed. 16. Ground nos. 12 – 14 It is submitted that assessee earned Rs.2,68,40,304/- as exempt income. Assessee had disallowed the expenditure at Rs. 59,772/- as per the Return of Income. 16.1 It is submitted that Rule 8D of the Income-tax Rules, 1962 cannot be applied without establishing that the expenditure incurred could be related to the exempted income as contemplated under Section 14A of the IT Act. The assessee had furnished details as to the investments, which has been extracted at Para 7.1 of the assessment order which amounted to Rs.208,80,85,280/- for the relevant year. The Ld.AO disallowed 0.5% of Average Balance of Investments without providing any details, as to how, he is not satisfied with the claim of the assessee that no part of the expenditure was liable to be disallowed. The investment was out of capital, reserve and surplus which is substantially available with the assessee and further there was no expenditure towards investments. It is submitted that, consequently, the Ld.AO having not brought any material to satisfy himself as to the application of Section 14A of the Act, the disallowance as made by applying Rule 8D of the IT Rules was unwarranted. The Ld.CIT.DR relied on orders passed by the authorities below. Page 51 ITA Nos. 1964 & 1965/Bang/2018 We have perused the submissions advanced by both sides in the light of records placed before us. It is not the case of the revenue that any interest expenditure has been incurred by the assessee for earning the exempt income. The assessee made the submissions and after considering the submissions of the assessee, AO by invoking the provision of Rule 8D worked out the disallowance u/s 14A of the Act. We find that AO had given detailed reason to discard the assessee's working of disallowance u/s 14A. In such a situation, we are of the view that the requirement of the statue has been satisfied. We therefore do not find any infirmity in the action of AO in invoking the provisions of Rule 8D r.w. Section 14A for working the disallowance is concerned. As far as the alternate submissions of the Learned AR in working the disallowance u/s 14A only after considering the investment which have yielded tax free income is concerned, we find force in the submission of Ld.AR. We find that decision of Hon'ble Delhi High Court in case of CIT vs. Holcim India Pvt. Ltd. reported in (2014) 90 CCH 81, Hon'ble Gujarat High Court in the case of CIT vs. Corrtech Engineering Pvt. Ltd. reported in 372 ITR 97 and decision of Hon'ble Allahabad High Court in case of CIT v. Shivam Motors (P.) Ltd. reported in (2015) 230 Taxman 63 has held that Section 14A of the Act, cannot be involved when no exempt income was earned. The contention of the assessee that, it received dividend only from the aforesaid investments has not been controverted by the revenue. In such a situation, relying on the aforesaid decisions, we are of the view that disallowance u/s 14A needs to be re-worked on the basis of the investments which have Page 52 ITA Nos. 1964 & 1965/Bang/2018 yielded tax free income. We therefore direct the Ld.AO to work out disallowance u/s.14A r.w.r 8D on the basis of investments which had yielded dividend. Accordingly, this ground raised by the assessee stands partly allowed. In the result, both the appeals filed by the assessee stands partly allowed. Order pronounced in open court on 29 th June, 2022. Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 29 th June, 2022. /MS / Copy to: 1. Appellant 4. CIT(A) 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file By order Assistant Registrar, ITAT, Bangalore