Whether transportation expenses on illegal mining are allowable under explanation 1 to section 37?

Respected Members

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Short note of today's case law for quick reference:

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[2024] 471 ITR 1 (Karn) [In The Karnataka High Court Dharwad Bench]

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Principal Commissioner Of Income-Tax And Another

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Obulapuram Mining Company Pvt. Ltd.

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K. Somashekar and Umesh M. Adiga JJ.

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March 17, 2023?????????

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1) The assessee-company was engaged in the business of iron ore mining.

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2) The main additions related to the claim of bogus transportation expenses of iron ore; illegal mining expenses; and personal expenses of directors which were confirmed by CIT(A).

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3) Tribunal partly allowed issue towards claim of bogus transportation expenses, being the payment to trans-porters of iron ore, holding that the statement recorded from these transporters were not made available to the assessee, and the assessee was not given an opportunity for cross-examining the transporters whose statements were recorded by the assessing authority under section 131 of the Act.

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4) As far as illegal mining expenses were concerned, the Tribunal deleted the disallowance of expenditure relating to the illegal mining by holding that the Explanation to section 37 was not attracted.

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5) Even if the allegation of the A.O. were accepted that the assessee was doing some illegal mining, the expenses incurred for such production did not attract the disallowance under Explanation 1 to section 37.

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6) The expenses incurred for mining could not be considered as for an offence or prohibited by law in itself.

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7) It is not the case of the A.O. that any deduction had been claimed by the assessee for facilitating the carrying out of illegal mining or for any penalty in respect of such illegal mining.

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8) The assessee had produced evidence to show that the expenditure claimed had been for purposes of transportation.

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9) The A.O. disallowed 50% of expenses of helicopter as one of the directors was a minister of state govt and helicopter was said to have been used by him for his personal use during the time of elections.

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10) It was held that if a director of a company had been benefited by the expenses in respect of repairs & maintenance and depreciation on helicopter, the A.O. of the directors was at liberty to make additions as per law in hands of such director.

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11) No disallowance could be made in the hands of Assessee Company.

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12) On further appeals to High Court, appeal was dismissed on the ground of absence of substantial question of law.

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13) Section 260A states that the provisions of code of civil procedure, 1908 relating to appeals to the High Court, as far as may be apply to these appeals.

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14) This section is analogous to section 100 of the code.

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15) Noticeably both these sections i.e section 260A of the Act & section 100 of the code do not define the expression substantial question of law.

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16) The supreme court in Santosh Hazari v. Purushottam Tiwari [2001] 251 ITR 84(SC) took the view that the word substantial qualifies the term question of law, it means a question having substance, essential, real or sound worth, important or considerable.

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17) The substantial question of law on which an appeal shall be heard need not necessarily be a question of law of general importance.

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18) The substantial question of law on which an appeal should be heard need not necessarily be a question of law of general importance.

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19) To be substantial, a question of law must be debatable and it must have a material bearing on the decision of the case in the sense that if answered either was in so far as the rights of the parties are concerned.

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20) A finding of fact may give rise to a substantial question of law, inter alia, in the event finding are based on no evidence or while arriving at the findings relevant admissible evidence has not been taken into consideration or inadmissible evidence has been taken into consideration or legal principles have not been applied in appreciating the evidences or when the evidence have been misread.

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21) Hence high court dismissed the appeal of revenue in the absence of substantial question of law.