HC disallowed exp. of iron ore business as it was carried on without obtaining necessary permits/licenses

Case Details: PCIT v. M. Abdul Zahid - [2021] 133 taxmann.com 72 (Karnataka)

Judiciary and Counsel Details

• • Krishna S. Dixit and Pradeep Singh Yerur, JJ.
  • Y.V. Raviraj, Adv. for the Appellant. 
  • Vijay Malali, Adv. for the Respondent.

Facts of the Case

The assessee had been running an iron ore business without obtaining necessary permits and licenses as required under the law. During a search under section 132 of the business premises, the said foundational fact had surfaced, and a section 153A notice was issued.
In response to the notice, the assessee filed the return of income tax for the relevant assessment years. However, the Assessing Officer (AO) disallowed expenditures in terms of section 37(1). The CIT(A) & Tribunal reversed the order AO on appeal, and aggrieved revenue filed the instant appeal before the High Court.

High Court Held

The Karnataka High Court held that the subject trade and business in iron ore during the relevant period was carried on by the assessee without the permits as required under section 4(1A) of the Mines and Minerals (Development and Regulation) Act, 1957. Thus, the said business is arguably being run contrary to law. Section 4(1A) prohibits transportation or storing of any mineral otherwise than by licence/permit, and a business without licence/permit is made punishable under section 21.

Section 37 is like a residuary provision extending the allowance to items of business expenditure that are not covered by sections 30 to 36.

The Finance (No. 2) Act, 1998 had added an Explanation to section 37(1) with retrospective effect from 1-4-1962 to the effect that any expenditure which an assessee incurs for any purpose which is an offense or which is prohibited by law shall not be deemed to have been incurred for business or profession. No deduction or allowance shall be admissible in respect of such expenditure.

The object of this Explanation is to discourage the businesses and professions that are tainted with illegality. Therefore, the expenditure incurred for purchasing the iron ore could not have been deducted as the expenditure for the business in question.

Case Review

• • Maddi Venkataraman & Co. (P.) Ltd. v. CIT [1998] 96 Taxman 643/229 ITR 534 (SC) (para 5) followed.

List of Cases Referred to

• • Indian Molasses Co. (P.) Ltd. v. CIT [1959] 37 ITR 66 (SC) (para 5)
  • Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC) (para 5)
  • Bengal Immunity Co. Ltd. v. State of Bihar [1955] 2 SCR 603 (para 5)
  • Maddi Venkataraman & Co. (P.) Ltd. v. CIT [1998] 96 Taxman 643/229 ITR 534 (SC) (para 5).