Royalty Paid to Power of Attorney Holder for Quarry Rights Allowed as Business Expense | ITAT

Case Details: Balajee Infratech & Constructions (P.) Ltd. v. Deputy Commissioner of Income tax - [2025] 179 taxmann.com 420 (Mumbai-Trib.)

Judiciary and Counsel Details

• Amit Shukla, Judicial Member & Girish Agrawal, Accountant Member
• Madhur Agarwal for the Appellant.
• Leyaqat Ali Aafaqui for the Respondent.

Facts of the Case

The assessee was engaged in the business of mining, quarrying, stone crushing and breaking, drilling, blasting, ground levelling and transportation of aggregates on a contract basis. For executing its projects, such as laying stones along highways or runways, the assessee was required to procure boulders and stones from nearby quarries. In the process, it utilized adjoining land parcels for excavation, mining and transportation.

In consideration of the right to use such land, compensation or royalty was paid to the landowners, whether private persons or governmental authorities, or to those in lawful possession or control thereof. Such payments were customary in the trade and were uniformly described as royalty for extraction of boulders and stones.

The assessee was consistently making such royalty payments for the last many years. However, for the year under consideration, the Assessing Officer (AO) noted that the assessee had made royalty payment to the person who was not the owner of the land. Subsequently, AO held that the expenditure was not for business purposes and disallowed the same under section 37(1).

On appeal, CIT(A) upheld the addition made by the AO. Aggrieved by the order, the assessee filed an appeal to the Tribunal.

ITAT Held

The Tribunal held that the assessee was engaged in the business of mining and quarrying. It could not have executed its contractual obligations without access to the land in question. The payment of royalty was therefore not only prudent but necessary. The assessee paid royalty to the person duly empowered to grant such rights, as supported by banking records and subject to tax deduction at source. No part of the transaction is shown to be sham or colourable.

Once the identity of the recipient, the nature of the service, and the nexus with business are established, the disallowance merely on the ground that the agreement was not registered or that the land belonged to another entity is an exercise in form over substance.

Commercial expediency is to be judged from the standpoint of the businessman and not from the armchair of the revenue authorities. The genuineness of the payment stands fortified by documentary evidence, including the Power of Attorney, the agreement, the declaration, and proof of payment through banking channels.

The Revenue has not demonstrated that the payment was either excessive or fictitious, nor has it brought any material to suggest that the assessee derived any extraneous advantage therefrom. The disallowance, thus, is founded more on conjecture than on evidence. Therefore, the reopening of the assessment under Section 147 was impermissible, as it was based solely on a change of opinion. Even on merits, the expenditure represents a legitimate business outlay allowable under section 37(1).