ORDER
Amit Shukla, Accountant Member. – The present appeal has been preferred by the assessee against the order dated 24th January 2025 passed by the Learned Addl./Joint Commissioner of Income Tax (Appeals), Bhubaneswar, pertaining to the assessment year 2012-13, arising out of the assessment framed under section 143(3) read with section 147 of the Income Tax Act, 1961.
2. In this appeal, the assessee has assailed the disallowance of royalty payment amounting to Rs. 31,96,000 made under section 37(1) of the Act. In addition, by way of additional grounds, the assessee has also impugned the reopening of the assessment under section 147, contending that the reassessment was founded merely on a change of opinion, the original assessment having already been completed under section 143(3).
3. The relevant facts of the case are that the assessee company is engaged in the business of mining, quarrying, stone crushing and breaking, drilling, blasting, ground levelling and transportation of aggregates on contract basis. For the purposes of 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.
4. It is pertinent to note that this was by no means the first year of such expenditure. From assessment years 2008-09 to 2019-20, similar royalty payments had been incurred and consistently accepted in scrutiny assessments framed under section 143(3). During the year under consideration, the assessee had incurred an aggregate royalty expenditure of about Rs. 2.46 crores, out of which Rs. 1.82 crores represented payments made to the Government, while Rs. 64 lakhs were paid to private parties. Out of the latter, a sum of Rs. 31.96 lakhs was paid to one Mr. Arun Gajanan Adhikari for allowing the assessee to excavate stones and boulders from specified land for road work. It was explained that all requisite details of royalty payments had been submitted during the course of the original scrutiny proceedings, and the assessment was thereafter completed under section 143(3) vide order dated 31st March 2015 accepting the claim. It was further brought on record that a survey under section 133A was earlier conducted on 16th March 2012, in which extensive verification of records and documents was made, yet no adverse finding or issue was raised in respect of the royalty payments made for quarrying and mining operations.
5. The assessment was reopened by the Assessing Officer on the basis of the following recorded reasons, which were communicated to the assessee during the reassessment proceedings:
REASONS FOR REOPENING THE CASE M/B. BALAJI INFRATECH CONSTRUCTIONS PVT LTD FOR A.Y.2012-13
“In this case, assessment has been completed and order was passed u/s 143(3) of the IT Act, 1961 on 31.03.2015 assessing income at Rs. 14,57,55,460/
2. In this case, information was called for from the assessee u/s 133(6) of the Income tax Act, 1961 after obtaining approval from Pr.CIT-12. Mumbai. Assessee was asked to provide details of transaction entered into with one Shri Arun Gajanan Adhikari and Twinkle/ Kiran Goenka. Assessee filed replied and after going through the reply it was observed that assessee has paid Rs. 31,96,000/- to Shri Arun Adhikari.
Now further perusal of the reply shows that the payment has been made in lieu of Royalty However, the reason given for paying royalty is not satisfactory. Shri Arun Adhikari is not the owner of the land Owner of the land is M/s Twinkle Plantation Pvt Ltd. So even if any royalty is payable, same is payable to M/s Twinkle Plantation Pvt Ltd and not Shri Arun Adhikari Further it is also not clear if the amount was subsequently transferred to M/s Twinkle Plantation Pvt Ltd by Shri Arun Adhikari. In the absence of the same, it is clear that amount paid to Shri Arun adhikari is not allowable as expense as same is not for business purpose and hence not allowable as per sec 37(1) of the income tax act, 1961.
3. In view of the above, I have reason to believe that the amount of Rs. 31,96,000/- has escaped assessment in the hands of M/s. Balaji Infratech & Constructions Pvt Ltd for the A.Y 2012-13 within the meaning of section 147 of the Income Tax Act, 1961 and hence, the case of the assessee needs to be reopened by issue of notice u/s 148 of the Income Tax Act, 1961.”
5.1. From a plain reading of the reasons, it is manifest that the foundation for reopening was the view that the payment of Rs. 31,96,000 made to Mr. Arun Gajanan Adhikari was not genuine, as the ownership of the land in question was held by M/s. Twinkle Plantations Pvt. Ltd., and not by the said individual. The Assessing Officer, therefore, inferred that the royalty ought to have been paid to the company and not to Mr. Adhikari, and in the absence of evidence that the latter had transferred the sum to the company, concluded that the expenditure was not for business purposes and hence not allowable under section 37(1).
6. Pursuant to the said reasons, notice under section 148 of the Act was issued on 31st March 2017. The assessee, in response, raised detailed objections vide letter dated 16th September 2017, challenging the very assumption of jurisdiction under section 147. It was emphatically submitted that the issue relating to payment of royalty to Mr. Arun Adhikari had already been examined in the course of the original assessment under section 143(3), and that the Assessing Officer, after due verification, had accepted the genuineness of the payment. The reopening, it was urged, was a mere change of opinion without any fresh tangible material. In support, the assessee furnished a comprehensive set of documents demonstrating the legality and genuineness of the transaction. The relevant documents included-
| (i) | | Copy of the Power of Attorney executed by M/s. Twinkle Plantations Pvt. Ltd. in favour of Mr. Arun Gajanan Adhikari; |
| (ii) | | Declaration from Mr. Adhikari granting the assessee right to use the land for mining purposes; |
| (iii) | | Agreement dated 21st October 2011 entered into between Mr. Adhikari and the assessee for payment of royalty; and |
| (iv) | | Ledger account, bank statements, and proof of tax deduction at source substantiating that all payments were made through banking channels after due TDS compliance. |
6.1. The assessee further drew attention to the fact that the payments had been fully subjected to deduction of tax at source and reflected in its books of account, thereby dispelling any inference of concealment or unaccounted outgo.
7. During the reassessment proceedings, the Assessing Officer issued a notice under section 133(6) to Mr. Arun Gajanan Adhikari on 25th October 2017, seeking details such as the ledger account of the assessee company, bank statements, copies of return of income, audited financial statements, and particulars of his arrangement with M/s. Twinkle Plantations Pvt. Ltd. In compliance, Mr. Adhikari responded vide letter dated 10th November 2017, enclosing the relevant documents, including the agreement with the assessee and his bank statements evidencing receipt of the payments. He, however, stated that his return of income and financials for the relevant year had not been filed.
7.1. Meanwhile, the assessee reiterated that it had no control over whether Mr. Adhikari had filed his return or maintained audited accounts; what was material, it contended, was that the payment had been made for legitimate business purposes, duly confirmed by the recipient and supported by contemporaneous documentation. The essence of the assessee’s submissions was thus
“It is an established fact that the assessee company is in the business of earth moving and quarrying. Royalty payments to both government and private parties have been made year after year and accepted in scrutiny assessments. The payment to Mr. Adhikari was made through proper banking channels with due deduction of tax at source. The relationship between Mr. Adhikari and M/s. Twinkle Plantations Pvt. Ltd. is of no consequence to the assessee, which has merely paid royalty for use of land as per the agreement. The expenditure, therefore, satisfies the test of section 37(1).”
8. The Assessing Officer, however, brushed aside the assessee’s submissions and disallowed the royalty expenditure. He observed that the land in question was registered in the name of M/s. Twinkle Plantations Pvt. Ltd., and therefore any agreement entered into by the assessee with Mr. Adhikari, who was merely the holder of a Power of Attorney, lacked legal validity. According to the Assessing Officer, the Power of Attorney executed by M/s. Twinkle Plantations Pvt. Ltd. did not specifically provide for any remuneration to Mr. Adhikari, and no corresponding payment was shown by him to the company. He also analysed the bank statement of Mr. Adhikari and noted that certain inflows appeared from unidentified sources. On this basis, the Assessing Officer held that the payment of Rs. 31,96,000 was not for business purposes and hence disallowed the same under section 37(1).
9. In appeal, the learned first appellate authority affirmed the disallowance, though with certain modifications in reasoning. He observed that the agreement between the assessee and Mr. Arun Adhikari was neither registered nor executed on stamp paper, but merely on the letterhead of the company, and therefore, according to him, it lacked legal sanctity. He, however, noted that the Assessing Officer had erroneously invoked section 69C, whereas the appropriate provision was section 37(1), since the issue pertained to allowability of business expenditure and not to unexplained expenditure. The learned CIT(A) thus upheld the addition on the ground that the transaction itself was not legally valid, and consequently, the expenditure could not be said to have been laid out wholly and exclusively for business purposes. The assessee’s grounds challenging the reopening under section 147 were also dismissed.
10. We have carefully heard the submissions of both sides and perused the material placed before us. The undisputed factual position that emerges is that the assessee is engaged in the line of business where extraction, transportation and levelling of stones and aggregates form an integral part of its operations. For carrying on such activity, the assessee necessarily requires access to land for quarrying and mining. As a matter of commercial reality, compensation or royalty for use of land is a legitimate business outgo, and such payments have been consistently incurred and accepted in earlier years.
10.1 It is not the case of the Revenue that the assessee has claimed any inflated or fictitious expenditure or that the payments have been made in cash. The only objection is that the payment was made to the holder of a Power of Attorney and not to the ostensible owner of the land.
11. The premise of the reopening, therefore, rests merely on a legal inference drawn from identical facts that were already examined during the original assessment. There is neither any tangible material brought on record to indicate that the expenditure was bogus nor any new information to justify the reopening. The Assessing Officer has simply re-evaluated the same set of documents, which constitutes nothing but a change of opinion. It is well settled that a change of opinion, howsoever reasoned, does not confer jurisdiction under section 147 once an assessment under section 143(3) has attained finality. Therefore, even at the threshold, the assumption of jurisdiction for reopening the assessment is unsustainable in law.
12. Coming now to the merits, the Revenue’s objection essentially turns on the legal status of the Power of Attorney holder. It is not in dispute that M/s. Twinkle Plantations Pvt. Ltd., the owner of the land, had executed an irrevocable Power of Attorney in favour of Mr. Arun Gajanan Adhikari on 15th October 2003. By virtue of this, he was vested with rights to deal with the land, including granting permission to others for quarrying and mining. When the assessee entered into an agreement with him for extraction of boulders and stones, the payment was made towards royalty for use of the land. The question, therefore, is whether such payment can be regarded as invalid merely because it was made to a Power of Attorney holder rather than the owner.
12.1. The legislative framework itself provides the answer. Section 2(47)(vi) of the Act, as amended by the Finance Act, 1987, expressly recognizes the concept of transfer through enjoyment of property rights by virtue of Power of Attorney arrangements. The relevant explanatory notes to the Finance Act, 1987 elucidate the legislative intent in the following terms:-
FINANCE ACT, 1987
“Definition of transfer widened to include certain transactions 11.1 The existing definition of the word transfer in section 2(47) does not include transfer of certain rights accruing to a purchaser, by way of becoming a member of or acquiring shares in a co-operative society, company, or association of persons or by way of any agreement or any arrangement whereby such person acquires any right in any building which is either being constructed or which is to be constructed. Transactions of the nature referred to above are not required to be registered under the Registration Act, 1908 Such arrangements confer the privileges of ownership without transfer of title in the building and are a common mode of acquiring flats particularly in multistoreyed constructions in big cities. The definition also does not cover cases where possession is allowed to be taken or retained in part performance of a contract, of the nature referred to in section 53A of the Transfer of Property Act, 1882. New sub-clauses (v) and (v) have been inserted in section 2(47) to prevent avoidance of capital gains liability by recourse to transfer of rights in the manner referred to above
FINANCE ACT, 1987
11.2 The newly inserted sub-clause (vi) of section 2(47) has brought into the ambit of transfer the practice of enjoyment of property rights through what is commonly known as Power of Attorney arrangements. The practice in such cases is adopted normally where transfer of ownership is legally not permitted. A person holding the power of attorney is authorised the powers of owner, including that of making construction. The legal ownership in such cases continues to be with the transferor.
12.2. The above extract makes it abundantly clear that the law acknowledges transactions where enjoyment of property rights and the attendant privileges of ownership are exercised through Power of Attorney arrangements, even though legal title continues to vest in another. The holder of such Power of Attorney, for all practical purposes, is clothed with authority to deal with the property, including its commercial exploitation. Therefore, the argument that the agreement between the assessee and Mr. Adhikari lacked legal sanctity cannot be accepted. The assessee, having paid royalty to the person duly authorized to grant such rights, has discharged a legitimate business liability, the expenditure being wholly and exclusively incurred for the purpose of its business.
13. The essence of section 37(1) is that any expenditure, not being capital or personal in nature and laid out wholly and exclusively for the purposes of business, is to be allowed as deduction. The legislative command is not that the expenditure must be incurred in a manner the Assessing Officer deems most appropriate, but that it should be incurred bona fide and in the course of carrying on business. The Assessing Officer is not to substitute his own business judgment for that of the assessee. Here, the payment of royalty to Mr. Arun Adhikari was made under a subsisting agreement with a person duly empowered to grant such rights, supported by banking records and subjected to deduction of tax 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.
14. Commercial expediency is to be judged from the standpoint of the businessman and not from the armchair of the revenue authorities. The assessee, engaged in mining and quarrying, 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 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.
15. In view of the foregoing discussion, we hold that the reopening of assessment under section 147 was impermissible, being based solely on a change of opinion. Even on merits, the expenditure represents a legitimate business outlay allowable under section 37(1). The Assessing Officer’s disallowance, and the learned CIT(A)’s confirmation thereof, are accordingly unsustainable and liable to be set aside. We, therefore, direct that the royalty payment of Rs. 31,96,000 be allowed as deduction.
16. In the result, the appeal of the assessee stands allowed.