The AO disallowed said SPV deduction by observing that as per observations of Supreme Court amount of sale proceeds deducted and retained towards SPV was penal in nature attracting Explanation 1 to section 37(1). The Supreme Court’s decision clearly held that 15 per cent contribution to SPV account was guarantee payment for implementing of R & R plan, which would be deducted from sale proceeds and this was one of conditions for resuming mining operations under Category ‘B’ mine.

Held that, since 15 per cent of sale proceeds was payable to SPV account, after it accrued to assessee, and fact that, assessee was obliged to part with such portion of income, by virtue of directions of Supreme Court, as a precondition to resume mining operations under Category ‘B’ mine would be application of income and, therefore, should be considered as expenditure incurred for carrying out its business activity. Contribution towards SPV being a requirement to be incurred to continue its business activities, these payments did not fall within category of penalty within ambit of Explanation to section 37(1). (AY. 2013-14)