Mining without Environmental Clearance Not Illegal, Income Tax Dept cannot Disallow Expenses without Proof u/s 37(1): Orissa HC [Read Order]
Orissa HC rules that mining without environmental clearance is not automatically illegal for taxation, barring the tax department from disallowing expenses without conclusive proof.
![Mining without Environmental Clearance Not Illegal, Income Tax Dept cannot Disallow Expenses without Proof u/s 37(1): Orissa HC [Read Order]](https://www.taxscan.in/wp-content/uploads/2025/03/Orissa-HC-Illegal-mining-tax-law-Orissa-HC-income-tax-Taxscan.jpg "Mining without Environmental Clearance Not Illegal, Income Tax Dept cannot Disallow Expenses without Proof u/s 37(1): Orissa HC [Read Order]")
In a recent ruling, the Orissa High Court held that mining without environmental clearance does not automatically constitute illegal mining for taxation purposes and ruled that the Income Tax Department cannot disallow expenses under Explanation (1) to Section 37(1) of the Income Tax Act unless illegal activity is conclusively proven. The Principal Commissioner of Income Tax (Central)...
In a recent ruling, the Orissa High Court held that mining without environmental clearance does not automatically constitute illegal mining for taxation purposes and ruled that the Income Tax Department cannot disallow expenses under Explanation (1) to Section 37(1) of the Income Tax Act unless illegal activity is conclusively proven.
The Principal Commissioner of Income Tax (Central) had challenged an Income Tax Appellate Tribunal (ITAT) ruling, which favored Tarini Minerals regarding tax assessments for the financial years 2008-2009 to 2010-2011.
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The tax department reopened the assessment under Section 147 of the Income Tax Act, alleging that Tarini Minerals engaged in illegal mining by operating without environmental clearance and had suppressed production figures. Based on this, the department attempted to disallow certain expenses under Explanation (1) to Section 37(1), which prohibits deductions for expenditures related to unlawful activities.
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The company’s counsel argued that its mining activities were not illegal and that it had properly reported to the Indian Bureau of Mines, with production figures matching those in its audit report (Form 3CD). They cited the Central Empowered Committee (CEC) report, which clarified that mining without environmental clearance does not fall under the definition of "illegal mining" under Section 21(5) of the Mines and Minerals (Development and Regulation) Act, 1957. The ITAT ruled in favor of the company.
The tax department’s counsel argued that the ITAT erred in deleting the disallowed expenses, claiming that the Justice M.B. Shah Commission report had identified leases operating without statutory clearances as illegal.
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A division bench led by Acting Chief Justice Arindam Sinha and Justice M.S. Sahoo observed that the CEC’s findings contradicted this view and ruled that a tax disallowance cannot be made solely based on allegations of non-compliance unless a violation is conclusively established.
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The court upheld the ITAT’s decision, stating that the tax department failed to prove illegal activity. The court explained that expenses can only be disallowed under Section 37(1) if a penalty is imposed and claimed as a deduction, which was not the case here. Since no substantial question of law arose from the ITAT’s order, the court dismissed the appeal.
To Read the full text of the Order CLICK HERE
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