Income Tax Appellate Tribunal - Chennai
Sri Saravana Mills Private Limited, ... vs Dcit Circle 1, Madurai on 5 March, 2022
आयकर अपीलीय अिधकरण, 'बी' यायपीठ, चे ई IN THE INCOME TAX APPELLATE TRIBUNAL 'B' BENCH, CHENNAI ी महावीर सह, उपा य एवं ी मनोज कु मार अ वाल, लेखा सद य के सम BEFORE SHRI MAHAVIR SINGH, VICE PRESIDENTAND SHRI MANOJ KUMAR AGGARWAL, ACCOUNTANT MEMBER आयकर अपील सं./ITA No.: 894/CHNY/2019 िनधा#रण वष# /Assessment Year: 2010 - 2011 Sri Saravana Mills Private Limited, The Deputy Commissioner of (Formerly known as Sri Saravana Income Tax, Spinning Mills Private Limited), Circle - 1, SF No.900, Renganathapuram, Dindigul - 624 002.
Kasipalayam Post, Vs. Tamil Nadu
Karur Road, Vedasandur Taluk,
Dindigul - 624 711.
PAN : AACCS 0540G
(अपीलाथ /Appellant) ( यथ /Respondent)
अपीलाथ क ओर से/Appellant by : Mr. T. Banusekar, C.A.
यथ क ओर से/Respondent by : Mr. P. Sajit Kumar, JCIT
सुनवाई क तारीख/Date of Hearing : 24.02.2022
घोषणा क तारीख/Date of Pronouncement : 04.03.2022
आदेश /O R D E R
PER MAHAVIR SINGH, VP:
This appeal by the assessee is arising out of the order of the Commissioner of Income Tax (Appeals)-1, Madurai in ITA No.45/2017-18; dated 20.02.2019. The Assessment was framed by the Deputy Commissioner of Income Tax, Circle -1, Dindigul for the Assessment Year 2010 - 2011 u/s.143(3) r.w.s. u/s.147 of the Income Tax Act, 1961 (hereinafter 'the Act') vide his order dated 30.06.2017.
2 I.T.A. No. 894/Chny/20192. The first issue in this appeal of Assessee's is against the order of the Commissioner of Income Tax (Appeals) confirming the action of the Assessing Officer in reopening of assessment, despite the fact that the reopening was beyond four years and that the original assessment was completed u/s.143(3) of the Act and further there is no failure pointed out by the Assessing Officer in the reasons recorded in regard to the full and true disclosure made by the Assessee for the relevant Assessment Year.
3. The second issue in this appeal of the Assessee is as regards to the deduction claimed on account of the carbon credit of receipts u/s.80IA of the Act.
4. We will deal with the first issue on merits as regards to the claim of deduction of carbon credit receipt u/s.80IA of the Act.
5. We noted that the Assessing Officer during the course of assessment proceedings noted that the carbon credit receipts are revenue in nature and therefore he made an addition of carbon credit receipts amounting to Rs.1,83,35,339/-. Aggrieved, the Assessee preferred an appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) also confirmed the action of the Assessing Officer by stating that, clearly the receipts on account of carbon credits is a revenue receipt and is 3 I.T.A. No. 894/Chny/2019 not eligible for deduction u/s.80IA of the Act. Aggrieved, the Assessee preferred an appeal before the Tribunal.
6. We noted that the issue of carbon credits is fully covered by the decision of the Hon'ble Madras High Court in the case of S.P. Spinning Mills Private Limited Vs. Assistant Commissioner of Income Tax reported in [2021] (1) TMI 1081; wherein the Hon'ble Madras High Court has considered this issue and decided vide paragraphs 28 & 29 as under:
"28.Insofar as substantial question of law no.4 is concerned, it deals with carbon credit. The question, as to the manner in which carbon credit receipt has to be treated, has been considered by several High Courts and it has been held that the receipt should be treated as a capital receipt. In this regard, it would be beneficial to refer to the decision in the case of CIT vs. Subhash Kabini Power Corporation Ltd., [(2016) 385 ITR 0592 (Karn.)].
In the said decision, the Karnataka High Court approved the view taken by the ITAT, Hyderabad Bench, which decision was upheld by the High Court of Andhra Pradesh in the case of CIT vs. My Home Power Ltd. [(2014) 365 ITR 0082 (AP)], which was subsequently followed by the ITAT, Chennai and Jaipur Benches. The operative portion of the judgment reads as follows:-
"11. The decision has been upheld by the Hon'ble Andhra Pradesh High Court. This decision has been subsequently followed by the ITAT Chennai and Jaipur Benches. There is no decision either from the Hon'ble Supreme Court or from the Hon'ble jurisdictional High Court. These decisions indicate that sale of carbon credit would result capital receipt which is not taxable. When we confronted the learned DR with regard to this position, it was contended that the position as on the day when the assessment order was passed, is to be seen and on that day these orders were not available. Therefore, the assessee cannot claim the benefit of these orders. However, we do not concur with this proposition of the learned CIT, because the Full Bench of the Hon'ble Punjab & Haryana High Court in the case of Aruna Luthra reported in 254 ITR 76 has held that a Court decide a dispute between the parties. The case can involve decision on facts. It can also involve a decision on point of law. Both may have bearing on the ultimate result of the case. When a Court interprets a provision, it decides as to what is the meaning and effect of the words used by the Legislature, it is the declaration regarding the statute. In other words the judgment declares as to what the legislature had said at the time of promulgation of the law, the declaration is.........., this was the law, this is the law, this is how the provision shall be construed. Therefore, he cannot plead that the view taken by the Tribunal and upheld by the Hon'ble Andhra Pradesh High Court could be considered as if applicable from the date 4 I.T.A. No. 894/Chny/2019 of the decision. In the decision only the position of the law as to how receipts from sale of carbon credits are to be treated, has been explained. One of the argument raised by the DR was that at this stage, the additional ground ought not to be permitted to be raised. It is pertinent to mention here that basically, it is not a separate ground, it is a limb of arguments, which is affecting the ultimate tax liability of the assessee. The Hon'ble Supreme Court in the case of NTPC Ltd (Supra) has held that the Tribunal had jurisdiction to examine a question of law which arose from the fact as found by the Income Tax authorities and having a bearing on the tax liability of the assessee. As far as the nature of the receipt from sale of carbon credit is concerned, it is available from the assessment stage. It is not disputed even by the learned Commissioner, the dispute is, whether it has been derived from the eligible industrial undertaking for qualifying the grant of deduction u/s 80IA.
The learned Commissioner felt that this receipt has not been derived from the industrial undertaking which will be eligible for grant of deduction u/s 80IA and the Assessing Officer committed an error in including the receipt in the eligible profit. Those facts are already on the record. It is to be seen, whether the receipt is of capital nature or of a revenue nature. Even in case the order of the CIT is upheld, then, in law, it will affect the computation of income, ultimately because the receipt will not be taxable, it will not come under the ambit of computation of income. Simultaneously it will be excluded from the deduction u/s 80IA as well as of the total income. The result will remain as it is. It is a revenue neutral case. Therefore, in view of the ratio laid down by the Hon'ble jurisdictional High Court in the case of Gopala Gowda (Supra), the second condition for taking action u/s 263 does not exist. The assessment order is not prejudicial to the interests of the Revenue. In view of the above discussion, we allow the appeal of the assessee and quash the impugned order of the learned CIT passed u/s 263 of the Income Tax Act." The aforesaid shows that, so far as the question as to whether, the income by sale of carbon credit could be termed as capital receipt or profit, is concerned, the Tribunal has considered the decision of the Hyderabad Bench and it has further taken note of the fact that decision of the Tribunal of Hyderabad Bench was carried before the Andhra Pradesh High Court and the said decision was not interfered with. The Tribunal, in its decision has also referred to the decision of the Apex Court with regard to power under Section 263 of the Income Tax Act, 1961 (hereinafter referred to as "the Act") of the revisional authority.
4. In our view, the principal question, which may arise is, as to whether by sale of carbon credit capital receipt is generated or a profit out of the business activity of the assessee. More or less, in a similar case, the Apex Court had an occasion to consider such an issue in the case of Commissioner of Income Tax v. Maheshwari Devi Jute Mills Ltd. [(1965) 57 ITR 36 (SC)], wherein the question came up for consideration before the Apex Court as to whether by sale of loom- hours, the amount received could be termed as capital receipt or the income out of business. In the said decision, the Apex Court held that the amount received out of sale of loom-hours can be termed as capital receipt and not income out of business.
5. Subsequently, in a later decision of the Apex Court, a question came up for consideration in the case of M/s. Empire Jute Co. Ltd. v. Commissioner of Income Tax [(1980) 4 SCC 25] the question which arose before the Apex Court was, if loom-hours are purchased by the manufacturing mills, whether it can be termed as capital expenditure or revenue expenditure. In the said decision, the earlier decision of the Apex Court in the case of Maheswari Devi Jute Mills (supra) was also relied upon by the Revenue and after considering the same, the Apex 5 I.T.A. No. 894/Chny/2019 Court at paragraph Nos. 4 and 5 observed thus:
"4. Now an expenditure incurred by an assessee can qualify for deduction under Section 10(2) (xv) only if it is incurred wholly and exclusively for the purpose of his business, but even if it fulfils this requirement, it is not enough; it must further be of revenue as distinguished from capital nature. Here in the present case it was not contended on behalf of the Revenue that the sum of Rs. 2,03,255 was not laid out wholly and exclusively for the purpose of the assessee's business but the only argument was and this argument found favour with the High Court, that it represented capital expenditure and was hence not deductible under Section 10(2) (xv). The sole question which therefore arises for determination in the appeal is whether the sum of Rs. 2,03,255 paid by the assessee represented capital expenditure or revenue expenditure. We shall have to examine this question on principle but before we do so, we must refer to the decision of this Court in Maheshwari Devi Jute Mills case since that is the decision which weighed heavily with the High Court, in fact, compelled it to negative the claim of the assessee and hold the expenditure to be on capital account. That was a converse case where the question was whether an amount received by the assessee for sale of loom hours was in the nature of capital receipt or revenue receipt. The view taken by this Court was that it was in the nature of capital receipt and hence not taxable. It was contended on behalf of the Revenue, relying on this decision, that just as the amount realised for sale of loom hours was held to be capital receipt, so also the amount paid for purchase of loom hours must be held to be of capital nature.
But this argument suffers from a double fallacy.
5. In the first place it is not a universally true proposition that what may be capital receipt in the hands of the payee must necessarily be capital expenditure in relation to the payer. The fact that a certain payment constitutes income or capital receipt in the hands of the recipient is not material in determining whether the payment is revenue or capital disbursement qua the prayer. It was felicitously pointed out by Macnaghten, J. in Racecourse Betting Control Board v. Wildthat a "payment may be a revenue payment from the point of view of the payer and a capital payment from the point of view of the receiver and vice versa".
Therefore, the decision in Maheshwari Devi Jute Mills case cannot be regarded as an authority for the proposition that payment made by an assessee for purchase of loom hours would be capital expenditure. Whether it is capital expenditure or revenue expenditure would have to be determined having regard to the nature of the transaction and other relevant factors."
Thereafter, the Apex Court while considering the test to find out as to whether a particular expenditure can be termed as capital or revenue expenditure observed at paragraph Nos. 8 and 9 as under:
"8. The decided cases have, from time to time, evolved various tests for distinguishing between capital and revenue expenditure but no test is paramount or conclusive. There is no all embracing formula which can provide a ready solution to the problem; no touchstone has been devised. Every case has to be decided on its own facts keeping in mind the broad picture of the whole operation in respect of which the expenditure has been incurred. But a few tests formulated by the courts may be referred to as they might help to arrive at a correct decision of the controversy between the parties. One celebrated test is that laid down by Lord Cave, L.C., Atherion v. British Insulated and 6 I.T.A. No. 894/Chny/2019 Halsby Cables Ltd. where the learned law Lord stated:
When an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.
This test, as the parenthetical clause shows, must yield where there are special circumstances leading to a contrary conclusion and, as pointed out by Lord Radcliffe in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd., it would be misleading to suppose that in all cases, securing a benefit for the business would be prima facie capital expenditure "so long as the benefit is not so transitory as to have no endurance at all". There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature, acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is therefore not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. But even if this test were applied in the present case, it does not yield a conclusion in favour of the Revenue. Here, by purchase of loom hours no new asset has been created. There is no addition to or expansion of the profit-making apparatus of the assessee. The income-earning machine remains what it was prior to the purchase of loom hours. The assessee is merely enabled to operate the profit-making structure for a longer number of hours. And this advantage is clearly not of an enduring nature. It is limited in its duration to six months and, moreover, the additional working hours per week transferred to the assessee have to be utilised during the week and cannot be carried forward to the next week. It is, therefore, not possible to say that any advantage of enduring benefit in the capital field was acquired by the assessee in purchasing loom hours and the test of enduring benefit cannot help the Revenue.
9. Another test which is often applied is the one based on distinction between fixed and circulating capital. This test was applied by Lord Haldane in the leading case of John Smith & Son v. Moore where the learned law Lord drew the distinction between fixed capital and circulation capital in words which have almost acquired the status of a definition.
He said:
Fixed capital (is) what the owner turns to profit by keeping it in his own possession; circulating capital (is) what he makes profit of by parting with it and letting it change masters.
Now so long as the expenditure in question can be clearly referred to the acquisition of an asset which falls within one or the other of these two categories, such a test would be a critical one. But this test also sometimes break down because there are many forms of expenditure 7 I.T.A. No. 894/Chny/2019 which do not fall easily within these two categories and not infrequently, as pointed out by Lord Radcliffe in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd., the line of demarcation is difficult to draw and leads to subtle distinctions between profit that is made "out of" assets and profit that is made "upon" assets or "with" assets. Moreover, there may be cases where expenditure, though referable to or in connection with fixed capital, is nevertheless allowable as revenue expenditure. An illustrative example would be of expenditure incurred in preserving or maintaining capital assets. This test is therefore clearly not one of universal application. But even if we were to apply this test, it would not be possible to characterise the amount paid for purchase of loom hours as capital expenditure, because acquisition of additional loom hours does not add at all to the fixed capital of the assessee. The permanent structure of which the income is to be the produce or fruit remains the same; it is not enlarged. We are not sure whether loom hours can be regarded as part of circulating capital like labour, raw material, power etc., but it is clear beyond doubt that they are not part of fixed capital and hence even the application of this test does not compel the conclusion that the payment for purchase of loom hours was in the nature of capital expenditure."
After making the aforesaid observation, at paragraph No. 10, the Apex Court, on the basis of the facts of the said case concluded as under:
"Similarly, if payment has to be made for securing additional power every week, such payment would also be part of the cost of operating the profit-making structure and hence in the nature of revenue expenditure, even though the effect of acquiring additional power would be to augment the productivity of the profit-making structure. On the same analogy payment made for purchase of loom hours which would enable the assessee to operate the profit-making structure for a longer number of hours than those permitted under the working time agreement would also be part of the cost of performing the income- earning operations and hence revenue in character." Accordingly, the payment made for purchase of loom- hours by Jute Mill Company was held to be Revenue expenditure.
6. At this stage, we may also refer to the decision of the Andhra Pradesh High Court, which has been relied upon by the Tribunal in the impugned order. More or less, identical question was raised and the Andhra Pradesh High Court in the case of Commissioner of Income Tax-IV v. My Home Power Ltd. [(2014) 46 Taxmann.com 314 (Andhra Pradesh), at paragraph No. 3 observed thus:
"3. We have considered the aforesaid submission and we are unable to accept the same, as the learned Tribunal has factually found that "Carbon Credit is not an offshoot of business but an offshoot of environmental concerns. No asset is generated in the course of business but it is generated due to environmental concerns.
"We agree with this factual analysis as the assessee is carrying on the business of power generation. The Carbon Credit is not even directly linked with power generation. On the sale of excess Carbon Credits the income was received and hence as correctly held by the Tribunal it is capital receipt and it cannot be business receipt or income. In the circumstances, we do not find any element of law in this appeal." The aforesaid shows that the Andhra Pradesh High Court has confirmed the view of the Tribunal that Carbon Credit is not an offshoot of business, but an offshoot of environmental concerns. No asset is generated in the course of business, but it is generated due to environmental concerns. It was also found that the carbon credit is not even directly linked with the power generation and the income is 8 I.T.A. No. 894/Chny/2019 received by sale of the excess carbon credits. It was found that the Tribunal has rightly held that it is capital receipt and not business income.
7. As such, in our view, when the issue is already covered by the decision of the Andhra Pradesh High Court, wherein the view taken by the Tribunal of Hyderabad Bench has been followed in the present case, one may say that no substantial question of law would arise for consideration."
29.The Hon'ble Division Bench of this Court in the case of PCIT vs. Arun Textiles Pvt. Ltd., [T.C.A.No.606 of 2016, dated 29.08.2016], after referring to the decision in My Home Power Ltd., (supra), dismissed the appeal filed by the Revenue and confirmed the order passed by the ITAT holding that sale of carbon credits has to be considered as capital receipt and accordingly, it is not taxable."
7. When this was confronted to Learned Senior Departmental Representative, he could not controvert the same. As the issue is squarely covered in favour of the Assessee by the decision of the Hon'ble Madras High Court in the case of S.P. Spinning Mills Private Limited Vs. Assistant Commissioner of Income Tax (supra) and also another decision of the Hon'ble Madras High Court in the case of Commissioner of Income Tax Vs. Ambika Cotton Mills Limited reported in [2021] 125 taxmann.com 206 (Madras), we hold that the receipt on carbon credit is in the nature of capital receipt and no disallowance can be made. Thus, we reverse the orders of the lower authorities and allow the appeal of the Assessee on this issue.
8. Since, the Commissioner of Income Tax (Appeals) has earlier allowed the claim of the Assessee on the ESI and PF paid by the Assessee on or before the due date of filing the return of income u/s.139(1) of the Act and the Revenue is not in appeal against the order of the Commissioner of Income Tax (Appeals), and it has 9 I.T.A. No. 894/Chny/2019 become final. Further, since we have decided the issue of carbon credits in favour of the Assessee on merits, we are refraining ourselves from adjudicating the jurisdictional issue of reopening, which is kept open and dismissed as academic.
9. In the result, the appeal of the assessee is allowed.
Order pronounced in the court on 4th March, 2022 at Chennai.
Sd/- Sd/-
(मनोज कुमार अ वाल) (महावीर िसंह )
(MANOJ KUMAR AGGARWAL) (MAHAVIR SINGH)
लेखा सद य /ACCOUNTANT MEMBER उपा य /VICE PRESIDENT
चे ई/Chennai,
दनांक/Dated, the 4th March, 2022
IA, Sr. PS
आदे श की ितिलिप अ ेिषत/Copy to: 1. अ पीलाथ /Appellant
2. थ /Respondent
3. आयकर आयु (अ पील)/CIT(A)
4. आयकर आयु /CIT
5. िवभागीय ितिनिध/DR
6. गाड$ फाईल/GF