The Commissioner Of Income Tax,Company Circle 3 (1)Chennai v. M/S.tamil Nadu Newsprint & Papers Limited

IN THE HIGH COURT OF JUDICATURE AT MADRASDATE: 26.07.2021 CORAM: THE HON'BLE MR.JUSTICE M.DURAISWAMYAND THE HON'BLE MRS.JUSTICE R.HEMALATHA T.C.A.No.517 of 2016 The Commissioner of Income Tax,Company Circle 3 (1)Chennai....Appellant/Appellant Vs. M/s.Tamil Nadu Newsprint & Papers Limited,No.67, TNPL Building,Mount Road, Guindy, Chennai – 600 032....Respondent/Respondent Appeal preferred under Section 260A of the Income Tax Act,1961, against the order of the Income Tax Appellate Tribunal,Madras, "B" Bench, dated 16.10.2015 in I.T.A.No.259/Mds/2015 forthe Assessment Year 2010-11 and against O/o Commissioner ofIncome Tax (Appeals)-III, 121, Mahatma Gandhi Road, Chennai – 34and made in ITA.No.1862/CIT(A)-III/2013-14 order dated26.09.2014 and against the O/o Assistant Commissioner & IncomeTax, Company Circle-III (1), Chennai and made inPAN/G.I.R.No.AAACT2935J dated 12.03.2013 for the Assessment year2010-2011. JUDGMENT (Judgment was delivered by M.DURAISWAMY, J.) Challenging the order passed in I.T.A.No.259/Mds/2015 inrespect of the Assessment Year 2010-11 on the file of the IncomeTax Appellate Tribunal, Chennai, "B" Bench, the Revenue hasfiled the above appeal. https://hcservices.ecourts.gov.in/hcservices/ 2.The assessee is a domestic Company engaged in the businessof manufacturing of newsprint and writing paper and generationof electricity. It filed its return of income for the AssessmentYear 2010-11 declaring an income of Rs.1,26,83,88,996/- withclaim of deduction under Section 80 IA. During the course ofassessment proceedings, the Assessing Officer denied thededuction under Section 80 IA on the profit on sale of carboncredit (incentive) as the income cannot be construed as incomederived from manufacturing activity for the purpose of claim ofdeduction under Section 80 IA and disallowed an amount ofRs.75,90,644/- and completed the assessment on 12.03.2015 underSection 143 (3). Aggrieved over the order passed by theAssessing Officer, the assessee preferred an appeal before theCommissioner of Income Tax (Appeals) and the Commissioner ofIncome Tax (Appeals) allowed the appeal. Challenging the orderpassed by the Commissioner of Income Tax (Appeals), the Revenuepreferred an appeal before the Income Tax Appellate Tribunal andthe Tribunal dismissed the appeal. Aggrieved over the orderpassed by the Income Tax Appellate Tribunal, the Revenue hasfiled the above appeal. 3.The above Tax Case Appeal was admitted on the followingsubstantial question of law:“Whether on the facts and in the circumstances ofthe case, the Tribunal was right in holding that theproceeds realized by the assessee on sale of CertifiedEmission Reduction Credit, which the assessee hadearned on the Clean Development Mechanism in its wingenergy operations, is a capital receipt and nottaxable?” 4.When the Tax Case Appeal is taken up for hearing,Mr.M.Swaminathan, learned Senior Standing Counsel assisted byMs.V.Pushpa, learned Junior Standing Counsel fairly submittedthat the question of law that arise for consideration in thisTax Case Appeal has already been decided against the Revenue andin favour of the assessee in the judgment reported in [2021] 279Taxman 405 (Madras) [Commissioner of Income Tax, Chennai Vs.M/s.Ambika Cotton Mills Ltd., 9A, Valluvar Street, SivanandaColony, Coimbatore – 641 012] wherein the Division Bench of thisCourt held as follows: “... 2.The appeal was admitted on 10.04.2014 on thefollowing substantial question of law:“Whether on the facts and circumstances of thecase, the Tribunal was right in holding that theproceeds realized by the assessee on sale ofCertified Emission Reduction Credit, which theassessee had earned on the Clean DevelopmentMechanisam in its wind energy operations, is a “... 2.The appeal was admitted on 10.04.2014 on thefollowing substantial question of law:“Whether on the facts and circumstances of thecase, the Tribunal was right in holding that theproceeds realized by the assessee on sale ofCertified Emission Reduction Credit, which theassessee had earned on the Clean DevelopmentMechanisam in its wind energy operations, is a capital receipt and not taxable?”3.When the appeal is taken up for hearing,Mrs.K.G.Usha Rani, learned Standing Counsel appearingfor the appellant/Revenue fairly submitted that thequestion of law involved in the present appeal iscovered by the decision of the Division Bench of thisCourt dated 19.01.2021 made in T.C.A.No.451 of 2018[S.P.Spinning Mills Pvt. Ltd., 1/147/104, CuddaloreMain Road, Kariapatti, Salem – 636 106 Vs. AssistantCommissioner of Income Tax, Circle – I(3), 3 GandhiRoad, Salem – 636 007] wherein the Division Bench heldas follows: “... 14.With regard to the disallowance on thededuction under Section 80IA of the Act, the CIT(A)noted the decision of the Chennai Tribunal relied onby the assessee in the case of Ambica Cotton MillsLtd., vs. DCIT [I.T.A.No.1836/Mds/2012, dated16.04.2013], wherein it was held that carbon creditreceipts cannot be considered as business income andit is a capital receipt. Hence, the assessee's claimunder Section 80IA of the Act is untenable, asdeduction under Section 80IA of the Act is allowableonly on profits and gains derived by an undertaking. ... 28.Insofar as substantial question of law no.4is concerned, it deals with carbon credit. Thequestion, as to the manner in which carbon creditreceipt has to be treated, has been considered byseveral High Courts and it has been held that thereceipt should be treated as a capital receipt. Inthis regard, it would be beneficial to refer to thedecision in the case of CIT vs. Subhash Kabini PowerCorporation Ltd., [(2016) 385 ITR 0592 (Karn.)]. Inthe said decision, the Karnataka High Court approvedthe view taken by the ITAT, Hyderabad Bench, whichdecision was upheld by the High Court of AndhraPradesh in the case of CIT vs. My Home Power Ltd.[(2014) 365 ITR 0082 (AP)], which was subsequentlyfollowed by the ITAT, Chennai and Jaipur Benches. Theoperative portion of the judgment reads as follows:- “11.The decision has been upheld by theHon’ble Andhra Pradesh High Court. This decisionhas been subsequently followed by the ITAT Chennaiand Jaipur Benches. There is no decision eitherfrom the Hon’ble Supreme Court or from the Hon’blejurisdictional High Court. These decisions indicatethat sale of carbon credit would result capitalreceipt which is not taxable. When we confrontedthe learned DR with regard to this position, it was contended that the position as on the day when theassessment order was passed, is to be seen and onthat day these orders were not available.Therefore, the assessee cannot claim the benefit ofthese orders. However, we do not concur with thisproposition of the learned CIT, because the FullBench of the Hon’ble Punjab & Haryana High Court inthe case of Aruna Luthra reported in 254 ITR 76 hasheld that a Court decide a dispute between theparties. The case can involve decision on facts. Itcan also involve a decision on point of law. Bothmay have bearing on the ultimate result of thecase. When a Court interprets a provision, itdecides as to what is the meaning and effect of thewords used by the Legislature, it is thedeclaration regarding the statute. In other wordsthe judgment declares as to what the legislaturehad 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 beconstrued. Therefore, he cannot plead that the viewtaken by the Tribunal and upheld by the Hon’bleAndhra Pradesh High Court could be considered as ifapplicable from the date of the decision. In thedecision only the position of the law as to howreceipts from sale of carbon credits are to betreated, has been explained. One of the argumentraised by the DR was that at this stage, theadditional ground ought not to be permitted to beraised. It is pertinent to mention here thatbasically, it is not a separate ground, it is alimb of arguments, which is affecting the ultimatetax liability of the assessee. The Hon’ble SupremeCourt in the case of NTPC Ltd (Supra) has held thatthe Tribunal had jurisdiction to examine a questionof law which arose from the fact as found by theIncome Tax authorities and having a bearing on thetax liability of the assessee. As far as the natureof the receipt from sale of carbon credit isconcerned, it is available from the assessmentstage. It is not disputed even by the learnedCommissioner, the dispute is, whether it has beenderived from the eligible industrial undertakingfor qualifying the grant of deduction u/s 80IA. Thelearned Commissioner felt that this receipt has notbeen derived from the industrial undertaking whichwill be eligible for grant of deduction u/s 80IAand the Assessing Officer committed an error inincluding the receipt in the eligible profit. Thosefacts are already on the record. It is to be seen, whether the receipt is of capital nature or of arevenue nature. Even in case the order of the CITis upheld, then, in law, it will affect thecomputation of income, ultimately because thereceipt will not be taxable, it will not come underthe ambit of computation of income. Simultaneouslyit will be excluded from the deduction u/s 80IA aswell as of the total income. The result will remainas it is. It is a revenue neutral case. Therefore,in view of the ratio laid down by the Hon’blejurisdictional High Court in the case of GopalaGowda (Supra), the second condition for takingaction u/s 263 does not exist. The assessment orderis not prejudicial to the interests of the Revenue.In view of the above discussion, we allow theappeal of the assessee and quash the impugned orderof the learned CIT passed u/s 263 of the Income TaxAct.” The aforesaid shows that, so far as the questionas to whether, the income by sale of carbon creditcould be termed as capital receipt or profit, isconcerned, the Tribunal has considered the decision ofthe Hyderabad Bench and it has further taken note ofthe fact that decision of the Tribunal of HyderabadBench was carried before the Andhra Pradesh High Courtand the said decision was not interfered with. TheTribunal, in its decision has also referred to thedecision of the Apex Court with regard to power underSection 263 of the Income Tax Act, 1961 (hereinafterreferred to as “the Act”) of the revisional authority. 4. In our view, the principal question, which mayarise is, as to whether by sale of carbon creditcapital receipt is generated or a profit out of thebusiness activity of the assessee. More or less, in asimilar case, the Apex Court had an occasion toconsider such an issue in the case of Commissioner ofIncome Tax v. Maheshwari Devi Jute Mills Ltd. [(1965)57 ITR 36 (SC)], wherein the question came up forconsideration before the Apex Court as to whether bysale of loom-hours, the amount received could be termedas capital receipt or the income out of business. Inthe said decision, the Apex Court held that the amountreceived out of sale of loom-hours can be termed ascapital receipt and not income out of business. 5.Subsequently, in a later decision of the ApexCourt, a question came up for consideration in the caseof M/s. Empire Jute Co. Ltd. v. Commissioner of IncomeTax [(1980) 4 SCC 25] the question which arose beforethe Apex Court was, if loom-hours are purchased by themanufacturing mills, whether it can be termed as capital expenditure or revenue expenditure. In the saiddecision, the earlier decision of the Apex Court in thecase of Maheswari Devi Jute Mills (supra) was alsorelied upon by the Revenue and after considering thesame, the Apex Court at paragraph Nos. 4 and 5 observedthus: “4. Now an expenditure incurred by an assesseecan qualify for deduction under Section 10(2) (xv)only if it is incurred wholly and exclusively forthe purpose of his business, but even if it fulfilsthis requirement, it is not enough; it must furtherbe of revenue as distinguished from capital nature.Here in the present case it was not contended onbehalf of the Revenue that the sum of Rs. 2,03,255was not laid out wholly and exclusively for thepurpose of the assessee’s business but the onlyargument was and this argument found favour with theHigh Court, that it represented capital expenditureand was hence not deductible under Section 10(2)(xv). The sole question which therefore arises fordetermination in the appeal is whether the sum ofRs. 2,03,255 paid by the assessee representedcapital expenditure or revenue expenditure. We shallhave to examine this question on principle butbefore we do so, we must refer to the decision ofthis Court in Maheshwari Devi Jute Mills case sincethat is the decision which weighed heavily with theHigh Court, in fact, compelled it to negative theclaim of the assessee and hold the expenditure to beon capital account. That was a converse case wherethe question was whether an amount received by theassessee for sale of loom hours was in the nature ofcapital receipt or revenue receipt. The view takenby this Court was that it was in the nature ofcapital receipt and hence not taxable. It wascontended on behalf of the Revenue, relying on thisdecision, that just as the amount realised for saleof loom hours was held to be capital receipt, soalso the amount paid for purchase of loom hours mustbe held to be of capital nature. But this argumentsuffers from a double fallacy. 5. In the first place it is not a universallytrue proposition that what may be capital receipt inthe hands of the payee must necessarily be capitalexpenditure in relation to the payer. The fact thata certain payment constitutes income or capitalreceipt in the hands of the recipient is notmaterial in determining whether the payment isrevenue or capital disbursement qua the prayer. Itwas felicitously pointed out by Macnaghten, J. in Racecourse Betting Control Board v. Wildthat a“payment may be a revenue payment from the point ofview of the payer and a capital payment from thepoint of view of the receiver and vice versa”.Therefore, the decision in Maheshwari Devi JuteMills case cannot be regarded as an authority forthe proposition that payment made by an assessee forpurchase of loom hours would be capital expenditure.Whether it is capital expenditure or revenueexpenditure would have to be determined havingregard to the nature of the transaction and otherrelevant factors.” Thereafter, the Apex Court whileconsidering the test to find out as to whether aparticular expenditure can be termed as capital orrevenue expenditure observed at paragraph Nos. 8 and9 as under: “8. The decided cases have, from time to time,evolved various tests for distinguishing betweencapital and revenue expenditure but no test isparamount or conclusive. There is no all embracingformula which can provide a ready solution to theproblem; no touchstone has been devised. Every casehas to be decided on its own facts keeping in mindthe broad picture of the whole operation in respectof which the expenditure has been incurred. But afew tests formulated by the courts may be referredto as they might help to arrive at a correctdecision of the controversy between the parties. Onecelebrated test is that laid down by Lord Cave,L.C., in Atherion v. British Insulated and HalsbyCables Ltd. where the learned law Lord stated: When an expenditure is made, not only once andfor all, but with a view to bringing into existencean asset or an advantage for the enduring benefit ofa trade, there is very good reason (in the absenceof special circumstances leading to an oppositeconclusion) for treating such an expenditure asproperly attributable not to revenue but to capital.This test, as the parenthetical clause shows,must yield where there are special circumstancesleading to a contrary conclusion and, as pointed outby Lord Radcliffe in Commissioner of Taxes v.Nchanga Consolidated Copper Mines Ltd., it would bemisleading to suppose that in all cases, securing abenefit for the business would be prima faciecapital expenditure “so long as the benefit is notso20/37https://www.mhc.tn.gov.in/judis/T.C.A.No.451 of 2018 transitory as to have noendurance at all”. There may be cases whereexpenditure, even if incurred for obtaining advantage of enduring benefit, may, nonetheless, beon revenue account and the test of enduring benefitmay break down. It is not every advantage ofenduring nature, acquired by an assessee that bringsthe case within the principle laid down in thistest. What is material to consider is the nature ofthe advantage in a commercial sense and it is onlywhere the advantage is in the capital field that theexpenditure would be disallowable on an applicationof this test. If the advantage consists merely infacilitating the assessee’s trading operations orenabling the management and conduct of theassessee’s business to be carried on moreefficiently or more profitably while leaving thefixed capital untouched, the expenditure would be onrevenue account, even though the advantage mayendure for an indefinite future. The test ofenduring benefit is therefore not a certain orconclusive test and it cannot be applied blindly andmechanically without regard to the particular factsand circumstances of a given case. But even if thistest were applied in the present case, it does notyield a conclusion in favour of the Revenue. Here,by purchase of loom hours no new asset has beencreated. There is no addition to or expansion of theprofit-making apparatus of the assessee. The income-earning machine remains what it was prior to thepurchase of loom hours. The assessee is merelyenabled to operate the profit-making structure for alonger number of hours. And this advantage isclearly not of an enduring nature. It is limited inits duration to six months and, moreover, theadditional working hours per week transferred to theassessee have to be utilised during the week andcannot be carried forward to the next week. It is,therefore, not possible to say that any advantage ofenduring benefit in the capital field was acquiredby the assessee in purchasing loom hours and thetest of enduring benefit cannot help the Revenue. 9.Another test which is often applied is the one basedon distinction between fixed and circulatingcapital. This test was applied by Lord Haldane inthe leading case of John Smith & Son v. Moore wherethe learned law Lord drew the distinction betweenfixed capital and circulation capital in words whichhave almost acquired the status of a definition. He said: Fixed capital (is) what the owner turns toprofit 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 canbe clearly referred to the acquisition of an assetwhich falls within one or the other of these twocategories, such a test would be a critical one. Butthis test also sometimes break down because thereare many forms of expenditure which do not falleasily within these two categories and notinfrequently, as pointed out by Lord Radcliffe inCommissioner of Taxes v. Nchanga Consolidated CopperMines Ltd., the line of demarcation is difficult todraw and leads to subtle distinctions between profitthat is made “out of” assets and profit that is made“upon” assets or “with” assets. Moreover, there maybe cases where expenditure, though referable to orin connection with fixed capital, is neverthelessallowable as revenue expenditure. An illustrativeexample would be of expenditure incurred inpreserving or maintaining capital assets. This testis therefore clearly not one of universalapplication. But even if we were to apply this test,it would not be possible to characterise the amountpaid for purchase of loom hours as capitalexpenditure, because acquisition of additional loomhours does not add at all to the fixed capital ofthe assessee. The permanent structure of which theincome is to be the produce or fruit remains thesame; it is not enlarged. We are not sure whetherloom hours can be regarded as part of circulatingcapital like labour, raw material, power etc., butit is clear beyond doubt that they are not part offixed capital and hence even the application of thistest does not compel the conclusion that the paymentfor purchase of loom hours was in the nature ofcapital expenditure.” After making the aforesaid observation, atparagraph No. 10, the Apex Court, on the basis of thefacts of the said case concluded as under: “Similarly, if payment has to be made for securingadditional power every week, such payment would also bepart of the cost of operating the profit-makingstructure and hence in the nature of revenueexpenditure, even though the effect of acquiringadditional power would be to augment the productivityof the profit-making structure. On the same analogypayment made for purchase of loom hours which wouldenable the assessee to operate the profit-makingstructure for a longer number of hours than thosepermitted under the working time agreement would alsobe part of the cost of performing the income-earning operations and hence revenue in character.” Accordingly, the payment made for purchase ofloom-hours by Jute Mill Company was held to be Revenueexpenditure. 6. At this stage, we may also refer to thedecision of the Andhra Pradesh High Court, which hasbeen relied upon by the Tribunal in the impugned order.More or less, identical question was raised and theAndhra Pradesh High Court in the case of Commissionerof Income Tax-IV v. My Home Power Ltd. [(2014) 46Taxmann.com 314 (Andhra Pradesh), at paragraph No. 3observed thus: “3. We have considered the aforesaid submissionand we are unable to accept the same, as the learnedTribunal has factually found that “Carbon Credit isnot an offshoot of business but an offshoot ofenvironmental concerns. No asset is generated in thecourse of business but it is generated due toenvironmental concerns. “We agree with this factual analysis as theassessee is carrying on the business of powergeneration. The Carbon Credit is not even directlylinked with power generation. On the sale of excessCarbon Credits the income was received and hence ascorrectly held by the Tribunal it is capital receiptand it cannot be business receipt or income. In thecircumstances, we do not find any element of law inthis appeal.” “3. We have considered the aforesaid submissionand we are unable to accept the same, as the learnedTribunal has factually found that “Carbon Credit isnot an offshoot of business but an offshoot ofenvironmental concerns. No asset is generated in thecourse of business but it is generated due toenvironmental concerns. “We agree with this factual analysis as theassessee is carrying on the business of powergeneration. The Carbon Credit is not even directlylinked with power generation. On the sale of excessCarbon Credits the income was received and hence ascorrectly held by the Tribunal it is capital receiptand it cannot be business receipt or income. In thecircumstances, we do not find any element of law inthis appeal.” The aforesaid shows that the Andhra Pradesh HighCourt has confirmed the view of the Tribunal thatCarbon Credit is not an offshoot of business, but anoffshoot of environmental concerns. No asset isgenerated in the course of business, but it isgenerated due to environmental concerns. It was alsofound that the carbon credit is not even directlylinked with the power generation and the income isreceived by sale of the excess carbon credits. It wasfound that the Tribunal has rightly held that it iscapital receipt and not business income. 7. As such, in our view, when the issue is alreadycovered by the decision of the Andhra Pradesh HighCourt, wherein the view taken by the Tribunal ofHyderabad Bench has been followed in the present case,one may say that no substantial question of law wouldarise for consideration.” ... 41.In the result, the tax case appeal is allowedto the extent indicated hereinbelow:- (i) Substantial question of law nos.1 and 2 areleft open and the issue with regard to the disallowance https://hcservices.ecourts.gov.in/hcservices/ under Section 14A of the Act read with Rule 8D of theRules is remanded to the Assessing Officer for freshdecision on merits and in accordance with law, afteropportunity to the assessee; (ii) Substantial question of law no.3 is notpressed by the assessee, as pursuant to the order ofremand passed by the Tribunal, the Assessing Officerhas allowed the relief to the assessee. Accordingly,this question is not required to be answered; and (iii) For the reasons assigned in the precedingparagraphs, substantial question of law no.4 isanswered in favour of the assessee. No costs.” 4.On a reading of the judgment cited supra, it isclear that the question of law involved in the presentappeal is covered by the said judgment. Hence,following the ratio laid down in the judgment dated19.01.2021 made in T.C.A.No.451 of 2018, the questionof law is decided against the Revenue and in favour ofthe assessee. Accordingly, the Tax Case Appeal isdismissed. No costs.” 5.Mr.R.Venkatnarayanan, learned counsel appearing for therespondent submitted that in view of the ratio laid down by theDivision Bench of this Court in the judgment reported in [2021]279 Taxman 405 (Madras) [Commissioner of Income Tax, Chennai Vs.M/s.Ambika Cotton Mills Ltd., 9A, Valluvar Street, SivanandaColony, Coimbatore – 641 012], cited supra, the appeal may bedismissed. 6.Having regard to the submissions made by the learnedcounsel on either side, following the ratio laid down in thejudgment reported in [2021] 279 Taxman 405 (Madras)[Commissioner of Income Tax, Chennai Vs. M/s.Ambika Cotton MillsLtd., 9A, Valluvar Street, Sivananda Colony, Coimbatore – 641012], cited supra, the question of law is decided against theRevenue and in favour of the assessee. Accordingly, the Tax CaseAppeal is dismissed. No costs. Sd/- Assistant Registrar(CS-VIII) //True Copy// Sub Assistant Registrar va To 1. The Income Tax Appellate Tribunal, Chennai, "B" Bench 2. The Commissioner of Income-Tax, (Appeals)-III 121, Mahatma Gandhi Road, Nungambakkam, Chennai – 34. 121, Mahatma Gandhi Road, Nungambakkam, Chennai – 34. 6.Having regard to the submissions made by the learnedcounsel on either side, following the ratio laid down in thejudgment reported in [2021] 279 Taxman 405 (Madras)[Commissioner of Income Tax, Chennai Vs. M/s.Ambika Cotton MillsLtd., 9A, Valluvar Street, Sivananda Colony, Coimbatore – 641012], cited supra, the question of law is decided against theRevenue and in favour of the assessee. Accordingly, the Tax CaseAppeal is dismissed. No costs. Sd/- Assistant Registrar(CS-VIII) //True Copy// Sub Assistant Registrar va To 1. The Income Tax Appellate Tribunal, Chennai, "B" Bench 2. The Commissioner of Income-Tax, (Appeals)-III 121, Mahatma Gandhi Road, Nungambakkam, Chennai – 34. 121, Mahatma Gandhi Road, Nungambakkam, Chennai – 34. 3. The Assistant Commissioner of Income-Tax, Company Circle – III, Chennai. Company Circle – III, Chennai. +1cc to M/s.M.Swaminathan, Advocate, S.R.No.36164+1cc to M/s.Subbaraya Aiyar Padmanabhan, Advocate, S.R.No.35741 T.C.A.No.517 of 2016 RR(CO)RGA(23/08/2021)