The Commissioner Of Incometax, Company Circle 3(2), Chennai v. M/S.wescare (India) Ltd., Nowamalgamated With M/S.vaatasmart Ltd., Chennai-83

In the High Court of Judicature at Madras Coram The Honourable Mr.Justice T.S.SIVAGNANAMandThe Honourable Mr.Justice SATHI KUMAR SUKUMARA KURUP Tax Case Appeal No.434 of 2021 The Commissioner of IncomeTax, Company Circle 3(2), Chennai ...Appellant/Appellant Vs M/s.Wescare (India) Ltd., nowamalgamated with M/s.VaataSmart Ltd., Chennai-83....Respondent/Respondent APPEAL under Section 260A of the Income Tax Act, 1961against the order dated 12.4.2021 passed in ITA.No.509/Chny/2017on the file of the Income Tax Appellate Tribunal, Chennai 'A'Bench for the assessment year 2009-10. TCA 434 of 2021: Against the Order of the Commissioner of Income Tax,(Appeals)-II Chennai-34 dated 30/11/2016 in ITA.No.505/CIT(A)-II/2013/2014 and against the order of the Income Tax Office,Company Ward III(1), Chennai-34 dated 30/12/2011 in PANNo.AAACW2681A for the assessment year 2009-2010 For Appellant: Mr.M.Swaminathan, SSCassisted by Ms.V.Pushpa, JSC For Respondent : Ms.S.Sriniranjani for Mr.G.Baskar Judgment was delivered by T.S.SIVAGNANAM,J We have heard Mr.M.Swaminathan, learned Senior StandingCounsel appearing for the appellant – Revenue andMs.S.Sriniranjani, learned counsel appearing for Mr.G.Baskar,learned counsel accepting notice for the respondent. 2. This appeal filed by the Revenue under Section 260A ofthe Income Tax Act, 1961 (for short, the Act) is directedagainst the order dated 12.4.2021 passed in ITA.No.509/Chny/2017 https://hcservices.ecourts.gov.in/hcservices/ on the file of the Income Tax Appellate Tribunal, Chennai 'A'Bench (for brevity, the Tribunal) for the assessment year 2009-10. 3. The Revenue is on appeal before us challenging thecorrectness of the order by raising the following substantialquestion of law : “Whether,onthefactsandcircumstances of the case, the Tribunal wasright in holding that the proceeds realizedby the assessee on sale of certifiedemission reduction credit, which theassessee had earned on the clean developmentmechanism in its wind energy operations, isa capital receipt and not taxable ?” 4. It is not disputed before us by the learned counsel oneither side that the substantial question of law raised forconsideration in this appeal has been answered against theRevenue in the decision of this Court, to which, one of us(TSSJ) was a party, in case of S.P. Spinning Mills Pvt. Ltd. Vs.ACIT, Circle – 1(3), Salem [reported in (2021) 433 ITR 61]. 5. The relevant portions in the said judgment read asfollows : “28.Insofar as substantial question oflaw no.4 is concerned, it deals with carboncredit. The question, as to the manner inwhich carbon credit receipt has to betreated, has been considered by several HighCourts and it has been held that the receiptshould be treated as a capital receipt. Inthis regard, it would be beneficial to referto the decision in the case of CIT vs.Subhash Kabini Power Corporation Ltd.,[(2016) 385 ITR 0592 (Karn.)]. In the saiddecision, the Karnataka High Court approvedthe view taken by the ITAT, Hyderabad Bench,which decision was upheld by the High Courtof Andhra Pradesh in the case of CIT vs. MyHome Power Ltd. [(2014) 365 ITR 0082 (AP)],which was subsequently followed by the ITAT,Chennai and Jaipur Benches. The operativeportion of the judgment reads as follows:- “11. The decision has been upheld bythe Hon’ble Andhra Pradesh High Court. Thisdecision has been subsequently followed bythe ITAT Chennai and Jaipur Benches. There “11. The decision has been upheld bythe Hon’ble Andhra Pradesh High Court. Thisdecision has been subsequently followed bythe ITAT Chennai and Jaipur Benches. There is no decision either from the Hon’bleSupreme Court or from the Hon’blejurisdictional High Court. These decisionsindicate that sale of carbon credit wouldresult capital receipt which is not taxable.When we confronted the learned DR withregard to this position, it was contendedthat the position as on the day when theassessment order was passed, is to be seenand on that day these orders were notavailable. Therefore, the assessee cannotclaim the benefit of these orders. However,we do not concur with this proposition ofthe learned CIT, because the Full Bench ofthe Hon’ble Punjab & Haryana High Court inthe case of Aruna Luthra reported in 254 ITR76 has held that a Court decide a disputebetween the parties. The case can involvedecision on facts. It can also involve adecision on point of law. Both may havebearing on the ultimate result of the case.When a Court interprets a provision, itdecides as to what is the meaning and effectof the words used by the Legislature, it isthe declaration regarding the statute. Inother words the judgment declares as to whatthe legislature had said at the time ofpromulgation of the law, the declarationis.........., this was the law, this is thelaw, this is how the provision shall beconstrued. Therefore, he cannot plead thatthe view taken by the Tribunal and upheld bythe Hon’ble Andhra Pradesh High Court couldbe considered as if applicable from the dateof the decision. In the decision only theposition of the law as to how receipts fromsale of carbon credits are to be treated,has been explained. One of the argumentraised by the DR was that at this stage, theadditional ground ought not to be permittedto be raised. It is pertinent to mentionhere that basically, it is not a separateground, it is a limb of arguments, which isaffecting the ultimate tax liability of theassessee. The Hon’ble Supreme Court in thecase of NTPC Ltd (Supra) has held that theTribunal had jurisdiction to examine aquestion of law which arose from the fact asfound by the Income Tax authorities andhaving a bearing on the tax liability of the assessee. As far as the nature of thereceipt from sale of carbon credit isconcerned, it is available from theassessment stage. It is not disputed even bythe learned Commissioner, the dispute is,whether it has been derived from theeligibleindustrialundertakingforqualifying the grant of deduction u/s 80IA.The learned Commissioner felt that thisreceipt has not been derived from theindustrial undertaking which will beeligible for grant of deduction u/s 80IA andthe Assessing Officer committed an error inincluding the receipt in the eligibleprofit. Those facts are already on therecord. It is to be seen, whether thereceipt is of capital nature or of a revenuenature. Even in case the order of the CIT isupheld, then, in law, it will affect thecomputation of income, ultimately becausethe receipt will not be taxable, it will notcome under the ambit of computation ofincome. Simultaneously it will be excludedfrom the deduction u/s 80IA as well as ofthe total income. The result will remain asit is. It is a revenue neutral case.Therefore, in view of the ratio laid down bythe Hon’ble jurisdictional High Court in thecase of Gopala Gowda (Supra), the secondcondition for taking action u/s 263 does notexist. The assessment order is notprejudicial to the interests of the Revenue.In view of the above discussion, we allowthe appeal of the assessee and quash theimpugned order of the learned CIT passed u/s263 of the Income Tax Act.” The aforesaid shows that, so far as thequestion as to whether, the income by saleof carbon credit could be termed as capitalreceipt or profit, is concerned, theTribunal has considered the decision of theHyderabad Bench and it has further takennote of the fact that decision of theTribunal of Hyderabad Bench was carriedbefore the Andhra Pradesh High Court and thesaid decision was not interfered with. TheTribunal, in its decision has also referredto the decision of the Apex Court withregard to power under Section 263 of the Income Tax Act, 1961 (hereinafter referredto as “the Act”) of the revisional authority. 4. In our view, the principal question,which may arise is, as to whether by sale ofcarbon credit capital receipt is generatedor a profit out of the business activity ofthe assessee. More or less, in a similarcase, the Apex Court had an occasion toconsider such an issue in the case ofCommissioner of Income Tax v. MaheshwariDevi Jute Mills Ltd. [(1965) 57 ITR 36(SC)], wherein the question came up forconsideration before the Apex Court as towhether by sale of loom-hours, the amountreceived could be termed as capital receiptor the income out of business. In the saiddecision, the Apex Court held that theamount received out of sale of loom-hourscan be termed as capital receipt and notincome out of business. 5. Subsequently, in a later decision ofthe Apex Court, a question came up forconsideration in the case of M/s. EmpireJute Co. Ltd. v. Commissioner of Income Tax[(1980) 4 SCC 25] the question which arosebefore the Apex Court was, if loom-hours arepurchased by the manufacturing mills,whether it can be termed as capitalexpenditure or revenue expenditure. In thesaid decision, the earlier decision of theApex Court in the case of Maheswari DeviJute Mills (supra) was also relied upon bythe Revenue and after considering the same,the Apex Court at paragraph Nos. 4 and 5observed thus: “4. Now an expenditure incurred by anassessee can qualify for deduction underSection 10(2) (xv) only if it is incurredwholly and exclusively for the purpose ofhis business, but even if it fulfils thisrequirement, it is not enough; it mustfurther be of revenue as distinguished fromcapital nature. Here in the present case itwas not contended on behalf of the Revenuethat the sum of Rs. 2,03,255 was not laidout wholly and exclusively for the purposeof the assessee’s business but the only argument was and this argument found favourwith the High Court, that it representedcapital expenditure and was hence notdeductible under Section 10(2) (xv). Thesole question which therefore arises fordetermination in the appeal is whether thesum of Rs. 2,03,255 paid by the assesseerepresented capital expenditure or revenueexpenditure. We shall have to examine thisquestion on principle but before we do so,we must refer to the decision of this Courtin Maheshwari Devi Jute Mills case sincethat is the decision which weighed heavilywith the High Court, in fact, compelled itto negative the claim of the assessee andhold the expenditure to be on capitalaccount. That was a converse case where thequestion was whether an amount received bythe assessee for sale of loom hours was inthe nature of capital receipt or revenuereceipt. The view taken by this Court wasthat it was in the nature of capital receiptand hence not taxable. It was contended onbehalf of the Revenue, relying on thisdecision, that just as the amount realisedfor sale of loom hours was held to becapital receipt, so also the amount paid forpurchase of loom hours must be held to be ofcapital nature. But this argument suffersfrom a double fallacy. 5. In the first place it is not auniversally true proposition that what maybe capital receipt in the hands of the payeemust necessarily be capital expenditure inrelation to the payer. The fact that acertain payment constitutes income orcapital receipt in the hands of therecipient is not material in determiningwhether the payment is revenue or capitaldisbursement qua the prayer. It wasfelicitously pointed out by Macnaghten, J.in Racecourse Betting Control Board v.Wildthat a “payment may be a revenue paymentfrom the point of view of the payer and acapital payment from the point of view ofthe receiver and vice versa”. Therefore, thedecision in Maheshwari Devi Jute Mills casecannot be regarded as an authority for theproposition that payment made by an assessee for purchase of loom hours would be capitalexpenditure.Whetheritiscapitalexpenditure or revenue expenditure wouldhave to be determined having regard to thenature of the transaction and other relevantfactors.” Thereafter, the Apex Court whileconsidering the test to find out as towhether a particular expenditure can betermed as capital or revenue expenditureobserved at paragraph Nos. 8 and 9 as under: “8. The decided cases have, from timeto time, evolved various tests fordistinguishing between capital and revenueexpenditure but no test is paramount orconclusive. There is no all embracingformula which can provide a ready solutionto the problem; no touchstone has beendevised. Every case has to be decided on itsown facts keeping in mind the broad pictureof the whole operation in respect of whichthe expenditure has been incurred. But a fewtests formulated by the courts may bereferred to as they might help to arrive ata correct decision of the controversybetween the parties. One celebrated test isthat laid down by Lord Cave, L.C., inAtherion v. British Insulated and HalsbyCables Ltd. where the learned law Lordstated: When an expenditure is made, not onlyonce and for all, but with a view tobringing into existence an asset or anadvantage for the enduring benefit of atrade, there is very good reason (in theabsence of special circumstances leading toan opposite conclusion) for treating such anexpenditure as properly attributable not torevenue but to capital. This test, as the parenthetical clauseshows, must yield where there are specialcircumstances leading to a contraryconclusion and, as pointed out by LordRadcliffe in Commissioner of Taxes v.Nchanga Consolidated Copper Mines Ltd., itwould be misleading to suppose that in all When an expenditure is made, not onlyonce and for all, but with a view tobringing into existence an asset or anadvantage for the enduring benefit of atrade, there is very good reason (in theabsence of special circumstances leading toan opposite conclusion) for treating such anexpenditure as properly attributable not torevenue but to capital. This test, as the parenthetical clauseshows, must yield where there are specialcircumstances leading to a contraryconclusion and, as pointed out by LordRadcliffe in Commissioner of Taxes v.Nchanga Consolidated Copper Mines Ltd., itwould be misleading to suppose that in all cases, securing a benefit for the businesswould be prima facie capital expenditure “solong as the benefit is not so transitory asto have no endurance at all”. There may becases where expenditure, even if incurredfor obtaining advantage of enduring benefit,may, nonetheless, be on revenue account andthe test of enduring benefit may break down.It is not every advantage of enduringnature, acquired by an assessee that bringsthe case within the principle laid down inthis test. What is material to consider isthe nature of the advantage in a commercialsense and it is only where the advantage isin the capital field that the expenditurewould be disallowable on an application ofthis test. If the advantage consists merelyin facilitating the assessee’s tradingoperations or enabling the management andconduct of the assessee’s business to becarried on more efficiently or moreprofitably while leaving the fixed capitaluntouched, the expenditure would be onrevenue account, even though the advantagemay endure for an indefinite future. Thetest of enduring benefit is therefore not acertain or conclusive test and it cannot beapplied blindly and mechanically withoutregard to the particular facts andcircumstances of a given case. But even ifthis test were applied in the present case,it does not yield a conclusion in favour ofthe Revenue. Here, by purchase of loom hoursno new asset has been created. There is noaddition to or expansion of the profit-making apparatus of the assessee. Theincome-earning machine remains what it wasprior to the purchase of loom hours. Theassessee is merely enabled to operate theprofit-making structure for a longer numberof hours. And this advantage is clearly notof an enduring nature. It is limited in itsduration to six months and, moreover, theadditionalworkinghoursperweektransferred to the assessee have to beutilised during the week and cannot becarried forward to the next week. It is,therefore, not possible to say that anyadvantage of enduring benefit in the capitalfield was acquired by the assessee in purchasing loom hours and the test ofenduring benefit cannot help the Revenue. 9. Another test which is often appliedis the one based on distinction betweenfixed and circulating capital. This test wasapplied by Lord Haldane in the leading caseof John Smith & Son v. Moore where thelearned law Lord drew the distinctionbetween fixed capital and circulationcapital in words which have almost acquiredthe status of a definition. He said: Fixed capital (is) what the owner turnsto profit by keeping it in his ownpossession; circulating capital (is) what hemakes profit of by parting with it andletting it change masters. purchasing loom hours and the test ofenduring benefit cannot help the Revenue. 9. Another test which is often appliedis the one based on distinction betweenfixed and circulating capital. This test wasapplied by Lord Haldane in the leading caseof John Smith & Son v. Moore where thelearned law Lord drew the distinctionbetween fixed capital and circulationcapital in words which have almost acquiredthe status of a definition. He said: Fixed capital (is) what the owner turnsto profit by keeping it in his ownpossession; circulating capital (is) what hemakes profit of by parting with it andletting it change masters. Now so long as the expenditure inquestion can be clearly referred to theacquisition of an asset which falls withinone or the other of these two categories,such a test would be a critical one. Butthis test also sometimes break down becausethere are many forms of expenditure which donot fall easily within these two categoriesand not infrequently, as pointed out by LordRadcliffe in Commissioner of Taxes v.Nchanga Consolidated Copper Mines Ltd., theline of demarcation is difficult to draw andleads to subtle distinctions between profitthat is made “out of” assets and profit thatis made “upon” assets or “with” assets.Moreover, there may be cases whereexpenditure, though referable to or inconnectionwithfixedcapital,isneverthelessallowableasrevenueexpenditure. An illustrative example wouldbe of expenditure incurred in preserving ormaintaining capital assets. This test istherefore clearly not one of universalapplication. But even if we were to applythis test, it would not be possible tocharacterise the amount paid for purchase ofloom hours as capital expenditure, becauseacquisition of additional loom hours doesnot add at all to the fixed capital of theassessee. The permanent structure of which the income is to be the produce or fruitremains the same; it is not enlarged. We arenot sure whether loom hours can be regardedas part of circulating capital like labour,raw material, power etc., but it is clearbeyond doubt that they are not part of fixedcapital and hence even the application ofthis test does not compel the conclusionthat the payment for purchase of loom hourswas in the nature of capital expenditure.” After making the aforesaid observation,at paragraph No. 10, the Apex Court, on thebasis of the facts of the said caseconcluded as under: “Similarly, if payment has to be madefor securing additional power every week,such payment would also be part of the costof operating the profit-making structure andhence in the nature of revenue expenditure,even though the effect of acquiringadditional power would be to augment theproductivity of the profit-making structure.On the same analogy payment made forpurchase of loom hours which would enablethe assessee to operate the profit-makingstructure for a longer number of hours thanthose permitted under the working timeagreement would also be part of the cost ofperforming the income-earning operations andhence revenue in character.” Accordingly, the payment made forpurchase of loom-hours by Jute Mill Companywas held to be Revenue expenditure. 6. At this stage, we may also refer tothe decision of the Andhra Pradesh HighCourt, which has been relied upon by theTribunal in the impugned order. More orless, identical question was raised and theAndhra Pradesh High Court in the case ofCommissioner of Income Tax-IV v. My HomePower Ltd. [(2014) 46 Taxmann.com 314(Andhra Pradesh), at paragraph No. 3observed thus: “3. We have considered the aforesaidsubmission and we are unable to accept the same, as the learned Tribunal has factuallyfound that “Carbon Credit is not an offshootof business but an offshoot of environmentalconcerns. No asset is generated in thecourse of business but it is generated dueto environmental concerns. 6. At this stage, we may also refer tothe decision of the Andhra Pradesh HighCourt, which has been relied upon by theTribunal in the impugned order. More orless, identical question was raised and theAndhra Pradesh High Court in the case ofCommissioner of Income Tax-IV v. My HomePower Ltd. [(2014) 46 Taxmann.com 314(Andhra Pradesh), at paragraph No. 3observed thus: “3. We have considered the aforesaidsubmission and we are unable to accept the same, as the learned Tribunal has factuallyfound that “Carbon Credit is not an offshootof business but an offshoot of environmentalconcerns. No asset is generated in thecourse of business but it is generated dueto environmental concerns. “We agree with this factual analysis asthe assessee is carrying on the business ofpower generation. The Carbon Credit is noteven directly linked with power generation.On the sale of excess Carbon Credits theincome was received and hence as correctlyheld by the Tribunal it is capital receiptand it cannot be business receipt or income.In the circumstances, we do not find anyelement of law in this appeal.” The aforesaid shows that the AndhraPradesh High Court has confirmed the view ofthe Tribunal that Carbon Credit is not anoffshoot of business, but an offshoot ofenvironmental concerns. No asset isgenerated in the course of business, but itis generated due to environmental concerns.It was also found that the carbon credit isnot even directly linked with the powergeneration and the income is received bysale of the excess carbon credits. It wasfound that the Tribunal has rightly heldthat it is capital receipt and not businessincome. 7. As such, in our view, when the issueis already covered by the decision of theAndhra Pradesh High Court, wherein the viewtaken by the Tribunal of Hyderabad Bench hasbeen followed in the present case, one maysay that no substantial question of lawwould arise for consideration.” 29.The Hon'ble Division Bench of thisCourt in the case of PCIT vs. Arun TextilesPvt. Ltd., [T.C.A.No.606 of 2016, dated29.08.2016], after referring to the decisionin My Home Power Ltd., (supra), dismissedthe appeal filed by the Revenue andconfirmed the order passed by the ITATholding that sale of carbon credits has tobe considered as capital receipt and accordingly, it is not taxable. 30.The argument of Ms.V.Pushpa, learnedSenior Standing Counsel is by referring tothe substantial questions of law framed bythe assessee and it is submitted that if thereceipts from sale of carbon credit has tobe treated as a capital receipt, then theassessee could not have claimed it as adeduction under Section 80IA of the Act andif the substantial question of law as framedby the assessee is to be answered, it shouldbe answered against the assessee.” 6. Thus, following the said decision, the above tax caseappeal is dismissed and the substantial question of law raisedis answered against the Revenue. No costs. Sd/- Assistant Registrar(CS III) //True Copy// Sub Assistant Registrar RS To 1. The Income Tax Appellate Tribunal, Chennai 'A' Bench 2. The Commissioner of Income Tax, Company Circle 3(2), Chennai 3. The Commissioner of Income Tax, (Appeals)-II Chennai-34 4. The Income Tax Office, Company ward III(1), Chennai-34 +1cc to Mr.M.Swaminathan, Advocate, S.R.No.44849 +1cc to Mr.G.Baskar, Advocate, S.R.No.44439 TCA.No.434 of 2021 AJS(CO)CT(20/09/2021)