Whether In The Facts And Circumstances Ofthe Case And In Law, The Appellate Tribunal Iscorrect In Holding That Sale Of Carbon Credits Isto Be Considered As Capi v. Https://Hcservices.ecourts.gov.in/Hcservices

IN THE HIGH COURT OF JUDICATURE AT MADRASDATE: 29.04.2021 Commissioner of Income Tax,No.63, Race Course Road,Coimbatore. ... AppellantVs. M/s.VMD Mills Pvt. Ltd.,427-B, Pollachi Main Road,Kamanaikenpalayam, Palladam,Coimbatore – 641 658.... Respondent Appeal preferred under Section 260A of the Income Tax Act,1961, against the order of the Income Tax Appellate Tribunal,Madras, "C" Bench, dated 30.06.2015 in C.O.No.109/Mds/2014 inI.TA.No.2166/ Mds/2014 Assessment Year 2010-11, as against theorder of the Commissioner of Income Tax (Appeals)-II, Coimbatoredated 29/05/2014 made in I.T.Appeal No.01/13-14 PANNO.AAACV6929J for the Assessment Year 2010-2011 as against theorder of the Deputy Commissioner of Income Tax Company Circle,Tirupur dated 31/01/2013 made in PAN No. from theAssessment Year 2010-2011/ For Respondent : No appearance Challenging the order passed in C.O.No.109/Mds/2014 inI.TA.No.2166/Mds/2014 on the file of the Income Tax AppellateTribunal, Chennai, "C" Bench in respect of the Assessment Year2010-11, the Revenue has filed the above appeal. 2.The above appeal was admitted on the following substantialquestions of law: https://hcservices.ecourts.gov.in/hcservices/ “1)Whether on the facts and circumstances ofthe case, the Tribunal was right in holding thatthe proceeds realized by the assessee on sale ofCertified Emission Reduction Credit, which theassessee had earned on the Clean DevelopmentMechanism in its wind energy operations, is acapital receipt and not taxable? 2)Whether in the facts and circumstances ofthe case and in law, the Appellate Tribunal iscorrect in holding that sale of Carbon Credits isto be considered as Capital Receipt and notliable for tax under any head of income under theIncome Tax Act, 1961? 3)Whether on the facts and circumstances ofthe case and in law, Income Tax AppellateTribunal is correct in holding that there is nocost of acquisition or cost of production to getentitlement for the Carbon Credits, withoutappreciating that generation of Carbon Credits isintricately linked to the machinery and processesemployed in the production process by theassessee?” 3.When the appeal is taken up for hearing, Mr.T.R.SenthilKumar, learned Senior Standing Counsel appearing for theappellant/Revenue fairly submitted that the Division Bench ofthis Court in the judgment reported in [2021] 125 taxmann.com206 (Madras) [Commissioner of Income Tax, Chennai Vs. AmbikaCotton Mills Ltd.], by following the decision of a DivisionBench of this Court dated 19.01.2021 made in T.C.A.No.451 of2018 [S.P.Spinning Mills Pvt. Ltd., 1/147/104, Cuddalore MainRoad, Kariapatti, Salem – 636 106 Vs. Assistant Commissioner ofIncome Tax, Circle – I(3), 3 Gandhi Road, Salem – 636 007],decided the question of law against the Revenue and in favour ofthe assessee and dismissed the appeal. The relevant portion ofthe judgment reported in [2021] 125 taxmann.com 206 (Madras)[Commissioner of Income Tax, Chennai Vs. Ambika Cotton MillsLtd.] reads as follows: “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: ... “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 on bythe assessee in the case of Ambica Cotton Mills Ltd.,vs. DCIT [I.T.A.No.1836/Mds/2012, dated 16.04.2013],wherein it was held that carbon credit receipts cannotbe considered as business income and it is a capitalreceipt. Hence, the assessee's claim under Section 80IAof the Act is untenable, as deduction under Section80IA of the Act is allowable only on profits and gainsderived by an undertaking. ... 28.Insofar as substantial question of law no.4 isconcerned, it deals with carbon credit. The question,as to the manner in which carbon credit receipt has tobe treated, has been considered by several High Courtsand it has been held that the receipt should be treatedas a capital receipt. In this regard, it would bebeneficial to refer to the decision in the case of CITvs. Subhash Kabini Power Corporation Ltd., [(2016) 385ITR 0592 (Karn.)]. In the said decision, the KarnatakaHigh Court approved the view taken by the ITAT,Hyderabad Bench, which decision was upheld by the HighCourt of Andhra Pradesh in the case of CIT vs. My HomePower Ltd. [(2014) 365 ITR 0082 (AP)], which wassubsequently followed by the ITAT, Chennai and JaipurBenches. The operative portion of the judgment reads asfollows:- “11.The decision has been upheld by the Hon’bleAndhra Pradesh High Court. This decision has beensubsequently followed by the ITAT Chennai and JaipurBenches. There is no decision either from the Hon’bleSupreme Court or from the Hon’ble jurisdictional HighCourt. These decisions indicate that sale of carboncredit would result capital receipt which is nottaxable. When we confronted the learned DR with regardto this position, it was contended that the position ason the day when the assessment order was passed, is tobe seen and on that day these orders were notavailable. Therefore, the assessee cannot claim thebenefit of these orders. However, we do not concur withthis proposition of the learned CIT, because the FullBench of the Hon’ble Punjab & Haryana High Court in thecase of Aruna Luthra reported in 254 ITR 76 has heldthat a Court decide a dispute between the parties. Thecase can involve decision on facts. It can also involvea decision on point of law. Both may have bearing onthe ultimate result of the case. When a Courtinterprets a provision, it decides as to what is themeaning and effect of the words used by the Legislature, it is the declaration regarding thestatute. In other words the judgment declares as towhat the legislature had said at the time ofpromulgation of the law, the declaration is..........,this was the law, this is the law, this is how theprovision shall be construed. Therefore, he cannotplead that the view taken by the Tribunal and upheld bythe Hon’ble Andhra Pradesh High Court could beconsidered as if applicable from the date of thedecision. In the decision only the position of the lawas to how receipts from sale of carbon credits are tobe treated, has been explained. One of the argumentraised by the DR was that at this stage, the additionalground ought not to be permitted to be raised. It ispertinent to mention here that basically, it is not aseparate ground, it is a limb of arguments, which isaffecting 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 toexamine a question of law which arose from the fact asfound by the Income Tax authorities and having abearing on the tax liability of the assessee. As far asthe nature of the receipt from sale of carbon credit isconcerned, 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 theeligible industrial undertaking for qualifying thegrant of deduction u/s 80IA. The learned Commissionerfelt that this receipt has not been derived from theindustrial undertaking which will be eligible for grantof deduction u/s 80IA and the Assessing Officercommitted an error in including the receipt in theeligible profit. Those facts are already on the record.It is to be seen, whether the receipt is of capitalnature or of a revenue nature. Even in case the orderof the CIT is upheld, then, in law, it will affect thecomputation of income, ultimately because the receiptwill not be taxable, it will not come under the ambitof computation of income. Simultaneously it will beexcluded from the deduction u/s 80IA as well as of thetotal income. The result will remain as it is. It is arevenue neutral case. Therefore, in view of the ratiolaid down by the Hon’ble jurisdictional High Court inthe case of Gopala Gowda (Supra), the second conditionfor taking action u/s 263 does not exist. Theassessment order is not prejudicial to the interests ofthe Revenue. In view of the above discussion, we allowthe appeal 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. 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 ascapital 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 assessee canqualify for deduction under Section 10(2) (xv) only ifit is incurred wholly and exclusively for the purposeof his business, but even if it fulfils thisrequirement, it is not enough; it must further be ofrevenue as distinguished from capital nature. Here inthe present case it was not contended on behalf of theRevenue that the sum of Rs. 2,03,255 was not laid outwholly and exclusively for the purpose of theassessee’s business but the only argument was and thisargument found favour with the High Court, that itrepresented capital expenditure and was hence not “4. Now an expenditure incurred by an assessee canqualify for deduction under Section 10(2) (xv) only ifit is incurred wholly and exclusively for the purposeof his business, but even if it fulfils thisrequirement, it is not enough; it must further be ofrevenue as distinguished from capital nature. Here inthe present case it was not contended on behalf of theRevenue that the sum of Rs. 2,03,255 was not laid outwholly and exclusively for the purpose of theassessee’s business but the only argument was and thisargument found favour with the High Court, that itrepresented capital expenditure and was hence not deductible under Section 10(2) (xv). The sole questionwhich therefore arises for determination in the appealis whether the sum of Rs. 2,03,255 paid by the assesseerepresented capital expenditure or revenue expenditure.We shall have to examine this question on principle butbefore we do so, we must refer to the decision of thisCourt in Maheshwari Devi Jute Mills case since that isthe decision which weighed heavily with the High Court,in fact, compelled it to negative the claim of theassessee and hold the expenditure to be on capitalaccount. That was a converse case where the questionwas whether an amount received by the assessee for saleof loom hours was in the nature of capital receipt orrevenue receipt. The view taken by this Court was thatit was in the nature of capital receipt and hence nottaxable. It was contended on behalf of the Revenue,relying on this decision, that just as the amountrealised for sale of loom hours was held to be capitalreceipt, so also the amount paid for purchase of loomhours must be held to be of capital nature. But thisargument suffers from a double fallacy. 5. In the first place it is not a universally trueproposition that what may be capital receipt in thehands of the payee must necessarily be capitalexpenditure in relation to the payer. The fact that acertain payment constitutes income or capital receiptin the hands of the recipient is not material indetermining whether the payment is revenue or capitaldisbursement qua the prayer. It was felicitouslypointed out by Macnaghten, J. in Racecourse BettingControl Board v. Wildthat a “payment may be a revenuepayment from the point of view of the payer and acapital payment from the point of view of the receiverand vice versa”. Therefore, the decision in MaheshwariDevi Jute Mills case cannot be regarded as an authorityfor the proposition that payment made by an assesseefor purchase of loom hours would be capitalexpenditure. Whether it is capital expenditure orrevenue expenditure 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 and 9as 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 the problem; no touchstone has been devised. Every case hasto be decided on its own facts keeping in mind thebroad picture of the whole operation in respect ofwhich the expenditure has been incurred. But a fewtests formulated by the courts may be referred to asthey might help to arrive at a correct decision of thecontroversy between the parties. One celebrated test isthat laid down by Lord Cave, L.C., in Atherion v.British Insulated and Halsby Cables Ltd. where thelearned law Lord stated: problem; no touchstone has been devised. Every case hasto be decided on its own facts keeping in mind thebroad picture of the whole operation in respect ofwhich the expenditure has been incurred. But a fewtests formulated by the courts may be referred to asthey might help to arrive at a correct decision of thecontroversy between the parties. One celebrated test isthat laid down by Lord Cave, L.C., in Atherion v.British Insulated and Halsby Cables Ltd. where thelearned law Lord stated: When an expenditure is made, not only once and forall, but with a view to bringing into existence anasset or an advantage for the enduring benefit of atrade, there is very good reason (in the absence ofspecial 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, mustyield where there are special circumstances leading toa contrary conclusion and, as pointed out by LordRadcliffe in Commissioner of Taxes v. NchangaConsolidated Copper Mines Ltd., it would be misleadingto suppose that in all cases, securing a benefit forthe business would be prima facie capital expenditure“so long as the benefit is not so 20/37https://www.mhc.tn.gov.in/judis/ T.C.A.No.451 of 2018transitory as to have no endurance at all”. There maybe cases where expenditure, even if incurred forobtaining advantage of enduring benefit, may,nonetheless, be on revenue account and the test ofenduring benefit may break down. It is not everyadvantage of enduring nature, acquired by an assesseethat brings the case within the principle laid down inthis test. What is material to consider is the natureof the advantage in a commercial sense and it is onlywhere the advantage is in the capital field that theexpenditure would be disallowable on an application ofthis test. If the advantage consists merely infacilitating the assessee’s trading operations orenabling the management and conduct of the assessee’sbusiness to be carried on more efficiently or moreprofitably while leaving the fixed capital untouched,the expenditure would be on revenue account, eventhough the advantage may endure for an indefinitefuture. The test of enduring benefit is therefore not acertain or conclusive test and it cannot be appliedblindly and mechanically without regard to theparticular facts and circumstances of a given case. Buteven if this test were applied in the present case, itdoes not yield 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 merely enabledto operate the profit-making structure for a longernumber of hours. And this advantage is clearly not ofan enduring nature. It is limited in its duration tosix months and, moreover, the additional working hoursper week transferred to the assessee have to beutilised during the week and cannot be carried forwardto the next week. It is, therefore, not possible to saythat any advantage of enduring benefit in the capitalfield was acquired by the assessee in purchasing loomhours and the test of enduring benefit cannot help theRevenue. 9. Another test which is often applied is theone based on distinction between fixed and circulatingcapital. This test was applied by Lord Haldane in theleading case of John Smith & Son v. Moore where thelearned law Lord drew the distinction between fixedcapital and circulation capital in words which havealmost acquired the status of a definition. He said: Fixed capital (is) what the owner turns to profitby keeping it in his own possession; circulatingcapital (is) what he makes profit of by parting with itand letting it change masters. He said: Fixed capital (is) what the owner turns to profitby keeping it in his own possession; circulatingcapital (is) what he makes profit of by parting with itand letting it change masters. Now so long as the expenditure in question can beclearly referred to the acquisition of an asset whichfalls within one or the other of these two categories,such a test would be a critical one. But this test alsosometimes break down because there are many forms ofexpenditure which do not fall easily within these twocategories and not infrequently, as pointed out by LordRadcliffe in Commissioner of Taxes v. NchangaConsolidated Copper Mines Ltd., the line of demarcationis difficult to draw and leads to subtle distinctionsbetween profit that is made “out of” assets and profitthat is made “upon” assets or “with” assets. Moreover,there may be cases where expenditure, though referableto or in connection with fixed capital, is neverthelessallowable as revenue expenditure. An illustrativeexample would be of expenditure incurred in preservingor maintaining capital assets. This test is thereforeclearly not one of universal application. But even ifwe were to apply this test, it would not be possible tocharacterise the amount paid for purchase of loom hoursas capital expenditure, because acquisition ofadditional loom hours does not add at all to the fixedcapital of the assessee. The permanent structure of which the income is to be the produce or fruit remainsthe same; it is not enlarged. We are not sure whetherloom hours can be regarded as part of circulatingcapital like labour, raw material, power etc., but itis clear beyond doubt that they are not part of fixedcapital and hence even the application of this testdoes not compel the conclusion that the payment forpurchase of loom hours was in the nature of capitalexpenditure.” 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-earningoperations 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 is notan 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 the circumstances, 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 is notan 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 the circumstances, 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 disallowanceunder 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.” 4.Following the judgment dated 19.01.2021 made inT.C.A.No.451 of 2018 [S.P.Spinning Mills Pvt. Ltd., 1/147/104,Cuddalore Main Road, Kariapatti, Salem – 636 106 Vs. AssistantCommissioner of Income Tax, Circle – I(3), 3 Gandhi Road, Salem– 636 007] and the judgment reported in [2021] 125 taxmann.com206 (Madras) [Commissioner of Income Tax, Chennai Vs. AmbikaCotton Mills Ltd.], the questions of law are decided againstthe Revenue and in favour of the assessee. Accordingly, the TaxCase Appeal is dismissed. No costs. Sd/- Assistant Registrar(CS IX) //True Copy// Sub Assistant RegistrarvaTo1.The Income Tax Appellate Tribunal, Chennai, "C" Bench2.The Commissioner of Income Tax (Appeals)-II, Coimbatore.3.The Deputy Commissioner of Income Tax, Company Circle, Tirupur.+1cc to Mr.T.R.Senthilkumar, Advocate Sr.26410T.C.A.No.151 of 2016kv[co]srg 08/07/2021