Madras High Court
Commissioner Of Income Tax vs M/S.Vedha Spinning Mills Private ... on 29 April, 2021
T.C.A.Nos.10, 11, 21, 158, 161,
438, 439, 304, 332 of 2015,
724, 476, 493 of 2016, 554, 647 of 2014
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATE: 29.04.2021
CORAM:
THE HON'BLE MR. JUSTICE M.DURAISWAMY
AND
THE HON'BLE MRS.JUSTICE R.HEMALATHA
T.C.A.Nos.10, 11, 21, 158, 161,
438, 439, 304, 332 of 2015,
724, 476, 493 of 2016, 554, 647 of 2014
T.C.A.Nos.10 & 11 of 2015:
Commissioner of Income Tax,
Company Circle – I,
Tirupur. ... Appellant in TCA.10 & 11/2015
Vs.
M/s.Vedha Spinning Mills Private Limited,
207/86, Mangalam Road,
Karuvampalayam,
Tirupur – 641 601. ... Respondent in TCA.10/2015
M/s.Sri Shanmugavel Mills Private Limited,
207/86, Mangalam Road,
Karuvampalayam,
Tirupur – 641 601. ... Respondent in TCA.11/2015
T.C.A.No.10 of 2015 preferred under Section 260A of the Income
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T.C.A.Nos.10, 11, 21, 158, 161,
438, 439, 304, 332 of 2015,
724, 476, 493 of 2016, 554, 647 of 2014
Tax Act, 1961, against the order of the Income Tax Appellate Tribunal,
Madras, "A" Bench, dated 18.08.2014 in I.T.A.No.630/Mds/2013
Assessment Year 2009-10.
T.C.A.No.11 of 2015 preferred under Section 260A of the Income
Tax Act, 1961, against the order of the Income Tax Appellate Tribunal,
Madras, "D" Bench, dated 18.08.2014 in I.T.A.No.619/Mds/2013
Assessment Year 2009-10.
T.C.A.No.332 of 2015:
Commissioner of Income Tax,
No.63, Race Course Road,
Coimbatore. ... Appellant
Vs.
M/s.C.N.V. Textiles Pvt. Ltd.,
No.2/1, Avinashi Road,
Chinnampalayam,
Coimbatore – 641 062. ... 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 21.11.2014 in I.T.A.No.746/Mds/ 2014 Assessment Year
2010-11.
T.C.A.Nos.438 & 439 of 2015:
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T.C.A.Nos.10, 11, 21, 158, 161,
438, 439, 304, 332 of 2015,
724, 476, 493 of 2016, 554, 647 of 2014
Commissioner of Income Tax,
No.63, Race Course Road,
Coimbatore. ... Appellant
Vs.
M/s.Best Corporation Ltd.,
No.89/2, Best Industrial Estate,
Avinashi Road, Tirupur – 641 603. ... Respondent
T.C.A.No.438 of 2015 preferred under Section 260A of the Income
Tax Act, 1961, against the order of the Income Tax Appellate Tribunal,
Madras, "B" Bench, dated 21.11.2014 in I.T.A.No.534/Mds/ 2014
Assessment Year 2009-10.
T.C.A.No.439 of 2015 preferred under Section 260A of the Income
Tax Act, 1961, against the order of the Income Tax Appellate Tribunal,
Madras, "B" Bench, dated 10.09.2014 in I.T.A.No.536/Mds/ 2014
Assessment Year 2010-11.
T.C.A.No.724 of 2016:
Principal Commissioner of Income Tax – III,
63, Race Course Road,
Coimbatore – 641 018. ... Appellant
Vs.
P.K.Ganeshwar ... Respondent
Appeal preferred under Section 260A of the Income Tax Act, 1961,
against the order of the Income Tax Appellate Tribunal, Madras, "D"
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T.C.A.Nos.10, 11, 21, 158, 161,
438, 439, 304, 332 of 2015,
724, 476, 493 of 2016, 554, 647 of 2014
Bench, dated 01.04.2016 in I.T.A.No.1583/Mds/2015 Assessment Year
2009-10.
T.C.A.No.304 of 2015:
Commissioner of Income Tax,
No.63, Race Course Road, Coimbatore. ... Appellant
Vs.
M/s.Salona Cotspin Ltd.,
No.9, Rasmalinga Nagar 4th Cross,
Saibaba Colony,
Coimbatore – 641 011. ... Respondent
Appeal preferred under Section 260A of the Income Tax Act, 1961,
against the order of the Income Tax Appellate Tribunal, Madras, "A"
Bench, dated 12.12.2014 in I.T.A.No.2223/Mds/2014 Assessment Year
2010-11.
T.C.A.No.158 of 2015:
Commissioner of Income Tax,
No.63, Race Course Road,
Coimbatore. ... Appellant
Vs.
M/s.Eastman Spinning Mills Pvt. Ltd.,
No.16-17, Kumar Nagar South 2nd Street,
Tirupur – 641 603. ... 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 09.10.2014 in I.T.A.No.352/Mds/2014 Assessment Year
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T.C.A.Nos.10, 11, 21, 158, 161,
438, 439, 304, 332 of 2015,
724, 476, 493 of 2016, 554, 647 of 2014
2009-10.
T.C.A.No.161 of 2015:
Commissioner of Income Tax,
No.63, Race Course Road, Coimbatore. ... Appellant
Vs.
M/s.India Dyeing Mills Pvt. Ltd.,
No.16-17, Kumar Nagar South 2nd Street,
Tirupur – 641 603. ... 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 08.10.2014 in I.T.A.No.498/Mds/2014 Assessment Year
2009-10.
T.C.A.No.21 of 2015:
Commissioner of Income Tax,
Company Circle,
Tirupur. ... Appellant
Vs.
Eastman Spinning Mills (P) Limited,
No.16, 17, Kumar Nagar South 2nd Street,
Tirupur – 641 603. ... 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 31.07.2014 in I.T.A.No.1428/Mds/2014 Assessment Year
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T.C.A.Nos.10, 11, 21, 158, 161,
438, 439, 304, 332 of 2015,
724, 476, 493 of 2016, 554, 647 of 2014
2010-11.
T.C.A.No.476 of 2016:
Commissioner of Income Tax - I,
No.63, Race Course Road,
Coimbatore. ... Appellant
Vs.
M/s.Ambika Cotton Mills Ltd.,
9-A, Valluvar Street, Sivanada colony,
Coimbatore – 641 012. ... Respondent
Appeal preferred under Section 260A of the Income Tax Act, 1961,
against the order of the Income Tax Appellate Tribunal, Madras, "A"
Bench, dated 29.10.2015 in I.T.A.No.1931/Mds/2013 Assessment Year
2010-11.
T.C.A.No.493 of 2016:
Principal Commissioner of Income Tax - 3,
No.63, Race Course Road,
Coimbatore. ... Appellant
Vs.
M/s.India Dyeing Mills Pvt. Ltd.,
10, 12, 2nd Street,
Kumar Nagar South, Tirupur – 641 603. ... Respondent
Appeal preferred under Section 260A of the Income Tax Act, 1961,
against the order of the Income Tax Appellate Tribunal, Madras, "D"
Bench, dated 31.12.2015 in I.T.A.No.1979/Mds/2014 Assessment Year
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T.C.A.Nos.10, 11, 21, 158, 161,
438, 439, 304, 332 of 2015,
724, 476, 493 of 2016, 554, 647 of 2014
2010-11.
T.C.A.No.554 of 2014:
Commissioner of Income Tax,
Coimbatore. ... Appellant
Vs.
M/s.Sudhan Spinning Mills Pvt. Ltd.,
No.207/86, Mangalam Road,
Karuvampalayam, Tirupur. ... Respondent
Appeal preferred under Section 260A of the Income Tax Act, 1961,
against the order of the Income Tax Appellate Tribunal, Madras, "D"
Bench, dated 30.08.2013 in I.T.A.No.616/Mds/2013 Assessment Year
2009-10.
T.C.A.No.647 of 2014:
Commissioner of Income Tax,
Coimbatore. ... Appellant
Vs.
M/s.Sri Velayudhasamy Spinning Mills (P) Ltd.,
207/86, Mangalam Road,
Karuvampalayam, Tirupur – 652 531. ...
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 12.06.2013 in I.T.A.No.582/Mds/2013 Assessment Year
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T.C.A.Nos.10, 11, 21, 158, 161,
438, 439, 304, 332 of 2015,
724, 476, 493 of 2016, 554, 647 of 2014
2009-10.
For Appellants : Mr.T.R.Senthil Kumar,
(in all TCAs) Senior Standing Counsel
assisted by Mrs.K.G.Usha Rani,
Standing Counsel
For Respondent : Mr.R.Senniappan (TCA.Nos.158, 161,
21/2015, 493/2016)
For Respondent : Mr.R.Sivaraman (TCA.Nos.10 & 11/2015,
554/2014)
For Respondent : Mr.R.Kumar (TCA.Nos.332, 438, 439/2015,
724/2016)
For Respondent : Mr.M.P.Senthil Kumar (TCA.Nos.304/2015,
476/2016)
no appearance (TCA.No.647/2014)
COMMON JUDGMENT
(Judgment was delivered by M.DURAISWAMY, J.)
Challenging the order passed in I.T.A.No.630/Mds/2013 on the file
of the Income Tax Appellate Tribunal, Chennai, "A" Bench in respect of
the Assessment Year 2009-10, the Revenue has filed the appeal in
T.C.A.No.10 of 2015.
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T.C.A.Nos.10, 11, 21, 158, 161,
438, 439, 304, 332 of 2015,
724, 476, 493 of 2016, 554, 647 of 2014
2.Challenging the order passed in I.T.A.No.746/Mds/2014 on the
file of the Income Tax Appellate Tribunal, Chennai, "B" Bench in respect
of the Assessment Year 2010-11, the Revenue has filed the appeal in
T.C.A.No.332 of 2015.
3.Challenging the orders passed in I.T.A.Nos.534 & 536/Mds/
2014 on the file of the Income Tax Appellate Tribunal, Chennai, "B"
Bench in respect of the Assessment Year 2009-10 & 2010-11, the
Revenue has filed the appeals in T.C.A.Nos.438 & 439 of 2015.
4.Challenging the orders passed in I.T.A.Nos.619/Mds/2013,
1583/Mds/2015, 616/Mds/2013 on the file of the Income Tax Appellate
Tribunal, Chennai, "D" Bench in respect of the Assessment Year 2009-
10, the Revenue has filed the appeal in T.C.A.No.11 of 2015, 724 of
2016, 554 of 2014.
5.Challenging the orders passed in I.T.A.Nos.2223 & 1428/Mds/
2014 on the file of the Income Tax Appellate Tribunal, Chennai, "A"
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T.C.A.Nos.10, 11, 21, 158, 161,
438, 439, 304, 332 of 2015,
724, 476, 493 of 2016, 554, 647 of 2014
Bench in respect of the Assessment Year 2010-11, the Revenue has filed
the appeal in T.C.A.Nos.304 & 21 of 2015.
6.Challenging the orders passed in .T.A.Nos.352 & 498/Mds/2014,
582/Mds/2013 on the file of the Income Tax Appellate Tribunal, Chennai,
"B" Bench in respect of the Assessment Year 2009-10, the Revenue has
filed the appeal in T.C.A.Nos.158, 161 of 2015 & 647 of 2014.
7.Challenging the order passed in I.T.A.No.1931/Mds/2013 on the
file of the Income Tax Appellate Tribunal, Chennai, "A" Bench in respect
of the Assessment Year 2010-11, the Revenue has filed the appeal in
T.C.A.Nos.476 of 2016.
8.Challenging the order passed in I.T.A.No.1979/Mds/2014 on the
file of the Income Tax Appellate Tribunal, Chennai, "D" Bench in respect
of the Assessment Year 2010-11, the Revenue has filed the appeal in
T.C.A.Nos.493 of 2016.
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T.C.A.Nos.10, 11, 21, 158, 161,
438, 439, 304, 332 of 2015,
724, 476, 493 of 2016, 554, 647 of 2014
9.The Tax Case Appeals in T.C.A.Nos.10, 11, 438, 304, 21 of
2015, 554 & 647 of 2014 were admitted on the following substantial
question of law:
“Whether on the facts and in the circumstances
of the case, the Income Tax Appellate Tribunal was
right in holding that the proceeds realized by the
assessee on sale of Certified Emission Reduction
Credit, which the assessee had earned on the Clean
Development Mechanism in its wind energy
operations, is a capital receipt and not taxable?”
9.1.The Tax Case Appeal in T.C.A.No.332 of 2015 was admitted
on the following substantial questions of law:
“1)Whether on the facts and in the
circumstances of the case, the Income Tax Appellate
Tribunal was right in holding that the proceeds
realized by the assessee on sale of Certified Emission
Reduction Credit, which the assessee had earned on
the Clean Development Mechanism in its wind
energy operations, is a capital receipt and not
taxable?
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724, 476, 493 of 2016, 554, 647 of 2014
2)Whether in the facts and circumstances of
the case and in law, the Appellate Tribunal is correct
in holding that sale of Carbon Credits is to be
considered as Capital Receipt and not liable for tax
under any head of income under the Income Tax Act,
1961?
3)Whether in the facts and circumstances of
the case and in law, Income Tax Appellate Tribunal is
correct in holding that there is no cost of acquisition
or cost of production to get entitlement for the
Carbon Credits, without appreciating that generation
of Carbon Credits is intricately linked to the
machinery and processes employed in the production
process by the assessee?
4)Whether in the facts and circumstances of
the case and in law, the Income Tax Appellate
Tribunal is correct in holding that the Technology
Up-gradation Fund (TUF) subsidy and compensation
receivable on non-performance of the Energy
Generation are capital receipts and not liable for tax
under any head of income under Income Tax Act,
1961?”
9.2.The appellant/Revenue has raised the following substantial
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questions of law in T.C.A.Nos.724, 476, 493 of 2016, 158, 161 of 2015:
“1)Whether on the facts and circumstances of
the case, the Tribunal was right in holding that the
proceeds realized by the assessee on sale of Certified
Emission Reduction Credit, which the assessee had
earned on the Clean Development Mechanism in its
wind energy operations, is a capital receipt and not
taxable?
2)Whether in the facts and circumstances of
the case and in law, the Appellate Tribunal is correct
in holding that sale of Carbon Credits is to be
considered as Capital Receipt and not liable for tax
under any head of income under the Income Tax Act,
1961?
3)Whether in the facts and circumstances of
the case and in law, Income Tax Appellate Tribunal is
correct in holding that there is no cost of acquisition
or cost of production to get entitlement for the
Carbon Credits, without appreciating that generation
of Carbon Credits is intricately linked to the
machinery and processes employed in the production
process by the assessee?
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T.C.A.Nos.10, 11, 21, 158, 161,
438, 439, 304, 332 of 2015,
724, 476, 493 of 2016, 554, 647 of 2014
10.When the appeal is taken up for hearing, Mr.T.R.Senthil
Kumar, learned Senior Standing Counsel appearing for the
appellant/Revenue fairly submitted that the Division Bench of this Court
in the judgment reported in [2021] 125 taxmann.com 206 (Madras)
[Commissioner of Income Tax, Chennai Vs. Ambika Cotton Mills
Ltd.], by following the decision of a Division Bench of this Court dated
19.01.2021 made in T.C.A.No.451 of 2018 [S.P.Spinning Mills Pvt.
Ltd., 1/147/104, Cuddalore Main Road, Kariapatti, Salem – 636 106
Vs. Assistant Commissioner of Income Tax, Circle – I(3), 3 Gandhi
Road, Salem – 636 007], decided the question of law against the
Revenue and in favour of the assessee and dismissed the appeal. The
relevant portion of the judgment reported in [2021] 125 taxmann.com
206 (Madras) [Commissioner of Income Tax, Chennai Vs. Ambika
Cotton Mills Ltd.] reads as follows:
“3.When the appeal is taken up for hearing,
Mrs.K.G.Usha Rani, learned Standing Counsel appearing for
the appellant/Revenue fairly submitted that the question of
law involved in the present appeal is covered by the decision
of the Division Bench of this Court dated 19.01.2021 made
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T.C.A.Nos.10, 11, 21, 158, 161,
438, 439, 304, 332 of 2015,
724, 476, 493 of 2016, 554, 647 of 2014
in T.C.A.No.451 of 2018 [S.P.Spinning Mills Pvt. Ltd.,
1/147/104, Cuddalore Main Road, Kariapatti, Salem – 636
106 Vs. Assistant Commissioner of Income Tax, Circle –
I(3), 3 Gandhi Road, Salem – 636 007] wherein the
Division Bench held as follows:
...
14.With regard to the disallowance on the deduction
under Section 80IA of the Act, the CIT(A) noted the decision
of the Chennai Tribunal relied on by the 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 cannot be considered as
business income and it is a capital receipt. Hence, the
assessee's claim under Section 80IA of the Act is untenable,
as deduction under Section 80IA of the Act is allowable only
on profits and gains derived by an undertaking.
...
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
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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
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724, 476, 493 of 2016, 554, 647 of 2014
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 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
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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
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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
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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 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
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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
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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
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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., in
Atherion v. British Insulated and 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
20/37 https://www.mhc.tn.gov.in/judis/ T.C.A.No.451 of
2018 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
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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
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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 which do
not fall easily within these two categories and not
infrequently, as pointed out by Lord Radcliffe in
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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
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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
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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
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
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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.”
...
41.In the result, the tax case appeal is allowed to the
extent indicated hereinbelow:-
(i) Substantial question of law nos.1 and 2 are left
open and the issue with regard to the disallowance under
Section 14A of the Act read with Rule 8D of the Rules is
remanded to the Assessing Officer for fresh decision on
merits and in accordance with law, after opportunity to the
assessee;
(ii) Substantial question of law no.3 is not pressed by
the assessee, as pursuant to the order of remand passed by
the Tribunal, the Assessing Officer has allowed the relief to
the assessee. Accordingly, this question is not required to be
answered; and
(iii) For the reasons assigned in the preceding
paragraphs, substantial question of law no.4 is answered in
favour of the assessee. No costs.
4.On a reading of the judgment cited supra, it is clear
that the question of law involved in the present appeal is
covered by the said judgment. Hence, following the ratio laid
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down in the judgment dated 19.01.2021 made in
T.C.A.No.451 of 2018, the question of law is decided against
the Revenue and in favour of the assessee. Accordingly, the
Tax Case Appeal is dismissed. No costs.”
11.Following the judgment dated 19.01.2021 made in
T.C.A.No.451 of 2018 [S.P.Spinning Mills Pvt. Ltd., 1/147/104,
Cuddalore Main Road, Kariapatti, Salem – 636 106 Vs. Assistant
Commissioner of Income Tax, Circle – I(3), 3 Gandhi Road, Salem –
636 007] and the judgment reported in [2021] 125 taxmann.com 206
(Madras) [Commissioner of Income Tax, Chennai Vs. Ambika Cotton
Mills Ltd.], the questions of law are decided against the Revenue and in
favour of the assessee. Accordingly, the Tax Case Appeals are dismissed.
No costs.
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Index : Yes/No [M.D., J.] [R.H., J.]
Internet : Yes 29.04.2021
va
To
1.The Income Tax Appellate Tribunal, Chennai, "A" Bench
2.The Income Tax Appellate Tribunal, Chennai, "B" Bench
3.The Income Tax Appellate Tribunal, Chennai, "C" Bench
4.The Income Tax Appellate Tribunal, Chennai, "D" Bench
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M.DURAISWAMY, J.
and
R.HEMALATHA, J.
va
T.C.A.Nos.10, 11, 21, 158, 161,
438, 439, 304, 332 of 2015,
724, 476, 493 of 2016, 554, 647 of 2014
(14 cases)
29.04.2021
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