Madras High Court
S.P.Spinning Mills Pvt. Ltd vs Asst. Commissioner Of Income Tax on 19 January, 2021
T.C.A.No.451 of 2018
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED : 19.01.2021
CORAM
THE HONOURABLE MR.JUSTICE T.S.SIVAGNANAM
and
THE HONOURABLE MS.JUSTICE R.N.MANJULA
Judgment Reserved On Judgment Pronounced On
07.01.2021 19.01.2021
T.C.A.No.451 of 2018
S.P.Spinning Mills Pvt. Ltd.,
1/147/104, Cuddalore Main Road,
Kariapatti, Salem-636 106.
[PAN: AACCS 9500J] .. Appellant
-vs-
Asst. Commissioner of Income Tax,
Circle – 1(3), 3 Gandhi Road,
Salem-636 007. .. Respondent
Appeal under Section 260A of the Income Tax, 1961 against the
order dated 24.03.2017 made in I.T.A.No.2845/Mds/2016 on the file of the
Income Tax Appellate Tribunal Bench 'C', Chennai for the assessment year
2011-12.
For Appellant : Mr.V.S.Jayakumar
1/36
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T.C.A.No.451 of 2018
For Respondent : Ms.V.Pushpa,
Senior Standing Counsel
******
JUDGMENT
This appeal filed by the assessee under Section 260A of the Income
Tax Act, 1961 (hereinafter referred to as “the Act”) is directed against the
order dated 24.03.2017, passed by the Income Tax Appellate Tribunal
Bench 'C', Chennai (for brevity “the Tribunal”), in I.T.A.No.2845/Mds/2016
for the assessment year 2011-12.
2.The appeal is entertained on the following substantial questions of
law:-
“(i).Whether on the facts and in the
circumstances of the case the Tribunal is correct in law
in its interpretation of Section 14A of the Income Tax
Act, 1961 and read with Rule 8D of the IT Rules, 1962
relating to the disallowance of expenses in the absence
of exempt income?
(ii).Whether the Tribunal is right in law in
holding that the disallowance u/s.14A should be made
even though no expenditure has been incurred relating
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to the exempt income?
(iii).Whether the Tribunal is right in law in
holding that the notional interest disallowance made by
the Assessing Officer is correct u/s.36(1)(iii) of the
Income Tax Act, 1961? and
4.Whether that Tribunal is right in law in holding
that upon the interpretation of 80IA the carbon credit is
not eligible for deduction?”
3.The assessee, a private limited company, filed its return of income
for the assessment under consideration (AY 2011-12) on 30.09.2011,
admitting a total income of Rs.8,16,93,770/- under normal computation and
book profit of Rs.10,26,72,726/- under Section 115JB of the Act.
Subsequently, the assessee filed revised return on 29.09.2012, admitting an
income of Rs.7,85,96,160/- under normal computation and book profit of
Rs.10,26,72,726/- under Section 115JB of the Act. The return was
processed under Section 143(1) of the Act. Subsequently, the case was
selected for scrutiny and notice dated 28.09.2012, was issued under Section
143(2) of the Act.
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4.During the scrutiny assessment, the issues, which were discussed
with the assessee, were whether the deduction claimed by the assessee under
Section 80IA of the Act to the tune of Rs.3,17,77,767/- was in respect of the
revenue generated for adhering to the clean development mechanism; the
second issue was with regard to interest disallowance; and the third issue
was with regard to the disallowance under Section 14A of the Act.
5.With regard to the first issue, the Assessing Officer held that the
assessee is engaged in the generation of electrical power, which is used for
its own textile business and the remaining is wheeled to the Tamil Nadu
Electricity Board. The income from generation of electricity and the carbon
credit earned by the assessee are totally separate and the source of the
income is also separate. Therefore, the income derived from the generation
of electrical power alone can be construed as income from the eligible
business for the purpose of deduction under Section 80IA of the Act.
Therefore, the assessee is not entitled for deduction under Section 80IA of
the Act in respect of the carbon credit.
6.With regard to the second issue, the Assessing Officer held that the
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assessee, having provided interest free loans to subsidiary companies and
obtained cash credits from two companies, had diverted the business loan
for non-business purpose and proportionate disallowance of interest at 12%
was calculated and added back to the income of the assessee.
7.With regard to the disallowance under Section 14A of the Act, the
Assessing Officer observed that from the balance sheet, it is seen that the
assessee had invested a sum of Rs.9 Crores in the subsidiary companies and
it had not claimed any expenditure. Therefore, he was satisfied that the
provisions of Section 14A of the Act read with Rule 8D of the Income Tax
Rule, 1962 (hereinafter referred to as “the Rules”) have to be applied and
accordingly, worked out the same.
8.On the above terms, the assessment was completed by order dated
10.03.2014 under Section 143(3) of the Act. Aggrieved by such order, the
assessee preferred appeal before the Commissioner of Income Tax
(Appeals), Salem (for brevity “the CIT(A)”).
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9With regard to the carbon credit, the assessee contended that without
prejudice to their claim for deduction under Section 80IA, the carbon credit
revenue is to be held as a capital receipt and ought to have been excluded
from the taxable income.
10.With regard to the interest disallowance, the assessee contended
that their current year profit was Rs.7,52,37,357/- and free reserves was
Rs.35,81,22,243/- and there was no necessity to divert the cash credit
borrowings for making interest free loans to the subsidiary companies.
11.With regard to the disallowance under Section 14A of the Act, the
assessee contended that the Assessing Officer mechanically resorted to the
disallowance in a routine manner merely because, the assessee had invested
in the subsidiary companies. Further, it was contended that the Assessing
Officer failed to note that the assessee never incurred any expenditure
directly or indirectly during the year, which was relatable to the
investments. Further, no dividend or any income was earned during the
year from such investment in the subsidiary companies. The CIT(A), by
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order dated 29.07.2016, dismissed the appeal.
12.With regard to the disallowance of proportionate interest, the
CIT(A) relied upon a decision of the Hyderabad Tribunal in the case of
M/s.Suryavamshi Holding Ltd., Secunderabad vs. DCIT, Circle 3(2),
Hyderabad [I.T.A.No.1175/H/2009] and held that disallowance of interest
at 12% was justified.
13.With regard to the deduction under Section 14A of the Act, after
extracting Section 14A of the Act, the CIT(A) held that the disallowance
made by the Assessing Officer was justified.
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
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untenable, as deduction under Section 80IA of the Act is allowable only on
profits and gains derived by an undertaking.
15.Aggrieved by such order, the assessee preferred appeal before the
Tribunal. With regard to the disallowance of interest under Section
36(1)(iii) of the Act, the Tribunal remanded the matter to the Assessing
Officer to decide the matter afresh on merits.
16.With regard to the disallowance under Section 14A of the Act, the
Tribunal referred to the disallowance of interest expenditure under Section
36(1)(iii) of the Act and did not deal with the contention advanced by the
assessee with regard to the deduction under Section 14A of the Act and in
particular, the contention of the assessee that such disallowance cannot be
done in a routine manner and that the assessee had never incurred any
expenditure directly or indirectly during the year when the investments were
made.
17.On a reading of the impugned order, more particularly in
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paragraph 6, we are unable to decipher as to how the Tribunal had
concluded the issue. We may point out that the Tribunal has not dealt with
the issue with regard to the correctness of the disallowance under Section
14A of the Act.
18.With regard to the claim for deduction under Section 80IA of the
Act, the Tribunal took note of the submission made by the assessee, the
decisions relied on and confirmed the finding of the CIT(A) largely on the
ground that the assessee themselves regarded it as a business income and
claimed deduction under Section 80IA of the Act.
19.We may point out that the Tribunal did not consider the specific
aspect, which was focused by the assessee before the CIT(A) that the carbon
credit received has been held to be capital receipt and thus, ought to have
been excluded from the taxable income. Challenging the correctness of the
order passed by the Tribunal, the assessee is before us.
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20.We have elaborately heard Mr.V.S.Jayakumar, learned counsel for
the appellant/assessee and Ms.V.Pushpa, learned Senior Standing Counsel
for the respondent/Revenue.
21.As noticed above, with regard to the disallowance under Section
36(1)(iii), the Tribunal had remanded the matter to the Assessing Officer for
fresh consideration and on such remission, the Assessing Officer has
allowed the relief on the ground that the assessee has adequate interest free
funds to advance amounts to sister concerns. In the light of the same, the
learned counsel for the assessee submits that the assessee does not press for
a decision on substantial question of law no.3.
22.The said submission is placed on record and it is held that it is not
necessary for the this Court to decide substantial question of law no.3, as
relief has already been granted to the assessee.
23.With regard to substantial question of law nos.1 and 2, they are
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both interlinked, as they pertain to the correctness of disallowance under
Section 14A of the Act.
24.In the narrative portion of this judgment, we noted that the
Tribunal while deciding the issue under Section 14A of the Act, largely was
guided by the provisions of Section 36(1)(iii) of the Act, on which, already
a decision was taken by the Tribunal and the Tribunal thought fit to remand
the matter to the Assessing Officer. The assessee has contended that the
equity investment made by the assessee in its subsidiary company was made
during the financial years 1997-98 to 2006-07 and no investments were
made during the year under consideration and hence, there is no interest
advance at all in the year of account.
25.Further, with regard to the equity investment in another subsidiary
company, it is submitted that it was made during the financial year 2010-11
and the investment was made out of the profits earned during the year and
with free cash reserves without any borrowals by way of overdraft funds
from banks. Further, the assessee from the very first instance has been
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contending that they have not incurred any expenditure for the investment in
the assessee's subsidiary companies and there was no income earned by way
of dividend as well as received by the assessee from its subsidiary and
therefore, the disallowance of any expenditure, that too, on notional basis is
illegal.
26.On a perusal of the order passed by the Tribunal as well as the
CIT(A), we find that this issue has not been adjudicated in the manner, in
which, it is required to be done. The Tribunal, while remanding the issue
with regard to interest disallowance under Section 36(1)(iii) of the Act,
ought to have remanded the issue with regard to disallowance under Section
14A of the Act as well. But, however failed to do so and therefore, we are
of the view that this issue needs to be remanded back to the Assessing
Officer for fresh consideration. Accordingly, the finding rendered by the
Tribunal with regard to the disallowance under Section 14A of the Act is set
aside and the matter is remanded to the Assessing Officer for fresh
consideration.
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27.In the result, substantial question of law nos.1 and 2 are left open.
28.Insofar as substantial question of law no.4 is concerned, it deals
with carbon credit. The question, as to the manner in which carbon credit
receipt has to be treated, has been considered by several High Courts and it
has been held that the receipt should be treated as a capital receipt. In this
regard, it would be beneficial to refer to the decision in the case of CIT vs.
Subhash Kabini Power Corporation Ltd., [(2016) 385 ITR 0592 (Karn.)].
In the said decision, the Karnataka High Court approved the view taken by
the ITAT, Hyderabad Bench, which decision was upheld by the High Court
of Andhra Pradesh in the case of CIT vs. My Home Power Ltd. [(2014) 365
ITR 0082 (AP)], which was subsequently followed by the ITAT, Chennai
and Jaipur Benches. The operative portion of the judgment reads as
follows:-
“11. The decision has been upheld by the Hon’ble
Andhra Pradesh High Court. This decision has been
subsequently followed by the ITAT Chennai and Jaipur
Benches. There is no decision either from the Hon’ble
Supreme Court or from the Hon’ble jurisdictional High
Court. These decisions indicate that sale of carbon credit
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would result capital receipt which is not taxable. When we
confronted the learned DR with regard to this position, it was
contended that the position as on the day when the
assessment order was passed, is to be seen and on that day
these orders were not available. Therefore, the assessee
cannot claim the benefit of these orders. However, we do not
concur with this proposition of the learned CIT, because the
Full Bench of the Hon’ble Punjab & Haryana High Court in
the case of Aruna Luthra reported in 254 ITR 76 has held that
a Court decide a dispute between the parties. The case can
involve decision on facts. It can also involve a decision on
point of law. Both may have bearing on the ultimate result of
the case. When a Court interprets a provision, it decides as to
what is the meaning and effect of the words used by the
Legislature, it is the declaration regarding the statute. In
other words the judgment declares as to what the legislature
had said at the time of promulgation of the law, the
declaration is.........., this was the law, this is the law, this is
how the provision shall be construed. Therefore, he cannot
plead that the view taken by the Tribunal and upheld by the
Hon’ble Andhra Pradesh High Court could be considered as
if applicable from the date 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
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pertinent to mention here that basically, it is not a separate
ground, it is a limb of arguments, which is affecting the
ultimate tax liability of the assessee. The Hon’ble Supreme
Court in the case of NTPC Ltd (Supra) has held that the
Tribunal had jurisdiction to examine a question of law which
arose from the fact as found by the Income Tax authorities
and having a bearing on the tax liability of the assessee. As
far as the nature of the receipt from sale of carbon credit is
concerned, it is available from the assessment stage. It is not
disputed even by the learned Commissioner, the dispute is,
whether it has been derived from the eligible industrial
undertaking for qualifying the grant of deduction u/s 80IA.
The learned Commissioner felt that this receipt has not been
derived from the industrial undertaking which will be eligible
for grant of deduction u/s 80IA and the Assessing Officer
committed an error in including the receipt in the eligible
profit. Those facts are already on the record. It is to be seen,
whether the receipt is of capital nature or of a revenue
nature. Even in case the order of the CIT is upheld, then, in
law, it will affect the computation of income, ultimately
because the receipt will not be taxable, it will not come under
the ambit of computation of income. Simultaneously it will be
excluded from the deduction u/s 80IA as well as of the total
income. The result will remain as it is. It is a revenue neutral
case. Therefore, in view of the ratio laid down by the Hon’ble
jurisdictional High Court in the case of Gopala Gowda
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(Supra), the second condition for taking action u/s 263 does
not exist. The assessment order is not prejudicial to the
interests of the Revenue. In view of the above discussion, we
allow the appeal of the assessee and quash the impugned
order of the learned CIT passed u/s 263 of the Income Tax
Act.”
The aforesaid shows that, so far as the question as to
whether, the income by sale of carbon credit could be termed
as capital receipt or profit, is concerned, the Tribunal has
considered the decision of the Hyderabad Bench and it has
further taken note of the fact that decision of the Tribunal of
Hyderabad Bench was carried before the Andhra Pradesh
High Court and the said decision was not interfered with. The
Tribunal, in its decision has also referred to the decision of
the Apex Court with regard to power under Section 263 of the
Income Tax Act, 1961 (hereinafter referred to as “the Act”)
of the revisional authority.
4. In our view, the principal question, which may arise
is, as to whether by sale of carbon credit capital receipt is
generated or a profit out of the business activity of the
assessee. More or less, in a similar case, the Apex Court had
an occasion to consider such an issue in the case of
Commissioner of Income Tax v. Maheshwari Devi Jute Mills
Ltd. [(1965) 57 ITR 36 (SC)], wherein the question came up
for consideration before the Apex Court as to whether by sale
of loom-hours, the amount received could be termed as
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capital receipt or the income out of business. In the said
decision, the Apex Court held that the amount received out of
sale of loom-hours can be termed as capital receipt and not
income out of business.
5. Subsequently, in a later decision of the Apex Court,
a question came up for consideration in the case of M/s.
Empire Jute Co. Ltd. v. Commissioner of Income Tax [(1980)
4 SCC 25] the question which arose before the Apex Court
was, if loom-hours are purchased by the manufacturing mills,
whether it can be termed as capital expenditure or revenue
expenditure. In the said decision, the earlier decision of the
Apex Court in the case of Maheswari Devi Jute Mills (supra)
was also relied upon by the Revenue and after considering
the same, the Apex 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
material in determining whether the payment is revenue or
capital disbursement qua the prayer. It was felicitously
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pointed out by Macnaghten, J. in Racecourse Betting Control
Board v. Wildthat a “payment may be a revenue payment
from the point of view of the payer and a capital payment
from the point of view of the receiver and vice versa”.
Therefore, the decision in Maheshwari Devi Jute Mills case
cannot be regarded as an authority for the proposition that
payment made by an assessee for purchase of loom hours
would be capital expenditure. Whether it is capital
expenditure or revenue expenditure would have to be
determined having regard to the nature of the transaction and
other relevant factors.”
Thereafter, the Apex Court while considering the test
to find out as to whether a particular expenditure can be
termed as capital or revenue expenditure observed at
paragraph Nos. 8 and 9 as under:
“8. The decided cases have, from time to time, evolved
various tests for distinguishing between capital and revenue
expenditure but no test is paramount or conclusive. There is
no all embracing formula which can provide a ready solution
to the problem; no touchstone has been devised. Every case
has to be decided on its own facts keeping in mind the broad
picture of the whole operation in respect of which the
expenditure has been incurred. But a few tests formulated by
the courts may be referred to as they might help to arrive at a
correct decision of the controversy between the parties. One
celebrated test is that laid down by Lord Cave, L.C., in
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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
transitory as to have no endurance at all”. There may be
cases where expenditure, even if incurred for obtaining
advantage of enduring benefit, may, nonetheless, be on
revenue account and the test of enduring benefit may break
down. It is not every advantage of enduring nature, acquired
by an assessee that brings the case within the principle laid
down in this test. What is material to consider is the nature of
the advantage in a commercial sense and it is only where the
advantage is in the capital field that the expenditure would be
disallowable on an application of this test. If the advantage
consists merely in facilitating the assessee’s trading
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operations or enabling the management and conduct of the
assessee’s business to be carried on more efficiently or more
profitably while leaving the fixed capital untouched, the
expenditure would be on revenue account, even though the
advantage may endure for an indefinite future. The test of
enduring benefit is therefore not a certain or conclusive test
and it cannot be applied blindly and mechanically without
regard to the particular facts and circumstances of a given
case. But even if this test were applied in the present case, it
does not yield a conclusion in favour of the Revenue. Here, by
purchase of loom hours no new asset has been created. There
is no addition to or expansion of the profit-making apparatus
of the assessee. The income-earning machine remains what it
was prior to the purchase of loom hours. The assessee is
merely enabled to operate the profit-making structure for a
longer number of hours. And this advantage is clearly not of
an enduring nature. It is limited in its duration to six months
and, moreover, the additional working hours per week
transferred to the assessee have to be utilised during the week
and cannot be carried forward to the next week. It is,
therefore, not possible to say that any advantage of enduring
benefit in the capital field was acquired by the assessee in
purchasing loom hours and the test of enduring benefit
cannot help the Revenue.
9. Another test which is often applied is the one based
on distinction between fixed and circulating capital. This test
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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
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
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test, it would not be possible to characterise the amount paid
for purchase of loom hours as capital expenditure, because
acquisition of additional loom hours does not add at all to the
fixed capital of the assessee. The permanent structure of
which the income is to be the produce or fruit remains the
same; it is not enlarged. We are not sure whether loom hours
can be regarded as part of circulating capital like labour,
raw material, power etc., but it is clear beyond doubt that
they are not part of fixed capital and hence even the
application of this test does not compel the conclusion that
the payment for purchase of loom hours was in the nature of
capital expenditure.”
After making the aforesaid observation, at paragraph
No. 10, the Apex Court, on the basis of the facts of the said
case concluded as under:
“Similarly, if payment has to be made for securing
additional power every week, such payment would also be
part of the cost of operating the profit-making structure and
hence in the nature of revenue expenditure, even though the
effect of acquiring additional power would be to augment the
productivity of the profit-making structure. On the same
analogy payment made for purchase of loom hours which
would enable the assessee to operate the profit-making
structure for a longer number of hours than those permitted
under the working time agreement would also be part of the
cost of performing the income-earning operations and hence
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revenue in character.”
Accordingly, the payment made for purchase of loom-
hours by Jute Mill Company was held to be Revenue
expenditure.
6. At this stage, we may also refer to the decision of
the Andhra Pradesh High Court, which has been relied upon
by the Tribunal in the impugned order. More or less, identical
question was raised and the Andhra Pradesh High Court in
the case of Commissioner of Income Tax-IV v. My Home
Power Ltd. [(2014) 46 Taxmann.com 314 (Andhra Pradesh),
at paragraph No. 3 observed thus:
“3. We have considered the aforesaid submission and
we are unable to accept the same, as the learned Tribunal has
factually found that “Carbon Credit is not an offshoot of
business but an offshoot of environmental concerns. No asset
is generated in the course of business but it is generated due
to environmental concerns.
“We agree with this factual analysis as the assessee is
carrying on the business of power generation. The Carbon
Credit is not even directly linked with power generation. On
the sale of excess Carbon Credits the income was received
and hence as correctly held by the Tribunal it is capital
receipt and it cannot be business receipt or income. In the
circumstances, we do not find any element of law in this
appeal.”
The aforesaid shows that the Andhra Pradesh High
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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
covered by the decision of the Andhra Pradesh High Court,
wherein the view taken by the Tribunal of Hyderabad Bench
has been followed in the present case, one may say that no
substantial question of law would arise for consideration.”
29.The Hon'ble Division Bench of this Court in the case of PCIT vs.
Arun Textiles Pvt. Ltd., [T.C.A.No.606 of 2016, dated 29.08.2016], after
referring to the decision in My Home Power Ltd., (supra), dismissed the
appeal filed by the Revenue and confirmed the order passed by the ITAT
holding that sale of carbon credits has to be considered as capital receipt
and accordingly, it is not taxable.
30.The argument of Ms.V.Pushpa, learned Senior Standing Counsel is
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by referring to the substantial questions of law framed by the assessee and it
is submitted that if the receipts from sale of carbon credit has to be treated
as a capital receipt, then the assessee could not have claimed it as a
deduction under Section 80IA of the Act and if the substantial question of
law as framed by the assessee is to be answered, it should be answered
against the assessee.
31.In our considered view, there is a slightly different approach that
needs to be adopted, as this Court exercises power under Section 260A of
the Act, while deciding the substantial question of law. The assessee is
required to place all materials before the Assessing Officer and make a full
and true disclosure of their entire financial. If any query is raised by the
Assessing Officer, the assessee is bound to answer. Thereafter, it is the
Assessing Officer, who has to apply the law and complete the assessment.
It has been held that it is not for the assessee to assist the Assessing Officer
to complete the assessment in a particular manner or to supply a draft
assessment order to the Assessing Officer. At this juncture, it is beneficial
to refer to the decision in the case of CIT vs. India Express (Madurai) Pvt.
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T.C.A.No.451 of 2018
Ltd., [(1983) 104 ITR 705 (Madras)]. The reference to the High Court was
to decide the scope of the appellate jurisdiction of the Income Tax Tribunal.
32.The Hon'ble Division Bench refers to three decisions of the
Hon'ble Supreme Court in the case of Hukumchand Mills Ltd. vs. CIT
[(1967) 63 ITR 232 (SC)]; CIT vs. Mahalakshmi Textile Mills Ltd.,
[(1967) 66 ITR 710]; and CIT vs. Nelliappan [(1967) 66 ITR 722 (SC)]
wherein, the observations made by the Hon'ble Supreme Court were referred
to, which are quoted hereunder:-
"In hearing an appeal, the Tribunal may give
leave to the assessee to urge grounds not set forth in
the memorandum of appeal, and in deciding the appeal
the Tribunal is not restricted to the grounds set forth in
the memorandum of appeal or taken by leave of the
Tribunal. The Tribunal was, therefore, competent to
allow the assessees to raise the contention relating to
the cash credits which was not made the subject-matter
of a ground in the memorandum of appeal. It cannot be
said that in accepting the contention of the assessee
that the cash credits represented income from the
business withheld from the books, the Tribunal made
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out a new case inconsistent with the assessee's own
plea. In any event, the Tribunal is not precluded from
adjusting the tax liability of the assessee in the light of
its findings merely because the findings are
inconsistent with the case pleaded by the assessees."
33.In Mahalakshmi Textile Mill's case, it was held as hereunder:-
“Under sub-s. (4) of s. 33 of the Indian Income-
tax Act, 1922, the Appellate Tribunal is competent to
pass such orders on the appeal "as it thinks fit". There
is nothing in the Income-tax Act which restricts the
Tribunal to the determination of questions raised
before the departmental authorities. All questions
whether of law or of fact which relate to the assessment
of the assessee may be raised before the Tribunal. If'
for reasons recorded by the departmental authorities in
rejecting a contention raised by the assessee, grant of
relief to him on another ground is justified, it would be
open to the departmental authorities and the Tribunal,
and indeed they would be under a duty to grant that
relief. The right of the assessee to relief is not
restricted to the plea raised by him.”
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34.After referring to the above decisions, it was pointed out that the
Appellate Tribunal is competent to pass such orders on the appeal, as it
thinks fit and it would be the duty of the Tribunal to decide all questions on
fact and law before it, even though it was not raised by the departmental
authorities. After referring to the powers of the Tribunal and that of this
Court and the Hon'ble Supreme Court, it was pointed out that based on the
cardinal principle, which has been incorporated as a veritable constitutional
provision, that no tax can be levied or collected save under authority of law.
35.It was further pointed out that the task of an Appellate Authority
under the taxing statute, especially a non-departmental authority like the
Tribunal, is to address its mind to the factual and legal basis of an
assessment for the purpose of properly adjusting the taxpayer's liability to
make it accord with the legal provisions governing his assessment. Since
be-all and end-all of the statutory provisions, especially those relating to the
administration and management of income tax is to ascertain the taxpayer's
liability correctly to the last pie, if it were possible, the various provisions
relating to Appeal, Second Appeal, Reference and the like can hardly be
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equated to a lis or dispute as arises between two parties in a civil litigation.
36.It was further pointed out that although the income-tax statute
makes the Department or its officers figure as parties in the appeal
proceedings, they are not in the strict sense what are called by American
writers as parties to adversary proceedings. This is so because, the very
object of the appeal is not to decide a point raised as a dispute, but any point
which goes into the adjustment of the taxpayer's liability. In that sense, a
view prevails, even in England, that the authorities sitting in an appeal in
tax case, cannot be regarded as deciding a lis, but they are only engaged in
an administrative act of adjusting the taxpayer's liability.
37.Further, it was pointed out that under our fiscal jurisprudence, we
may regard the Appellate Authorities as exercising quasi-judicial functions
in the same sense, as a tax officer does. But, even so, the proceedings
before them lack the basic elements of adversary proceedings. It, therefore,
follows that the discussion and the scope of the appellate jurisdiction of the
Tribunal and the other authorities under the tax code cannot be pursued by
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T.C.A.No.451 of 2018
drawing a parallel to civil litigation with particular reference to appeal from
decrees, and the like. Further, it was pointed out that in the case of
Mahalakshmi Textile Mills Ltd., the Hon'ble Supreme Court observed that
the Tribunal is not precluded from “adjusting the tax liabilities” of the
assessee in the light of its findings merely because, the findings are
inconsistent with the case pleaded by the assessee. The decision of the
Hon'ble Full Bench of this Court in the case of State of Tamil Nadu vs.
Arulmurugan & Co., [(1982) 51 STC 381] was referred to wherein, it was
held that the Appellate Authorities perform precisely the same functions, as
the assessing authority. The above decision and the findings rendered are a
clear answer to the arguments raised before us by the Revenue contending
that substantial question of law no.4, as framed has to be decided against the
assessee. We, thus, have no hesitation to hold that the Tribunal failed to
exercise its power in a proper prospective as a final fact finding authority
and examining as to whether there is any adjustment required to be made in
the assessee's tax liability qua the various decisions of the Court, which
have held that receipt on account of sale of carbon credit is capital in nature.
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38.In the instant case, the assessee while preferring appeal before the
CIT(A), has specifically raised a contention that the receipts from sale of
carbon credit is a capital receipt and cannot be included in the taxable
income. Though this ground raised by the assessee before the CIT(A) has
been recorded in the order, the CIT(A) did not take a decision on the same.
Similar ground was raised by the assessee before the Tribunal, which was
not considered by the Tribunal, though the Tribunal refers to all the
decisions relied on by the assessee, but would pin the assessee to his claim
made under Section 80IA of the Act and accordingly, negatives it. This
finding of the Tribunal is wholly erroneous and perverse. The Tribunal was
expected to apply the law and take a decision in the matter and if the CIT(A)
or the Assessing Officer had failed to apply the law, then the Tribunal was
bound to apply the law. This is so because, in the light of the decisions
referred above, the receipt by way of sale of carbon credit has been held to
be capital receipt. Therefore, it is of a little consequence as to the claim
made by the assessee under Section 80IA of the Act or in other words, the
question of taking a decision as to whether the deduction is admissible
under Section 80IA of the Act is a non-issue. If the receipt from the sale of
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carbon credit is a capital receipt, then it will go out of the purview of the
gross total income as defined under Section 80B(5) of the Act, which
expression is found in Section 80IA of the Act. Thus, if the receipts by sale
of carbon credit will not fall within the definition of total income, the same
cannot be included under Section 80IA of the Act. Therefore, even if the
assessee has made such a claim, that cannot be a reason for the Tribunal to
non-suit the assessee.
39.One more important factor to be noted is that Section 115BBG of
the Act was introduced by Finance Act, 2017 with effect from 01.04.2018,
prior to which, there was no such provision and Mr.V.S.Jayakumar, learned
counsel for the assessee would submit that the assessees were under utter
confusion as to under which provision of the Act, they should make a claim
for deduction and having left with no other option, had been making the
claim under Section 80IA of the Act and merely because the assessee due to
uncertainty in the legal position, had made a claim under Section 80IA of
the Act that cannot be a reason to deny a benefit granted in favour of the
assessee. The submission, made by Mr.V.S.Jayakumar, learned counsel for
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the appellant, in this regard, is well found and accepted.
40.For the above reasons, substantial question of law no.4 is
answered in favour of the assessee.
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
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(iii) For the reasons assigned in the preceding paragraphs, substantial
question of law no.4 is answered in favour of the assessee. No costs.
(T.S.S., J.) (R.N.M., J.)
19.01.2021
Index: Yes/ No
Speaking Order : Yes/ No
abr
To
1.The Asst. Commissioner of Income Tax,
Circle – 1(3), 3 Gandhi Road,
Salem-636 007.
2.The Income Tax Appellate Tribunal Bench 'C', Chennai.
T.S.Sivagnanam, J.
and
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T.C.A.No.451 of 2018
R.N.Manjula, J.
(abr)
T.C.A.No.451 of 2018
19.01.2021
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