TMI Blog2016 (5) TMI 793X X X X Extracts X X X X X X X X Extracts X X X X ..... s profit, naturally it will have no adverse effect on the Revenue. It is settled legal position that one of the requirements for exercise of power under Section 263 of the Act, is that the order passed by the lower authority should not only be erroneous, but should also be prejudicial to the interest of the Revenue, which is lacking in the present case and rightly found so by the Tribunal. No substantial question of law - Decided against revenue - ITA No. 169 of 2015 - - - Dated:- 29-3-2016 - MR. JAYANT PATEL AND MRS. B.V.NAGARATHNA JJ. For the Appellant: Sri: K.V. Aravind, Senior Standing Counsel For the Respondent: Sri: R.V. Easwar, Senior Advocate For Smt. Chythanya K.K., Advocate JUDGMENT JAYANT PATEL J., The appellant/Revenue has preferred the present appeal by raising the following substantial questions of law: 1. Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in quashing the order under Section 263 of the Income Tax Act without appreciating the judgment of Supreme Court in the case of M/s. Liberty India v. CIT [317 ITR 218] and M/s. Sterling Foods v. CIT [237 ITR 579] that any ancil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted. (iii) An incorrect assumption of facts or an incorrect application of law will suffice the requirement of order being erroneous. (iv) If the order is passed without application of mind, such order will fall under the category of erroneous order. (v) Every loss of revenue cannot be treated as prejudicial to the interests of the Revenue and if the AO has adopted one of the courses permissible under law or where two views are possible and the AO has taken one view with which the CIT does not agree. If cannot be treated as an erroneous order, unless the view taken by the AO is unsustainable under law (vi) If while making the assessment, the AO examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determine the income, the CIT, while exercising his power under s 263 is not permitted to substitute his estimate of income in place of the income estimated by the AO. (vii) The AO exercises quasi-judicial power vested in his and if he exercises such power in accordance with law and arrive at a conclusion, such conclusion cannot be termed to be erroneous simply because the CIT does not fee stratifie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue. Aggrieved by the said order, the assessee preferred an appeal to the Tribunal. The Tribunal went into the factual aspects and took note of the legal position as settled in various judgments of the courts and in fact, calculated both the short term and long term capital gain and then found that the assessee is not liable to pay any tax. Therefore, it recorded the finding that even if the order of the Assessing Authority is erroneous, it is not prejudicial to the interest of the revenue. Therefore, set aside the order of the revisional authority and granted relief to the assessee . 9. The Hon ble High Court while upholding the order of the ITAT has observed as under: Even if it is erroneous, unless the said erroneous order is prejudicial to the interest of the Revenue, the Commissioner could not have exercised the said power. From the admitted material on record, the amount that is ordered to be refunded to the assessee is not the amount, which is lawfully due to the Revenue at all, it was an amount which is Revenue legitimately should have refunded if only the claim had been in the return enclosing the certificates under Section 203. The said amount should have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest of the revenue. On the contrary, in the reply to the notice, the assessee had filed a statement. Even if the assessment is to be made separately for the land on long term basis and to the building on short term basis, the assessee is not liable to pay any tax for the building. The assessee has demonstrated that in no event the order passed by the Assessing Officer is prejudicial to the interest of the revenue. That aspect has not been considered and there is no reference to that aspect in the entire order passed by the revisional authority and by a cryptic order, the matter is remanded to the Assessing Authority. Though the Tribunal was not expected to go into the merits of the case, in order to demonstrate that the order passed by the Assessing Authority even if it is erroneous, is not prejudicial to the interest of the revenue, they have set out computation of capital gains and demonstrated that the order was not prejudicial. Therefore, the order passed by the revisional authority is illegal and rightly it has been set aside. In the light of what we have stated above, the substantial question of law is answered in favour of the assessee and against the reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re made available to the assessee on account of saving of energy consumption and not because of its business. Further, in our opinion, carbon credits cannot be considered as a bi-product. It is a credit given to the assessee under the Kyoto Protocol and because of international understanding. Thus, the assessees who have surplus carbon credits can sell them to other assesses to have capped emission commitment under the Kyoto Protocol. Transferable carbon credit is not a result or incidence of one s business and it is a credit for reducing emissions. The persons having carbon credits get benefit by selling the same to a person who needs carbon credits to overcome one s negative point carbon credit. The amount received is not received for producing and/or selling any product, bi-product or for rendering any service for carrying on the business. In our opinion, carbon credit is entitlement or accretion of capital and hence income earned on sale of these credits is capital receipt. For this proposition, we place reliance on the judgment of the Supreme Court in the case of CIT vs. Maheshwari Devi Jute Mills Ltd. (57 ITR 36) wherein held that transfer of surplus loom hours to o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the main issue, the alternate ground of the assessee becomes infructuous and the same is dismissed. 28. In the result, assessee s appeal is allowed. Order pronounced in the open court on 2nd November, 2012 . 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 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 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 und er 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 payer. It was felicitously pointed out by Macnaghten, J. in Racecourse Betting Control Board v. Wild that 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 vic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture, 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 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 purcha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmanent 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 perfo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business, the same would be a profit from business and is taxable. Therefore, the same cannot be termed as capital receipt, but business income. In his submission, it was stated that on account of running the business of power generation, carbon credit is earned, which is marketable and therefore, it is an income out of business. 9. We cannot accept the said submission for the simple reason that earning of carbon credit is not the business of the assessee nor the same is generated as a byproduct on account of business activity of power generation, but it is earned on account of concern for environment carbon credit is generated on account of employment of good and viable practices by the assessee. 10. Mr. Aravind, learned counsel for the Revenue also relied upon the decision of the Apex Court in the case of Oberoi Hotel (P) Ltd. v. Commissioner of Income Tax [(1999) 103 Taxman 236 (SC)] and another decision in the case of Kettlewell Bullen Co. Ltd. v. Commissioner of Income Tax [(1964)53 ITR 261] and contended that unless there is any adverse effect to the trading structure of the business, the income received cannot be termed as capital receipt. 11. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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