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TMI Blog2016 (5) TMI 793X X X X Extracts X X X X X X X X Extracts X X X X ..... acts and in the circumstances of the case, the Tribunal was justified in law in treating the sale proceeds of carbon credits as capital in nature without appreciating that the Carbon Emission Reduction Certificates issued by the UNFCC have intrinsic value and has a ready market for its redemption/trading, that the assessee pursues to obtain the said certificate and hence the sale proceeds arising out of sale of the carbon credits by the assessee is revenue in nature? 3. Whether on the facts and circumstances of the case, the Tribunal was justified in relying upon the judgment passed by the jurisdictional High Court in the case of CIT v. D.G. Gopala Gowda [354 ITR 501(2013) and thereby holding that the order passed under Section 263 as revenue neutral case and is not prejudicial to the interest of the Revenue? 2. We have heard Mr. K.V.Aravind, learned Senior Standing Counsel for the appellant/Revenue and Mr. R.V.Easwar, learned Senior Counsel for Mr. Chythanya K.K., learned counsel appearing for respondent/assessee. 3. We may record the relevant discussion of the Tribunal from paragraph Nos.7 to 11 as under: "7. We have duly considered the rival contentions and gone through ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on being satisfied with the explanation of the assessee, the decision of the AO cannot be held to be erroneous simply because in his order he does not make an elaborate discussion in that regard. 8. Before adverting to the facts of the present case, we would like to make a reference to the decision of the Hon'ble jurisdictional High Court in the case of CIT vs. D.G. Gopala Gowda, 354 ITR 501 (2013). In this case, the facts noticed by the Hon'ble High court read as under: "2. The assessee had purchased a site at Rupena Agrahara in the financial year 1995-96 for a consideration of Rs. 3,46,520/-. He started construction of the building in April 1999. He agreed to sell the said property under the agreement dated 9-9-2000 in unfinished condition. Under the terms of agreement, the assessee should complete the construction of the building before execution of sale deed with the help of the funds provided by the purchaser. On 22-11-2000 the assessee executed a sale deed in favour of the purchaser for a consideration of Rs. 1,38,00,000/- The assessee received a sum of Rs. 40,00,000/- at the time of agreement. The total cost of construction was Rs. 1,04,30,425/-. Thereafter, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave been refunded to the assessee. Therefore, the condition precedent for exercising the revisional power under Section 263 of the Act is that the order under revision should not only be erroneous, but such erroneous order should result in prejudice to the interest of the revenue. Mere error would not confer jurisdiction to exercise revisional power under Section 263 of the Act. We have gone through the order passed by the revisional authority. It is a very cryptic order. It neither points out an error nor prejudice which has caused to the revenue. After declaring that the order is prejudicial, it refers to the notice being issued to the assessee and the assessee filing reply to the said notice and then review authority feels that it is a matter to be readjudicated by the Assessing Authority and therefore, the matter was remanded for fresh consideration. This is not the way, the revisional authority should exercise their power under Section 263 of the Act. The order of revisional authority should indicate the error committed by the Assessing Authority and consequential prejudice caused to the revenue because of the erroneous order. Unless these two conditions exist, the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mately arrived at a conclusion that even if this exercise is being done, then there will not be any tax liability and therefore, there is no need to set aside the assessment order. The Hon'ble High Court has upheld this finding of the Tribunal. In the light of the above, let us examine the facts of the present case. There is no dispute that the assessee is in the business of Hydro Power Project. It has earned carbon credit which has been rated by the agency and it has sold those carbon credit to a Japanese Company. The details indicating service from carbon management service, allotment of letter of carbon credit, sale bill for sale of carbon credits are available on page Nos. 102 to 110 of the paper book. The ITAT Hyderabad has decided this issue for the first time and the discussion made by the ITAT Hyderabad Bench worth to note, it read as under: "24. We have heard both the parties and perused the material on record. Carbon credit is in the nature of "an entitlement" received to improve world atmosphere and environment reducing carbon, heat and gas emissions. The entitlement earned for carbon credits can, at best, be regarded as a capital receipt and cannot be taxed as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee transferred the carbon credits like loom hours to some other concerns for certain consideration. Therefore, the receipt of such consideration cannot be considered as business income and it is a capital receipt. Accordingly, we are of the opinion that the consideration received on account of carbon credits cannot be considered as income as taxable in the assessment year under consideration. 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. Credit for reducing carbon emission or greenhouse effect can be transferred to another party in need of reduction of carbon emission. It does not increase profit in any manner and does not need any expenses. It is a nature of entitlement to reduce carbon emission, however, there is no cost of acquisition or cost of production to get this entitlement. Carbon credit is not in the nature of profit or in the nature of income. 25. Further, as per guidance note on accounting for Self-generated Certified Emission Reductions (CERs) issued by the Institute of Chartered Accountants of India (ICAI) in June, 2009 st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 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 expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between fixed and circulating capital. This test was applied by Lord Haldane in the leading case of John Smith & Son v. Moore 6 where the learned law Lord drew the distinction between fixed capital and circulating 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 conne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dit 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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