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Commissioner of Income Tax-III Versus M/s. Subhash Kabini Power Corporation Limited

2016 (5) TMI 793 - KARNATAKA HIGH COURT

Sale of carbon credits - revenue or capital receipt - Tribunal quashing the order under Section 263 - whether he consideration received from the sale of carbon credits is not derived from the eligible business undertakings? - Held that:- In the case of Commissioner of Income Tax v. Maheshwari Devi Jute Mills Ltd. [1965 (4) TMI 10 - SUPREME Court] , 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 capi .....

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mount realized by sale of carbon credit is not taxable as 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 re .....

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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 ancillary profits should be excluded from the meaning of profits derived from the eligible business for the purpose of deduction under Section 80IA and the consideration received from the sale of carbon credits is not derived from the .....

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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 .....

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action of the CIT taken u/s 263. The ITAT in the case of M/s Khatiza S. Oomerbhoy Vs. ITO, Mumbai reported in 101 TTJ 1095, analyzed in details various authoritative pronouncements including the decision of the Hon ble Supreme Court in the case of Malabar Industries Co. vs. CIT 243 ITR 83 and propounded the following broader tests: (i) The CIT must record satisfaction that the order of the AO is erroneous and prejudicial to the interest of the Revenue. Both the conditions must be ful .....

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f 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 an .....

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n under s. 263 must have material on record to arrive at a satisfaction. (ix) If the AO has made enquiries during the course of assessment proceedings on the relevant issues and the assessee has given detailed explanation by a letter in writing and the AO allows the claim 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. Befo .....

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erty 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 ₹ 1,38,00,000/- The assessee received a sum of ₹ 40,00,000/- at the time of agreement. The total cost of construction was ₹ 1,04,30 .....

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ting the sale as long term capital gain and according to him, it should have been treated as short term capital gain. The assessee filed his reply to the show cause notice. Thereafter, the Commissioner proceeded to pass the order setting aside the order of assessment on the ground that it is prejudicial to the interest of the revenue. 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 po .....

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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 certific .....

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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 a .....

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sional 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 revisional authority does not get jurisdiction to pass any order under Section 263 of the Act. Once these two conditions are set out in the order, then it is open to the revisional authority to consider the case on merits and pass final order or in its view, requires some adjudication or enquiry, t .....

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ntrary, 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 .....

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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 revenue . 10. The Hon ble High Court has held that fulfillment of twin condition is must i.e. assessment order should be erroneous and it should cause a prejudice to the Revenue. If any one condition is lacking, then action u/s 263 would not be justified. In the above case, the assessment order was erro .....

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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 Ben .....

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rn . It has been made available assuming character of transferable right or entitlement only due to world concern. The source of carbon credit is world concern and environment. Due to that the assessee gets a privilege in the nature of transfer of carbon credits. Thus, the amount received for carbon credits has no element of profit or gain and it cannot be subjected to tax in any manner under any head of income. It is not liable for tax for the assessment year under consi .....

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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 cr .....

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ar to consideration received by transferring of loom hours. The Supreme Court considered this fact and observed that taxability of payment received for sale of loom hours by the assessee is on account of exploitation of capital asset and it is capital receipt and not an income. Similarly, in the present case the assessee transferred the carbon credits like loom hours to some other concerns for certain consideration. Therefore, the receipt of such consideration cannot be considered as .....

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r 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 Accoun .....

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ating assessee should apply AS-9 to recognise revenue in respect of sale of CERs. 26. Thus, sale of carbon credits is to be considered as capital receipt. This ground is allowed. 27. As we have decided 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 Ho .....

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, 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 bearin .....

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ld 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 ultimat .....

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ived 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 .....

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63 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 furthe .....

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on credit capital receipt is generated or a profit out of the business activity of the assessee. More or less, i n 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 decisi .....

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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 mus .....

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ether the sum of ₹ 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 .....

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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 Cont .....

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o 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 .....

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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 circums .....

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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 operations or enabling the managem .....

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, 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 durati .....

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ting 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 .....

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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 .....

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d 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 t .....

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y, 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:

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tion. 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 .....

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has been followed in the present case, one may say that no substantial question of l aw would arise for consideration. 8. However, Mr.K.V. Aravind, learned counsel appearing for the appellant/Revenue, relied upon the provisions of Section 28 of the Act and contended that if any benefit or perquisite or credit is generated from 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 su .....

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ount 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 recei .....

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