TMI Blog2022 (2) TMI 758X X X X Extracts X X X X X X X X Extracts X X X X ..... rom transfer of carbon credits are in the nature of capital receipts not subjected to tax in terms of section 28(iv) read with section 2(24)(vd) of the Act. The claim of the assessee raised in grounds of appeal from 1 to 3 is hereby allowed. Exclusion of carbon credits from the book profits computed u/s 115JB - HELD THAT:- Carbon credits being the capital receipts cannot be brought to tax as book profits and are, thus, liable to be excluded from the computation of book profits u/s. 115JB - See Ankit Metal Power Ltd. [ 2019 (7) TMI 878 - CALCUTTA HIGH COURT] Allowability of education cess as deductible expenditure u/s. 37 (1) - HELD THAT:- As it stands today (as the proposed amendment by Finance Bill, 2022 is yet to take effect) hold that education cess is not a disallowable expenditure u/s. 40(a)(ii) of the Act having been expressly excluded from section 40(a)(ii) of the Act by following the judgment of the Hon'ble Rajasthan High Court in the case of Chambal Fertilisers And Chemicals Ltd. [ 2018 (10) TMI 589 - RAJASTHAN HIGH COURT] and the Hon'ble Bombay High Court in the case of Sesa Goa Limited [ 2020 (3) TMI 347 - BOMBAY HIGH COURT] . We, therefore, allow t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee as capital receipts and hence not liable to income tax by relying on the order of this Tribunal (ITAT), Hyderabad Bench in case of My Home Power Ltd. [ITA no. 1114/Hyd/2009) approved by Hon'ble High Court of Andhara Pradesh. 2.1. Briefly stated, the assessee was incorporated in the year 1973 and is a leading business conglomerate engaged in the manufacturing of refrigerants, engineering plastics and industrial yarns. The assessee is having one of its refrigerant manufacturing facility at Village, Jhiwana, in District Alwar, Rajasthan. The manufacturing facility was setup in the year 1989. In carrying on the fluoro-chemicals business, the assessee, at its refrigerant manufacturing facility at Jhiwana, produces HCFC-22. Production of HCFC-22 generates HFC-23, a Green House Gas (GHG). The assessee was having an option to emit such Green House Gas HFC-23 in the air without impacting its business of production of HCFC-22 as there is no legal/statutory obligation on the assessee for reduction in emission of HFC 23 gas in the open air. However, the assessee chose to reduce the emission of green-house gas namely HFC-23, in the atmosphere by a adopting a process called 'Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income chargeable to tax or not. In view of this, the application of the assessee for admission of the additional ground of appeal is allowed as well as the additional ground admitted is remitted back to the file of the Ld. assessing officer to decide it in accordance with the law, after granting reasonable opportunity of hearing to the assessee. 2.4. After the issue was set aside to the assessing officer, the assessee submitted various evidences and filed necessary information in support of its claim. The AO, however, did not accept the submission of the assessee and held that income on sale of carbon credits is a benefit arising out of the business of the assessee and would fall within the definition of income u/s. 2(24)(vd) r.w.s. 28(iv) of the Act by relying upon the order of the Ahmedabad Bench of the Tribunal in the case of Kalpataru Power Transmission Ltd. {[2016] 68 taxmann.com 237 (Ahm. Trib.)} and further on the order of the ITAT Cochin Bench in the case of Apollo Tyres Ltd. {[2014] 47 taxmann.com 416 (Cochin Trib.)}. 2.5. Thereafter, the Ld. Commissioner of Income Tax (Appeal-22) vide his order dated 20.08.2018 also rejected the claim of the assessee by relying t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bon credit are to be treated as capital receipts and not liable to tax. The ld. DRP has assigned one more reasons for not entertaining claim of the assessee particularly in the assessment year 2012-13 is that such claim was not in the return of income, rather it was made during the course of assessment proceedings. On the strength of Hon'ble Supreme Court judgment in the case of Goetez India Ltd.(supra), we are of the view that the AO cannot entertain any claim for allowing deduction resulting in a reduction of total income returned, which is not claimed in the original return or a revised return. To this reasoning of the DRP, we are of the view that we have considered this aspect while dealing with the issue regarded enhancement claim made under section 80IA of the Act. We have made reference to the decision of the ITAT, Mumbai and Bangalore Benches as well as Hon'ble High Gujarat High Court in the case of Mitesh Impex (supra) and held that if a particular item is going to affect taxability of assessee, then a fresh claim can be entertained by the first appellate authority or by the DRP. Thus, we overrule this reasoning of the DRP and direct the AO to treat these receipts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. Business activity producing the emission: Production site HCFC-22 plant at village Ranjitnagar, Gujarat HFCF-22 facility at Jhiwan, Rajasthan 2. Main commercial product HFC-22 HFC-22 3. Waste Gas (Emission) HFC-23 HFC-23 4. Protocol Kyoto Protocol Kyoto Protocol 5. Regulatory Framework UNFCCC UNFCCC 6. Purpose Green House Gas Emission reduction for Environment Protection Green House Gas Emission reduction for Environment Protection 7. Process employed Thermal Oxidation Thermal Oxidation 8. CER s Awarded CER s awarded by UNFCCC, transferred to international agencies for value realization CER s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )} 3.6. As regards, the orders relied upon by the AO and the Ld. CIT(A) in their respective orders, the Ld. AR submitted that the order of the Cochin Bench of the Tribunal in the case of Apollo Tyres Ltd. {[2014] 47 taxmann.com 416 (Cochin Trib.)}as relied by the revenue, had already been analyzed by the Hon'ble Allahabad High Court in the case of L.H. Sugar Factory Pvt. Ltd. (supra) which held it 'not to be good in law'. It was submitted that the Hon'ble High Court in L.H. Sugar Factory Pvt. Ltd. (supra) has referred to the order of the Chennai Bench of the ITAT in case of India Dyeing Mills (P.) Ltd. [2014] 36 ITR(T) 55 (Chennai - Trib.) which has considered the judgment of Apollo Tyres Ltd. (supra) and My Home Power Ltd. (supra) and then held the issue in favour of the assessee. It was further submitted that the order of the ITAT Ahmedabad Bench in the case of Kalpataru Power Transmission Ltd. {[2016] 68 taxmann.com 237 (Ahm. Trib.)}which has been relied upon by the AO and the Ld. CIT(A) has already been examined and overruled by the later judgment of the same bench of Ahmedabad Tribunal in the same case of Kalpataru Power Transmission Ltd.[2019-TIOL-1424-ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld concern . 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 consideration in terms of sections 2(24), 28, 45 and 56 of the Income-tax Act, 1961. Carbon credits are 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 assessees 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le to the generating entity. CERs are inventories of the generating entities as they are generated and held for the purpose of sale in ordinary course. Even though CERs are intangible assets those should be accounted as per AS-2 (Valuation of inventories) at a cost or market price, whichever is lower. Since CERs are recognised as inventories, the generating 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. 5.1. The above order of the Hyderabad Bench has been confirmed by the Hon'ble High Court of Andhara Pradesh. Next, the judgment of Hon'ble High Court of Gujarat in case of Gujarat Flourochemicals Ltd. [ITA Nos. 11/2019 28/2019], wherein the facts as noted by the Tribunal are similar with the facts of the assessee, has held the issue in favour of assessee. Undoubtedly, the facts of said case are similar to the case of the assessee which goes a long way to support the claim of the assessee. 5.2. The coordinate bench in case of Malana Power Co. Ltd. [ITA Nos. 2281/Del/2013, 1550/Del/2015 3957/Del/2015] while adjudicating the additional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctory Pvt. Ltd. (supra) which held it 'not to be good in law'. The other order of the ITAT Ahmedabad Bench in the case of Kalpataru Power Transmission Ltd. {[2016] 68 taxmann.com 237 (Ahm. Trib.)}has been overruled by the later judgment of same bench of Ahmedabad Bench of the Tribunal in the same case of Kalpataru Power Transmission Ltd.[2019-TIOL-1424-ITAT-AHM].In view of the fact that case laws relied upon by the revenue have already been overruled by higher court or by the same court in later judgment, we are not inclined to consider those judgments while adjudicating the issue under consideration. 5.4. We also borrow some reasoning from the fact that Ministry of Finance has inserted a specific provision in form of section 115BBG in the Act which is effective from 1st April, 2018 and will accordingly apply from assessment year 2018-19 and subsequent years. The rate of taxation provided in said section is 10% (in addition to applicable surcharge and education cess). This also corroborates the case of the assessee that CERs are not regular business receipts arising from business of the assessee and this fact has also been recognized by the Government and, therefore, nee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;s own case in subsequent years in AY 2007-08 and AY 2010-11 which have been placed before us. We, therefore, hold that carbon credits are not offshoot of business but offshoot of environmental concerns and hence not chargeable to tax. The receipts arising from transfer of carbon credits are in the nature of capital receipts not subjected to tax in terms of section 28(iv) read with section 2(24)(vd) of the Act. The claim of the assessee raised in grounds of appeal from 1 to 3 is hereby allowed. 6.0. Connected with the above, another issue raised by the assessee, by way of additional ground of appeal no. 4, is the exclusion of carbon credits from the book profits computed under section 115JB of the Act. It was submitted that the above additional ground is legal ground, all the facts are available on record. The learned authorised representative relied upon the several judicial precedents on this issue. 6.1. Although, the Ld. Sr. DR has opposed the assessee's prayer for admitting the additional ground, the issue raised by way of additional ground is a legal issue and has been adjudicated by various courts and, hence, we allow the additional ground no. 4 to be raised befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was to be included as a part of the book profit. But where a receipt is not in the nature of income at all it cannot be included in book profit for the purpose of computation under Section 115JB of the Income Tax Act, 1961. For the aforesaid reason, we hold that the interest and power subsidy under the schemes in question would have to be excluded while computing book profit under Section 115JB of the Income Tax Act, 1961. 6.5. Further ITAT, Lucknow Bench, in case of L.H. Sugar Factory Ltd. (ITA No. 717 418/LKW/2013 and others), held as under:- 4. We have considered the rival submissions. We find that the issue in dispute as per Ground No. 1 of appeal is regarding nature of receipt on account of sale of carbon credit and in the case of CIT Vs. My Home Power Ltd. (Supra) also, the dispute before Hon'ble Andhra Pradesh High Court was this as to whether the amount received by the assessee on transfer of carbon credit is capital receipt or Revenue receipt. It was held by Hon'ble Andhra Pradesh High Court in that case that carbon credit is not an off shoot of business but an offshoot of environmental concerns and no assets is generated in the course of business but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilips India Limited [TS-326-ITAT-2020(KOL)] v. the Kolkata ITAT in the case of Reckitt Benckiser (India) Private Limited [TS-614-ITAT-2020(KOL)] 7.4. Further, the learned AR had also relied upon the recent order of the coordinate bench in the case of DCM Shriram Ltd. [TS-554-ITAT-2021(DEL)-TP], dated 28th October, 2021, wherein the coordinate bench has allowed the deduction of education cess u/s. 37(1) of the Act by following the above judgments of the Hon'ble Bombay and Rajasthan High Court in the case of Sesa Goa Limited and Chambal Fertilisers And Chemicals Ltd. 7.5. It is noted that provisions of section 40(a)(ii) of the Act prohibits the allowance of any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at proportion of, or otherwise on the basis of, any such profits or gains. There is no dispute that tax payable under the Act is not an allowable expense due to express provisions of section 40(a)(ii). The core issue, however, is that whether the education cess is part of tax or not. In the judgments referred to by the Ld. AR, it has been held that 'cess' is not part of tax. Reference is also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted before us of Honourable Bombay and Rajasthan High court bind us. We find that this issue is squarely covered in favour of the assessee by the decision of Honourable Bombay high court in case of Sesa Goa Limited [2020] 117 taxmann.com 96 (Bombay)/[2020] 423 ITR 426 (Bombay) and Honourable Rajasthan High court in case of Chambal fertilizers Limited [2019] 107 taxmann.com 484 (Rajasthan). Therefore respectfully following the same, we direct the ld. AO to allow assessee the deduction of cess u/s. 37 (1) of the act. Accordingly, additional ground of appeal is allowed. 7.8. We have carefully considered the rival contentions and pursued the various judicial precedents cited before us and respectfully following the legal precedent, as it stands today (as the proposed amendment by Finance Bill, 2022 is yet to take effect) hold that education cess is not a disallowable expenditure u/s. 40(a)(ii) of the Act having been expressly excluded from section 40(a)(ii) of the Act by following the judgment of the Hon'ble Rajasthan High Court in the case of Chambal Fertilisers And Chemicals Ltd. (supra) and the Hon'ble Bombay High Court in the case of Sesa Goa Limited (supra). We, there ..... X X X X Extracts X X X X X X X X Extracts X X X X
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