Full Judgment Text
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R
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
TH
DATED THIS THE 29 DAY OF MARCH, 2016
PRESENT
THE HON'BLE MR. JUSTICE JAYANT PATEL
AND
THE HON’BLE MRS. JUSTICE B.V.NAGARATHNA
I.T.A. NO.169/2015
BETWEEN:
COMMISSIONER OF INCOME TAX-III,
REVENUE BUILDINGS,
QUEENS ROAD,
BANGALORE – 560 001. ... APPELLANT
(BY SRI: K.V. ARAVIND, SENIOR STANDING COUNSEL)
AND:
M/S. SUBHASH KABINI POWER
CORPORATION LIMITED,
8/2, ULSOOR ROAD,
BANGALORE – 560 042.
PAN: AACCS0881J. ... RESPONDENT
(BY SRI: R.V. EASWAR, SENIOR ADVOCATE FOR
SMT. CHYTHANYA K.K., ADVOCATE)
*
THIS ITA IS FILED UNDER SEC.260-A OF INCOME TAX
ACT 1961, ARISING OUT OF ORDER DATED:28/11/2014
PASSED IN ITA NO.258/BANG/2014, FOR THE ASSESSMENT
YEAR 2009-2010.
THIS ITA COMING ON FOR ADMISSION THIS DAY,
JAYANT PATEL J., DELIVERED THE FOLLOWING:-
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J U D G M E N T
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
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
eligible business undertakings?
2. Whether on the facts 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
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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:
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“7. We have duly considered the rival
contentions and gone through the record
carefully. Before embarking upon an
inquiry about the facts available on record
and how to construe them, we deem it
pertinent to take note of the fundamental
principles for judging the 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 fulfilled.
(ii) Sec. 263 cannot be invoked to
correct each and every type of
mistake or error committed by the
AO and it was only when an order
is erroneous that the section will
be attracted.
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(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
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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 stratified with the
conclusion.
(viii) The CIT, before exercising his
jurisdiction 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
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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
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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 assessee purchased
another property at Koramangala.
The Assessing Officer computed the
income from the long term capital
gains at Rs.22,17,940/- for the sale of
the property. However, the assessee
was exempted from paying tax since
the fund was utilized fully towards
purchase of another property at
Koramangala. The Commissioner of
Income Tax issued notice under
Section 263 of the Act stating that the
Assessing Officer was not justified in
treating 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
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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 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
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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 been refunded to the
assessee. Because he was
handicapped by such certificates not
being forwarded to him, consequently
not able to make the claim, such a
claim was not made. The moment he
got possession of those certificates on
12.02.2001, within two years from
the date of the end of the assessment
year he has put forth the claim. The
said amount was not a lawful amount
to the Government. It was an
amount which should have 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
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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
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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, the
matter can be remanded to Assessing
Authority. But such remand should
be only after setting out the facts
which show erroneous nature of the
order and the consequential prejudice
to the revenue which confer
jurisdiction on the revisional
authority.
Seen from that angle, in the
impugned order though we could
make out what is the error committed
by the revisional authority, certainly
there is no iota of evidence to show
how it is prejudicial to the interest of
the revenue. On the contrary, in the
reply to the notice, the assessee had
filed a statement. Even if the
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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.
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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
erroneous because the learned Assessing
Officer failed to compute the long term
capital gain and short term capital gain
separately. But the Tribunal ultimately
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
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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 revenue receipt.
It is not generated or created due to
carrying on business but it is accrued
due to “world 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
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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
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
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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
other mill out of those allotted to the
assessee under an agreement for
control of production was capital
receipt and not income. Being so, the
consideration received by the
assessee is similar to consideration
received by transferring of loom
hours. The Supreme Court
considered this fact and observed that
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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
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
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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 states that CERs should be
recognised in books when those are
created by UNFCCC and/or
unconditionally available 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-
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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
nd
on 2 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
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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
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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
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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
(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.”
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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
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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 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:
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“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 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
2
Maheshwari Devi Jute Mills case since that
is the decision which weighed heavily with
the High Court, in fact, compelled it to
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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 payer. It was
felicitously pointed out by Macnaghten, J.
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in Racecourse Betting Control Board v.
3
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 vice versa”.
Therefore, the decision in Maheshwari Devi
2
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
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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
4
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
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conclusion and, as pointed out by Lord
Radcliffe in Commissioner of Taxes v.
5
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 operations or enabling
the management and conduct of the
assessee’s business to be carried on more
efficiently or more profitably while leaving
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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
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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 was applied by Lord Haldane in the
6
leading case of John Smith & Son v. Moore
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
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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.
5
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 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
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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
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performing the income-earning operations
and hence 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.
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“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.
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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.
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 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
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generated as a by product 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. In our view, the aforesaid decisions are of
no help to the Revenue for the reason that to find out
whether the particular amount received is a capital
receipt or income out of business, there cannot be any
standard yardstick or a straight-jacket formula as
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observed by the Apex Court in the case of M/s. Empire
Jute Co. Ltd. (Supra). The facts of the aforesaid two
decisions of the Apex Court in the case of Kettlewell
Bullen as well as Oberoi Hotel were concerning the
issue of contract and the effect on the trading activity,
which was undertaken pursuant to the contract.
Therefore, such observations made by the Apex Court
can not be applied to the fact situation in the present
case. Hence, the said decisions are of no help to the
appellant/Revenue.
12. Considering the above, we find that when
the carbon credit is generated out of environmental
concerns, and it is not having the character of trading
activity, the Tribunal has rightly held that it is capital
receipt and it is not income out of business and hence,
not liable to pay income tax.
13. Once it is found that the amount 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
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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.
14. In view of the above, we do not find any
substantial question of law would arise as sought to be
canvassed. Hence, the appeal is meritless and
therefore, dismissed.
Sd/-
JUDGE
Sd/-
JUDGE
S*