DCM Shriram Industries Limited, New Delhi V. ACIT, Circle-7(1), Delhi

ITA 1000/DEL/2022

AI Insights

The case involves DCM Shriram Industries Ltd., which appealed against the orders of the Commissioner of Income Tax (Appeals) concerning transfer pricing adjustments and disallowances made in the assessment years 2015-16, 2016-17, and 2017-18. The primary issues included the arm's length price adjustments for the transfer of power and steam between units eligible and non-eligible for deductions under section 80IA, and the treatment of income from the sale of Renewable Energy Certificates (RECs). The Tribunal found that the adjustments made were not in accordance with the directions of the Dispute Resolution Panel (DRP) and that the income from RECs should be treated as capital receipts, not taxable as revenue.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 300742 (ITAT-DELHI)
• Duration Of Justice: 10 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-03-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: I
• Next Hearing Date: 16-02-2023
• Assessment Year: 2017-2018
• Appeal Filed On: 10-05-2022
• Other Referred Cases: CIT Vs. My Home Power Ltd., Essel Mining and Industries Ltd. vs. DCIT, Dwarikesh Sugar Industries Ltd. vs. NFAC, Malana Power Co. Ltd. vs. DCIT, SRF Ltd. vs. ACIT, L.H. Sugar Factory Pvt. Ltd. vs. CIT, Arun Textiles Pvt. Ltd. vs. CIT, Rajasthan State Mines and Minerals Ltd. vs. CIT, Shree Cement Ltd. vs. CIT, Subhash Kabini Power Corporation Ltd. vs. CIT, Dodson Lindblom Hydro Power Pvt. Ltd. vs. CIT, My Home Power Ltd. vs. CIT
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MAHESH SHAH
• Keywords: Capital asset; Business income; Revision of order; Opportunity of being heard; Earning of tax free income; Cost of acquisition; Capital receipt; Rule 8D
• Section: 263; 154; 14A; 115JB; 133(6); 80IA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH: ‘I’ NEW DELHI BEFORE SHRI G.S. PANNU, HON’BLE PRESIDENT AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA No.1000/Del/2022 Assessment Year: 2017-18 With ITA No.539/Del/2021 Assessment year 2016-17 With ITA No.1841/Del/2020 Assessment year 2015-16 DCM Shriram Industries Ltd., 6 th Floor, Kanchenjunga Building, 18 Barakhamba Road, New Delhi Vs. ACIT, Circle -7(1), Delhi PAN :AAACD0204C (Appellant) (Respondent) ORDER PER SAKTIJIT DEY, JM: Captioned appeals have been filed by the assessee against an order passed by learned Commissioner of Income Tax (Appeals) in assessment year 2015-16 and final assessment Appellant by Sh. Pradeep Dinodia, CA Sh. Ravi Kumar, CA Respondent by Sh. Mahesh Shah, CIT(DR) Sh. Sanjay Kumar, Sr. DR Date of hearing 17.02.2023 Date of pronouncement 15.03.2023 ITA No.1000/Del/2022; 539/Del/2021 & 1841/Del/2020 2 | P a g e orders passed for assessment years 2016-17 and 2017-18. Since, the issues raised in these appeals are, more or less, identical; they have been clubbed together and disposed of in a common order, for the sake of convenience. 2. The first issue arising for consideration is, transfer pricing adjustment of Rs. 9,70,87,302/- to the arm’s length price (ALP) of the specified domestic transaction relating to transfer of power from eligible unit to non eligible units. This issue arises in assessment year 2016-17 only. 3. Briefly the facts are, the assessee, a resident corporate entity, is stated to be engaged in the business of manufacturing of sugar, industrial fiber, alcohol, power and organic and fine chemicals. In course of proceedings before him the Transfer Pricing Officer (TPO) noticed that in the year under consideration, the assessee had generated power in an unit eligible to avail deduction under section 80IA of the Act and transferred part of the power generated to other units, which are not eligible for deduction under section 80IA of the Act. He noticed that the assessee has benchmarked the transaction by applying the rate at which it has transferred power to Uttar Pradesh Power Corporation Ltd. (UPPCL). Since, according to the TPO, 95-96% of ITA No.1000/Del/2022; 539/Del/2021 & 1841/Del/2020 3 | P a g e power is traded through Indian Energy Exchange (IEX), he issued notice under section 133(6) of the Act to IEX to ascertain the average rate of power trade in UP, Rajasthan and Gujarat region. From the information received he found that the average sale price for UP region in the year under consideration was Rs.2.77 per KWH. Applying the aforesaid rate as external CUP (Comparable Uncontrolled Price), the TPO suggested the disputed TP adjustment. While framing the draft assessment order, the Assessing Officer added the TP adjustment. While considering assessee’s objection on the issue, learned DRP taking note of the fact that similar disallowance made in assessee’s case in assessment year 2015-16 was deleted by learned Commissioner (Appeals), directed the Assessing Officer to ascertain, whether the department has preferred any appeal against the decision of learned Commissioner (Appeals) and in case it is found not to be so then delete the addition. By stating that the department has preferred appeal against the decision of learned Commissioner (Appeals), the Assessing Officer retained the addition in the final assessment order. 4. We have heard the parties and perused the materials on record. On a specific query of the Bench, learned CIT(DR) has ITA No.1000/Del/2022; 539/Del/2021 & 1841/Del/2020 4 | P a g e furnished letter dated 27.09.2022 enclosing a sworn affidavit of the Assessing Officer admitting that against the order of Commissioner (Appeals) for assessment year 2015-16 no appeal has been preferred by the Revenue before the Tribunal. The aforesaid factual position makes it clear that the Assessing Officer instead of implementing the direction of learned DRP in letter and spirit has tried to circumvent it by mis-stating the fact that department has preferred an appeal against the decision of learned Commissioner (Appeals) in assessment year 2015-16. In view of the aforesaid, we delete the addition. Grounds raised are allowed. 5. The next issue arising for consideration is relating to adjustments made by the TPO with reference to the specified domestic transaction, being the transfer of steam from eligible unit to non eligible units. This issue arises in assessment years 2016-17 and 2017-18. 6. Facts relating to this issue are, more or less, identical to the issue relating to TP adjustment on transfer of power from eligible unit to non eligible unit. The TPO observed, (i) steam itself is not power. To extract power from steam, machinery is required. (ii) Steam is a bye product of power plant generation, hence, no ITA No.1000/Del/2022; 539/Del/2021 & 1841/Del/2020 5 | P a g e direct cost is attributed to it. (iii) Assessee’s submission that its main function is generation of steam and power is incidental is not acceptable. (iv) The assessee has not sold steam to any non- AE or other eligible unit, hence, no data regarding price of steam to be charged has been provided by assessee. (v) Assessee or its AE have not purchased steam from any non AE, hence, data for purchase cost is not available. Based on aforesaid reasoning, the TPO determined the ALP of transfer of steam as nil. This resulted in TP adjustments. While deciding the issue, learned DRP took note of the fact that in assessee’s own case in assessment year 2015-16, learned Commissioner (Appeals) has decided the issue in favour of the assessee. Accordingly, learned DRP directed the Assessing Officer to verify the fact whether any appeal against the decision of Commissioner (Appeals) has been preferred before the higher forum and in case it is found not to be so, delete the adjustment. While completing the final assessment, the Assessing Officer incorporated the adjustment again. 7. We have considered rival submissions and perused the materials on record. As could be seen from the materials on record, the TP adjustments have been made in the final assessment orders by stating that against the decision of ITA No.1000/Del/2022; 539/Del/2021 & 1841/Del/2020 6 | P a g e Commissioner (Appeals) in assessment year 2015-16 the department has preferred appeal. However, in the affidavit filed before us, the Assessing Officer has admitted that no appeal has been filed by the department against the order of Commissioner (Appeals) in assessment year 2015-16. That being the factual position, in terms with the direction of learned DRP no addition can be made. Accordingly, we delete the additions in both the assessment years. 8. The next issue is with reference to re-determination of ALP of steam transferred from eligible unit to non-eligible units and consequent enhancement of deduction under section 80IA of the Act. This issue arises in assessment years 2016-17 and 2017-18. 9. We have considered rival submissions and perused the materials on record. As could be seen from the materials placed before us, this issue was raised for the first time by the assessee before the Tribunal through additional grounds in assessment year 2016-17. In assessment year 2017-18, as well, the assessee did not raise the issue in course of assessment proceedings. Even, before learned DRP no specific objection was raised in this regard. It is the say of the assessee, in course of proceedings before the DRP, the assessee has raised the issue of enhanced claim of ITA No.1000/Del/2022; 539/Del/2021 & 1841/Del/2020 7 | P a g e deduction under section 80IA of the Act through submissions. However, learned DRP has completely ignored the issue while issuing the directions. 10. Having heard the parties and considering the fact that neither the Assessing Officer, nor learned DRP have examined this particular claim of the assessee, we are inclined to restore this issue to the file of the Assessing Officer for verifying assessee’s claim and deciding the issue in accordance with law. However, the Assessing Officer is directed to provide reasonable opportunity of being heard to assessee. The grounds are allowed for statistical purposes. 11. The next issue relates to disallowance of payment made out of marriage fund. This issue arises in assessment years 2016-17 and 2017-18. 12. Briefly the facts are, the assessee created marriage fund long back to assist its employees, who face hardship at the time of marriage of their children. As per the scheme of the fund, both the assessee and employees agreed to contribute nominal amounts. Employees’ contribution is deducted from their salaries and deposited in the fund and corresponding contribution was made by the employer to the fund. While computing taxable ITA No.1000/Del/2022; 539/Del/2021 & 1841/Del/2020 8 | P a g e income, assessee added back the contribution made by it to marriage fund and claimed deduction of payments made out of fund during the year. The Assessing Officer disallowed the deduction claimed following the view taken by him in earlier assessment years. While deciding assessee’s objections on the issue, learned DRP directed the Assessing Officer to verify whether any appeal has been filed by the department against the order of Commissioner (Appeals), who decided the issue in favour of the assessee in assessment year 2015-16 and in case no such appeal was filed, to allow the deduction. However, in the final assessment order, the Assessing Officer retained the addition by stating that department has challenged the order of Commissioner (Appeals) in assessment year 2015-16. 13. Before us, learned CIT(DR) has furnished an affidavit of the Assessing Officer admitting that against the decision of learned Commissioner (Appeals) for assessment year 2015-16 no appeal has been preferred by the department in any higher forum. Considering the aforesaid factual position, we delete the additions in both the assessment years under dispute. These grounds are allowed. ITA No.1000/Del/2022; 539/Del/2021 & 1841/Del/2020 9 | P a g e 14. The next issue relates to disallowance under section 14A of the Act read with rule 8D while computing income both under the normal provisions as well as under section 115JB of the Act. This issue arises in assessment years 2016-17 and 2017-18. 15. Briefly the facts are, though, in the years under consideration, the assessee had not earned any exempt income either by way of dividend or even otherwise, however, suo motu the assessee made some disallowance under section 14A of the Act read with Rule 8D(2)(iii). In the objections raised before learned DRP, the assessee contended that since the assessee had not earned any exempt income in these years, no disallowance under section 14A read with Rule 8D can be made. While deciding the issue, learned DRP, having found that identical arising assessment year 2015-16 has been decided in assessee’s favour by learned Commissioner (Appeals), directed the Assessing Officer to verify whether the department has preferred any appeal against the order of Commissioner (Appeals) and in case it is not so, to delete the addition/adjustment. While implementing the directions of learned DRP in the final assessment order, the Assessing Officer sustained the addition by stating that ITA No.1000/Del/2022; 539/Del/2021 & 1841/Del/2020 10 | P a g e department has preferred appeal against the decision of Commissioner (Appeals). 16. We have considered rival submissions and perused materials on record. Admittedly, in the assessment year under dispute, the assessee had not earned any exempt income. Therefore, as per the settled legal principles, no disallowance under section 14A read with Rule 8D is called for. It is observed, while deciding assessee’s appeal on identical issue in assessment years 2011-12, 2013-14 and 2015-16, learned Commissioner (Appeals), considering the fact that the assessee had not earned any exempt income, deleted the disallowance under section 14A. In an affidavit furnished before us the Assessing Officer has admitted that department has not preferred any appeal against the decision of Commissioner (Appeals) in assessment year 2015- 17. Therefore, in view of specific directions of learned DRP, the disallowances cannot be sustained. Accordingly, we delete them in both the assessment years. Grounds are allowed. 18. The next issue arising for consideration is concerning the nature and character of receipts from sale of Renewable Energy Certificates (RECs), whether capital or revenue. This issue arises ITA No.1000/Del/2022; 539/Del/2021 & 1841/Del/2020 11 | P a g e in all the three assessment years, viz, assessment years 2015-16, 2016-17 and 2018-19. 19. Briefly the facts are, in course of assessment proceedings, the Assessing Officer noticed that though the assessee had substantial receipts from sale of RECs issued by Central Electricity Regulatory Commission (CERC), however, he has not offered them to tax in the respective assessment years under consideration. When the assessee was called upon to explain the reason for not doing so, he replied that the income received from sale of RECs is for fulfillment of its mandate to promote renewable source of energy, hence, not in regular course of business. It was submitted that RECs were not issued to the assessee on account of any business but is a credit given for reducing emissions. Thus, it was submitted, the sale proceeds of RECs are in the nature of capital receipts. In support of such contention, the assessee relied upon a decision of the Hon’ble Andhra Pradesh High Court in case of CIT Vs. My Home Power Ltd. (2014) 46 taxmann.com 314 (AP). 20. The Assessing Officer, however, did not accept assessee’s claim. While doing so, he observed that against the decision of the Hon’ble Andhra Pradesh High Court in case of CIT Vs. My Home ITA No.1000/Del/2022; 539/Del/2021 & 1841/Del/2020 12 | P a g e Power Ltd. (supra), the department has filed a Special Leave Petition (SLP) in the Hon’ble Supreme Court, which has been admitted. Accordingly, he treated the receipts from sale of RECs as revenue in nature and added back to the income of the assessee. The assessee contested the aforesaid additions by filing appeal/objections before learned Commissioner (Appeals)/DRP. However, the additions were sustained. 21. Before us, learned counsel appearing for the assessee submitted that RECs are akin to carbon credits, as, both are incentives provided to energy generating companies. He submitted, like carbon credits, RECs are earned by making use of non-fossil fuel as raw material while generating energy. He submitted, the purpose of incentivizing both RECs and carbon credits is similar as object is to reduce emissions and controlling environmental pollution. He submitted, in case of both RECs and carbon credit the manner of controlling environmental pollution is same, i.e., through offsetting by the seller or the State to meet its renewable purchase obligation. He submitted, since purpose of granting REC is akin to carbon credit, i.e., to benefit and improve the environment, the decision in case of My Home Power Ltd.(supra) will apply. He submitted, merely because SLP filed by ITA No.1000/Del/2022; 539/Del/2021 & 1841/Del/2020 13 | P a g e the department against the decision of the Hon’ble High Court in case of My Home Power Ltd.(supra) has been admitted, the decisions of the Hon’ble High Court and Tribunal would not become inapplicable as the decisions have neither been stayed nor reversed by the Hon’ble Supreme Court. Further, in support of his contention, learned counsel relied upon the following decisions: i. Essel Mining and Industries Ltd. vs. DCIT ITA No. 602/Mum/2021 ii.Dwarikesh Sugar Industries Ltd. vs. NFAC ITA No. 562/Mum/2022 22. Learned Departmental Representative submitted, RECs cannot be considered to be at par with carbon credit as carbon credit was approved under Kyoto Protocol. Further, he submitted, the assessee is not a power generating company but runs a sugar factory. Therefore, assessee’s case factually stands in a different footing than the case of My Home Power Ltd.(supra) and other decisions relied upon by the assessee. 23. We have considered rival submissions in the light of decisions relied upon and perused materials on record. Undisputedly, the assessee has set up a captive power plant for generating power. It generates powers by means of renewable energy using non-fossil fuel such as molasses. It is a fact on ITA No.1000/Del/2022; 539/Del/2021 & 1841/Del/2020 14 | P a g e record that the assessee has received RECs issued by CERC. Before we proceed to decide the issue, whether sale proceeds from RECs are in the nature of capital or revenue, it is necessary to briefly deal with the nature and character of RECs. 24. As per the Electricity Act, 2003, the State Electricity Regulatory Commission is to provide a percentage of consumption of power, which should be procured from renewable energy sources referred as Renewable Purchase Obligation (RPO). The Electricity Act/Policies of the National Action Plan of Climate Change (NAPCC) has provided a road map for increasing share of renewable energy in the total electricity generation capacity in the country. The renewable energy consists of electricity generated using biomass, hydropower, solar and wind technology. The object is to reduce environmental pollution caused by emissions from fossil fuel and its impact on the climate change. Therefore, to encourage use of renewable energy the Government of India launched RECs. RECs are basically market based instruments that certify that the bearer owns 1 mg/hour (MWh) of electricity generated from renewable energy resource. Once, the power provider has fed the energy into the grid, the REC received can be sold in the open market or Indian Energy Exchange (IEX), as ITA No.1000/Del/2022; 539/Del/2021 & 1841/Del/2020 15 | P a g e energy commodity. RECs earned may be sold as a carbon credit to other entities that are polluting to off-set their emissions. 25. Thus, as could be seen from the brief description of REC given above, they are basically issued to incentivize generation of power through renewable energy so as to reduce the effect of emissions, which impact clean environment and leads to global warming. Thus, if we apply the test of purposive interpretation, it can be seen that the object of REC and carbon credits are more or less identical, that is, to reduce the effect of emissions on environment. Therefore, in our view, REC and carbon credit would stand on same footing. For this reason we are unable to accept the contention of learned Departmental Representative that since REC is not approved under Kyoto protocol it cannot be taken at par with carbon credit. 26. In case of one of assessee’s sister concerns, viz; SRF Ltd., the Tribunal while deciding more or less identical issue relating to nature of receipts from transfer of Carbon Emission Reduction (CER) certificates followed the decisions of the Coordinate Bench and Hon’ble Andhra Pradesh High Court in case of My Home Power Ltd.(supra) and held that the receipts are of capital nature. The Coordinate Bench also took note of the fact that the ITA No.1000/Del/2022; 539/Del/2021 & 1841/Del/2020 16 | P a g e introduction of section 115BBG to the to the Act w.e.f. 1 st April, 2018, goes further to suggest that receipts from CERs are not regular business receipts. Therefore, special provision was brought to the statute to tax such kind of receipt by applying concessional rate of tax. The relevant observations of the Coordinate Bench in this regard are as under: “5.0 We have carefully considered the rival contentions and have perused the orders of the lower authorities and judgments relied upon by the revenue and the Ld. AR on the issue under consideration. As observed in various judgments, the ‘Carbon credits’ or CERs represent the ‘privilege /entitlement’ given to the businesses for its efforts resulting in reduction of emission of greenhouse gases. Such CERs are tradable commodity and one party to Kyoto protocol is benefited by selling such entitlement to other parties to Kyoto protocol which are in deficit. During the year under consideration, the assessee has also received certain sum on account of sale of certain CERs entitlement to other parties. All such parties are foreign parties and the amount has been received in foreign currency. The question that we are really required to adjudicate upon is whether such money received by the assessee on sale of CERs/ carbon credits is taxable under Income-tax Act or not. The Hyderabad bench of the Tribunal in case of My Home Power Ltd (Supra) while dealing with the similar issue held 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 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 ITA No.1000/Del/2022; 539/Del/2021 & 1841/Del/2020 17 | P a g e 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 byproduct. 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 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 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 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.” ITA No.1000/Del/2022; 539/Del/2021 & 1841/Del/2020 18 | P a g e “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-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 ground of carbon credits held as under: “5. We have heard the rival submissions in respect of the assessee’s plea for admission of additional grounds and it is our considered opinion that the additional grounds raise a purely legal issue, the facts of which are already available on record. It is well settled that legal ground can be raised any time as per the ratio laid down by the Hon'ble Supreme Court in the case of NTPC Ltd. Vs CIT reported in 229 ITR 383 (SC), therefore, these are admitted.” “6. Coming to the merits of the additional grounds of appeal raised by the assessee, we find that this issue is covered in favour of the assessee by the judgment of the Hon’ble Allahabad High Court in the case of Pr. Commissioner of Income Tax vs. L.H. Sugar Factory Pvt. Ltd. reported in 392 ITR 568 (All.) wherein the Hon’ble Allahabad High Court had held that income from sale of carbon credits/profits from sale of carbon credits is capital in nature. We also find that ITAT Bangalore Bench in the case of Subhash Kabini Power Corpn. Ltd. vs. CIT reported in (2015) 37 ITR (T)106 (Bang .Trib.) had held that once the Assessing Officer had allowed the assessee’s claim of deduction u/s 80-IA in respect of income ITA No.1000/Del/2022; 539/Del/2021 & 1841/Del/2020 19 | P a g e derived from sale of carbon credits, such order was not amendable u/s 263 of the Act. This order of ITAT, Bangalore Bench was also upheld by the Hon’ble Karnataka High Court.” “6.1 Further, ITAT Hyderabad Bench in the case of CIT Vs. My Home Power Ltd. Hyderabad in ITA No. 1114/Hyd/2009 held that carbon credit receipts are capital in nature. This order of ITAT Hyderabad Bench was subsequently upheld by the Hon'ble Andhra Pradesh High Court in 365 ITR 82.” “6.2 Accordingly, respectfully following the ratio of the settled judicial precedent as aforementioned, we allow the additional grounds raised by the assessee and hold that the income from sale of carbon credits is capital in nature.” 5.3 Coming to the judgments relied upon by the AO and the Ld. CIT(A) and which have been further relied by the Ld. DR, we are of opinion that such cases do not support the case of revenue. As pointed out by the Ld. AR, the order of the Cochin Bench of the Tribunal in the case of Apollo Tyres Ltd.{[2014] 47 taxmann.com 416 (Cochin Trib.)} 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’. 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, need arose to bring a special provision under the Act and that too at concessional rate of tax. Further, in any case, in view of amendment being applicable from assessment year 2018-19, the taxability in year concerned, which is AY 2006-07, is not governed by said provisions and hence ITA No.1000/Del/2022; 539/Del/2021 & 1841/Del/2020 20 | P a g e the taxability of carbon credits need to be decided in light of extant judicial position. 5.5 We are in complete agreement with the Ld. AR that the issue in no longer res integra in view of several judgments of Hon’ble High Courts. In the following cases, the Hon’ble High Courts have decided the issue in favour of assessee by holding carbon credits as capital receipts not liable to tax: i. Alembic Limited [ITA Nos. 553/2017 & 554/2017] (Gujarat High Court 28.08.2017) ii. L.H. Sugar Factory Pvt. Ltd. [2016-TIOL-1942-HC-ALL-IT] iii. Ambika Cotton Mills Ltd. [TS-144-HC-2021(MAD)] iv. LancoTanjore Power Co. Ltd. [[2021] 434 ITR 671 (Madras)] v. Tamil Nadu Newsprint & Papers Ltd. [[2021] 130 taxmann.com 213 (Madras)] vi. Arun Textiles Pvt. Ltd. [2016-TIOL-2212-HC-MAD-IT] vii. Rajasthan State Mines and Minerals Ltd. [2017-TIOL-2297- HC-RAJ-IT] viii. Shree Cement Ltd. [ ITA No. 86/204 dated 22.08.2017] ix. SubhashKabini Power Corporation Ltd. {[2016] 69 taxmann.com 394 (Karnataka)} x. Dodson Lindblom Hydro Power Pvt. Ltd. [2019-TIOL-531- HC- MUM-IT] xi. My Home Power Ltd. {[2014] 46 taxmann.com 314 (Andhra Pradesh)} 5.6 Further, we are not aware of any contrary judgment of any High Court on the issue nor the Ld. DR could point out any contrary judgment on the issue. Therefore, respectfully following the ratio of the Hon’ble High Courts as discussed above as well the orders of the ITAT including the jurisdictional bench of the Tribunal, we are of the view that carbon credits/CERs are in nature entitlement accrued to the assessee on account of its efforts to reduce the emission of harmful greenhouse gases. They have arisen due to environmental concerns and therefore cannot be said to be ‘connected with’or ‘incidental to’ the business activities of assessee. The assessee is engaged in the business of refrigerants, engineering plastics and industrial yarns etc. and is not into the business of trading of carbon credits. All these findings of facts have been given by the coordinate bench in assessee’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.” ITA No.1000/Del/2022; 539/Del/2021 & 1841/Del/2020 21 | P a g e 27. In a case of identical nature involving the issue, whether receipts from sale of RECs are capital or revenue in nature, the Coordinate Bench in case of M/s. Dwarikesh Sugar Industries Ltd. Vs. Assessing Officer (NFAC) (supra) has held as under: “9. At the very outset, the Ld. A.R. for the assessee brought to the notice of the Bench that identical issue has already been decided in favour of the assessee in its own case in ITA No.312/M/2019 for A.Y. 2015-16. This fact is also clear for the findings returned by Ld. DRP in the impugned order as under: “FINDINGS OF THE DRP FOR GROUND No. 3 13.1 The submissions of the assessee are considered. It is seen that though the Mumbai ITAT has decided this issue in favour of the assessee for the A.Y. 2015-16, Revenue has not accepted the same, and taken a decision to challenge the order of the ITAT in Bombay High Court. Considering that Revenue has no right to file appeal against the order of DRP, to keep the issue alive, the panel refrains from granting relief to the assessee.” 10. We have perused the order passed by co-ordinate Bench of the Tribunal in assessee’s own case in ITA No.312/M/2019 for A.Y. 2015-16 order dated 24.05.2021 which is on identical issue and decided the same in favour of the assessee by following the decision rendered by Hon’ble Andhra Pradesh High Court in case of CIT vs. My Home Power Ltd. (2014) 365 ITR 082 (AP) by returning following findings: “7. Considered the submissions of the learned Counsel for both the parties and perused the material on record. While going through the judicial pronouncements relied upon by the learned Counsel for the assessee, we find that the issue for our adjudication is squarely covered by the aforesaid decisions relied upon by the learned Counsel wherein in one of the cases relied upon in CIT v/s My Home Power Ltd., [2014] 365 ITR 082 (AP) (supra) filed by the Revenue, the Hon’ble Andhra Pradesh High Court held that the Tribunal had factually found that Carbon Credit was not off–shoot of business but off–shoot of environmental concerns and no asset was generated in course of business but it was ITA No.1000/Del/2022; 539/Del/2021 & 1841/Del/2020 22 | P a g e generated due to environment concerns. Further we find that the Hon’ble A.P. High Court agreed with the factual analysis as the assessee carried on business of power generation and Carbon Credit was not even directly linked with power generation. It is held that on sale of excess Carbon Credits income was received and the Tribunal correctly held that it is capital receipt and could not be a business receipt or income. As a matter of convenience, the observations of the Hon’ble A.P. High Court in CIT v/s My Home Power Ltd., [2014] 365 ITR 082 (AP) (supra) is reproduced below:– “ITAT have considered the aforesaid submission and ITAT 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”. ITAT 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.” 8. Since the issue in hand is mutatis mutandis covered by the aforesaid decision of the Hon’ble A.P. High Court as well as other decisions referred to above, respectfully following the same, we uphold the order of the learned Commissioner (Appeals) by dismissing the ground raised by the Revenue.” 11. When the identical issue has already been decided by the co- ordinate Bench of the Tribunal in assessee’s own case for A.Y. 2015-16 (supra) in favour of the assessee, it is beyond comprehension as to how the Ld. DRP has not followed the same on the pretext that “the Revenue has not accepted the same and taken a decision to challenge the order of ITAT in Bombay High Court to keep the issue alive and as such the panel refrains from granting relief to the assessee”. Such type observation on flimsy grounds are highly uncalled for from such a senior officers of DRP who are expected to follow the judicial discipline. 12. Following the order passed by the co-ordinate Bench of the Tribunal in assessee’s own case for A.Y. 2015-16 (supra), which is based upon the decision rendered by Hon’ble Andhra Pradesh High Court in case of My Home Power Ltd. (supra), we are of the ITA No.1000/Del/2022; 539/Del/2021 & 1841/Del/2020 23 | P a g e considered view that sale of REC (carbon credits) income received by the assessee is a capital receipt and could not be a business receipt or income nor it is directly linked with the business of the assessee nor any asset is generated in the course of business but it is generated due to environmental concern. Therefore, addition made by Ld. TPO/AO to the tune of Rs.8,90,53,500/- on account of sale of RECs/carbon credits during the year under assessment is not sustainable in the eyes of law, hence, ordered to be deleted. Consequently, the appeal filed by the assessee is allowed.” 28. Though, before us, learned Departmental Representative had attempted to make out a case for the Revenue by submitting that RECs are different from carbon credits, however, that is not in sync with the reasoning of the departmental authorities while rejecting assessee’s claim that the receipts from RECs are of capital nature. The only reason on which the departmental authorities have rejected assessee’s claim is, filing of SLP against the decision of the Hon’ble Andhra Pradesh High Court in case of My Home Power Ltd. (supra). Thus, in our view, the decisions cited by learned counsel for the assessee and more particularly, the decisions of the Coordinate Benches discussed hereinabove, clearly support the case of the assessee that the receipts from RECs are not in the nature of revenue receipt. Therefore, we hold that the amounts received by the assessee from sale of RECs, being in the nature of capital receipts, are not taxable at the hands of the assessee. In view of our decision above, the ITA No.1000/Del/2022; 539/Del/2021 & 1841/Del/2020 24 | P a g e alternative claim of the assessee of allowing deduction under section 80IA of the Act on receipts from RECs, no longer survives. 29. Another off-shoot of this issue is whether the receipts from RECs, being in the nature of capital receipts, will form part of book profit computed under section 115JB of the Act. We find, this issue has also been addressed by the Coordinate Bench in case of SRF Ltd. Vs. ACIT (supra) wherein it has been held as under: 6.4 It is a settled law that a capital receipt is not liable to tax under the Act unless it is specifically included in the definition of income u/s 2(24) of the Act and chargeable under any of the charging provisions of the Act. Once a particular receipt is treated as capital receipt, the same cannot be brought to tax in garb of ‘minimum alternative tax’ applicable on book profits computed u/s 115JB of the Act. The ratio of judgment delivered by the Hon’ble High Court of Calcutta in case of Ankit Metal & Power Ltd. [2019] 109 taxmann 93 (Cal) is worth mentioning. In Para no. 27, the Hon’ble Court held that: “27. In this case since we have already held that in relevant assessment year 2010-11 the incentives 'Interest subsidy' and 'Power subsidy' is a 'capital receipt' and does not fall within the definition of 'Income' under Section 2(24) of Income Tax Act, 1961 and when a receipt is not on in the character of income it cannot form part of the book profit under Section 115JB of the Act, 1961. In the case of Appollo Tyres Ltd. (supra) the income in question was taxable but was exempt under a specific provision of the Act as such it 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 115 JB of the Income Tax Act, 1961.” ITA No.1000/Del/2022; 539/Del/2021 & 1841/Del/2020 25 | P a g e 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 offshoot of business but an offshoot of environmental concerns and no assets is generated in the course of business but it is generated due to environmental concerns and therefore, it was held that the Tribunal has correctly held that this is a capital receipt and it cannot be business receipt of income and in this manner, Hon’ble Andhra Pradesh High Court has upheld the Tribunal’s order in that case. The dispute in the present case is also regarding nature of receipt on account of transfer of carbon credit. Ld. DR of the Revenue could not point out any difference in facts in the present case and in the case of CIT Vs. My Home Power Ltd. (Supra) and therefore, respectfully following this judgment of Hon'ble Andhra Pradesh High Court, we decline to interfere in the order of Ld. CIT(A) on this issue. Accordingly, Ground No.1 of the Revenue is rejected.” 6.6 We, therefore, respectfully following the aforesaid ratio of Hon’ble High Court hold 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. The additional ground of appeal no.4 of the assessee is thus allowed.” 30. Thus, respectfully following the ratio laid down by Coordinate Bench, as aforesaid, we hold that the receipts from sale of RECs, being in the nature of capital receipts, should be excluded for the purpose of computing book profit under section 115JB of the Act. Grounds are allowed to the extent indicate above. ITA No.1000/Del/2022; 539/Del/2021 & 1841/Del/2020 26 | P a g e 31. The last and final issue which survives is the issues raised in ground nos. 4 and 5 in assessment year 2017-18. In these grounds assessee has raised the issue of various mistakes in the assessment order, which are as under: “4.1 The Ld. DRPTTPO and consequently the Ld. AO have erred in proposing the addition of entire value of transfer pricing adjustment amounting to Rs.96,48,24,657/- to the total income of the assessee and thus completely ignoring the fact that amount of deduction u/s 80-IA of the Act actually claimed by the assessee in its return of income is only Rs.37,77,45,126/-. The Ld. TPO/AO completely lost sight while making the aforesaid addition which is much higher than the amount of deduction u/s 80-IA actually claimed by the assessee. 4.2 That the Id. AO has erred in computing the income tax demand by considering the total income of the assessee at Rs.2,40,49,21,540/-, while as per the final assessment order dated 31.03.2022, the total income as assessed (although also incorrect) is Rs.2,02,71,76,412/-. 4.3 That the Id. AO has erred in taking an imaginary figure of Rs.1,52,95,21,937/- as book profits u/s 115JB of the Act while the correct book profits as per return of income is Rs.1,51,43,13,700/- 4.4 That the Id. AO has erred in law and on facts in levying interest u/s 234A of the Act amounting to Rs.49,50,967/-, without appreciating that assessee has filed its return of income on 29th November 2017 (i.e. before the due date), and hence the Id. AO erred in law in wrongly charging interest under said section. 4.5 That the Id. AO has erred in raising an incorrect demand on account of DDT payable [Rs.1,06,25,713/-] and interest u/s 115P [Rs.71,19,228/-] completely ignoring that DDT amounting to Rs.1,06,25,713/- has been duly paid by the assessee on time.” ITA No.1000/Del/2022; 539/Del/2021 & 1841/Del/2020 27 | P a g e 32. At the time of hearing, learned counsel appearing for the assessee submitted, pointing out these mistakes the assessee has already filed a rectification application under section 154 of the Act, which is pending before the Assessing Officer. He submitted, similar mistakes committed by the Assessing Officer in assessment year 2016-17 were rectified based on a rectification application filed by the assessee. Thus, he submitted, the issues may be restored back to the Assessing Officer for factually verifying assessee’s claim with reference to the materials on record and carry out necessary rectification. 33. Learned Departmental Representative agreed for restoration of the issues to the Assessing Officer. 34. We have heard the parties and perused the materials on record. As could be seen, grievance of the assessee is against various computational errors committed by Assessing Officer while computing deduction under various provisions of the Act as well as computation of income. As stated before us by learned counsel for the assessee, a rectification application in this regard is pending for disposal before the Assessing Officer. Considering the above, we direct the Assessing Officer to verify assessee’s claim with reference to the rectification application filed under ITA No.1000/Del/2022; 539/Del/2021 & 1841/Del/2020 28 | P a g e section 154 of the Act and thereafter carry out necessary rectification, if warranted, after providing reasonable opportunity of being heard to the assessee. These grounds are allowed for statistical purposes. 35. In the result, the appeals are partly allowed. Order pronounced in the open court on 15 th March, 2023 Sd/- Sd/- (G.S. PANNU) (SAKTIJIT DEY) PRESIDENT JUDICIAL MEMBER Dated: 15 th March, 2023. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi