My Home Power Ltd., Hyderabad V. DCIT, Hyderabad

ITA 1114/HYD/2009

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 66401 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 11 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-11-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 28-04-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 13-11-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M H NAIK
• Assessee Lawyers: S RAMA RAO
• Keywords: Capital asset; Gift; Business income; Depreciation; Cost of acquisition; Capital receipt; Revenue expenditure; Capital expenditure
• Section: 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B', HYDERABAD BEFORE SRI CHANDRA POOJARI, ACCOUNTANT MEMBER & SRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO. 1114/HYD/2009 ASSESSMENT YEAR: 2007-08 M/S. MY HOME POWER LTD. HYDERABAD PAN: AAECM3090K VS. DY. CIT CENTRAL CIRCLE-7, HYDERABAD APPELLANT RESPONDENT APPELLANT BY: SRI S. RAMA RAO RESPONDENT BY: SRI M.H. NAIK DATE OF HEARING: 1 2 . 1 0.2012 DATE OF PRONOUNCEMENT: 02.11.2012 O R D E R PER CHANDRA POOJARI, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF THE CIT(A)-I, HYDERABAD DATED 15 TH OCTOBER, 2009 FOR ASSESSMENT YEAR 2007-08. 2. THE ASSESSEE RAISED THE FOLLOWING GROUNDS OF APPEAL : 1. THE ORDER OF THE LEARNED CIT(A) IS ERRONEOUS BOTH ON FACTS AND IN LAW. 2. THE LEARNED CIT(A) ERRED IN FINALISING THE APPEAL WITHOUT PROVIDING PROPER OPPORTUNITY TO THE APPELLANT. 3. THE LEARNED CIT(A) ERRED IN HOLDING THAT THE AMOUNT REALISED BY TRANSFERRING CARBON CREDITS CER (CERTIFIED EMISSION REDUCTIONS) REPRESENT INCOME FROM TRANSFER OF GOODS AND THAT THE ENTIRE AMOUNT WAS REALISED ON SALE OF SUCH GOODS REPRESENTS INCOME OF THE APPELLANT. 4. THE LEARNED CIT(A) ERRED IN HOLDING THAT REALISATION OF THE CARBON CREDITS REPRESENT THE REVENUE RECEIPT AND NOT A CAPITAL RECEIPT AND FURTHER ERRED IN CONFIRMING THE ADDITION OF RS. 11,75,00,000 MADE BY THE ASSESSING OFFICER. ITA NO. 1114/HYD/2009 M/S. MY HOME POWER LTD. ==================== 2 5. WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED CIT(A) ERRED IN HOLDING THAT THE AMOUNT REALISED ON CARBON CREDITS IS NOT ELIGIBLE FOR DEDUCTION U/S. 80IA OF THE IT ACT. 6. THE LEARNED CIT(A) ERRED IN CONFIRMING THE ORDER OF THE ASSESSING OFFICER IN DETERMINING THE TOTAL INCOME OF THE APPELLANT AT RS. 8,99,61,870 BY TREATING THE REALISATION FROM CARBON CREDITS OF RS. 11.75 CRORES AS THE TAXABLE INCOME OF THE APPELLANT. 3. BRIEF FACTS OF THE ISSUE ARE THAT THE ASSESSEE HAD FILED RETURN OF INCOME FOR THE ASSESSMENT YEAR UNDER CONS IDERATION ON 28.2.2008 SHOWING A LOSS OF RS. 86,54,970. THE COMPANY IS ENGAGED IN THE BUSINESS OF POWER GENERATION THROUGH BIOMASS POWER GENERATION UNIT. DURING THE YEAR UNDER CONSI DERATION IT HAS RECEIVED 1,74,037 CARBON EMISSION REDUCTION CER TIFICATES (CERS) POPULARLY KNOWN AS 'CARBON CREDITS' FOR THE PROJECT ACTIVITY OF SWITCHING OFF FOSSIL FUEL FROM NAPHTHA AND DIESEL TO BIOMASS. IT HAS SOLD 1,70,556 CERS TO A FOREIGN CO MPANY M/S. NOBLE CARBON CREDITS LTD., IRELAND AND HAD RECEIVED AN AMOUNT OF RS. 12.87 CRORES. THE ASSESSEE HAD ACCOUNTED THI S RECEIPT AS CAPITAL IN NATURE AND HAD NOT OFFERED THE SAME FOR TAXATION. THE ASSESSING OFFICER DEALT IN DETAIL THE TAXABILITY OF SALE PROCEEDS ARISING OUT OF THE SALE OF CERS AND HELD THE SAME T O BE A REVENUE RECEIPT SINCE THE CERS ARE A TRADABLE COMMO DITY AND EVEN QUOTED IN STOCK EXCHANGE. ACCORDINGLY, ADDED THE NET RECEIPT OF RS. 11,75,00,000 TO THE RETURNED INCOME. AFTER `GIVING EFFECT TO SET OFF OF BROUGHT FORWARD LOSSES THE TOT AL INCOME WAS DETERMINED AT RS. 8,99,61,870 AND TAX DEMAND OF RS. 3,60,80,529 WAS RAISED. BEING AGGRIEVED, THE ASSES SEE WENT IN APPEAL BEFORE THE CIT(A). THE CIT(A) CONFIRMED TH E ORDER OF THE ALSO AND ALSO GIVEN A FINDING THAT THE AMOUNT WHICH WAS CONSIDERED AS INCOME OF THE ASSESSEE CANNOT BE CONS IDERED AS INCOME FROM BUSINESS AND AS SUCH THE SAME IS NOT EN TITLED FOR ITA NO. 1114/HYD/2009 M/S. MY HOME POWER LTD. ==================== 3 DEDUCTION U/S. 80IA OF THE ACT. AGAINST THIS THE A SSESSEE IS IN APPEAL BEFORE US. 4. THE LEARNED AR SUBMITTED THAT FOR ARRIVING AT THE CONCLUSIONS, THE FIRST ATTEMPT IS TO KNOW THE NATUR E OF THE RECEIPT. THE COMPANY'S MAIN BUSINESS ACTIVITY IS G ENERATION OF BIOMASS BASED POWER. THE RECEIPT IN QUESTION HAS N O RELATIONSHIP WITH THE PROCESS OF PRODUCTION NOR IT IS CONNECTED WITH THE SALE OF POWER OR WITH THE RAW MATERIAL CON SUMED. IT IS NOT EVEN THE SALE PROCEED OF ANY BYE PRODUCT. THE CERCS ARE ISSUED TO EVERY INDUSTRY WHICH SAVES EMISSION OF CA RBON AND NOT LIMITED TO POWER PROJECTS. FURTHER, THE CERTIFICATE S WERE ISSUED KEEPING IN VIEW THE PRODUCTION RELATING TO PERIODS EARLIER TO THE PREVIOUS YEAR UNDER CONSIDERATION. THE AMOUNT IS NO T A COMPENSATION FOR THE LOSS SUFFERED IN THE PROCESS O F PRODUCTION OR EXPENDITURE INCURRED IN ACQUISITION OF CAPITAL A SSETS. 5. THE AR SUBMITTED THAT THE CERTIFICATE ISSUED BY THE UNITED NATIONS FRAMEWORK CONVENTION ON CLIMATE CHANGE (UNF CCC), KYOTO PROTOCOL ONLY INDICATES THE ACHIEVEMENT MADE BY THE ASSESSEE COMPANY IN EMITTING LESSER QUANTITY OF GAS ES THAN THE ASSIGNED QUANTITY. IT DOES NOT MENTION ABOUT EITHER REVENUE OR CAPITAL EXPENDITURE INCURRED BY THE ASSESSEE. THE C ERTIFICATE BY ITSELF DOES NOT HAVE ANY VALUE UNLESS THERE ARE OTH ER INDUSTRIES WHICH ARE IN NEED OF SUCH CERTIFICATES. THE CERTIFI CATE IS NOT DEPENDENT ON PRODUCTION. IN A HYPOTHETICAL SITUATIO N WHERE ALL THE INDUSTRIES IN THE WORLD ARE ABLE TO LIMIT EMISS ION OF GASES TO THE ASSIGNED LEVEL THERE WOULD NOT BE ANY VALUE FOR THE CERTIFICATES ISSUED BY UNFCCC. THE PROCESS OF BUSIN ESS COMMENCES FROM PURCHASE OF RAW MATERIAL AND ENDS WI TH THE SALE OF FINISHED PRODUCT. THE GAIN IS NOT WITHIN AN Y OF THE PROCESS IN BETWEEN AND DOES NOT REPRESENT RECEIPT T O COMPENSATE THE LOSS SUFFERED IN THE PROCESS. THEREF ORE, THE ITA NO. 1114/HYD/2009 M/S. MY HOME POWER LTD. ==================== 4 AMOUNT DOES NOT REPRESENT ANY INCOME IN THE PROCESS OR DURING THE COURSE OF BUSINESS. 6. HE SUBMITTED THAT THE SAID AMOUNT DOES NOT REPRESEN T SUBSIDY FOR ESTABLISHING THE INDUSTRY OR FOR PURCHA SE OF RAW MATERIAL OR A CAPITAL ASSET. THE UNFCCC DOES NOT RE IMBURSE EITHER REVENUE OR CAPITAL EXPENDITURE. IN FACT THE UNFCCC DOES NOT PROVIDE ANY FUNDS TO THE INDUSTRY. IT ONLY CERT IFIES THAT THE INDUSTRY EMITTED A PARTICULAR QUANTITY OF GASES AS AGAINST THE PERMISSIBLE QUANTITY. IT IS NOT, THEREFORE, A SUBSI DY GRANTED TO REIMBURSE THE LOSSES. NO PAYMENT IS IN FACT MADE BY THE UNFCCC BUT ONLY A CERTIFICATE IS ISSUED WITHOUT ANY CONSIDERATION OF PROFIT OR LOSS OR THE ACQUISITION OF CAPITAL ASSETS. THE AMOUNT CANNOT BE CONSIDERED TO BE A PER QUISITE AS THIS IS NOT RECEIVED FROM ANY PERSON HAVING A BUSIN ESS CONNECTION WITH THE COMPANY AND IS NOT RECEIVED IN THE PROCESS OF CARRYING ON THE BUSINESS. THE PERQUISITES ARE TH OSE PROVIDED IN ADDITION TO THE PROFITS OR BENEFITS BY THE BENEF ICIARIES. IT IS DEFINED TO BE AN INCIDENTAL EMOLUMENT IN ADDITION T O THE FIXED INCOME UNLESS THERE EXISTS A BUSINESS CONNECTION NO SUCH BENEFIT CAN BE DERIVED. 7. THE LEARNED AR SUBMITTED THAT, THEREFORE, THE AMOUN T IS NOT FALLING WITHIN ANY OF THE CLAUSES OF SEC. 2(24) OF THE I.T. ACT. THE AMOUNT ALSO WOULD NOT REPRESENT AN INCENTIVE GR ANTED IN THE PROCESS OF BUSINESS ACTIVITY AS THE AMOUNT IS N OT RECEIVED UNDER ANY SCHEME FRAMED BY THE GOVERNMENT OR ANYBOD Y TO BENEFIT THE INDUSTRY OR TO REIMBURSE EITHER THE COS T OF THE RAW MATERIAL OR THE COST OF CAPITAL ASSET. THE AMOUNT A LSO CANNOT BE CONSIDERED AS AN AWARD FOR THE REVENUE LOSS SUFFERE D BY THE COMPANY AS THE AMOUNT IS GRANTED WITHOUT RELEVANCE TO THE FINANCIAL GAINS OR LOSSES. THE PAYMENT IS MADE ABSO LUTELY WITHOUT ANY RELEVANCE TO THE FINANCIAL TRANSACTIONS OF THE ITA NO. 1114/HYD/2009 M/S. MY HOME POWER LTD. ==================== 5 ASSESSEE. THERE IS NO CONSIDERATION FOR PAYING THIS AMOUNT. THE AMOUNT IS PAID IN THE INTEREST OF INTERNATIONAL COM MUNITY AND NOT EITHER IN THE INTEREST OF INDUSTRY AS SUCH OR I N THE INTEREST OF THE ASSESSEE COMPANY OR AS A COMPENSATION FOR THE L OSS/ EXPENDITURE DURING THE COURSE OF BUSINESS. THEREFOR E, THE AMOUNT IS A SORT OF A GIFT GIVEN BY THE UNFCCC FOR THE DISTINCTION ACHIEVED BY THE ASSESSEE COMPANY IN ACH IEVING EMISSION OF LESSER AMOUNT OF GASES THAN THE 'ASSIGN ED AMOUNT'. IT CANNOT, THEREFORE, BE AN INCOME WITHIN THE MEANI NG OF SEC. 2(24) OR SEC. 28 OF THE LT. ACT, 1961. 8. THE LEARNED AR SUBMITTED THAT THE PROVISIONS OF SEC . 2(24) DEFINE THE WORD 'INCOME' WHICH CLEARLY INDICATES TH AT THIS TYPE OF RECEIPTS ARE NOT COVERED BY THE SAID PROVISION. NO DOUBT SUB SECTION (24) OF SECTION 2 ONLY PROVIDES INCLUSIVE D EFINITION FOR THE WORD 'INCOME'. EVEN IF IT IS AN INCLUSIVE DEFINITIO N, IT IS TO BE CONSIDERED WHETHER THE AMOUNT RECEIVED BY THE COMPA NY FALLS WITHIN ANY OF THE CATEGORIES OF INCOME MENTIONED IN THE SAID SUB SECTION OR NOT. THIS TYPE OF RECEIPT IS NOT INCLUDE D IN THE SAID SUB SECTION AS INCOME. THE AMOUNT DOES NOT REPRESEN T ANY CONSIDERATION IN THE PROCESS OF ITS BUSINESS ACTIVI TY. AS ALREADY MENTIONED IN THE EARLIER PARAGRAPH, THE AMOUNT IS N OT FITTING WITHIN ANY OF THE ITEMS MENTIONED IN SEC. 2(24) OF THE LT. ACT NOR RELATES TO THE YEAR OF ACCOUNT. 9. THE AR FURTHER SUBMITTED THAT SIMILAR SITUATIONS AR OSE IN THE PAST. CERTIFICATES WERE ISSUED BY THE GOVERNMEN T FOR EXPORT OF GOODS WHICH WERE CAPABLE OF SALE. THE SALE CONSI DERATION IS HELD AS NOT RELATING TO THE INDUSTRIAL UNDERTAKING AND WAS HELD TO BE RELATED TO THE EXPORT PROMOTION SCHEME ANNOUN CED BY THE GOVERNMENT (CIT VS. STERLING FOODS (1999) 237 ITR 5 79/104 TAXMAN 204 (SC) AT PAGE 209). IN THE SAID SITUATION , EXPORT IS A PART OF TRADE AND THE CERTIFICATE IS GRANTED DURING THE COURSE OF ITA NO. 1114/HYD/2009 M/S. MY HOME POWER LTD. ==================== 6 AND IN CONNECTION WITH THE EXPORT TRADE. SOME OTHER CERTIFICATES WERE ISSUED AGAINST PAYMENT OF DUTY AGAINST PURCHAS E OF RAW MATERIAL AND SUCH CERTIFICATES ACTED AS REIMBURSEME NT OF EXCISE DUTY SUFFERED. IN THE INSTANT CASE THE CERTIFICATES ARE TO BE ATTRIBUTED TO THE CLIMATIC PROTECTION, WHICH IS NOT A PART OF THE BUSINESS. THE SCHEME BY UNFCCC IS IN THE INTEREST O F GLOBAL PROTECTION FROM POLLUTION AND HAS NO RELEVANCE TO T HE BUSINESS ACTIVITIES OF THE ASSESSEE. THEREFORE, THE ASSESSEE IS IN A BETTER SITUATION FOR CLAIMING EXEMPTION. SUCH CERTIFICATES ARE LATER INCLUDED AS INCOME BOTH IN SEC. 2(24) AND IN SEC. 2 8. THE CERTIFICATES RECEIVED BY THE ASSESSEE ARE NOT INCLU DED AS INCOME WITHIN SEC. 2(24) OR IN SEC. 28 OF THE ACT. AN ATTE MPT IS MADE TO INCLUDE THE SAME IN DTC IN THE YEAR 2010 ITSELF AND DTC IS NOT INTRODUCED AS ACT SO FAR. THOUGH THE DTC INCLUDED T HE CERTIFICATES AS INCOME, THE PARLIAMENT IN ITS WISDO M DID NOT AMEND THE IT ACT. THEREFORE, THE INTENTION OF THE P ARLIAMENT IS NOT TO TAX THE CERS, OTHERWISE WHEN THE SAME IS INC LUDED AS INCOME IN THE BILL OF DTC, THERE IS NO OTHER REASON AS TO WHY THE SAME IS NOT INCLUDED IN SEC. 2(24) OR SEC. 28. 10. THE AR SUBMITTED THAT IN THE PAST, INDUSTRIES RECEI VED GRANTS, SUBSIDIES AND INCENTIVES. THE TREATMENT FOR SUCH AMOUNT, MAY ALSO BE RELEVANT. THEY ARE DISCUSSED HE REUNDER W.R.T. THE CIRCULARS ISSUED BY THE CBDT 1. THE CBDT IN CIRCULAR NO. 142 DATED 1-8-1974 REPORTE D IN 95 ITR PAGE 131(ST) OBSERVED THAT THE SUBSIDY RECEIVED UNDER THIS SCHEME FOR HELPING THE GROWTH O F INDUSTRIES WHICH IS NOT MEANT FOR SUPPLEMENTING THE PROFITS IS CONSIDERED AS NOT TAXABLE. IN THE PRESEN T CASE THERE IS NO QUESTION OF SUPPLEMENTING THE PROFITS. 2. CIRCULAR NO. 447 DATED 22.1.1986 WHEREIN THE BOARD ADVISED THAT AWARD RECEIVED BY AN AMATEUR SPORTSMAN IS NOT TAXABLE IN HIS HANDS AS IT IS A CAPITAL RECE IPT. ITA NO. 1114/HYD/2009 M/S. MY HOME POWER LTD. ==================== 7 11. THE AR SUBMITTED THAT THE ASSESSEE'S CASE IS FAR BE TTER THAN THE ABOVE TWO SITUATIONS. THERE IS SOME RELEVA NT TO THE ACTIVITIES. BUT IN THE CASE OF THE ASSESSEE THERE I S NO RELEVANCE. IN THE ABOVE MENTIONED CIRCULARS, THE CBDT EXPRESSE D A VIEW THAT IF THE AMOUNT IS PAID BY WAY OF SUBSIDY TO THE INDUSTRIES ESTABLISHED IN THE BACK- WARD AND REMOTE AREAS WOUL D NOT REPRESENT THE INCOME. ACCORDING TO THE CBDT IF THE AMOUNT IS PAID BY THE GOVERNMENT TOWARDS LOSS SUFFERED ON REV ENUE ACCOUNT, SUCH SUBSIDY WOULD BE TAXABLE. IN CASE THE SUBSIDY IS ON CAPITAL ACCOUNT, IT IS A CAPITAL RECEIPT AND IN CASE THE SUBSIDY IS NOT FOR ANY OF THE TWO, THEN ALSO SUCH SUBSIDY I S TO BE TREATED AS CAPITAL RECEIPT AND SHOULD BE EXEMPTED. THIS IS THE VIEW EXPRESSED BY VARIOUS JUDICIAL PRONOUNCEMENTS AS DIS CUSSED HEREINAFTER. 12. THE AR SUBMITTED THAT THE ABOVE CIRCULARS ARE CITED JUST TO SHOW THAT THE AMOUNT RECEIVED OTHERWISE THAN REV ENUE ACCOUNT IS NOT ASSESSABLE AS THE INCOME AND DOES NO T REPRESENT REVENUE RECEIPT. IN THE CASE OF THE ASSESSEE COMPAN Y, THE AMOUNT RECEIVED DOES NOT REPRESENT THE COMPENSATION FOR THE LOSS ON REVENUE ACCOUNT. THIS AMOUNT ALSO DOES NOT REPRESENT A GAIN DURING BUSINESS ACTIVITIES. THE AMOUNT ALSO DO ES NOT REIMBURSE ANY CAPITAL EXPENDITURE. A READING OF THE FOLLOWING DECISIONS OF VARIOUS COURTS WOULD ALSO INDICATE CLE ARLY THAT SUCH RECEIPTS DO NOT REPRESENT INCOME OF THE COMPANY. TH E ANDHRA PRADESH HIGH COURT IN THE CASE OF CIT VS. CHITRAKAL PA REPORTED IN 177 ITR 540 HELD THAT SUBSIDY RECEIVED BY THE PR ODUCER FOR THE PRODUCTION OF FEATURE FILMS IN THE STATE ARE CA PITAL IN NATURE. IT WAS ALSO HELD THAT THE SAID AMOUNT CANNOT BE CON SIDERED AS THE INCOME OF THE ASSESSEE. THE DECISION OF THE GAU HATI HIGH COURT IN THE CASE OF LACHIT FILMS VS. CIT 195 ITR 4 02 - THE GAUHATI HIGH COURT WAS CONSIDERED THE QUESTION WHET HER THE GRANTS-IN-AID RECEIVED BY THE ASSESSEE FROM THE GOV ERNMENT FOR ITA NO. 1114/HYD/2009 M/S. MY HOME POWER LTD. ==================== 8 PRODUCTION OF FILMS IS A REVENUE RECEIPT OR NOT. TH E HON'BLE HIGH COURT HELD THAT THE GRANTS-IN-AID WAS NOT A PRODUCT OF NORMAL BUSINESS ACTIVITY AND THEREFORE, IS NOT A REVENUE R ECEIPT. THE KERALA HIGH COURT IN THE CASE OF CIT VS. 225 ITR 39 4 UDAYA PICTURES PRIVATE LTD., ALSO HELD THE SAME VIEW THAT THE SUBSIDY RECEIVED BY THE PRODUCER OF CINEMATOGRAPH FILMS IS NOT TAXABLE. THE MADRAS HIGH COURT IN THE CASE OF CIT VS. KANYAK UMARI DISTRICT CO- OPERATIVE SPINNING MILLS LTD., 128 TAX MAN 544 HELD THAT THE SUBSIDY RECEIVED FROM THE STATE GOVERNMENT FOR RECRUITING THE ADI DRAVIDAS BY THE ASSESSEE AS CAPI TAL IN NATURE. THE CALCUTTA HIGH COURT IN THE CASE OF CIT VS. ANAN D AND COMPANY REPORTED IN 233 ITR PAGE 18 OBSERVED THAT S UBSIDY RECEIVED FROM FEDERATION WITHOUT RENDERING ANY SERV ICES IS IN THE NATURE OF VOLUNTARY ASSISTANCE IS IN THE NATURE OF GIFT AND FURTHER HELD THAT THE SAME IS NOT INCLUDABLE FOR TH E PURPOSE OF INCOME. THE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. GOGTE MINERALS REPORTED IN 222 ITR PAGE 245 OBSERVED THAT DEVELOPMENT GRANT RECEIVED BY AN ASSESSEE FOR ACQUI RING MACHINERY AND REPLACING THE OLD MACHINERY IS CAPITA L IN NATURE. THE KERALA HIGH COURT IN THE CASE OF CIT VS. RAJAGI RI RUBBER AND PROJECTS COMPANY LTD., REPORTED IN 182 ITR 393 HELD THAT SUBSIDY RECEIVED BY A RUBBER PLANTATION FOR REPLANT ING RUBBER TREES UNDER THE RE- PLANTATION SUBSIDY SCHEME IS NO T TAXABLE INCOME. THE KERALA HIGH COURT IN THE CASE OF CIT VS RUBI RUBBER WORKS LTD., 178 ITR 181 OBSERVED THAT SUBSID Y GIVEN FOR BENEFICIAL PURPOSES OF PROMOTING PUBLIC INTEREST IS CAPITAL RECEIPT AND NOT A REVENUE RECEIPT. 13. THE AR FURTHER RELIED ON THE DECISION OF THE PUNJAB AND HARYANA HIGH COURT IN THE CASE OF BAGHAPURANA COOPE RATIVE MARKETING SOCIETY LTD., VS. CIT 44 TAXMAN 92 HELD T HAT SUBSIDY RECEIVED BY THE COOPERATIVE MARKETING SOCIETY FROM MARKFED IS CAPITAL RECEIPT AND IS EXEMPT FROM TAX. THE DECISIO N OF THE ITA NO. 1114/HYD/2009 M/S. MY HOME POWER LTD. ==================== 9 CALCUTTA BENCH-B IN THE CASE OF MAGNUM EXPORTS PVT. LTD. VS ACIT REPORTED IN 54 ITD 425 WHEREIN IT IS HELD THAT INCOME ON SALE OF EXPORT LICENCE IS A CAPITAL RECEIPT. THE KE RALA HIGH COURT (FULL BENCH) IN THE CASE OF CIT VS. RUBY RUBBER WOR KS LTD., REPORTED IN 178 ITR 181 HELD THAT THE RUBBER SUBSID Y RECEIVED IS A CAPITAL RECEIPT SINCE IT WAS FOR A PUBLIC PURPOSE AND NOT WITH A VIEW TO REIMBURSE THE EXPENSES INCURRED. THE SAID D ECISION OF THE KERALA HIGH COURT HAS THE APPROVAL OF THE HON'B LE SUPREME COURT IN THE CASE OF KALPATARU ESTATES LTD., VS CIT REPORTED IN 221 ITR 601. 14. HE FURTHER RELIED ON THE CALCUTTA HIGH COURT IN THE CASE OF CIT VS. BALRAMPUR CHINNI MILLS LTD., REPORTED IN 238 ITR 445 HELD THAT THE SURPLUS OF THE SALE CONSIDERATION PER MITTED TO BE COLLECTED BY THE COMPANY WITH A STIPULATION TO USE SAME IN REPAYING THE LOANS TAKEN FROM FINANCIAL INSTITUTION S IS HELD AS CAPITAL INCOME. THE MADRAS HIGH COURT IN THE CASE O F CIT VS. MADHURAKANTAN CO-OPERATIVE SUGAR MILLS REPORTED IN 263 ITR 388 HELD THAT THE AMOUNT COLLECTED ON SALE OF MOLAS SES IS NOT INCOME TO THE COMPANY AS THE SAID AMOUNT IS TO BE U TILIZED FOR THE PURPOSE OF ACQUISITION OF THE SPECIFIED ASSETS. THERE ARE VARIOUS OTHER DECISIONS TO THE EFFECT THAT SUCH REC EIPTS ARE CAPITAL IN NATURE. 15. THE AR SUBMITTED THAT THE ASSESSING OFFICER RELIED ON THE FOLLOWING DECISIONS AND THE SAID DECISIONS HAVE NO APPLICATION TO THE FACTS OF THE CASE, IN VIEW OF THE EXPLANATIONS SUBMITTED HEREUNDER: A) THE ASSESSING OFFICER RELIED ON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF TATA CONSULTANCY SERVI CES VS. STATE OF ANDHRA PRADESH REPORTED IN 271 ITR 401 . ACCORDING TO THE ASSESSING OFFICER, THE CERS REPRES ENT ITA NO. 1114/HYD/2009 M/S. MY HOME POWER LTD. ==================== 10 GOODS AS THEY ARE CAPABLE OF MARKETING. THE SAID CA SE HAS NO APPLICATION-TO THE FACTS OF THE ASSESSEE'S CASE. IN THE SAID CASE, THE COMPANY IS ENGAGED IN THE BUSINESS O F SALE OF COMPUTER SOFTWARE PACKAGES. THE QUESTION WAS WHE THER THE ITEMS TRADED IN ARE GOODS OR NOT FOR THE PURPOS E OF SALES TAX. THE CASE OF THE ASSESSEE IS TOTALLY DIFF ERENT. THE CERS WERE NOT THE STOCK IN TRADE OF THE ASSESSEE. T HERE IS NO RELEVANCE OF THE DECISION OF THE SUPREME COURT T O THE CASE OF THE ASSESSEE'S CASE. B) THE ASSESSING OFFICER ALSO RELIED ON THE DECISI ON OF THE SUPREME COURT IN THE CASE OF BHARAT SANCHAR NIGAM L TD., VS. UNION OF INDIA REPORTED IN 282 ITR 273 TO STATE THAT THE CERS ARE GOODS. THE SUPREME COURT WAS CONSIDERI NG THE CASE OF BSNL WHICH SUPPLIES THE TELE COMMUNICAT ION SYSTEM. THE APEX COURT WAS CONSIDERING THE QUESTION WHETHER THE ELECTROMAGNETIC WAVES OR THE RADIO FREQUENCIES ARE THE GOODS OR NOT. THE HON'BLE SUPRE ME COURT HELD THAT THE RADIO FREQUENCIES ARE NOT GOODS . THERE IS ABSOLUTELY NO RELEVANCE OF THE SAID DECISION TO THE FACTS OF THE ASSESSEE'S CASE. C) THE ASSESSING OFFICER RELIED UPON THE DECISION OF THE HOUSE OF LORDS IN THE CASE OF PONTYPRIDE AND RHONDD A JOINT' WATER BOARD V. OSTIME (H.M. INSPECTOR OF TAX ), (1946) 14 ITR 45. IN THE SAID CASE, THE HOUSE OF L ORDS ARE DEALING WITH A SITUATION WHERE SUBSIDIES FROM PUBLI C FUNDS WERE PROVIDED IN CARRYING ON THE BUSINESS ARE IN THE NATURE OF PROFITS AND GAINS. IT WAS FOUND BY THE HO USE OF LORDS THAT THE SUBSIDY RECEIVED WERE TO MEET AN EST IMATED DEFICIENCY IN THE OPERATION LOSS/TRADING ACTIVITY A ND OBSERVED THAT THE AMOUNTS WERE ADMITTEDLY PAID DURI NG ITA NO. 1114/HYD/2009 M/S. MY HOME POWER LTD. ==================== 11 THE TRADING ACTIVITY. THE SAID CASE HAS NO APPLICAT ION TO THE FACTS OF THE ASSESSEE'S CASE. THE HOUSE OF LORD S ARE DEALING WITH A SITUATION WHERE THE SUBSIDY WAS GRAN TED TO REIMBURSE THE LOSS SUFFERED BY THE WATER BOARD. THE AMOUNT RECEIVED BY THE ASSESSEE IS NOT SUCH A RECEI PT. THEREFORE, THE DECISION OF THE HOUSE OF LORDS HAS N O APPLICATION TO THE FACTS OF THE ASSESSEE'S CASE. SI MILAR IS THE VIEW TAKEN IN THE CASE OF SMART VS. LINCOLNSHIR E SUGAR CO. LTD., REPORTED IN 20 TCU 643 REFERRED TO BY THE ASSESSING OFFICER. THE ASSESSING OFFICER HIMSELF MENTIONED THAT THE AMOUNT OF SUBSIDY WAS PROVIDED T O SUBSIDIZE THE TRADING RECEIPTS. THEREFORE, THE SAID CASE HAS NO APPLICATION TO THE FACTS OF THE ASSESSEE'S C ASE. D) THE ASSESSING OFFICER ALSO REFERRED TO THE DECI SION OF SUPREME COURT IN THE CASE OF V.S.S.V. MEENAKSHI ACH I VS. CIT REPORTED IN 60 ITR 253. IN THE SAID CASE, THE S UPREME COURT FOUND THAT THE AMOUNT FROM THE FUNDS WERE EARMARKED FOR THE ASSESSEE ON THE BASIS OF THE RUBB ER PRODUCED BY THEM AND WERE PAID AGAINST THE EXPENDIT URE INCURRED BY THEM FOR MAINTAINING THE LABOUR AND PRODUCING THE RUBBER. THE FACTS IN THE SAID CASE IN DICATE THAT THE SUBSIDY WAS RECEIVED BY THE ASSESSEE TO COMPENSATE THE REVENUE EXPENDITURE INCURRED IN THE PROCESS OF THE TRADING ACTIVITY WHICH HAS ABSOLUTEL Y NO RELEVANCE TO THE FACTS OF THE ASSESSEE'S CASE. 16. THE AR SUBMITTED THAT FROM THE ANALYSIS OF THE DECI SIONS CITED BY THE ASSESSEE OR THE ASSESSING OFFICER, IT CAN BE SEEN THAT THE SUBSIDIES GRANTED ARE CATEGORIZED INTO THR EE TYPES. A) SUBSIDY GRANTED TO COMPENSATE THE TRADING LOSS OR A MANUFACTURING LOSS WHICH IS HELD AS A REVENUE RECEI PT. ITA NO. 1114/HYD/2009 M/S. MY HOME POWER LTD. ==================== 12 B) SUBSIDY GRANTED TO COMPENSATE THE CAPITAL INVESTMEN T, PURCHASE OF SPECIFIED PLANT AND MACHINERY ETC. THIS SUBSIDY IS HELD TO BE CAPITAL RECEIPT AND ALSO HELD THAT THE SAME SHALL BE REDUCED FROM THE COST OF THE CAPITAL ASSET FOR THE PURPOSE OF ARRIVING AT THE DEPRECIATION. C) SUBSIDY GRANTED FOR THE PUBLIC GOOD IS HELD AS NOT TAXABLE AND NOT DEDUCTABLE FROM CAPITAL ASSET. 17. THE AR SUBMITTED THAT IN SO FAR AS THE AMOUNT RECEI VED FROM THE INTERNATIONAL ORGANIZATIONS, IT IS SUBMITT ED THAT SUCH AMOUNT IS FOR PUBLIC GOOD AND NOT TO COMPENSATE EIT HER THE REVENUE EXPENDITURE OR THE CAPITAL EXPENDITURE AND, THEREFORE, IS NOT TAXABLE. FROM THE ABOVE EXPLANATIONS, IT IS CLE AR THAT THE SUBSIDY RECEIVED BY A PERSON UNCONNECTED WITH THE T RADING OR MANUFACTURE AND MEANT FOR PROMOTION OF PUBLIC GOOD IS CAPITAL IN NATURE. IT IS CLEAR FROM VARIOUS DECISIONS THAT ANY SUBSIDY WHICH COMPENSATE REVENUE EXPENDITURE IS REVENUE IN NATURE AND WHICH COMPENSATE REVENUE EXPENDITURE IS REVENUE IN NATURE AND WHICH COMPENSATES CAPITAL EXPENDITURE IS CAPITAL IN NATURE. WHEN IT IS NEITHER, THE SAME CANNOT BE INCL UDED AS INCOME. 18. THE AR SUBMITTED THAT THE AMOUNT RECEIVED IS NOT TO COMPENSATION EITHER REVENUE TYPE OF EXPENDITURE NOR THE CAPITAL EXPENDITURE INCURRED BY THE ASSESSEE. THEREFORE, TH E SAID AMOUNT CAN NEITHER BE REDUCED FROM THE COST OF THE ASSETS NOR ADDED TO THE INCOME OF THE ASSESSEE. THEREFORE, THE ASSESSEE REQUESTS THE HONOURABLE INCOME-TAX APPELLATE TRIBUN AL TO KINDLY CONSIDER THE ABOVE EXPLANATIONS AND ALLOW TH E APPEAL HOLDING THAT THE AMOUNT RECEIVED FROM CERS DOES NOT REPRESENT THE REVENUE INCOME. ITA NO. 1114/HYD/2009 M/S. MY HOME POWER LTD. ==================== 13 19. ALTERNATIVELY, THE AR SUBMITTED THAT THE AMOUNT REC EIVED IS NOT RELATED TO THE BUSINESS ACTIVITY AND THAT IT DOES NOT REPRESENT A REVENUE RECEIPT. THE ASSESSEE EXPLAINED AS TO HOW THE AMOUNT CANNOT BE CONSIDERED AS A REVENUE RECEIP T. WITHOUT PREJUDICE TO ANY OF THE SUBMISSIONS, THE ASSESSEE R EQUESTS THE TRIBUNAL TO KINDLY CONSIDER THE FOLLOWING CLAIMS: A) IF AS HELD BY THE ASSESSING OFFICER (AS PER THE EXT RACT AT PARA 8 (C) ABOVE THE AMOUNT REPRESENTS A REVENUE RE CEIPT CONNECTED WITH THE BUSINESS ACTIVITY, THE SAME CANN OT BE HELD AS RELATING TO THE YEAR OF ACCOUNT AS THE CERT IFICATE RELATED TO THE EMISSION OF CARBON DURING THE EARLIE R YEARS. IT IS SUBMITTED IN THE EARLIER PARAGRAPHS THAT THE CERS DO NOT RELATE TO THE YEAR OF ACCOUNT. HENCE, THE INCOM E IS NOT ASSESSABLE FOR THE ASSESSMENT YEAR UNDER CONSIDERAT ION. B) EVEN IF IT WERE TO BE CONSIDERED AS A REVENUE RECEI PT FOR THE YEAR UNDER CONSIDERATION, IT IS TO BE EXEMPT U/ S. 80IA AS THE ASSESSING OFFICER HIMSELF CLEARLY MENTIONED THAT IT IS CONNECTED TO THE PRODUCTION OF POWER. IN THE WOR DS OF THE ASSESSING OFFICER THEY ARE DIRECTLY LINKED TO T HE GENERATION OF POWER. THEREFORE, THE ASSESSEE WOULD BE ENTITLED FOR DEDUCTION U/S. 80IA OF THE ACT. C) WITH REGARD TO REJECTION OF THE CLAIM FOR DEDUCTION U/S. 80IA, THE ASSESSING OFFICER RELIED ON THE DECISION OF THE SUPREME COURT IN THE CASE OF CAMBAY ELECTRIC SUPPLY INDUSTRIAL CO., LTD., VS. CIT REPORTED IN 113 ITR 8 4. THE SUPREME COURT IN THE SAID CASE HELD THAT THE INCOME ATTRIBUTABLE TO COVER THE RECEIPTS FROM SOURCES OTH ER THAN THE ACTUAL CONDUCT OF THE BUSINESS OF THE SPECIFIC NATURE ALSO IS ELIGIBLE FOR DEDUCTION. HOWEVER, THE ASSESS ING OFFICER IS OF THE VIEW THAT THE SAID DECISION WAS R EFERRED AS ITA NO. 1114/HYD/2009 M/S. MY HOME POWER LTD. ==================== 14 THE WORD 'ATTRIBUTABLE' AS USED IN SEC. 80I AND WHE REAS THE WORD 'DERIVED FROM' IS USED IN SEC. 80IA OF THE ACT . THEREFORE, THE ASSESSING OFFICER RELIED ON THE DECI SION OF THE SUPREME COURT IN THE CASE OF ASHOK LEYLAND VS. CIT REPORTED IN 224 ITR 122. IN THE SAID CASE, THE SUPR EME COURT CONSIDERED THE ALLOWABILITY OF DEDUCTION U/S 80IA OF THE IT ACT. THE QUESTION BEFORE THE SUPREME COURT W AS WHERE THE PROFIT DERIVED FROM SALE OF IMPORTED PART S CAN BE SAID TO BE ATTRIBUTABLE TO THE PRIORITY NATURE OR N OT. THE SUPREME COURT HELD THAT THE RECEIPT FROM SOURCES OT HER THAN THE ACTUAL CONDUCT OF THE BUSINESS OF GENERATI ON AND DISTRIBUTION OF ELECTRICITY ALSO IS ELIGIBLE FOR DE DUCTION. BOTH THE DECISIONS REFERRED TO ABOVE I.E. 113 ITR 8 4 AND 224 ITR 122 ARE IN FAVOUR OF THE ASSESSEE AND DO NO T SUPPORT THE VIEW OF THE ASSESSING OFFICER. D) THE ASSESSING OFFICER RELIED ON THE DECISION OF THE SUPREME COURT IN THE CASE OF STERLING FOODS VS. CIT REPORTED IN 237 ITR 579 AND THE DECISION OF THE MAD RAS HIGH COURT IN THE CASE OF PANDIAN CHEMICALS LTD., V S. CIT REPORTED IN 233 ITR 497. ACCORDING TO THE ASSESSING OFFICER, THE GAIN ON SALE OF IMPORT ENTITLEMENTS IS NOT ATTRIBUTABLE TO THE INDUSTRIAL ACTIVITY AND, THEREF ORE, THE EXEMPTION U/S. 80IA IS NOT ALLOWED. E) THE DECISIONS OF PUNJAB & HARYANA HIGH COURTS IN TH E CASE OF LIBERTY SHOES LTD. VS. CIT REPORTED IN 293 ITR 478, LIBERTY INDIA VS. CIT REPORTED IN 293 ITR 520 AND S HAKTI FOOT WEAR VS. JCIT REPORTED IN 13 DTR 157 WERE ALSO RELIED UPON BY THE ASSESSING OFFICER. F) IN THIS REGARD, THE AR SUBMITTED THAT THERE IS DIFF ERENCE BETWEEN THE DECISION OF THE APEX COURT AND THE FACT S OF THE ITA NO. 1114/HYD/2009 M/S. MY HOME POWER LTD. ==================== 15 ASSESSEE'S CASE. IN THE CASE OF THE APPELLANT, THE ASSESSING OFFICER ALREADY HELD THAT THE CERS ARE DIRECTLY LIN KED WITH THE PRODUCTION OF POWER AND IN THE CASES DECIDED BY VARIOUS COURTS THE SAME WAS IN DISPUTE. G) IT IS FURTHER SUBMITTED THAT FIRSTLY, THE SALE OF I MPORT LICENSES IS HELD AS BUSINESS RECEIPT AS THE SAME IS INCLUDED IN SEC. 28 OF THE IT ACT. IN SO FAR AS THE GRANT OF CERS IS CONCERNED, THE SAME DOES NOT REPRESENT INCO ME WITHIN THE MEANING OF SEC. 28 OF THE IT ACT. FURTHE R, THE ASSESSING OFFICER AT PAGE NO. 5 OF THE ASSESSMENT O RDER EXTRACTED IN THE ABOVE MENTIONED PARAGRAPHS OBSERVE D THAT THE AMOUNT IS DIRECTLY ATTRIBUTABLE TO THE BUS INESS OF PRODUCTION OF POWER. WHEN THE ASSESSING OFFICER AFT ER HOLDING THAT THE RECEIPT IS ATTRIBUTABLE TO THE BUS INESS ACTIVITY, CANNOT NOW SAY THAT THE INCOME IS NOT DER IVED FROM THE INDUSTRIAL ACTIVITY FOR THE PURPOSES OF SE C. 80IA OF THE IT ACT. THE OBSERVATIONS OF THE ASSESSING OFFIC ER AND THE CIT (APPEALS) ARE CONTRADICTORY. H) FURTHER, IF IT IS RELATED TO PRODUCTION RELATING TO EARLIER YEARS, THE EXPENDITURE RELATABLE TO EARNING OF CERT IFICATES HAS TO BE ARRIVED AT BY TAKING INTO CONSIDERATION T HE ASSETS USED AND THE MATERIAL CONSUMED IN THE EARLIER YEARS AND SUCH AMOUNT HAS TO BE REDUCED. THE NET INCOME CAN O NLY BE SUBJECTED TO TAX AND NOT THE GROSS RECEIPT. THE CERTIFICATION REPORT GIVES THE DATA BASED ON WHICH SUCH CERTIFICATES ARE ISSUED. THE EXPENDITURE ATTRIBUTAB LE TO SUCH ACTIVITIES HAS TO BE REDUCED FROM THE RECEIPTS . 20. WITHOUT PREJUDICE TO ANY OF THE CONTENTIONS, IF THE SECOND VIEW EXPRESSED BY THE LEARNED CIT(A) THAT CERS REPR ESENT GOODS WERE TO BE CONSIDERED, AS SUBMITTED EARLIER THE SAI D GOODS ARE ITA NO. 1114/HYD/2009 M/S. MY HOME POWER LTD. ==================== 16 CAPITAL GOODS AND CANNOT BE CONSIDERED AS STOCK IN TRADE. THE LEARNED CIT (A) HELD THAT THE CERTIFICATES ARE AKIN TO STOCKS OR SHARES. IN SUCH AN EVENT, THEY REPRESENT CAPITAL GO ODS THE GAIN WOULD BE SUBJECT TO TAX AS CAPITAL GAIN. IN SUCH AN EVENT, IT IS SUBMITTED THAT THERE IS NO COST OF ACQUISITION OF S UCH CAPITAL ASSET AND HENCE THE GAIN CANNOT BE SUBJECT TO CAPIT AL GAINS IN VIEW OF THE DECISION OF THE SUPREME COURT IN THE CA SE OF CIT VS. RC SRINIVASA SETTY REPORTED IN 128 ITR 294. IT IS F URTHER SUBMITTED THAT THE AMOUNT SPENT FOR REGISTRATION OF THE CLAIM CANNOT BE CONSIDERED AS THE COST OF ACQUISITION. IT ONLY REPRESENTS THE PROCESS COST FOR MAKING APPLICATIONS ETC. THIS VIEW IS SUPPORTED BY THE DECISION OF THE ITAT, HYDE RABAD BENCH IN THE CASE OF ITO VS. UPPALA VENKATARAO REPORTED I N 83 ITD 273. ON THE OTHER HAND IF IT WERE TO BE HELD THAT T HERE IS COST FORMING PART OF THE MANUFACTURING PROCESS, THE PROP ORTION HAS TO BE DETERMINED AND THE COST SUFFERED FROM THE INC EPTION OF THE COMPANY HAS TO BE ARRIVED AT IN WHICH CASE THERE WO ULD BE NO GAIN. IN VIEW OF THE ABOVE SUBMISSIONS, THE AR SUBM ITTED THAT THE TRIBUNAL MAY PASS APPROPRIATE ORDERS ALLOWING T HE APPEAL. 21. THE LEARNED DR SUBMITTED THAT THE ONLY GRIEVANCE OF THE ASSESSEE IS THAT THE SALE FROM OUT OF TRANSFER/SALE OF CERS POPULARLY KNOWN AS CARBON CREDIT IS NOT TAXABLE AS PER THE PROVISIONS OF THE IT ACT AND IF AT ALL IT IS TAXABL E, THE PROVISION OF SECTION 80IA WOULD APPLY FOR SAID RECEIPTS. THE CO NCEPT OF CARBON TRADING IS IN ITS BUDDING/INFANCY PHASE. BUT NO DOUBT THE GROWTH OF THIS BUSINESS IS TREMENDOUS WORLDWIDE . THE CONCERN FOR GLOBAL WARMING ARISING OUT OF EMISSION OF HARMFUL GASES INTO ATMOSPHERE, MORE PRECISELY THE EMISSION OF CARBON DIOXIDE HAS GIVEN RISE TO THIS CONCEPT OF CARBON TR ADING. THE FAMOUS KYOTO PROTOCOL TRIED TO SOLVE THIS GLOBAL CO NCERN OF HIGH DEGREE OF EMISSION OF HARMFUL GASES. THE IDEA WAS T O DIVIDE THE ENTIRE WORLD INTO TWO, ONE WHICH CAN MAKE CHANGES I N THE ITA NO. 1114/HYD/2009 M/S. MY HOME POWER LTD. ==================== 17 EXISTING INFRASTRUCTURE AND ONE WHO CANNOT. THE IDE A BEHIND THIS WAS THAT EACH COUNTRY WILL HAVE TO CUT DOWN TH EIR EMISSION BY SOME PERCENTAGE OR ELSE HAVE TO PAY HEAVY FINE B Y WAY OF MEASURING HOW MUCH THEY ARE POLLUTING THE AIR. THIS HAS GIVEN RISE TO THE CONCEPT OF 'CLEAN DEVELOPMENT MECHANISM '(CDM) WHICH IS A PROJECT EXECUTED IN A COUNTRY WHERE THEY CANNOT ON THEIR OWN AFFORD TO BRING THAT TECHNOLOGICAL CHANGE IN THE EXISTING INDUSTRY, WHICH CAN RESULT IN LESS CARBON EMISSION. FOR EXAMPLE, A COMPANY IN A DEVELOPED WORLD WOULD LEND MONEY TO A COMPANY IN A DEVELOPING WORLD TO BUY THE NECESSAR Y TECHNOLOGY AND IN TURN OWN UNITS GENERATED BY BRING ING THE TECHNOLOGY CHANGE AND THUS MEET THE TARGET SET. THI S WILL HELP THE DEVELOPING COUNTRIES TO GET MUCH NEEDED FINANCI AL HELP AND IN TURN HELP THE DEVELOPED COUNTRIES TO MEET THE EM ISSION CUT TARGETS SET BY THEIR GOVERNMENT. IF THE COMPANY IN THE DEVELOPING COUNTRY ENDS UP WITH EXCESS UNITS THAN T HE PERMISSIBLE LIMIT, IT CAN SELL THE SAME FOR SOME PR OFIT OUT OF IT. THUS, THE UNDERLYING INTENTION BEHIND THE TECHNOLOG ICAL IMPLEMENTATION BY A COMPANY IN THE DEVELOPING WORLD IS NOT ONLY TO REDUCE THE POLLUTION OF ATMOSPHERE BUT ALSO TO EARN SOME PROFIT FROM OUT OF EXCESS UNITS THAT CAN BE GE NERATED BY IMPLEMENTATION OF THE CDM PROJECT. THE ASSESSING OF FICER WHILE CONSIDERING THE RECEIPT TO BE REVENUE IN NATURE HAS RELIED ON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF TA TA CONSULTANCY SERVICES VS. STATE OF ANDHRA PRADESH. THE RATIONALE LAID DOWN BY HON'BLE SUPREME COURT IN THE ABOVE MENTIONED CASE IS SQUARELY APPLICABLE TO THE CASE O F THE ASSESSEE. IN THAT CASE WHILE DEALING WITH THE ISSUE OF LEVY OF SALES TAX ON COMPUTER SOFTWARE, THE HON'BLE SUPREME COURT HELD THAT A 'GOODS' MAY BE TANGIBLE PROPERTY OR INT ANGIBLE PROPERTY. IT WOULD BECOME 'GOODS' PROVIDED IT HAS T HE ATTRIBUTES THEREOF WITH REGARD TO (A) ITS UTILITY (B) CAPABILI TY OF BEING BOUGHT ITA NO. 1114/HYD/2009 M/S. MY HOME POWER LTD. ==================== 18 AND SOLD (C) CAPABILITY OF BEING TRANSMITTED, TRANS FERRED, DELIVERED, STORED AND POSSESS. THE CER CREDITS CAN BE CONSIDERED AS 'GOODS' AS THEY HAVE ALL THE ATTRIBUT ES OF GOODS AS LAID DOWN IN THE DECISION OF HON'BLE SUPREME COURT. THIS APPROACH WAS REITERATED BY THE SUPREME COURT IN THE CASE OF BSNL VS. UNION OF INDIA (2006) (282 ITR 273). THE D IFFERENT CLAUSES IN THE PURCHASE AGREEMENT BETWEEN THE ASSESSEE COMPANY AND M/S. NOBLE CARBON CREDIT, IREL AND CLEARLY INDICATE THAT THE SALE TRANSACTION OF CER I S NOTHING BUT A TRANSACTION IN 'GOODS'. THE AGREEMENT HAD DIFFERENT CLAUSES REGARDING THE CONTRACT QUANTITY, CONTRACT PRICE, DA TE OF DELIVERY AND THE RECEIPT THEREOF, WHICH ARE' BASICALLY THE A TTRIBUTES IN A TRANSACTION OF SALE OF GOODS. 22. THE DR SUBMITTED THAT, OTHERWISE ALSO, THIS ISSUE C AN BE VIEWED FROM A DIFFERENT ANGLE. THE ASSESSEE SUBMITT ED THAT THE CERTIFICATES ARE IN RECOGNITION OF THE ACHIEVEMENT FOR REDUCING THE POLLUTION. NO DOUBT BY IMPLEMENTING THE CDM PRO JECT THE ASSESSEE GETS THE BENEFIT OF EFFICIENCY IN RESPECT OF REDUCING THE POLLUTION. HAD THERE BEEN NO OTHER BENEFIT ATTACHED TO IT, IN THE NORMAL SITUATION, THE ASSESSEE COMPANY WOULD NOT HA VE BOTHERED FOR OBTAINING THE CERS. IT IS BECAUSE WHAT EVER EXPENDITURE IS INCURRED FOR IMPLEMENTATION OF THE P ROJECT AS A POLLUTION REDUCTION MEASURE, THE ASSESSEE WOULD HAV E GOT THE BENEFIT OF THE EXPENDITURE INCURRED BY CLAIMING IT IN ITS PROFIT AND LOSS ACCOUNT. SINCE THERE IS SOMETHING MORE TO THIS AND SINCE IT IS KNOWN THAT THE CERTIFICATES ISSUED BY U NFCCC HAVE INTRINSIC VALUE AND HAS A READY MARKET FOR ITS REDE MPTION/ TRADING, THAT THE ASSESSEE OBVIOUSLY PURSUED TO OBT AIN THE SAID CERTIFICATES. HE SUBMITTED THAT 'CARBON CREDITS' HA S A READY MARKET WORLDWIDE AND IT IS UNDERSTOOD THAT THESE AR E ALSO QUOTED IN THE INTERNATIONAL MARKET. FOR EXAMPLE THE RE IS REGULAR TRADING IN CARBON CREDIT IN EUROPEAN CLIMATE EXCHAN GE BASED ITA NO. 1114/HYD/2009 M/S. MY HOME POWER LTD. ==================== 19 AT LONDON WHERE THE TRADING IS APPARENTLY WEB- BASE D. SIMILAR TRADING ALSO TAKES PLACE THROUGH THE WEBSITE OF NOR DPOOL.COM A NORWAY BASED WEBSITE, BLUENEXT.COM A PARIS BASED WE BSITE AND CHICAGO CLIMATE EXCHANGE, CHICAGO USA. OF LATE, THE TRADING HAS APPARENTLY COMMENCED IN INDIA THROUGH MCX (MULT I COMMODITY EXCHANGE) AND NCDEX (NATIONAL COMMODITY A ND DERIVATIVE EXCHANGE). THUS THE CERTIFICATES (CERS) ARE AKIN TO SHARES OR STOCK WHICH ARE TRANSACTED IN THE STOCK E XCHANGE. HENCE, THE SALE PROCEEDS ARISING OUT OF SALE OF THE CERS BY THE ASSESSEE IS A REVENUE RECEIPT AND RIGHTLY BROUGHT T O TAX BY THE ASSESSING OFFICER. ACCORDINGLY, THE DR SUBMITTED TH AT THE STAND TAKEN BY THE ASSESSING OFFICER IS JUSTIFIED AND THE RECEIPT ARISING OUT OF THE SALE OF CERS IS REVENUE IN NATURE AND HE NCE TAXABLE. 23. THE DR SUBMITTED THAT THE NEXT QUESTION IS WHETHER THE SAID RECEIPT WILL ENTITLE THE ASSESSEE TO CLAIM DED UCTION U/S. 80IA. THE VIEW OF THE ASSESSING OFFICER THAT THE SA ID RECEIPTS ARE NOT DIRECTLY AND INEXTRICABLY RELATED TO THE BUSINE SS OF THE UNDERTAKING IS JUSTIFIED. IT IS OBVIOUS THAT GENER ATION AND SALE OF CER IS NOT THE BUSINESS OF THE ASSESSEE. HOWEVER , THE SAID CERS ACCRUED TO THE ASSESSEE IN VIEW OF IMPLEMENTAT ION OF THE CDM PROJECT FOR ITS EXISTING BUSINESS THE BASIC PUR POSE OF WHICH WAS REDUCTION OF POLLUTION. TO THAT EXTENT, THOUGH THE CERS ARE ACCRUED IN COURSE OF THE BUSINESS OPERATIONS OF THE ASSESSEE BUT ARE NOT DIRECTLY CONNECTED TO THE BUSINESS OF THE I NDUSTRIAL UNDERTAKING. IT IS ONLY INCIDENTAL TO THE BUSINESS. THE ASSESSING OFFICER HAS RELIED ON THE DECISION OF HON'BLE PUNJA B AND HARYANA HIGH COURT IN THE CASE OF LIBERTY SHOE LTD VS. CIT AND LIBERTY INDIA VS. CIT REPORTED IN 293 ITR. THE ASS ESSING OFFICER HAS ALSO RELIED ON THE DECISION OF SUPREME COURT IN THE CASE OF STERLING FOOD LTD AND THE DECISION OF MADRAS HIGH C OURT IN THE CASE OF PANDIAN CHEMICALS. THE CONTENTION OF THE AS SESSEE IS THAT ONCE THE ASSESSEE QUALIFIES FOR DEDUCTION U/S. 80IA OF THE ITA NO. 1114/HYD/2009 M/S. MY HOME POWER LTD. ==================== 20 ACT BY BEING COVERED BY THE DESCRIPTION INDUSTRIAL UNDERTAKING ANY PROFIT EARNED BY THE BUSINESS OF THE ASSESSEE W AS ELIGIBLE FOR DEDUCTION AND IT WAS NOT NECESSARY THAT THE BUSINES S MUST BE FROM THE ACTIVITY OF THE INDUSTRIAL UNDERTAKING. IT HAS BEEN HELD BY VARIOUS COURTS THAT IF THE INCOME IS FROM A DIFF ERENT AND INDEPENDENT SOURCE, THE SAME MAY NOT BE ELIGIBLE FO R DEDUCTION U/S, 80IA/80IB. IN THE CONTEXT OF DEPB BENEFITS, TH E HON'BLE PUNJAB AND HARYANA HIGH COURT HELD THAT FOR APPLICA TION OF THE WORDS 'DERIVED FROM' THERE MUST BE A DIRECT NEXUS B ETWEEN PROFITS AND GAINS AND THE INDUSTRIAL UNDERTAKING. THE INCOME OF THE ASSESSEE FROM DUTY DRAW BACK CANNOT BE HELD TO BE INCOME DERIVED FROM SPECIFIED BUSINESS. THIS VIEW OF HON'B LE PUNJAB AND HARYANA HIGH COURT HAS BEEN CONFIRMED BY THE HO N'BLE SUPREME COURT REFERRED TO ABOVE. SINCE THE INCOME FROM SALE OF CERS IS INDEPENDENT OF THE MAIN BUSINESS OF POWER G ENERATION IT CANNOT BE SAID THAT THE RECEIPT FROM SALE OF CER S WOULD AUTOMATICALLY BE ENTITLED FOR DEDUCTION U/S. 80IA B Y VIRTUE OF THE FACT THAT THE POWER GENERATION BUSINESS OF THE ASSESSEE IS ENTITLED FOR DEDUCTION U/S. 80IA. THUS THE ARGUMENT OF THE ASSESSEE IS NOT ACCEPTABLE AND HENCE DESERVES TO BE REJECTED. THE JUDICIAL DECISIONS RELIED UPON BY THE ASSESSEE IN ITS SUBMISSION RELATE TO TAXABILITY OF SUBSIDY. ACCORDI NGLY, THE SALE PROCEEDS OF THE CERS CANNOT BE EQUATED WITH SUBSIDY AND HENCE THE APPLICABILITY OF THE CASE-LAW RELIED ON B Y THE ASSESSEE DOES NOT ARISE. THUS, CONSIDERING THE TOTALITY OF THE FACTS, THE DR WAS OF THE VIEW THAT THE ASSESSING OFFICER HAS R IGHTLY REJECTED THE CLAIM OF DEDUCTION U/S. 80IA OF THE AC T. 24. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. CARBON CREDIT IS IN THE NATURE OF 'AN E NTITLEMENT' RECEIVED TO IMPROVE WORLD ATMOSPHERE AND ENVIRONMEN T REDUCING CARBON, HEAT AND GAS EMISSIONS. THE ENTIT LEMENT EARNED FOR CARBON CREDITS CAN, AT BEST, BE REGARDED AS A CAPITAL ITA NO. 1114/HYD/2009 M/S. MY HOME POWER LTD. ==================== 21 RECEIPT AND CANNOT BE TAXED AS A REVENUE RECEIPT. IT IS NOT GENERATED OR CREATED DUE TO CARRYING ON BUSINESS BU T IT IS ACCRUED DUE TO 'WORLD CONCERN'. IT HAS BEEN MADE A VAILABLE ASSUMING CHARACTER OF TRANSFERABLE RIGHT OR ENTITLE MENT ONLY DUE TO WORLD CONCERN. THE SOURCE OF CARBON CREDIT IS W ORLD CONCERN AND ENVIRONMENT. DUE TO THAT THE ASSESSEE GETS A P RIVILEGE IN THE NATURE OF TRANSFER OF CARBON CREDITS. THUS, TH E AMOUNT RECEIVED FOR CARBON CREDITS HAS NO ELEMENT OF PROFI T OR GAIN AND IT CANNOT BE SUBJECTED TO TAX IN ANY MANNER UNDER A NY HEAD OF INCOME. IT IS NOT LIABLE FOR TAX FOR THE ASSESSMEN T YEAR UNDER CONSIDERATION IN TERMS OF SECTIONS 2(24), 28, 45 AN D 56 OF THE INCOME-TAX ACT, 1961. CARBON CREDITS ARE MADE AVAI LABLE 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 CRED IT GIVEN TO THE ASSESSEE UNDER THE KYOTO PROTOCOL AND BECAUSE OF IN TERNATIONAL UNDERSTANDING. THUS, THE ASSESSEES WHO HAVE SURPLU S CARBON CREDITS CAN SELL THEM TO OTHER ASSESSEES TO HAVE CA PPED EMISSION COMMITMENT UNDER THE KYOTO PROTOCOL. TRAN SFERABLE 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 CAR BON CREDIT. THE AMOUNT RECEIVED IS NOT RECEIVED FOR PRODUCING A ND/OR SELLING ANY PRODUCT, BI-PRODUCT OR FOR RENDERING AN Y SERVICE FOR CARRYING ON THE BUSINESS. IN OUR OPINION, CARBON C REDIT IS ENTITLEMENT OR ACCRETION OF CAPITAL AND HENCE INCO ME EARNED ON SALE OF THESE CREDITS IS CAPITAL RECEIPT. FOR THIS PROPOSITION, WE PLACE RELIANCE ON THE JUDGEMENT OF THE SUPREME COUR T 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 AGRE EMENT FOR ITA NO. 1114/HYD/2009 M/S. MY HOME POWER LTD. ==================== 22 CONTROL OF PRODUCTION WAS CAPITAL RECEIPT AND NOT I NCOME. BEING SO, THE CONSIDERATION RECEIVED BY THE ASSESSEE IS S IMILAR TO CONSIDERATION RECEIVED BY TRANSFERRING OF LOOM HOUR S. THE SUPREME COURT CONSIDERED THIS FACT AND OBSERVED THA T TAXABILITY OF PAYMENT RECEIVED FOR SALE OF LOOM HOURS BY THE A SSESSEE 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 S OME 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 O F THE OPINION THAT THE CONSIDERATION RECEIVED ON ACCOUNT OF CARBO N CREDITS CANNOT BE CONSIDERED AS INCOME AS TAXABLE IN THE AS SESSMENT 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 GENER ATED DUE TO ENVIRONMENTAL CONCERNS. CREDIT FOR REDUCING CARBO N EMISSION OR GREENHOUSE EFFECT CAN BE TRANSFERRED TO ANOTHER PARTY IN NEED OF REDUCTION OF CARBON EMISSION. IT DOES NOT INCRE ASE PROFIT IN ANY MANNER AND DOES NOT NEED ANY EXPENSES. IT IS A NATURE OF ENTITLEMENT TO REDUCE CARBON EMISSION, HOWEVER, THE RE IS NO COST OF ACQUISITION OR COST OF PRODUCTION TO GET THIS EN TITLEMENT. CARBON CREDIT IS NOT IN THE NATURE OF PROFIT OR IN THE NATURE OF INCOME. 25. FURTHER, AS PER GUIDANCE NOTE ON ACCOUNTING FOR SEL F- GENERATED CERTIFIED EMISSION REDUCTIONS (CERS) ISSU ED 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 GEN ERATING ENTITIES AS THEY ARE GENERATED AND HELD FOR THE PUR POSE OF SALE IN ORDINARY COURSE. EVEN THOUGH CERS ARE INTANGIBLE A SSETS THOSE ITA NO. 1114/HYD/2009 M/S. MY HOME POWER LTD. ==================== 23 SHOULD BE ACCOUNTED AS PER AS-2 (VALUATION OF INVEN TORIES) AT A COST OR MARKET PRICE, WHICHEVER IS LOWER. SINCE CE RS ARE RECOGNISED AS INVENTORIES, THE GENERATING ASSESSEE SHOULD APPLY AS-9 TO RECOGNISE REVENUE IN RESPECT OF SALE OF CER S. 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 GR OUND OF THE ASSESSEE BECOMES INFRUCTUOUS AND THE SAME IS DISMISSED. 28. IN THE RESULT, ASSESSEE'S APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 2 ND NOVEMBER, 2012. SD/- (SAKTIJIT DEY) JUDICIAL MEMBER SD/- (CHANDRA POOJARI) ACCOUNTANT MEMBER HYDERABAD, DATED 2 ND NOVEMBER, 2012 TPRAO COPY FORWARDED TO: 1. M/S. MY HOME POWER LTD., C/O. SRI S. RAMA RAO, ADVO CATE, 102, SHRIYA'S ELEGANCE, DOOR NO. 3-6-643, ST. NO. 9 , HIMAYATHNAGAR, HYDERABAD. 2. THE DCIT, CENTRAL CIRCLE-7, HYDERABAD. 3. THE CIT(A)-I, HYDERABAD. 4. THE CIT (CENTRAL), HYDERABAD. 5. THE DR B BENCH, ITAT, HYDERABAD