Deputy Commissioner of Income-Tax, Bangalore V. M/s.Bhoruka Power Corporation Ltd., Bangalore

ITA 1734/BANG/2016

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 9049 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 10 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-08-2020
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2010-2011
• Appeal Filed On: 04-10-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PRADEEP KUMAR BENGALURU
• Keywords: Capital asset; Earning of tax free income; Wholly owned subsidiary; Capital receipt; Rule 8D; Set aside
• Section: 14A; 43

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI B R BASKARAN , ACCOUNTANT MEMBER IT A NO. 1734/BANG/2016 ASSESSMENT YEAR: 2010 - 11 THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 1(1)(2), BANGALORE. VS. M/S. BHORUKA POWER CORPORATION LTD., NO.48, LAVELLE ROAD, BANGALORE 560 001. PAN: AACCB 1422A APPELLANT RESPONDENT APPELLANT BY : SHRI PRADEEP KUMAR, CIT(DR)(ITAT), BENGALURU. RESPONDENT BY : SMT. SHEETAL BORKAR, ADVO C ATE DATE OF HEARING : 05 .0 8 .2020 DATE OF PRONOUNCEMENT : 07 .0 8 .2020 O R D E R PER N.V. VASUDEVAN, VICE PRESIDENT THIS APPEAL BY THE REVENUE IS AGAINST THE ORDER DA TED 04.08.2016 OF CIT(APPEALS)-14, LTU, BANGALORE RELATING TO ASSESSM ENT YEAR 2010-11. 1. THE ORDER OF THE LEARNED CIT (APPEALS), IN SO FAR AS IT IS PREJUDICIAL TO THE INTEREST OF REVENUE, IS OPPOSED TO LAW AND THE FACTS AND CIRCUMSTANCES OF THE CASE. 2. THE LEARNED CIT(APPEALS) ERRED IN ALLOWING THE A LTERNATE PLEA OF THE ASSESSEE THAT THE CONSIDERATION RECEIVE D ON SALE OF CARBON CREDITS WAS A CAPITAL RECEIPT WITHOUT APPREC IATING THAT CERTIFIED EMISSION REDUCTION (CER) ARE NOT AWARDED AS A SUBSIDY BUT GRANTED AS AN INCENTIVE FOR USE OF ALTE RNATIVE FUEL WHICH IS A REVENUE ITEM; THAT THEY ARE NOT GRANTED AGAINST OR IN LIEU OF ANY CAPITAL ASSET; THAT IT IS NOT GRANTED I N LIEU OF ITA NO.1734/BANG/2016 PAGE 2 OF 8 DESTRUCTION OR IMPAIRMENT OF PROFIT MAKING APPARATU S; THAT IT IS NOT AWARDED FOR TRANSFER OF ANY CAPITAL ASSET NOR G RANTED AS SUBSIDY OR COMPENSATION FOR PARTLY MEETING THE COST OF THE PLANT AND MACHINERY AND THAT ACCORDING TO AS-9, CERS ARE CONSIDERED AS INVENTORIES AND VALUED ACCORDINGLY BY THE INDUST RY. 3. THE LD.CIT(A) ERRED IN UPHOLDING THE GROUND ON C LAIM OF CARBON CREDITS AS CAPITAL RECEIPTS BY THE ASSESSEE BY RELYING ON THE DECISIONS IN THE CASE OF M/S MY HOME POWER LTD. (VO L.365 PAGE 82 OF ITR) AND M/S AMBUTHIRTHA POWER PVT. LTD IN IT A NO.465(BNG)/2013 AS THE AFORESAID DECISIONS HAVE NO T BEEN ACCEPTED BY THE DEPARTMENT AND REVENUE IS IN FURTHE R APPEAL, HENCE THE ISSUE HAS NOT REACHED FINALITY. 4. THE LD.CIT(A) ERRED IN ALLOWING THE GROUND OF AP PEAL OF THE ASSESSEE PERTAINING TO DISALLOWANCE U/S 14A R.W .R 8D OF THE IT ACT THEREBY DELETING THE ADDITION OF RS.2,91,230/- BECAUSE IN THE CASE OF MAXOPP INVESTMENTS LTD. VS. CIT (TS-668-HC- 2011(HC)) AND ITAT KOLKATA BENCH 'B' ORDER IN THE C ASE OF COAL INDIA LTD. DTD. 13.5.2015 IT IS HELD THAT INVESTMEN TS IN SUBSIDIARY COMPANIES ALSO ATTRACT DISALLOWANCE U/S 14A. 5. FOR THESE AND SUCH OTHER GROUNDS THAT MAY BE URG ED AT THE TIME OF HEARING, IT IS HUMBLY PRAYED THAT THE ORDER OF THE CIT(A) BE REVERSED AND THAT OF THE ASSESSING OFFICER BE RE STORED. 6. THE APPELLANT CRAVES LEAVE TO ADD, TO ALTER, TO AMEND OR DELETE ANY OF THE GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING OF APPEAL. 2. GROUND NOS. 1, 5 & 6 ARE GENERAL IN NATURE AND D O NOT CALL FOR ANY SPECIFIC ADJUDICATION. 3. AS FAR AS GROUNDS NO.2 & 3 ARE CONCERNED, THE IS SUE IS WITH REGARD TO TAXABILITY ON ACCOUNT OF CARBON CREDIT. THE ASSE SSEE IS A COMPANY ENGAGED IN THE BUSINESS OF GENERATION OF HYDRO AND WIND POWER. THE ASSESSEE WAS ENTITLED TO CLAIM DEDUCTION U/S. 80 I A OF THE INCOME-TAX ACT, 1961 [THE ACT] IN RESPECT OF BUSINESS OF GENERATION OF POWER. THE ASSESSEE ITA NO.1734/BANG/2016 PAGE 3 OF 8 CLAIMED A SUM OF RS.20,74,42,471 AS DEDUCTION U/S. 80 I A OF THE ACT. IN THE CLAIM FOR DEDUCTION U/S. 80IA, THE ASSESSEE ALSO IN CLUDED RECEIPT OF RS.5,91,59,000 FROM SALE OF CARBON CREDIT. THE AO HELD THAT RECEIPT OF ACCOUNT OF SALE OF CARBON CREDIT IS NOT DERIVED FRO M ELIGIBLE BUSINESS AND DENIED THE BENEFIT U/S. 80 I A OF THE ACT, TO THE EXTENT OF RECEIPT ON ACCOUNT OF SALE OF CARBON CREDIT. ALTERNATIVELY, THE ASSES SEE CLAIMED THAT THE RECEIPT ON ACCOUNT OF CARBON CREDIT IS A CAPITAL RE CEIPT NOT CHARGEABLE TO TAX. THE AO, HOWEVER, REJECTED THIS CONTENTION AND HELD THAT IT IS A REVENUE RECEIPT CHARGEABLE TO TAX. 4. ON APPEAL BY THE ASSESSEE, THE CIT(APPEALS) ALLO WED THE ALTERNATIVE CLAIM OF THE ASSESSEE FOLLOWING THE DEC ISION OF THE HONBLE ANDHRA PRADESH HIGH COURT IN CIT V. MY HOME POWER LTD., 385 ITR 82 (AP). AGGRIEVED BY THE ORDER OF CIT(APPEALS), THE REVEN UE HAS RAISED GROUND NOS.2 & 3 BEFORE THE TRIBUNAL. 5. THE HONBLE ANDHRA PRADESH HIGH COURT IN CASE OF MY HOME POWER LTD. (SUPRA) HELD THAT 'CARBON CREDIT WAS NOT AN OF FSHOOT OF BUSINESS OF THE ASSESSEE BUT AN OFFSHOOT OF ENVIRONMENTAL CONCERNS. NO ASSET WAS GENERATED IN THE COURSE OF BUSINESS BUT IT WAS GENE RATED DUE TO ENVIRONMENTAL CONCERNS. THERE WAS NO COST OF ACQUIS ITION OR COST OF PRODUCTION TO GET ENTITLEMENT FOR THE CARBON CREDIT S. THEREFORE, THE INCOME FROM SALE OF CARBON CREDITS WAS TO BE CONSIDERED AS CAPITAL RECEIPT AND NOT LIABLE TO TAX UNDER ANY HEAD OF INCOME UNDER THE IN COME-TAX ACT, 1961. ' 6. THE ITAT CHENNAI IN CASE OF AMBIKA COTTON MILLS LTD. V. DEPUTY COMMISSIONER OF INCOME- TAX [27 ITR(TRIB) 44] HELD THAT ' THE REALISATION OF CARBON CREDIT WAS TO BE CONSIDERED AS CAPITAL RECEI PT. ITA NO.1734/BANG/2016 PAGE 4 OF 8 7. THE ITAT, JAIPUR IN CASE OF SHREE CEMENT LTD. VS . ACIT [31 ITR(TRIB) 513] HELD THAT ' CARBON CREDIT IS IN THE NATURE OF 'AN ENTITLEMENT' RECEIVED TO IMPROVE WORLD ATMOSPHERE AND ENVIRONMEN T REDUCING CARBON, HEAT AND GAS EMISSIONS. THE ENTITLEMENT EARNED FOR CARBON CREDITS IS A CAPITAL RECEIPT AND CANNOT BE TAXED AS A REVENUE RECEIPT. I T IS NOT GENERATED OR CREATED DUE TO CARRYING ON BUSINESS BUT IT IS ACCRU ED DUE TO 'WORLD CONCERN '. IT HAS BEEN MADE AVAILABLE ASSUMING CHARACTER OF TR ANSFERABLE RIGHT OR ENTITLEMENT ONLY DUE TO WORLD CONCERN. THE SOURCE O F CARBON CREDIT IS WORLD CONCERN AND ENVIRONMENT. DUE TO THAT THE ASSESSEE G ETS A PRIVILEGE IN THE NATURE OF TRANSFER OF CARBON CREDITS. THUS, THE AMO UNT RECEIVED FOR CARBON CREDITS HAS NO ELEMENT OF PROFIT OR GAIN AND IT CAN NOT BE SUBJECTED TO TAX IN ANY MANNER UNDER ANY HEAD OF INCOME .' IN CIT VS. SUBHASH KABINI POWER CORPORATION LTD. 385 ITR 592 (KARN.), THE HONBLE K ARNATAKA HIGH COURT UPHELD THE VIEW TAKEN BY THE TRIBUNAL THAT RECEIPTS ON ACCOUNT OF CARBON CREDIT ARE CAPITAL RECEIPTS NOT CHARGEABLE TO TAX. 8. IN VIEW OF THE AFORESAID JUDGMENTS, WE DO NOT FI ND ANY MERIT IN GROUND NO.2 & 3 RAISED BY THE REVENUE. ACCORDINGLY GROUND NO.2 & 3 RAISED BY THE REVENUE ARE DISMISSED. 9. AS FAR AS GROUND NO.4 RAISED BY THE REVENUE REG ARDING DISALLOWANCE U/S. 14A R.W. RULE 8D IS CONCERNED, THE AO ON NOTIC ING THAT THE ASSESSEE HAS EARNED EXEMPT INCOME, INVOKED THE PROVISIONS OF SECTION 14A OF THE ACT AND DISALLOWED A SUM OF RS.2,91,230 AS EXPENSES ATTRIBUTABLE TO EARNING OF EXEMPT INCOME AS PER THE FOLLOWING DETAI LS:- ITA NO.1734/BANG/2016 PAGE 5 OF 8 A. TOTAL AMOUNT OF DIRECT INTEREST/ OTHER EXPENSES PERTAINING TO TAX-EXEMPT INVESTMENTS U/R 8D(2)(I) NIL B. TOTAL AMOUNT OF INDIRECT INTEREST PERTAINING TO TAX-EXEMPT INVESTMENTS 2,19,22,000 A.Y 09-10 A.Y 10-11 AVERAGE C. AVERAGE AMOUNT OF TAX EXEMPT INVESTMENTS 37,14,000 83,98,000 60,56,000 D. AVERAGE AMOUNT OF TOTAL ASSETS 466,02,36,000 551,45,49,000 508,73,92,500 E. PROPORTIONATE INDIRECT INTEREST TO BE DISALLOWED B X C D 2,19,22,000 X 60,56,000 508,73,92,500 = 2,60,950 F. 0.5% OF AVERAGE AMOUNT OF TAX EXEMPT INVESTMENTS 30,280 G. TOTAL DISALLOWANCE ATTRACTED U/S. 14A READ WITH RULE 8D A + E + F 2,91,230 THIS AMOUNT OF RS.2,91,230/- WAS HELD TO BE LIABLE TO BE DISALLOWED U/S. 14A READ WITH RULE 8D OF THE INCOME TAX ACT AND ACC ORDINGLY ADDITION OF RS. 2,91,230/- WAS MADE TO THE RETURNED INCOME. 10. BEFORE THE CIT(APPEALS), THE ASSESSEE RAISED G ROUND NO.4 IN WHICH THE CONTENTION OF THE ASSESSEE WAS THAT THE ASSESSE E HAD OWN SOURCE OF INCOME OUT OF WHICH INVESTMENTS WERE MADE AND THERE FORE NO DISALLOWANCE U/S. 14A OF THE ACT SHOULD HAVE BEEN MADE. HOWEVER , IN THE SUBMISSION BEFORE THE CIT(APPEALS), THE ASSESSEE SUBMITTED THA T INVESTMENTS WERE MADE IN SUBSIDIARY COMPANY AND ONE SUCH COMPANY WAS AN INDONESIAN COMPANY AND DIVIDED RECEIVED FROM THE SAID COMPANY TO THE EXTENT OF RS.46.84 LAKHS WAS CHARGEABLE TO TAX AND NOT EXEMPT . INVESTMENT WAS MADE IN ANOTHER COMPANY, M/S. BHORUKA ENERGY LTD. O WING TO BUSINESS ITA NO.1734/BANG/2016 PAGE 6 OF 8 EXIGENCIES AND THEREFORE NO DISALLOWANCE COULD HAVE BEEN MADE U/S. 14A OF THE ACT. THE CIT(APPEALS) DELETED THE ADDITION MADE BY THE AO. THE SUBMISSION MADE BY THE ASSESSEE BEFORE THE CIT(APPE ALS) AND THE OBSERVATIONS OF THE CIT(APPEALS) ARE AS FOLLOWS:- 6.1 THE APPELLANT IN HIS WRITTEN SUBMISSION STATE D THAT : ' A. THE COMPANY HAS CONTINUED INVESTMENT DURING TH E YEAR TO THE EXTENT OF RS. 30 LAKHS IN M/S. BHORUKA ENERGY LIMITED AND ALSO MADE A NEW INVESTMENT IN M/S. PT BHORUKA, INDONESIA WHICH IS 100% SUBSIDIARY OF THE COMPANY. AS PER THE DECISION OF APPELLATE TRIBUNAL IN CASE OF DY COMMISSIONER OF INCOME TAX VS AMALGAMATIONS LTD 2015 43 TTR (TRIB) 540 [ITAT(CHEN)], IT WAS MENTIONED THAT THE INVESTMENT MADE BY THE ASSESSEE PURELY INCIDENTAL ON ACCOUNT OF BUS INESS EXPEDIENCY WILL NOT BE SUBJECT TO DISALLOWANCE OF I NTEREST ON THE PROPORTIONATE INVESTMENT UNDER SECTION 14 A. AS PER THIS, THE INVESTMENT MADE BY THE COMPANY IN M/S . BHORUKA ENERGY LTD AND ALSO M/S. PT BHORUKA, INDONE SIA ARE PURELY OF BUSINESS EXPEDIENCY. THE PROPORTIONAT E INTEREST DISALLOWANCE AS COMPILED BY THE ASSESSING OFFICER ARE NOT TO BE RECKONED FOR DISALLOWANCE UNDER SECTI ON 14 A READ WITH RULE 8D. INVESTMENT IN M/S. P T BHORUKA, INDONESIAS IS RS.46.84 LAKHS, EVEN DIVIDEND RECEIVE D FROM MIS. PT BHORUKA IS NOT EXEMPT HENCE NO DISALLOWNCE OF INTEREST U/S 14 A READ WITH 8D IS NOT APPLICABLE . B. SEC.14A WILL NOT APPLY IF NO EXEMPT INCOME IS RECEIVED OR RECEIVABLE DURING THE RELEVANT PREVIOUS YEAR - AS PER CASE LAW [2015] 378 TTR 33 IN THE CASE OF CHEMINVEST LTD. V. CIT , [DELHI], CASE LAW [2014] D TRJ 506 [ALLH.HC) IN THE CASE OF CIT V. SHIVRAM MOTORS P LTD, CASE LAW [2015] 372 ITR 97 IN THE CASE OF CIT V. CO RRTECH ENERGY P LTD.' 6.2 WITH REGARD TO THE INTEREST DISALLOWANCE U/S. 1 4A OF THE IT ACT, THE APPELLANT RELIED ON THE DECISION OF THE IT AT, CHENNAI BENCH IN THE CASE OF DCIT VS. AMALGAMATIONS LTD. IN 43 ITR 540 (2015) WHEREIN IT IS HELD THAT THE INVESTMENT M ADE BY THE ASSESSEE PURELY INCIDENTAL ON ACCOUNT OF BUSINESS E XPEDIENCY WILL ITA NO.1734/BANG/2016 PAGE 7 OF 8 NOT BE SUBJECT TO DISLLOWANCE OF INTEREST ON THE PR OPORTIONATE INVESTMENT U/S. 14A. 6.3 THE APPELLANT CONTENDS THAT THE INVESTMENT MADE BY THE COMPANY IN M/S. BHORUKA ENERGY LTD AN ALSO M/S. PT BHORUKA, INDONESIA ARE PURELY OF BUSINESS EXPEDIENCY. THE PR OPORTIONATE INTEREST DISALLOWANCE AS COMPLIED BY THE AO ARE NOT TO BE RECKONED FOR DISALLOWANCE U/S. 14A READ WITH RULE 8 D. INVESTMENT IN M/S. P.T. BHORUKA, INDONESIAS IS RS.4 6.84 LAKHS EVEN DIVIDEND RECEIVED FROM M/S. PT BHORUKA IS NOT EXEMPT HENCE THE APPELLANT CLAIMS THAT NO DISALLOWANCE OF INTEREST U/S. 14A READ WITH 8D IS NOT APPLICABLE. 6.4 IT IS SEEN THAT AO DID NOT EXAMINE THE FACT THA T INVESTMENTS MADE BY THE APPELLANT ARE IN THE SUBSID IARY COMPANIES AND ALSO DID NOT GIVE A VALID REASON FOR INVOKING RULE 811 THE SUBMISSION MADE BY THE ASSESSEE ARE SEEN AN D AFTER GOING THROUGH THE DECISION OF ITAT CHENNAI REFERRED ABOVE, THIS GROUND IS ALLOWED. 11. AGGRIEVED BY THE ORDER OF CIT(APPEALS), THE REV ENUE IS IN APPEAL BEFORE THE TRIBUNAL. 12. WE HAVE HEARD THE RIVAL SUBMISSIONS. PURSUANT TO THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF MAXOPP INVESTMENTS LTD., 402 ITR 640 (SC) , THE DOMINANT PURPOSE OF MAKING THE INVESTMENT IS IRRELEVANT. THE DECISION OF THE HONBLE SUPREME COURT WAS RENDE RED AFTER THE PASSING OF THE IMPUGNED ORDER BY THE CIT(APPEALS). SINCE TH E PURPOSE OF MAKING THE INVESTMENT IS NO LONGER RELEVANT, THE BASIS ON WHICH THE RELIEF WAS GIVEN TO THE ASSESSEE BY THE CIT(APPEALS) NO LONGER SURVI VES. 13. THE LD. COUNSEL FOR THE ASSESSEE, HOWEVER, SUBM ITTED THAT SINCE THE ISSUE OF DISALLOWANCE U/S. 14A OF THE ACT HAS NOT B EEN EXAMINED EITHER BY THE AO OR THE CIT(A) ON THE BASIS OF AVAILABILITY O F OWN FUNDS OF THE ASSESSEE WHICH HAVE BEEN UTILIZED FOR MAKING INVEST MENTS WHICH ARE LIKELY TO YIELD TAX FREE INCOME AND OTHER RELEVANT CONSIDE RATIONS, THE ISSUE SHOULD ITA NO.1734/BANG/2016 PAGE 8 OF 8 BE REMANDED TO THE AO FOR DE NOVO CONSIDERATION OF DISALLOWANCE U/S. 14A OF THE ACT. 14. WE ARE OF THE VIEW THAT THE PRAYER FOR REMANDIN G THE ISSUE TO THE AO AS PUT FORTH BY THE LD. COUNSEL FOR THE ASSESSEE HA S TO BE ACCEPTED AS NEITHER THE AO OR THE CIT(APPEALS) HAS EXAMINED THI S ISSUE. IN THIS REGARD, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT A P ERUSAL OF BALANCE SHEET WOULD SHOW AVAILABILITY OF OWN FUNDS. WE ARE OF TH E VIEW THAT THIS ASPECT CAN BE LOOKED INTO BY THE AO IN THE SET ASIDE PROCE EDINGS. WE HOLD AND DIRECT ACCORDINGLY. 15. IN THE RESULT, THE APPEAL BY THE REVENUE IS TRE ATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 07 TH DAY OF AUGUST, 2020. SD/- SD/- ( B R BASKARAN ) ( N V VASUDEVAN ) ACCOUNTANT MEMBER VICE PRESIDENT BANGALORE, DATED, THE 07 TH AUGUST, 2020. / DESAI S MURTHY / COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.