M/s. Alembic Limited, Baroda V. The Dy.CIT.,Circle-1(1), Baroda

ITA 1913/AHD/2012

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 9784 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 3 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-12-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 28-11-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 30-08-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: PARIN SHAH ARS
• Keywords: Business income; Depreciation; Transfer pricing; International transaction; Earning of tax free income; Question of law; Capital receipt; Capital expenditure
• Section: 244A; 14A; 115JB; 28; 11

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, AHMEDABAD BEFORE SHRI R.P. TOLANI, JUDICIAL MEMBER AND SHRI AMARJIT SINGH, ACCOUNTANT MEMBER ./ ITA NO. 1912/AHD/2012 / ASSESSMENT YEAR : 2009-10 ALEMBIC LIMITED, 5 TH FLOOR, ADMIN. BUILDING, ALEMBIC ROAD, BARODA PAN : AABCA 7950 P VS DCIT, CIRCLE (1)1, BARODA ./ ITA NO. 1913/AHD/2012 / ASSESSMENT YEAR : 2009-10 ALEMBIC LIMITED, 5 TH FLOOR, ADMIN. BUILDING, ALEMBIC ROAD, BARODA PAN : AABCA 7950 P VS DCIT, CIRCLE (1)1, BARODA ./ ITA NO. 1939/AHD/2012 / ASSESSMENT YEAR : 2009-10 DCIT, CIRCLE (1)1, BARODA VS ALEMBIC LIMITED, 5 TH FLOOR, ADMIN. BUILDING, ALEMBIC ROAD, BARODA PAN : AABCA 7950 P / (APPELLANT) / (RESPONDENT) ASSESSEE BY : SHRI S.N. SOPARKAR & SHRI PARIN SHAH, ARS REVENUE BY : SHRI JAMES KURIAN, SR DR / DATE OF HEARING : 28/11/2016 / DATE OF PRONOUNCEMENT: 09/12/2016 / O R D E R PER R.P. TOLANI, JUDICIAL MEMBER:- THESE ARE GROUP OF TWO APPEALS BY THE ASSESSEE AND A CROSS-APPEAL BY THE DEPARTMENT, ALL APPEALS PREFERRED AGAINST THE O RDER OF THE LD. ITA NO.1912,1913 & 1939/AHD/2012 ALEMBIC LIMITED VS. DCIT AY : 2009-10 2 COMMISSIONER OF INCOME-TAX (APPEALS)-I, BARODA DATE D 07.06.2012 FOR AY 2009-2010. 2. ITA NO.1912/AHD/2012 FOR AY 2009-10 IS THE APPEA L PREFERRED BY THE ASSESSEE AGAINST THE CONFIRMATION OF LD. CIT(A) IN UPHOLDING THE ACTION OF AO IN GRANTING INTEREST U/S 244A ONLY TILL THE DATE OF SIGNING ORDER AND NOT TILL THE DATE OF REFUND. THE LD. COUNSEL FOR THE A SSESSEE, LOOKING AT THE SMALLNESS OF THE AMOUNT, DID NOT PRESS THE GROUND; HENCE THIS APPEAL IS ACCORDINGLY DISMISSED. 3. ADVERTING TO THE CROSS-APPEALS FOR AY 2009-10, O NE COMMON GROUND RAISED IN BOTH THE APPEALS PERTAINS TO DISALLOWANCE OF INCOME AND EXPENSES OUT OF THE INTEREST FREE INCOME U/S 14A R.W.S. RULE 8D ON EXEMPT INCOME OF RS.3,18,472/-. IN THIS REGARD, THE EFFECTIVE GROUN D RAISED BY BOTH PARTIES IN RESPECTIVE APPEALS REVOLVES AROUND:- LD. CIT(A) ERRED IN LAW AND ON FACTS IN PARTLY REDU CING THE DISALLOWANCE U/S 14A FROM RS.75,02,592/- TO RS.25,6 6,000/-. THE ASSESSEE IS AGGRIEVED ON RETENTION OF R.25,66,000/- AND REVENUE IS AGGRIEVED ON RELIEF OF RS.49,36,592/- (RS.75,02,592 /- MINUS RS.25,66,000/-). 3.1 THE ASSESSEE IN ITS GROUNDS OF APPEAL HAS TAKEN FOLLOWING ISSUES IN ITS SUPPORT:- A) THE ASSESSEE HAD OWN FUNDS WHICH WERE MORE THAN SUF FICIENT FOR THE PURPOSE OF MAKING INVESTMENTS; B) THE ASSESSING OFFICER HAD NOT REACHED APPROPRIATE S ATISFACTION AS REQUIRED UNDER LAW FOR INVOKING THE PROVISIONS OF S EC. 14A; C) CIT(A) ERRED IN CONSIDERING GROSS INTEREST FOR THE PURPOSE OF COMPUTATION OF DISALLOWANCE U/S 14A. ITA NO.1912,1913 & 1939/AHD/2012 ALEMBIC LIMITED VS. DCIT AY : 2009-10 3 3.2 AT THE OUTSET, IT MAY BE MENTIONED THAT BOTH TH E REVENUE AS WELL AS ASSESSEE RAISED FOLLOWING ADDITIONAL GROUNDS OF APP EAL. REVENUES ADDITIONAL GROUND READS AS UNDER:- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(APPEALS) ERRED IN DIRECTING THE ASSESSING OFFIC ER TO REDUCE THE AMOUNT TRANSFERRED TO DEBENTURE REDEMPTION RESERVE FROM TH E BOOK PROFIT U/S 115JB OF THE ACT WITHOUT APPRECIATING THAT THE PROVISIONS OF EXPLANATION (1) TO SUB- CLAUSE (I) TO (III), (VII), (VIII) TO CLAUSE (2) TO SECTION 115JB DO NOT PERMIT THE SUCH ADJUSTMENTS FROM THE BOOK PROFIT. 3.3 THE ASSESSEE ALSO HAS FILED FOLLOWING TWO ADDIT IONAL GROUNDS:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(APPEALS) ERRED IN TREATING THE INCOME FROM REAL IZATION OF CARBON CREDITS RS.1,32,59,006/- AS TAXABLE REVENUE RECEIPT. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(APPEALS) ERRED IN CONFIRMING AOS ACTION IN ADD ING THE DISALLOWANCE U/S 14A R.W.R. 8D OF THE ACT WHILE COMPUTING BOOK P ROFITS U/S 115JB OF THE ACT. 3.4 BOTH THE PARTIES ARE RELIED ON THE JUDGMENTS OF HONBLE SUPREME COURT IN THE CASE OF NATIONAL THERMAL POWER CO. LTD VS. CIT, REPORTED IN (1998) 229 ITR 383 (SC) & JUTE CORPORATION OF INDIA LIMITED VS. CIT, [1991] 187 ITR 688 (SC) FOR ADMISSION OF ADDITIONAL GROUND S. BOTH PARTIES CONTEND THAT THE THEY ARE LEGAL GROUNDS AND DO NOT REQUIRE VERIFICATION OF NEW FACTS. REVENUES ADDITIONAL GROUND IS ADJUNCT TO ITS MAIN GROUND NO.3. QUA ASSESSEES ADDITIONAL GROUND NO.1, LD. COUNSEL FOR THE ASSESSEE CONTENDS THAT THE ISSUE IN QUESTION IS SQUARELY COVERED IN I TS FAVOR BY FOLLOWING JUDGMENTS OF HONBLE AP AND KARNATAKA HIGH COURTS : - A. CIT VS. MY HOME POWER LTD [2014] 46 TAXMANN.COM 314 /365 ITR 82 (AP) B. CIT VS. SUBHASH KABINI POWER CORPORATION LTD, [2016 ] 69 TAXMANN.COM 394 (KARNATAKA) ITA NO.1912,1913 & 1939/AHD/2012 ALEMBIC LIMITED VS. DCIT AY : 2009-10 4 3.5 THE ADDITIONAL GROUND NO.2 OF ASSESSEE RELATES TO AOS ACTION IN ADDING THE DISALLOWANCE U/S 14A R.W.R. 8D OF THE AC T WHILE COMPUTING BOOK PROFITS U/S 115JB OF THE ACT. THIS GROUND IS CONSE QUENTIAL TO THE CORRESPONDING MAIN GROUND RAISED IN ASSESSEES AND REVENUES APPEALS. 3.6. AFTER HEARING BOTH THE PARTIES, WE ARE INCLINE D TO ADMIT THE ADDITIONAL GROUNDS RAISED BY THE REVENUE AND ASSESSEE RELYING UPON THE JUDGMENTS IN THE CASE OF NATIONAL THERMAL POWER CO. LTD AND JUTE CORPORATION OF INDIA LIMITED (SUPRA). 4. THE BRIEF FACTS PERTAINING TO RESPECTIVE GROUNDS ABOUT DISALLOWANCE U/S 14A R.W.R. 8D ARE THE ASSESSEE EARNED TAX FRE E INCOME OF ONLY RS.3,18,472/-, OUT OF WHICH AN AMOUNT OF RS.2,00,00 0/- WAS SUO MOTO DISALLOWED IN COMPUTATION OF INCOME TOWARDS ADMINIS TRATIVE EXPENDITURE ATTRIBUTABLE TO THE EARNING OF THE EXEMPT INCOME. THE LD. AO, HOWEVER, PROPOSED TO APPLY RULE 8D WHICH WAS RESULTING IN HU GE DISALLOWANCE. THE ASSESSEE CONTENDED THAT ITS EXEMPT DIVIDEND INCOME WAS MEAGER RS.3,18,472/-, THE INVESTMENTS THEREIN WERE ACQUIRE D IN EARLIER YEARS OUT OF HUGE OWN NONINTEREST BEARING FUNDS IN THE FORM OF S HARE CAPITAL, RESERVE AND SURPLUS ETC. THE DIVIDEND THUS WAS EARNED ON O LD INVESTMENTS WHICH ARE OUT OF NON-BORROWED FUNDS AND RESERVES. THE DE TAILED SUBMISSIONS WERE MADE ALONG WITH CASE LAWS AVAILABLE TILL THAT TIME. LD. AO, HOWEVER, DID NOT AGREE AND PASSED THE ASSESSMENT ORDER ON 05 .07.2011 AND NOTIONALLY WORKED OUT A FIGURE ON PROPORTIONATE BASIS FOR DISA LLOWANCE AND MADE THE DISALLOWANCE BY FOLLOWING OBSERVATIONS:- ..SINCE THE ASSESSEE ITSELF DISALLOWED AN AMOUNT OF RS.2,00,000/-, REMAINING DISALLOWANCE OF RS.75,02,592/- IS ADDED T O THE INCOME OF THE ASSESSEE. THE DISALLOWANCE IS ALSO MADE IN BOOK PR OFIT U/S 115JB OF THE INCOME TAX ACT. 5. AGGRIEVED, THE ASSESSEE PREFERRED FIRST APPEAL W HERE THE LD. CIT(A) GAVE PART RELIEF TO THE ASSESSEE BY HOLDING THAT TH E JUDGMENT OF KERALA HIGH ITA NO.1912,1913 & 1939/AHD/2012 ALEMBIC LIMITED VS. DCIT AY : 2009-10 5 COURT IN THE CASE OF CIT VS. SMT. LEENA RAMCHANDRAN (2011) 10 TAXMAN.COM 109 (KERALA) AND DECISION OF MUMBAI SPECIAL BENCH O F ITAT IN THE CASE OF ITO VS. DAGA CAPITAL MANAGEMENT PVT LTD (2008) 119 TTJ (MUM) SB (289) WERE APPLICABLE. THE ASSESSEES CONTENTION THAT TH E EXEMPT INCOME BEING ONLY INCIDENTAL TO MAIN INTENTION OF HOLDING SHARES WAS NOT ACCEPTABLE AND NON RECORDING OF SATISFACTION ABOUT SUO MOTU DISALL OWANCE BY LD. AO WAS NOT A RELEVANT CONTENTION. 5.1. LD. CIT(A) GAVE PARTIAL RELIEF BROADLY BY MAKI NG OBSERVATIONS:- (I) APPELLANT'S CONTENTION THAT INVESTMENTS IN SHARES W ERE EXCLUSIVELY MADE OUT OF INTEREST FREE FUNDS INCLUDING CASH OPER ATING PROFIT OF CURRENT YEAR CANNOT BE ACCEPTED SINCE APPELLANT DID NOT MAINTAIN SEPARATE ACCOUNTS FOR SUCH ACTIVITY AND THE BANK AC COUNT USED WAS COMMON. WHERE IT IS NOT POSSIBLE TO ESTABLISH ONE T O ONE NEXUS BETWEEN SOURCE OF INVESTMENT AND THE INVESTMENT MAD E, IT WOULD BE JUSTIFIED TO APPORTION INTEREST AS PER RULE 8D. (II) APPELLANTS CONTENTION THAT ONLY NET INTERES T BE CONSIDERED FOR APPORTIONMENT UNDER RULE 8D AND THE INTEREST RECEIP TS OF RS.984.74 LAKH BE EXCLUDED FROM GROSS INTEREST OF RS.4990.87 LAKH FOR THE PURPOSE OF APPORTIONMENT UNDER RULE 8D; . INTEREST RECEIPTS HAVE NO CONNECTION WITH EXPEND ITURE IN RELATION TO EXEMPT INCOME AND CANNOT THEREFORE, BE SET OFF A GAINST INTEREST EXPENSE FOR THE PURPOSE OF RULE 8D(2)(II). (III) APPELLANT'S CONTENTION THAT INTEREST ON LOANS FO R SPECIFIC PURPOSES BE NOT CONSIDERED FOR APPORTIONMENT UNDER RUL E 8D IS HOWEVER, ACCEPTABLE SINCE UNDER RULE 8D(2)(II), WHAT IS TO B E APPORTIONED IS INTEREST, WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. ACCORDINGLY, INTEREST ON ECBS (RS.545.24 L AKH), INTEREST FOR DEBENTURES FOR ACQUISITION (RS. 810 LAKH) AND INTER EST ON PACKING CREDIT LOAN (RS.376.57 LAKH) TOTALING TO RS. 1731.8 1 LAKH IS DIRECTED TO BE EXCLUDED FOR THE PURPOSE OF APPORTIONMENT UND ER RULE 8D (2)(II) SUBJECT TO VERIFICATION BY THE ASSESSING OFFICER OF QUANTUM OF INTEREST ON SUCH LOANS. 5.2. IN VIEW OF THESE OBSERVATIONS, THE DISALLOWANC E OF RS.75,02,592/- MADE BY THE ASSESSING OFFICER WAS REDUCED TO RS.25, 66,000/-. AGGRIEVED, BOTH THE PARTIES ARE IN APPEAL. ITA NO.1912,1913 & 1939/AHD/2012 ALEMBIC LIMITED VS. DCIT AY : 2009-10 6 6. THE LD. COUNSEL FOR THE ASSESSEE, AT THE OUTSET, RELIED UPON THE JUDGMENT OF HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. CORRTECH ENERGY PVT LTD, REPORTED IN [2015] 372 ITR 097 (GUJ ), FOR THE PROPOSITION THAT THE DISALLOWANCE OF EXPENSES CANNOT EXCEED THE EXEM PT INCOME WHICH ACCRUED TO THE ASSESSEE. THIS VIEW IS FURTHER FORTI FIED BY THE HONBLE DELHI HIGH COURT JUDGMENT IN THE CASE OF JOINT INVESTMENT S PVT LTD VS. CIT, REPORTED IN [2015] 372 ITR 0694 (DELHI). THUS, IN THE ASSESSEES CASE, EVEN IF ALL OTHER CONTENTIONS OF THE ASSESSEE ARE NOT ACCEP TED, THE DISALLOWANCE IN ANY CASE CANNOT EXCEED RS.3,18,472/-, I.E. THE EXEM PT INCOME OF THE YEAR. 6.1 THE ASSESSEE SUO MOTO DISALLOWED AN AMOUNT OF RS.2 LAKHS. THE LD. AO HAS NOT RECORDED ANY REASONS AS TO HOW HE IS NOT SATISFIED IN TERMS OF RULE 8D. RELIANCE IS PLACED ON HONBLE DELHI HIGH COURT JUDGMENT IN THE CASE OF CIT VS. TAIKISHA ENGINEERING INDIA LTD., RE PORTED IN (2015) 370 ITR 0338 (DELHI). 6.2 LD. COUNSEL FOR THE ASSESSEE CONTENDS THAT DISA LLOWANCE U/S 14A READ WITH RULE 8D CANNOT MADE IN THE INSTANT CASE INASMU CH AS THE INVESTMENTS IN SHARES/SECURITIES ARE OLD AND NOT MADE OUT OF BORRO WED FUNDS. THE ASSESSEE OWNS INTEREST FREE FUNDS IN THE FORM OF SH ARE CAPITAL ACCUMULATED PROFIT AND RESERVES, WHICH FAR TOO MUCH EXCEEDED TH E EXEMPT INCOME WHICH IS PLACED ON PAPER BOOK PAGE 120 & 121. THE ACCUMU LATED SHARE CAPITAL, RESERVES AND SURPLUS AMOUNT TO RS.32,699.06 LAKHS A S AGAINST THE SUCH INVESTMENTS OF ONLY RS.794.24 LAKHS. THOUGH ALL T HE DETAILS WERE FURNISHED WITH THE LD. AO; HOWEVER, THE BURDEN OF NEXUS HAS B EEN ARBITRARILY SHIFTED ON THE ASSESSEE. THE HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. HITACHI HOME AND LIFE SOLUTIONS (I) LTD, REPORTED I N [2014] 41 TAXMANN.COM 540 (GUJ.), HAS SQUARELY HELD THAT THE BURDEN TO PR OVE THE NEXUS LIES ON THE ASSESSING OFFICER TO REBUT THE ASSESSEES CLAIM BY ESTABLISHING NECESSARY NEXUS IN THIS BEHALF BY FOLLOWING OBSERVATIONS:- ITA NO.1912,1913 & 1939/AHD/2012 ALEMBIC LIMITED VS. DCIT AY : 2009-10 7 8. MOREOVER, SPECIFIC FINDINGS OF THE TRIBUNAL TH AT THE ASSESSING OFFICER HAS FAILED TO ESTABLISH NEXUS BETWEEN THE BORROWED FUNDS AND THE INVESTMENT AND THAT THE SPECIFIC AVERMENT OF THE ASSESSEE HAS NOT BEEN REBUTTED BY THE ASSESSING OFFICER THAT THE INVESTMENT HAD BEEN MADE FROM OWN INTEREST FREE FUNDS AND NOT FROM THE BORROWED FUNDS, NO ERROR MUC H LESS SUBSTANTIAL ERROR IS COMMITTED IN SO HOLDING BY BOTH THE AUTHORITIES. 6.3 ON THE ISSUE OF OWN FUNDS BEING MORE THAN THE T AX FREE INVESTMENTS, A PLETHORA OF JUDGMENTS ARE RELIED ON, INCLUDING VARI OUS JUDGMENTS OF HONBLE JURISDICTIONAL HIGH COURT AS UNDER:- I) INDIA GELATINE AND CHEMICALS LIMITED (TAX APPEAL NO .276 & 277 GUJ HC); II) CIT VS. HITACHI HOME & LIFE SOLUTIONS (I) LTD (TAX APPEAL NO.948 OF 2012 21 TAXMAN 109) (GUJ HC ) (2014); III) CIT VS. TORRENT POWER LTD (363 ITR 474/222 TAXMAN 3 67) (GUJHC) (2014); IV) CIT VS. GUJARAT STATE FERTILIZERS & CHEMICALS LTD ( 101 DTR 175 / 217 TAXMAN 229 / 358 ITR 323) (GUJ HC) (2013); V) GUJARAT POWER CORPORATION LIMITED (2011) (APPEAL NO .1587 OF 2009 44 TAXMANN.COM 359) (GUJ HC), VI) GUJARAT INDUSTRIAL DEVELOPMENT CORPORATION LTD 0 21 8 TAXMAN 0142 (GUJ); VII) UTI BANK LIMITED IN TAX APPEAL NO.118 OF 2013 215 TAXMAN 8 (GUJ HC); VIII) SUZLON ENERGY LIMITED TAX APPEAL NO.223 OF 2013, 215 TAXMANN 272 (GUJ. HC); FURTHER RELIANCE IN ALSO PLACED ON FOLLOWING HONB LE BOMBAY HIGH COURT JUDGMENTS:- I) HDFC BANK LTD (APPEAL NO.330 OF 2012) (BOM HC) II) RELIANCE UTILITIES AND POWER LIMITED, 18 DTR 1 (BOM HC) 7. LD. DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HA ND, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 8. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHOR ITIES BELOW. AS THE FACTS EMERGE, WE FIND THAT THE ASSESSEES OWN FUNDS, I.E. , EQUITY, RESERVE AND ITA NO.1912,1913 & 1939/AHD/2012 ALEMBIC LIMITED VS. DCIT AY : 2009-10 8 SURPLUS FUNDS AMOUNTING TO RS.32,699.06 LAKHS FAR E XCEED THE TAX FREE INVESTMENTS. THE IMPUGNED INVESTMENTS ARE OLD AND O UT OF OWN FUNDS HAVE NOT BEEN REBUTTED. RELYING ON THE HONBLE GUJARAT HIGH COURT JUDGMENTS IN THE CASE OF HITACHI HOME AND LIFE SOLUTIONS (I) LTD (SUPRA), TORRENT POWER LTD (SUPRA) AND OTHER JUDGMENTS MENTIONED ABO VE, WE ARE OF THE VIEW THAT WHEN THE ASSESSEE POSSESSES OWN FUNDS MUC H MORE THAN THE TAX FREE INVESTMENTS, THE DISALLOWANCE U/S 14A READ WIT H RULE 8D CANNOT BE MADE. THERE IS ALSO MERIT IN THE PLEA OF LD. COUNS EL ON THE COUNT THAT THE BURDEN OF ESTABLISHING THE NEXUS HAS BEEN WRONGLY A TTRIBUTED TO THE ASSESSEE AND IT WAS FOR THE ASSESSING OFFICER TO RE BUT THE ASSESSEES CONTENTION AND DEMONSTRATE THAT THE TAX FREE INVEST MENTS WERE NOT FROM OWN FUNDS BUT FROM BORROWED FUNDS. IN THE ABSENCE OF SUCH REBUTTAL, IT CANNOT BE ASSUMED THAT THE ASSESSEE MADE TAX FREE I NVESTMENTS OUT OF BORROWED FUNDS. THE ASSESSEE HAS SUO MOTO OFFERED RS. 2 LAKHS OUT OF INCOME OF RS.3,18,472/- AS DISALLOWED U/S 14A OF TH E ACT. IN VIEW OF OUR FOREGOING OBSERVATIONS AND RELYING ON HONBLE GUJAR AT HIGH COURT JUDGMENTS, WE ARE OF THE VIEW THAT NO DISALLOWANCE BEYOND WHAT HAS BEEN SUO MOTO DISALLOWED BY THE ASSESSEE CAN BE MADE. IN THE RE SULT, THE ASSESSEES GROUND IN THIS BEHALF IS ALLOWED AND THA T OF REVENUE IS DISMISSED. 9. THE OTHER GROUNDS RAISED BY THE REVENUE ARE AS U NDER:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(APPEALS) ERRED IN DELETING ADDITION OF RS.6,93, 435/- MADE U/S 40A(2)(B) OF THE ACT, FAILING TO APPRECIATE THAT IN TEREST IS NOT CHARGED AT MARKET RATE ON ADVANCES TO SUBSIDIARY IN SPITE OF T HE FACT THAT ASSESSEE IS PAYING HUGE AMOUNT OF INTEREST. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(APPEALS) ERRED IN DIRECTING THE AO TO ALLOW AM OUNT OF RS.750 LACS TRANSFERRED TO DEBENTURE REDEMPTION RESERVE FOR COM PUTING BOOK PROFIT U/S 115JB OF THE ACT. 10. APROPOS THE DISALLOWANCE U/S 40A(2)(B) OF THE A CT, THE ADVANCES IN QUESTION WERE GIVEN TO 100% FOREIGN SUBSIDIARY FOR A VERY SHORT PERIOD IN ITA NO.1912,1913 & 1939/AHD/2012 ALEMBIC LIMITED VS. DCIT AY : 2009-10 9 THE COURSE OF BUSINESS TO PROTECT ITS LONG TERM BUS INESS INTEREST. IN VIEW OF THE BUSINESS EXIGENCIES, THE INTEREST WAS NOT CHARG ED. HOWEVER, FOR TP PURPOSES, THE ASSESSEE DISALLOWED INTEREST OF SIX M ONTHS AT LIBOR OF 2% IN ITS COMPUTATION OF INCOME. LD. AO, HOWEVER, PROPOS ED TO DISALLOW THE SAME U/S 40A(2)(B) OF THE ACT ALSO. THE ASSESSEE O BJECTED ON THE GROUND THAT SECTION 40A(2)(B) DISALLOWANCE IS ATTRACTED WH EN THERE IS SOME PAYMENT OF EXPENDITURE BY ASSESSEE TO ANY SPECIFIED ASSOCIA TED CONCERNS. IN THE GIVEN FACTS, NO PAYMENT OF ANY EXPENDITURE WAS MADE BY THE ASSESSEE TO THE ASSOCIATED CONCERNS; THERE BEING NO EXPENDITURE, TH E QUESTION OF DISALLOWANCE U/S 40A(2)(B) DOES NOT ARISE. LD. AS SESSING OFFICER, HOWEVER, WITHOUT APPRECIATING THE ASSESSEES CONTENTIONS MAD E THE DISALLOWANCE. LD. CIT(A) IN FIRST APPEAL HELD THAT THERE WAS NO EXPEN DITURE INCURRED BY THE ASSESSEE AND SECTION 40A(2)(B) WAS NOT APPLICABLE A ND DELETED THE ADDITION BY FOLLOWING OBSERVATIONS:- 3.2. I HAVE CONSIDERED FACTS OF THE CASE AND APPELLANT'S SUBMISSIONS. APPELLANT DID NOT CHARGE INTEREST ON LOAN GIVEN TO ITS FOREIGN SUBSIDIARY. SINCE CLAIM OF EXPENDITURE IN RESPECT OF RELATED PA RTY IS NOT INVOLVED, SECTION 40A(2)(B) HAS NO APPLICATION IN THIS CASE . DISALLOWANCE, IF ANY COULD BE MADE OF INTEREST ATTRIBUTABLE TO SUCH LOAN OUT OF T OTAL INTEREST CLAIMED U/S.36(1)(III) OF THE INCOME TAX ACT. HOWEVER, L ENDING MONEY TO FOREIGN SUBSIDIARY I.E. AN ASSOCIATED ENTERPRISE AMOUNTS T O AN 'INTERNATIONAL TRANSACTION' UNDER SECTION 92B. PROVISIONS OF CHAPT ER X ARE THEREFORE APPLICABLE AND ANY INCOME ARISING FROM THE INTERNAT IONAL TRANSACTION IS TO BE COMPUTED HAVING REGARD TO ARM'S LENGTH PRICE. APPEL LANT COMPLIED WITH STATUTORY REQUIREMENTS IN THIS REGARD BY DULY REPOR TING THE TRANSACTION IN FORM 3CEB AND BY PROVIDING REQUIRED INFORMATION IN RESPECTIVE COLUMNS OF THE FORM. APPELLANT BENCHMARKED ARM'S LENGTH NAT URE OF THE TRANSACTION BY USING CUP METHOD AND APPLIED INTEREST RATE OF 3. 8% BEING SIX MONTH'S LIBOR + 2% TO COMPUTE ARM'S LENGTH PRICE. THE SAME WAS JUSTIFIED SINCE THE LOAN WAS IN FOREIGN CURRENCY. INTEREST RATE ON A FOREIGN CURRENCY LOAN CANNOT BE COMPARED WITH INTEREST RATE ON A RUPEE LO AN. APPELLANT ADDED INTEREST OF RS.2,95,920/- TO ITS INCOME BEING THE A RM'S LENGTH PRICE OF INTEREST ON LOAN TO ITS SUBSIDIARY IN COMPLIANC E TO REQUIREMENTS OF CHAPTER X OF THE INCOME TAX ACT. AO'S ACTION IN COM PUTING INTEREST @ 12% THEREBY MAKING ADDITION U/S. 40A(2)(B) OF RS.6,93,4 35/- CANNOT THEREFORE BE SUSTAINED. ADDITION OF RS.6,93,435/- IS DELETED. ITA NO.1912,1913 & 1939/AHD/2012 ALEMBIC LIMITED VS. DCIT AY : 2009-10 10 11. AGGRIEVED, THE REVENUE IS IN APPEAL. 12. LD. DEPARTMENTAL REPRESENTATIVE RELIED ON THE O RDER OF THE ASSESSING OFFICER. LD. COUNSEL FOR THE ASSESSEE, IN REJOINDE R, VEHEMENTLY CONTENDS SECTION 40A(2)(B) IS APPLICABLE ONLY WHEN THE ASSES SEE MAKES PAYMENT OF ANY EXPENDITURE TO ASSOCIATED CONCERNS. IN THIS CA SE, THERE IS NO SUCH EXPENDITURE. THE LD. CIT(A) HAS RIGHTLY GIVEN THE RELIEF. RELIANCE IS PLACED ON THE DECISION OF CO-ORDINATE BENCH OF AHMEDABAD T RIBUNAL IN THE CASE OF MICRO INK LTD. VS. CIT, REPORTED IN [2016] 157 ITD 132 (AHD). 13. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED TH E MATERIAL AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHOR ITIES BELOW. IT IS NOT DISPUTED THAT THE ASSESSEE HAS NOT PAID ANY EXPENDI TURE TO WHICH SECTION 40A(2)(B) CAN BE ATTRACTED. IN OUR CONSIDERED VIEW , LD. CIT(A) HAS RIGHTLY APPRECIATED THE FACTUAL AND LEGAL ASPECTS AND HELD THAT SECTION 40A(2)(B) IS NOT APPLICABLE. HIS ORDER IS UPHELD AND THIS GROUN D OF THE REVENUES APPEAL IS DISMISSED. 14. THE OTHER REMAINING GROUND OF THE REVENUE RELAT ES TO SECTION 115JB. THIS GROUND WAS TAKEN BY THE ASSESSEE BEFORE THE LD . CIT(A) BY WAY OF ADDITIONAL GROUND IN VIEW OF THE SUBSEQUENT JUDGMEN T RENDERED BY VARIOUS JUDICIAL AUTHORITIES IN FAVOUR OF THE ASSESSEE. ASS ESSEE RELIED ON THE JUDGMENTS OF HONBLE SUPREME COURT IN THE CASE OF N ATIONAL THERMAL POWER CO. LTD VS. CIT, REPORTED IN (1998) 229 ITR 3 83 (SC) & JUTE CORPORATION OF INDIA LIMITED VS. CIT, [1991] 187 IT R 688 (SC). THE LD. CIT(A) ADMITTED THE GROUND AND FORWARDED THE ASSESS EES SUBMISSION TO LD. ASSESSING OFFICER. THE ASSESSING OFFICER SUBMITTED A REMAND REPORT DATED 28.05.2012, WHICH IN ESSENCE OBJECTED TO THE ASSESS EES CLAIM THAT THE DEBENTURES WERE ISSUED AND THE PROCEEDS RECEIVED BY THE ASSESSEE WERE NOT TREATED AS INCOME; CONSEQUENTLY WHEN THE LOAN CAPIT AL WAS RETURNED, IT WAS CAPITAL EXPENDITURE NOT DEDUCTABLE IN VIEW OF CLAUS E (B) OF EXPLANATION 1 TO ITA NO.1912,1913 & 1939/AHD/2012 ALEMBIC LIMITED VS. DCIT AY : 2009-10 11 SECTION 115JB OF THE ACT. THE LD. CIT(A) RELIED ON THE DECISIONS OF HONBLE KOLKATA BENCH OF ITAT IN THE CASE OF IOL LTD, LUCKN OW ITAT BENCH DECISION IN THE CASE OF HINDALCO LTD AND HONBLE BO MBAY HIGH COURT JUDGMENT IN THE CASE OF CIT VS. RAYMOND LTD [2012] 21 TAXMANN.COM 60 (BOM.) AND ALLOWED THE DEDUCTION BY FOLLOWING OBSER VATIONS:- FURTHER, LUCKNOW BENCH OF ITAT IN THE CASE OF HIND ALCO INDUSTRIES LTD. IN ITA NOS. 715/LUC/01 & 749/LUC/01 THROUGH ORDERS DAT ED 21.4.2010 / 21.9.2010 FOLLOWED DECISION BY ITAT KOLKOTA IN THE CASE OF IOL LTD. 81 TTJ (CAL) 525, DECISION DATED 25.2.2009 IN THE CASE OF RAYMOND LTD. BY ITAT BENCH, MUMBAI [ 2009-TIOL-343-ITAT-MUM] AND DECISIO N DATED 1.10.2007 BY ITAT, MUMBAI, 'B' BENCH IN ITA NO.5189 /MUM/2001 IN THE CASE OF MANGALORE REFINERY & PETROCHEMICALS LTD TO DECIDE THE ISSUE REGARDING DEDUCTION OF DEBENTURE REDEMPTION RESERVE FROM BOOK PROFITS U/S SECTION 115J(1) IN ASSESSEE'S FAVOUR. CLAUSES (B) & (C) OF EXPLANATION 1 BELOW SECTION 115JB(1) ARE IDENTICAL TO SIMILAR CL AUSES IN SECTION 115JA AND SECTION 115J. RATIO OF DECISIONS IN THE CASES OF RA YMOND LTD., IOL LTD. AND HINDALCO LTD. (SUPRA) WOULD THEREFORE BE APPLICABLE TO DEDUCTION OF DEBENTURE REDEMPTION RESERVE FOR COMPUTING BOOK PRO FITS U/S. 115JB. AO'S CONTENTION THAT SECTION 115JB HAS BEEN AMENDED DUE TO INSERTION OF EXPLANATION TO CLAUSE (B), DUE TO WHICH DECISION IN THE CASE OF NATIONAL RAYON CORPORATION LTD. (1997) 142 CTR (SC) 202 WOUL D NOT BE APPLICABLE IS NOT TENABLE SINCE THERE HAS BEEN NO SUCH AMENDMENT IN CLAUSE (B) OR (C) OF EXPLANATION 1 BELOW SECTION 115JB(1). ASSESSING OFF ICER'S CONTENTION THAT LIABILITY ON CAPITAL ACCOUNT CANNOT BE CHARGED TO P ROFIT & LOSS ACCOUNT IS NOT TENABLE IN VIEW OF DECISIONS BY HON'BLE HIGH COURT OF BOMBAY IN THE CASE OF RAYMOND LTD (SUPRA) AND HON'BLE ITAT, KOLKATA I N THE CASE OF IOL LTD. (SUPRA) ALLOWING DEDUCTION OF DEBENTURE REDEMPTION RESERVE FOR COMPUTING BOOK PROFITS UNDER SIMILAR PROVISION, I.E . SECTIONS 115JA/115J. FOLLOWING DECISIONS IN THE CASE OF RAYMOND LTD. (SU PRA), IOL LTD. (SUPRA) AND HINDALCO LTD. (SUPRA), AMOUNT OF RS 7.5 CRORE T RANSFERRED TO DEBENTURE REDEMPTION RESERVE IS DIRECTED TO BE ALLOWED AS DED UCTION FOR COMPUTING BOOK PROFITS U/S 115JB IN APPELLANTS CASE. THIS GROUND OF APPEAL IS ALLOWED. 14.1 THE LD. COUNSEL FOR THE ASSESSEE CONTENDS T HAT THE ITAT, AHMEDABAD BENCHES HAS CONSIDERED ALL THE ASPECTS ON THIS ISSU E IN THE CASE OF GENUS ELECTROTECH LTD IN ITA NOS.2826 & 2840/AHD/2012 VID E ORDER DATED 11.05.2016, WHEREIN IT WAS HELD THAT DEBT REDEMPTIO N FUND IS TO BE REDUCED BY WORKING OUT THE BOOK PROFITS BY FOLLOWING OBSERV ATIONS: ITA NO.1912,1913 & 1939/AHD/2012 ALEMBIC LIMITED VS. DCIT AY : 2009-10 12 17. HAVING HEARD THE RIVAL CONTENTIONS AND HAVING PERUSED THE MATERIAL ON RECORD, WE FIND THAT THE ISSUE IS INDEED COVERED BY THE DECISION OF HON'BLE BOMBAY HIGH COURT, IN THE CASE OF CIT VS RAYMONDS L TD [(2012) 71 DTR 265 (BOM)] WHEREIN THEIR LORDSHIPS HAVE INTER ALIA OBSERVED AS FOLLOWS: 2. RE QUESTION (A): SECTION 115JA OF THE INCOME TAX ACT, 1961 PROVIDES IN SUBSECTION (2) THAT EVERY ASSESSEE, BEI NG A COMPANY SHALL FOR THE PURPOSE OF THE SECTION PREPARE ITS PROFIT A ND LOSS ACCOUNT FOR THE RELEVANT PREVIOUS YEAR IN ACCORDANCE WITH THE PROVI SIONS OF PARTS II AND III OF SCHEDULE VI TO THE COMPANIES ACT, 1956. THE EXPLANATION TO THE SECTION PROVIDES THAT FOR THE PURPOSE OF THE SE CTION, 'BOOK PROFIT' MEANS THE NET PROFIT AS SHOWN IN THE PROFIT AND LOS S ACCOUNT FOR THE RELEVANT PREVIOUS YEAR PREPARED UNDER SUBSECTION (2 ) AS INCREASED INTER ALIA BY '(B) THE AMOUNTS CARRIED TO ANY RESER VES BY WHATEVER NAME CALLED'. PART III OF SCHEDULE VI TO THE COMPAN IES ACT, 1956 PROVIDES INTER ALIA IN CLAUSE 7(1)(B) THAT, 'THE EX PRESSION 'RESERVE' SHALL NOT INCLUDE ANY AMOUNT WRITTEN OFF OR RETAINE D BY WAY OF PROVIDING FOR DEPRECIATION, RENEWALS OR DIMINUTION IN VALUE OF ASSETS OR RETAINED BY WAY OF PROVIDING FOR ANY KNOWN LIABI LITY'. 3. THE NATURE OF A DEBENTURE REDEMPTION RESERVE (DR R) HAS BEEN CONSIDERED BY THE JUDGMENT OF THE SUPREME COURT IN NATIONAL RAYON CORPORATION LTD. VS. COMMISSIONER OF INCOME TAX [(1 997) 227 ITR 764]. THE SUPREME COURT AFTER ADVERTING TO THE PROV ISIONS OF CLAUSE 7 OF PART III TO SCHEDULE VI OF THE COMPANIES ACT, 19 56 HELD THAT 'THE BASIC PRINCIPLE IS THAT AN AMOUNT SET APART TO MEET A KNOWN LIABILITY CANNOT BE REGARDED AS RESERVE'. WHERE A COMPANY ISS UES DEBENTURES, THE LIABILITY TO REPAY ARISES THE MOMENT THE MONEY IS BORROWED. BY ISSUING DEBENTURES A COMPANY TAKES A LOAN AGAINST T HE SECURITY OF ITS ASSETS. THOUGH THE LOAN MAY NOT BE REPAYABLE IN THE YEAR OF ACCOUNT, THE OBLIGATION TO REPAY IS A PRESENT OBLIGATION. HE NCE ANY MONEY SET APART IN THE ACCOUNTS OF THE COMPANY TO REDEEM THE DEBENTURE HAS TO BE TREATED AS MONIES SET APART TO MEET A KNOWN LIAB ILITY. CONSEQUENTLY, DEBENTURES HAVE TO BE SHOWN IN THE BALANCE SHEET OF A COMPANY AS A LIABILITY. BEING MONIES SET APART TO MEET A KNOWN L IABILITY, A DEBENTURE REDEMPTION RESERVE CANNOT BE REGARDED AS A RESERVE FOR THE PURPOSE OF SCHEDULE VI TO THE COMPANIES ACT, 1956. IN NATIONAL RAYON CORPORATION, THE SUPREME COURT FOLLOWED ITS E ARLIER DECISION IN VAZIR SULTAN TOBACCO CO. LTD. VS. CIT [[1981] 13 2 ITR 559], IN HOLDING THAT SINCE THE CONCEPT OF RESERVE AND OF A PROVISION IS WELL KNOWN IN COMMERCIAL ACCOUNTANCY AND IS USED IN THE COMPANIES ACT, 1956, WHILE DEALING WITH THE PREPARATION OF BALANCE SHEETS AND PROFIT AND LOSS ACCOUNTS THE MEANING OF THAT CONCEPT WOULD HAVE TO BE GATHERED FROM THE MEANING ATTACHED IN THE COMPANIES ACT ITSELF. THE FOLLOWING OBSERVATIONS OF THE SUPREME COURT ARE OF SIGNIFICANCE: ITA NO.1912,1913 & 1939/AHD/2012 ALEMBIC LIMITED VS. DCIT AY : 2009-10 13 'THE DEBENTURES WERE NOTHING BUT SECURED LOANS. MER ELY BECAUSE THE DEBENTURES WERE NOT REDEEMABLE DURING T HE ACCOUNTING PERIOD, THE LIABILITY TO REDEEM THE DEBE NTURES DID NOT CEASE TO EXIST. IT WAS REDEEMABLE OR REPAYABLE AT A FUTURE DATE. BUT IT WAS A KNOWN LIABILITY. IN THE FORM OF BALANCE-SHEET PRESCRIBED BY THE ACT IN SCHEDULE VI, THE SECURED L OANS HAVE TO BE SHOWN UNDER THE HEADING 'LIABILITIES'. SECURED L OANS INCLUDE (1) DEBENTURES, (2) LOANS AND ADVANCES FROM BANKS, (3) LOANS AND ADVANCES FROM SUBSIDIARIES, AND (4) OTHER LOANS AND ADVANCES. THE SECURED LOANS MIGHT NOT BE IMMEDIATEL Y REPAYABLE, BUT THE LIABILITY TO REPAY THESE LOANS I S AN EXISTING LIABILITY AND HAS TO BE SHOWN IN THE COMPANY'S BALA NCE-SHEET FOR THE RELEVANT YEAR OF ACCOUNT AS A LIABILITY. AM OUNTS SET APART TO PAY THESE LOANS CANNOT BE 'RESERVE'. THE I NTERPRETATION CLAUSE OF THE BALANCE-SHEET IN SCHEDULE VI OF THE C OMPANIES ACT SPECIFICALLY LAYS DOWN THAT RESERVES SHALL NOT INCLUDE ANY AMOUNT WRITTEN OFF OR RETAINED BY WAY OF PROVIDING FOR A KNOWN LIABILITY.' 4. THE MERE FACT THAT A DEBENTURE REDEMPTION RESERV E IS LABELED AS A RESERVE WILL NOT RENDER IT AS A RESERVE IN THE TRUE SENSE OR MEANING OF THAT CONCEPT. AN AMOUNT WHICH IS RETAINED BY WAY OF PROVIDING FOR A KNOWN LIABILITY IS NOT A RESERVE. CONSEQUENTLY, THE TRIBUNAL WAS CORRECT IN HOLDING THAT THE AMOUNT WHICH WAS SET AP ART AS A DEBENTURE REDEMPTION RESERVE IS NOT A RESERVE WITHI N THE MEANING OF EXPLANATION (B) TO SECTION 115JA OF THE INCOME TAX ACT, 1961. 18. WE, THEREFORE, UPHOLD THE PLEA OF THE ASSESSEE, AND DIRECT THE ASSESSING OFFICER TO GRANT THE RELIEF ACCORDINGLY. 14.2 LD. DEPARTMENTAL REPRESENTATIVE RELIED ON THE ORDER OF THE ASSESSING OFFICER. 15. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED TH E MATERIAL AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHOR ITIES BELOW. THE ENTIRE ISSUE HAS BEEN DISCUSSED BY THE CO-ORDINATE BENCH I N THE CASE OF IN THE CASE OF GENUS ELECTROTECH LTD (SUPRA) AND HELD THAT THE DEBT REDEMPTION FUND IS TO BE EXCLUDED WHILE COMPUTING THE BOOK PROFITS U/S 115JB OF THE ACT. FOLLOWING THE JUDGMENT OF THE TRIBUNAL (SUPRA) AND IN VIEW OF THE AFORESAID ITA NO.1912,1913 & 1939/AHD/2012 ALEMBIC LIMITED VS. DCIT AY : 2009-10 14 OTHER JUDICIAL PRONOUNCEMENTS, WE SEE NO INFIRMITY IN THE ORDER OF THE LD. CIT(A) WHICH IS UPHELD. THIS GROUND OF THE REVENUE IS ALSO DISMISSED. 15.1 SINCE THIS REVENUE GROUND IS DISMISSED, CONSEQ UENTIALLY, THE ADDITIONAL GROUND RAISED BY THE REVENUE, AS ADMITTE D BY US BEING ONLY ADJUNCT TO THIS ISSUE OF COMPUTATION OF BOOK PROFIT U/S 115JB, ALSO STANDS DISMISSED. 16. IN THE RESULT, THE REVENUES APPEAL IS DISMISSE D. 17. THE REMAINING GROUND OF ASSESSEES APPEAL READS AS UNDER:- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(APPEALS) ERRED IN CONSIDERING RATE OTHER THAN T HE SELLING PRICE CHARGED BY DISTRIBUTION LICENSEE COMPANIES FOR WORKING OUT PROFIT OF CAPTIVE POWER PLANT U/S 80IA(4)(IV) OF THE ACT. 17.1 LD. COUNSEL FOR THE ASSESSEE CONTENDS THAT THE ISSUE IN QUESTION STANDS COVERED IN FAVOUR OF THE ASSESSEE IN ITS OWN CASE BY THE JUDGMENT OF HONBLE GUJARAT HIGH COURT VIDE A CONSOLIDATED ORDE R DATED 20.07.2016 IN TAX APPEAL NO. 471 TO 474 OF 2009, IN TAX APPEAL NO. 471 AND 473, THE COMMON QUESTION OF LAW REFERRED TO BY THE REVENUE I S AS UNDER:- WHETHER THE APPELLATE TRIBUNAL WAS RIGHT IN LAW AN D ON FACTS IN NOT APPRECIATING THAT DEDUCTION U/S 80IA(4) IS NOT ALLO WABLE TO THE ASSESSEE FOR GENERATING POWER FOR CAPTIVE CONSUMPTION? 17.2 THE ITAT ALLOWED THE ASSESSEES CLAIM U/S 80IA (4) AT THE RATE OF SELLING PRICE CHARGED BY GUJARAT STATE ELECTRICITY BOARD AND OTHER DISTRIBUTING COMPANIES FROM ITS CAPTIVE POWER PLANT . AGAINST THE ORDER OF THE TRIBUNAL, THE REVENUE PREFERRED THE APPEAL BEFO RE THE HONBLE GUJARAT HIGH COURT AND THE ABOVE QUESTION OF LAW WAS FRAMED . THE HONBLE GUJARAT HIGH COURT WHILE HOLDING IN FAVOUR OF ASSES SEE, RELIED ON A HOST OF JUDGMENTS INCLUDING ACIT, BHARUCH CIRCLE, BHARUCH V S. PRAGATI GLASS WORKS PVT LTD DECIDED ON 25.09.2012 AND CIT VS. SHA H ALLOYS LTD, DECIDED ITA NO.1912,1913 & 1939/AHD/2012 ALEMBIC LIMITED VS. DCIT AY : 2009-10 15 ON 22.11.2011 IN TAX APPEAL NO.2092 OF 2010. THE H ONBLE GUJARAT HIGH COURT FURTHER RELIED ON THE JUDGMENT OF CALCUTTA HI GH COURT IN THE CASE OF CIT VS. KANORIA CHEMICALS & INDUSTREIS LTD, [2013] 35 TAXMANN.COM 566 (CALCUTTA), WHEREIN THE COURT HAS HELD AS UNDER:- IT IS PRICE AT WHICH ASSESSEE TRANSFERRED ELECTRI CITY GENERATED BY IT ELIGIBLE BUSINESS TO ITS OTHER BUSINESS WHICH WOULD BE CONSI DERED FOR PURPOSE OF COMPUTATION OF PROFITS AND GAINS OF ELIGIBLE BUSINE SS IN TERMS OF SECTION 80- IA(8) AND NOT LESSER PRICE AT WHICH SURPLUS ELECTRI CITY WAS SOLD TO ELECTRICITY BOARD. 17.3 RELYING ON ALL THESE JUDGMENTS, BY DETAILED OB SERVATIONS, THE HONBLE GUJARAT HIGH COURT UPHELD THE CLAIM OF THE ASSESSEE AND DISMISSED THE REVENUES GROUND IN THIS BEHALF BY FOLLOWING OBSERV ATIONS:- 11. WE HAVE CONSIDERED THE SUBMISSIONS MADE BY THE LEARNED COUNSEL FOR THE PARTIES. WE HAVE ALSO CONSIDERED THE CASE LAWS CITE D BY THE LEARNED COUNSEL FOR THE ASSESSEE. TAKING INTO CONSIDERATION THE JUD EMENTS OF THIS COURT AND OTHER HIGH COURTS, CITED ABOVE, WE ARE OF THE OPINI ON THAT THE TRIBUNAL HAS RIGHTLY ALLOWED THE CLAIM OF THE ASSESSEE. IN THAT VIEW OF THE MATTER, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE TRIBUNAL. TH EREFORE, WE ANSWER QUESTION (C) AND (D) IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. 17.4 THE LD. DEPARTMENTAL REPRESENTATIVE, ON THE OT HER HAND, RELIED UPON THE ORDER OF THE AUTHORITIES BELOW. 18. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED TH E MATERIAL AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHOR ITIES BELOW. IN VIEW OF THE HONBLE GUJARAT HIGH COURT JUDGMENT ON THE SAME ISSUE IN ASSESSEES OWN CASE, THE ISSUE IN QUESTION THAT THE ASSESSEE I S ELIGIBLE FOR COMPUTATION OF DEDUCTION U/S 80IA(4) ON THE RATES CHARGED BY IT AT SELLING PRICE IS NO MORE RES INTEGRA. RESPECTFULLY FOLLOWING THE HONB LE GUJARAT HIGH COURT JUDGMENT IN ASSESSEES OWN CASE (SUPRA), THIS GROUN D OF THE ASSESSEE IS ALLOWED. 19. ADVERTING TO THE ADDITIONAL GROUND NO.1 IN RESP ECT OF INCOME FROM REALIZATION OF CARBON CREDITS, WHICH IS TAXED AS RE VENUE RECEIPT. THE LD. ITA NO.1912,1913 & 1939/AHD/2012 ALEMBIC LIMITED VS. DCIT AY : 2009-10 16 COUNSEL FOR THE ASSESSEE, AT THE OUTSET, CONTENDS T HAT THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. SUBHASH KABINI PO WER CORPORATION LTD, [2016] 69 TAXMANN.COM 394 (KARNATAKA) DEALT WITH TH E ISSUE AT LENGTH AND RELIED ON VARIOUS JUDICIAL PRONOUNCEMENTS, HOLDING INCOME RECEIVED FROM REALIZATION OF CARBON CREDITS AS CAPITAL IN NATURE. THE HONBLE KARNATAKA HIGH COURT IN PARAGRAPH 6 OF ITS ORDER (SUPRA) HAS DEALT WITH THE ISSUE AT LENGTH AND SQUARELY HELD THAT THE CARBON CREDITS AR E GENERATED OUT OF ENVIRONMENTAL CONCERNS WHICH DOES NOT HAVE ANY CHAR ACTER OF TRADING ACTIVITY; THEREFORE, ANY RECEIPT FROM AN ACTIVITY W HICH IS NOT A TRADING ACTIVITY IS CAPITAL IN NATURE BY FOLLOWING OBSERVAT ION:- 6. AT THIS STAGE, WE MAY ALSO REFER TO THE DECISIO N OF THE ANDHRA PRADESH HIGH COURT, WHICH HAS BEEN RELIED UPON BY THE TRIBUNAL IN THE I MPUGNED ORDER. MORE OR LESS, IDENTICAL QUESTION WAS RAISED AND THE ANDHRA PRADESH HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME TA X-IV V. MY HOME POWER LTD. [(2014) 46 TAXMANN.COM 314 (ANDHRA PRADE SH), AT PARAGRAPH NO.3 OBSERVED THUS: '3. WE HAVE CONSIDERED THE AFORESAID SUBMISSION AND WE ARE UNABLE TO ACCEPT THE SAME, AS THE LEARNED TRIBUNAL HAS FACTUA LLY FOUND THAT 'CARBON CREDIT IS NOT AN OFFSHOOT OF BUSINESS BUT A N OFFSHOOT OF ENVIRONMENTAL CONCERNS. NO ASSET IS GENERATED IN TH E COURSE OF BUSINESS BUT IT IS GENERATED DUE TO ENVIRONMENTAL C ONCERNS. 'WE AGREE WITH THIS FACTUAL ANALYSIS AS THE ASSESSE E 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 RECEIP T OR INCOME. IN THE CIRCUMSTANCES, WE DO NOT FIND ANY ELEMENT OF LAW IN THIS APPEAL.' THE AFORESAID SHOWS THAT THE ANDHRA PRADESH HIGH CO URT HAS CONFIRMED THE VIEW OF THE TRIBUNAL THAT CARBON CREDIT IS NOT AN O FFSHOOT OF BUSINESS, BUT AN OFFSHOOT OF ENVIRONMENTAL CONCERNS. NO ASSET IS GEN ERATED IN THE COURSE OF BUSINESS, BUT IT IS GENERATED DUE TO ENVIRONMENTAL CONCERNS. IT WAS ALSO FOUND THAT THE CARBON CREDIT IS NOT EVEN DIRECTLY L INKED WITH THE POWER GENERATION AND THE INCOME IS RECEIVED BY SALE OF TH E EXCESS CARBON CREDITS. IT WAS FOUND THAT THE TRIBUNAL HAS RIGHTLY HELD THAT I T IS CAPITAL RECEIPT AND NOT BUSINESS INCOME. ITA NO.1912,1913 & 1939/AHD/2012 ALEMBIC LIMITED VS. DCIT AY : 2009-10 17 7. AS SUCH, IN OUR VIEW, WHEN THE ISSUE IS ALREADY COVERED BY THE DECISION OF THE ANDHRA PRADESH HIGH COURT, WHEREIN THE VIEW TAK EN BY THE TRIBUNAL OF HYDERABAD BENCH HAS BEEN FOLLOWED IN THE PRESENT CA SE, ONE MAY SAY THAT NO SUBSTANTIAL QUESTION OF LAW WOULD ARISE FOR CONSIDE RATION. 8. HOWEVER, MR.K.V. ARAVIND, LEARNED COUNSEL APPEAR ING FOR THE APPELLANT/REVENUE, RELIED UPON THE PROVISIONS OF SE CTION 28 OF THE ACT AND CONTENDED THAT IF ANY BENEFIT OR PERQUISITE OR CRED IT IS GENERATED FROM THE BUSINESS, THE SAME WOULD BE A PROFIT FROM BUSINESS AND IS TAXABLE. THEREFORE, THE SAME CANNOT BE TERMED AS CAPITAL RECEIPT, BUT B USINESS INCOME. IN HIS SUBMISSION, IT WAS STATED THAT ON ACCOUNT OF RUNNIN G THE BUSINESS OF POWER GENERATION, CARBON CREDIT IS EARNED, WHICH IS MARKE TABLE AND THEREFORE, IT IS AN INCOME OUT OF BUSINESS. 9. WE CANNOT ACCEPT THE SAID SUBMISSION FOR THE SIM PLE REASON THAT EARNING OF CARBON CREDIT IS NOT THE BUSINESS OF THE ASSESSEE N OR THE SAME IS GENERATED AS A BY PRODUCT ON ACCOUNT OF BUSINESS ACTIVITY OF POWER GENERATION, BUT IT IS EARNED ON ACCOUNT OF CONCERN FOR ENVIRONMENT CARBON CREDIT IS GENERATED ON ACCOUNT OF EMPLOYMENT OF GOOD AND VIABLE PRACTICES BY THE ASSESSEE. 10. MR. ARAVIND, LEARNED COUNSEL FOR THE REVENUE AL SO RELIED UPON THE DECISION OF THE APEX COURT IN THE CASE OF OBEROI HO TEL (P) LTD. V. COMMISSIONER OF INCOME TAX [(1999) 103 TAXMAN 236 ( SC)] AND ANOTHER DECISION IN THE CASE OF KETTLEWELL BULLEN & CO. LTD . V. COMMISSIONER OF INCOME TAX [(1964) 53 ITR 261] AND CONTENDED THAT UNLESS THERE IS ANY ADVERSE EFFECT TO THE TRADING STRUCTURE OF THE BUSI NESS, THE INCOME RECEIVED CANNOT BE TERMED AS CAPITAL RECEIPT. 11. IN OUR VIEW, THE AFORESAID DECISIONS ARE OF NO HELP TO THE REVENUE FOR THE REASON THAT TO FIND OUT WHETHER THE PARTICULAR AMOU NT RECEIVED IS A CAPITAL RECEIPT OR INCOME OUT OF BUSINESS, THERE CANNOT BE ANY STANDARD YARDSTICK OR A STRAIGHT-JACKET FORMULA AS OBSERVED BY THE APEX COU RT IN THE CASE OF M/S. EMPIRE JUTE CO. LTD. (SUPRA). THE FACTS OF THE AFOR ESAID TWO DECISIONS OF THE APEX COURT IN THE CASE OF KETTLEWELL BULLEN AS WELL AS OBEROI HOTEL WERE CONCERNING THE ISSUE OF CONTRACT AND THE EFFECT ON THE TRADING ACTIVITY, WHICH WAS UNDERTAKEN PURSUANT TO THE CONTRACT. THEREFORE, SUCH OBSERVATIONS MADE BY THE APEX COURT CAN NOT BE APPLIED TO THE FACT SI TUATION IN THE PRESENT CASE. HENCE, THE SAID DECISIONS ARE OF NO HELP TO THE APP ELLANT/REVENUE. 12. CONSIDERING THE ABOVE, WE FIND THAT WHEN THE CA RBON CREDIT IS GENERATED OUT OF ENVIRONMENTAL CONCERNS, AND IT IS NOT HAVING THE CHARACTER OF TRADING ACTIVITY, THE TRIBUNAL HAS RIGHTLY HELD THAT IT IS CAPITAL RECEIPT AND IT IS NOT INCOME OUT OF BUSINESS AND HENCE, NOT LIABLE TO PAY INCOME TAX. ITA NO.1912,1913 & 1939/AHD/2012 ALEMBIC LIMITED VS. DCIT AY : 2009-10 18 19.1 THE HONBLE HIGH COURT FURTHER RELIED ON THE J UDGMENT OF HONBLE ANDHRA PRADESH HIGH COURT IN THE CASE OF CIT VS. MY HOME POWER LTD [2014] 46 TAXMANN.COM 314/365 ITR 82 AND THE JUDGME NT OF HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. D.G. GO PALA GOWDA, [2013] 354 ITR 501, WHICH HAVE TAKEN THE SAME VIEW ON REALIZAT ION OF CARBON CREDITS AS CAPITAL RECEIPT. THERE IS NO CONTRARY JUDGMENT AN D THE TWO HONBLE HIGH COURTS, I.E. ANDHRA PRADESH HIGH COURT AND KARNATAK A HIGH COURT, HAVING TAKEN A CONCURRENT VIEW ON THIS MATTER, ARE TO BE F OLLOWED IN JUDICIAL DISCIPLINE. 19.2 THE LD. DEPARTMENTAL REPRESENTATIVE, ON THE OT HER HAND, CONTENDS THAT THE REALIZATION FROM CARBON CREDITS HAS BEEN T REATED BY THE ASSESSEE ITSELF AS REVENUE INCOME AND OFFERED TO TAX AND IN FACT IN ACTUALITIES THEY ARE REVENUE RECEIPT. HOWEVER, NO ADVERSE JUDGMENT ON TH IS HAS BEEN CITED. 20. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED TH E MATERIAL AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHOR ITIES BELOW. THE ADDITIONAL GROUND STANDS ALREADY ADMITTED. THE DUTY OF THE ITAT IS TO ENSURE THAT FAIR, JUST AND PROPER ASSESSMENT IS MAD E. MERELY BECAUSE THE ASSESSEE WAS OF THE OPINION THAT THE RECEIPT WAS RE VENUE IN NATURE CANNOT ACT AS AN ESTOPPELS AGAINST IT WHEN THE LAW AS INTE RPRETED BY HONBLE HIGH COURTS TAKES A VIEW AT VARIANCE WITH THE ASSESSEE. THE LAW IS SETTLED THAT THE REVENUE CANNOT STAND BENEFITED FROM A TAX WHICH IS NOT LEVIABLE IN RIGHT EARNEST. WE FIND MERIT IN THE CONTENTIONS OF THE L D. COUNSEL FOR THE ASSESSEE THAT THE HONBLE KARNATAKA HIGH COURT IN THE CASE O F SUBHASH KABINI POWER CORPORATION LTD (SUPRA) AND THE HONBLE ANDHRA PRAD ESH HIGH COURT IN THE CASE OF MY HOME POWER LTD (SUPRA), HAVE TAKEN A VIE W THAT THE CARBON CREDIT REALIZATION IS CAPITAL IN NATURE. NO CONTRA RY JUDGMENT IS CITED. THEREFORE, RESPECTFULLY FOLLOWING THESE JUDGMENTS, THIS ADDITIONAL GROUND OF ITA NO.1912,1913 & 1939/AHD/2012 ALEMBIC LIMITED VS. DCIT AY : 2009-10 19 THE ASSESSEE IN RESPECT OF REALIZATION OF CARBON CR EDIT AS CAPITAL RECEIPT IS ALLOWED. THUS, THIS ADDITIONAL GROUND IS ACCORDING LY ALLOWED. 21 APROPOS SECOND ADDITIONAL GROUND, WHILE DECIDING THE ISSUE ABOUT DISALLOWANCE U/S 14A READ WITH RULE 8D IN ASSESSEE S AND REVENUES APPEAL, WE HAVE HELD THAT THE AMOUNT IN QUESTION ST ANDS RESTRICTED TO ONLY RS.2 LAKHS. WE HAVE ALLOWED THE GROUND OF THE ASSE SSEE IN RESPECT OF REDEMPTION RESERVES. THE ISSUE IN QUESTION IS ONLY A NOTIONAL DISALLOWANCE; THEREFORE, IT WILL NOT BE JUSTIFIED TO DISALLOW THI S EXPENDITURE OF RS. 2 LACS WHILE COMPUTING THE BOOK PROFIT U/S 115JB OF THE AC T. IN VIEW THEREOF, THE SECOND ADDITIONAL GROUND OF THE ASSESSEE IS ALSO AL LOWED. 22. IN THE RESULT, ASSESSEES APPEAL BEARING ITA NO .1912/AHD/2012 IS DISMISSED; ASSESSEES APPEAL BEARING ITA NO.1913/AH D/2012 IS ALLOWED AND THE REVENUES APPEAL BEARING ITA NO.1939/AHD/20 12 IS DISMISSED. ORDER PRONOUNCED IN THE COURT ON 9 TH DECEMBER, 2016 AT AHMEDABAD. SD/- SD/- (AMARJIT SINGH) ACCOUNTANT MEMBER (R.P. TOLANI) JUDICIAL MEMBER AHMEDABAD; DATED /12/2016 *BIJU T., SR PS / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / CONCERNED CIT 4. ( ) / THE CIT(A) 5. , , / DR, ITAT, AHMEDABAD 6. / GUARD FILE . / BY ORDER, TRUE COPY / ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD