DCIT, Coimbatore V. Salona Cotspin Limited, Coimbatore

ITA 2223/CHNY/2014

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7160 (ITAT-CHENNAI)
• Duration Of Justice: 3 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-12-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2010-2011
• Appeal Filed On: 05-09-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P RADHAKRISHNAN
• Assessee Lawyers: G BASKAR
• Keywords: Business income; Cost of acquisition; Capital receipt

Judgement Text

, , IN THE INCOME-TAX APPELLATE TRIBUNAL A BENCH, CHE NNAI . , . ! ! ! ! , ' ' ' ' # # # # BEFORE SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER & SHRI V. DURGA RAO, JUDICIAL MEMBER ./ I.T.A.NO.2223/MDS/2014 ' ! $! / ASSESSMENT YEAR :2010-11 THE DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE I(3), 63-A, RACE COURSE ROAD, COIMBATORE. VS. M/S. SALONA COTSPIN LIMITED, NO. 9, RASMALINGA NAGAR 4 TH CROSS, SAIBABA COLONY, COIMBATORE 11. [PAN : AACCS4554N] ( %& %& %& %& /APPELLANT ) ( '(%& '(%& '(%& '(%& / RESPONDENT ) %& ) * / APPELLANT BY : SHRI P. RADHAKRISHNAN, JCIT '(%& ) * / RESPONDENT BY : SHRI G. BASKAR, ADVOCATE ) + / DATE OF HEARING : 02.12.2014 ,$ ) + /DATE OF PRONOUNCEMENT : 12.12.2014 - - - - / O R D E R PER V. DURGA RAO, JUDICIAL MEMBER : THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINS T THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) I, COIMBATORE, DATED 11.06.2014 RELEVANT TO THE ASSESSMENT YEAR 2010-11. 2. THE FIRST GROUND OF APPEAL OF THE REVENUE IS RE LATING TO DISALLOWANCE UNDER SECTION 40(A)(I) OF THE INCOME TAX ACT IN RES PECT OF COMMISSION PAYMENT TO OVERSEAS AGENT. I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.2223 2223 2223 2223/M/ /M/ /M/ /M/1 11 14 44 4 2 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE I S IN THE BUSINESS OF MANUFACTURE AND TRADING OF COTTON YARN. THE ASSESSE E HAS EXPORTED BLENDED YARN TO FOREIGN COUNTRIES. THE ASSESSEE HAS APPOINT ED AN AGENT TO PROCURE ORDERS FOR THE PURPOSE OF EXPORTING BLENDED YARN. T HE ASSESSEE HAS PAID COMMISSION TO THE AGENT, WHO ACTED AS AN INDEPENDEN T AGENT IN THE COURSE OF BUSINESS AND PAYMENT WAS ALSO MADE BY DIRECT REM ITTANCE TO HIS BANK ACCOUNT OUTSIDE INDIA. IT WAS ALSO SUBMITTED BEFORE THE ASSESSING OFFICER THAT NO TDS WAS REQUIRED TO BE DEDUCTED. HOWEVER, T HE ASSESSING OFFICER HAS NOT ACCEPTED THE SUBMISSIONS OF THE ASSESSEE AN D HE WAS OF THE OPINION THAT THE PAYMENTS MADE BY THE ASSESSEE TO T HE AGENT FOR THE PURPOSE OF MANAGING THE SALES OF THE ASSESSEE OUTSI DE INDIA BY MEANS OF ENGAGING AGENTS AS PER THE PROVISIONS OF SECTION 9( 1)(VII) OF THE ACT, ANY PAYMENT MADE FOR THE PURPOSE OF RENDERING MANAGERIA L SERVICES OUTSIDE INDIA SHALL BE CONSIDERED ONLY AS THE PAYMENT MADE FOR FEES FOR TECHNICAL SERVICES. FURTHER, FAILURE TO DEDUCT TDS ATTRACTS 40A(I) OF THE ACT AND ACCORDINGLY AN AMOUNT OF .6,78,334/- WAS DISALLOWED AND ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE. 4. ON APPEAL, THE LD. CIT(A), AFTER CONSIDERING TH E SUBMISSION OF THE ASSESSEE AND BY FOLLOWING THE DECISION IN THE CASE OF ACIT V. FARIDA SHOES (P) LTD. 34 TAXMAN.COM 268 DIRECTED THE ASSESSING O FFICER TO DELETE THE ADDITION BY OBSERVING AS UNDER: I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.2223 2223 2223 2223/M/ /M/ /M/ /M/1 11 14 44 4 3 I HAVE GONE THROUGH THE SUBMISSIONS MADE BY THE AP PELLANT AND ALSO THE ORDER OF THE ASSESSING OFFICER. THE JU RISDICTIONAL TRIBUNAL IN THE CASE OF MAHINDRA HOLIDAYS & RESORTS INDIA LTD., HELD THAT COMMISSION PAYABLE BY THE ASSESSEE TO NON-RESI DENT FRANCHISE AGENCIES FOR CANVASSING CLIENTS FOR ASSESSEES TIME SHARE UNITS ABROAD FALLS UNDER THE EXCEPTION IN CLAUSE (B) OF SEC.9(1) (VII) AND CONSEQUENTLY IT IS NOT CHARGEABLE TO TAX IN INDIA A S FEES FOR TECHNICAL SERVICES. ACCORDINGLY, THE ASSESSEE WAS NOT OBLIGE D TO DEDUCT TAX AT SOURCE FROM THE COMMISSION PAYMENT AND THE SAME COU LD NOT BE DISALLOWED U/S 40(IA)(I). THE FACT OF THE CASE ARE SIMILAR TO THE DECISION OF THE CHENNAI A BENCH IN THE CASE OF AS SISTANT COMMISSIONER OF INCOME TAX VS. FARIDA SHOES (P) LTD . IN THE JUDGMENT THE HONBLE ITAT HAS DISCUSSED THE APPLICA TION OF SEC. 9 AND ALSO THE WITHDRAWAL OF THE BOARDS CIRCULAR NO. 786 DATED 07.02.2000 AND HELD THAT THE COMMISSION PAYMENT MA DE TO OVERSEAS AGENT FOR PROCUREMENT OF EXPORT ORDERS OUTSIDE INDI A WAS NOT CHARGEABLE TO TAX IN INDIA AS SERVICES WERE RENDERE D OUTSIDE INDIA, FURTHER THE AGENT DOES NOT HAVE ANY PERMANENT ESTAB LISHMENT IN INDIA. HENCE, THE OBLIGATION OF SEC. 195 HAS NO REL EVANCE TO THE ASSESSEES CASE. RESPECTFULLY FOLLOWING THE ABOVE JURISDICTIONAL ITAT JUDGMENT THE ASSESSING OFFICER IS DIRECTED TO DELET E THE ADDITION. THE GROUND OF APPEAL IS ALLOWED. 5. WE HAVE HEARD BOTH SIDES, PERUSED THE MATERIALS ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. THE ISSUE INVOLVED IN THIS APPEAL IS WHETHER THE OVERSEAS AGENCY COMMISSION PAYMENTS M ADE TO THE NON- RESIDENT FOREIGN AGENTS, TDS HAS TO BE DEDUCTED OR NOT. IN A RECENT DECISION OF THE COORDINATE BENCH OF THE TRIBUNAL ON SIMILAR ISSUE RAISED ON THE IDENTICAL FACTS AND CIRCUMSTANCES FOR THE ASSESSMEN T YEAR 2008-09 IN THE CASE OF M/S. FARIDA SHOES P. LTD. (SUPRA) [WHEREIN THE JUDICIAL MEMBER IS PARTY TO THE ORDER], THE TRIBUNAL HAS EXAMINED THE ISSUE OF COMMISSION PAYMENTS TO NON-RESIDENTS FOR PROCURING EXPORT ORDE RS AND CONCLUDED THAT THE COMMISSION PAYMENTS TO THE SAID NON-RESIDENT AG ENTS ARE NOT I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.2223 2223 2223 2223/M/ /M/ /M/ /M/1 11 14 44 4 4 ASSESSABLE TO TAX IN INDIA AND THE ASSESSEE WAS NOT UNDER THE OBLIGATION OF DEDUCTING TDS ON THE COMMISSION PAYMENTS UNDER SECT ION 195 OF THE ACT. THE HONBLE MADRAS HIGH COURT IN THE CASE OF CIT V. FAIZAN SHOES PVT. LTD. IN T.C.(A) NO. 789 OF 2013 VIDE ORDER DATED 22.07.2 014 HAS CONSIDERED SIMILAR ISSUE ON IDENTICAL FACTS AND DECIDED THE CA SE IN FAVOUR OF THE ASSESSEE. IN VIEW OF THE ABOVE, WE FIND NO INFIRMIT Y IN THE ORDER PASSED BY THE LD. CIT(A) AND THE GROUND RAISED BY THE REVENUE IS DISMISSED. 6. THE NEXT ISSUE INVOLVED IN THIS APPEAL IS WHETH ER THE CARBON CREDIT RECEIPTS RECEIVED BY THE ASSESSEE ARE TO BE TREATED AS REVENUE RECEIPTS OR CAPITAL RECEIPTS. THE ASSESSEE MADE A CLAIM BEFORE THE ASSESSING OFFICER FOR EXCLUSION OF AN AMOUNT OF .33,28,048/- IN COMPUTATION THE BUSINESS PROFITS, BEING THE REVENUE FROM TRANSFER OF CARBON CREDIT, W HICH STANDS CREDITED TO THE PROFIT & LOSS ACCOUNT. BEFORE THE ASSESSING OFF ICER, IT WAS REQUESTED FOR EXCLUSION OF THE SAID REVENUE ON ACCOUNT OF CARBON CREDIT AS A CAPITAL RECEIPT, SINCE THE ASSESSEE DERIVED THE REVENUE FRO M THE TRANSFER OF CERTIFICATES WHICH THE ASSESSEE RECEIVED UNDER THE SCHEME FOR CONTROL OF EMISSION OF CARBON, AS FORMULATED BY UNITED NATION AND THAT THE ASSESSEE DID NOT INCUR ANY COST FOR DERIVING THE SAID REVENU E. HOWEVER, THE ASSESSING OFFICER HAS NOT ACCEPTED THE SUBMISSIONS MADE BY TH E ASSESSEE. 7. ON APPEAL, THE LD. CIT(A), AFTER CONSIDERING TH E SUBMISSIONS OF THE ASSESSEE AS WELL AS BY FOLLOWING THE DECISION OF TH E HYDERABAD BENCH OF THE I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.2223 2223 2223 2223/M/ /M/ /M/ /M/1 11 14 44 4 5 TRIBUNAL IN THE CASE OF MY HOME POWER LIMITED VS. D CIT, DIRECTED THE ASSESSING OFFICER TO TREAT THE INCOME EARNED ON SAL E OF CARBON CREDIT AS CAPITAL RECEIPT. 8. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. 9. AT THE TIME OF HEARING, THE LD. COUNSEL FOR THE ASSESSEE, BY FILING A COPY OF THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2009-10, HAS SUBMITTED THAT THE ISSUE IS SQUAR ELY COVERED IN FAVOUR OF THE ASSESSEE. 10. ON THE OTHER HAND, THE LD. DR FAIRLY ACCEPTED THAT THE ISSUE IS COVERED BY THE DECISION OF THE TRIBUNAL. 11. WE HAVE HEARD BOTH SIDES, PERUSED THE MATERIAL S ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. ON AN IDEN TICAL FACTS AND SIMILAR CIRCUMSTANCES, THE COORDINATE BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2009-10 IN I.T.A. NO. 426/MDS/2013 ORDER DATED 11.06.2013, DECIDED THE ISSUE IN FAVOUR OF TH E ASSESSEE BY OBSERVING AS UNDER: 9. AFTER GIVING OUR THOUGHTFUL CONSIDERATION TO TH E FACTS NARRATED HEREIN ABOVE, IT EMERGES THAT THE QUESTION SOUGHT TO BE RA ISED BY THE REVENUE IS THAT THE CIT(APPEALS) HAS ERRED IN HOLDING THE RECE IPT FROM CARBON CREDITS AS CAPITAL IN NATURE STATED TO HAVE ARISEN IN THE C OURSE OF BUSINESS. KEEPING IN MIND THE ABOVE PLEADINGS, WE NOTICE THAT IN THE CASE LAW CITED BY THE ASSESSEE, THE CO-ORDINATE BENCH (SAME CONSTITUTION) HAS DEALT WITH THE ISSUE I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.2223 2223 2223 2223/M/ /M/ /M/ /M/1 11 14 44 4 6 BY PLACING RELIANCE ON THE DECISION OF HYDERABAD BE NCH OF ITAT {ALSO RELIED UPON BY THE CIT(APPEALS)} AS UNDER :- 9. WE HAVE HEARD BOTH PARTIES AND PERUSED THE REL EVANT FINDINGS AS WELL AS CASE LAW CITED (SUPRA). THE FIRST CONTEN TION OF THE ASSESSEE IS THAT THE AMOUNT OF `.3,39,64,303/- REPRESENTING REA LIZATION OF ENTIRE CARBON CREDITS IS A CAPITAL RECEIPT WHICH IS CONTES TED BY THE REVENUE, WHO TERMS IT AS REVENUE RECEIPT LIABLE TO BE TAXED. WE MAKE IT CLEAR THAT THERE IS NO ISSUE BETWEEN THE PARTIES QUA REALIZATI ON OF THE AMOUNT IN QUESTION OR ITS SOURCE AND THE DISPUTE IS REGARDING NATURE OF RECEIPT I.E. WHETHER CAPITAL OR REVENUE. IN THIS BACKDROP, WE FI ND THAT THE VERY ISSUE STANDS ADJUDICATED BY THE COORDINATE BENCH OF ITAT, HYDERABAD (SUPRA) WHEREIN IT HAS BEEN HELD AS UNDER: 24. WE HAVE HEARD BOTH THE PARTIES AND PERUSED TH E MATERIAL ON RECORD. CARBON CREDIT IS IN THE NATURE OF 'AN ENTIT LEMENT' RECEIVED TO IMPROVE WORLD ATMOSPHERE AND ENVIRONMENT REDUCIN G CARBON, HEAT AND GAS EMISSIONS. THE ENTITLEMENT EARNED FOR CARBON CREDITS CAN, AT BEST, BE REGARDED AS A CAPITAL RECEIPT AND CANNOT BE TAXED AS A REVENUE RECEIPT. IT IS NOT GENERATED OR CREATED D UE TO CARRYING ON BUSINESS BUT IT IS ACCRUED DUE TO 'WORLD CONCERN'. IT HAS BEEN MADE AVAILABLE ASSUMING CHARACTER OF TRANSFERABLE RIGHT OR ENTITLEMENT ONLY DUE TO WORLD CONCERN. THE SOURCE OF CARBON CRE DIT IS WORLD CONCERN AND ENVIRONMENT. DUE TO THAT THE ASSESSEE G ETS A PRIVILEGE IN THE NATURE OF TRANSFER OF CARBON CREDITS. THUS, THE AMOUNT RECEIVED FOR CARBON CREDITS HAS NO ELEMENT OF PROFI T OR GAIN AND IT CANNOT BE SUBJECTED TO TAX IN ANY MANNER UNDER ANY HEAD OF INCOME. IT IS NOT LIABLE FOR TAX FOR THE ASSESSMENT YEAR UN DER CONSIDERATION IN TERMS OF SECTIONS 2(24), 28, 45 AND 56 OF THE INCOM E-TAX ACT, 1961. CARBON CREDITS ARE MADE AVAILABLE TO THE ASSESSEE O N ACCOUNT OF SAVING OF ENERGY CONSUMPTION AND NOT BECAUSE OF ITS BUSINESS. FURTHER, IN OUR OPINION, CARBON CREDITS CANNOT BE C ONSIDERED AS A BI-PRODUCT. IT IS A CREDIT GIVEN TO THE ASSESSEE UN DER THE KYOTO PROTOCOL AND BECAUSE OF INTERNATIONAL UNDERSTANDING . THUS, THE ASSESSEES WHO HAVE SURPLUS CARBON CREDITS CAN SELL THEM TO OTHER ASSESSEES TO HAVE CAPPED EMISSION COMMITMENT UNDER THE KYOTO PROTOCOL. TRANSFERABLE CARBON CREDIT IS NOT A RESUL T OR INCIDENCE OF ONE'S BUSINESS AND IT IS A CREDIT FOR REDUCING EMIS SIONS. THE PERSONS HAVING CARBON CREDITS GET BENEFIT BY SELLING THE SA ME TO A PERSON WHO NEEDS CARBON CREDITS TO OVERCOME ONE'S NEGATIVE POINT CARBON CREDIT. THE AMOUNT RECEIVED IS NOT RECEIVED FOR PRO DUCING AND/OR SELLING ANY PRODUCT, BI-PRODUCT OR FOR RENDERING AN Y SERVICE FOR CARRYING ON THE BUSINESS. IN OUR OPINION, CARBON CR EDIT IS ENTITLEMENT OR ACCRETION OF CAPITAL AND HENCE INCOM E EARNED ON SALE OF THESE CREDITS IS CAPITAL RECEIPT. FOR THIS PROPO SITION, WE PLACE I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.2223 2223 2223 2223/M/ /M/ /M/ /M/1 11 14 44 4 7 RELIANCE ON THE JUDGEMENT OF THE SUPREME COURT IN T HE CASE OF CIT VS. MAHESHWARI DEVI JUTE MILLS LTD. (57 ITR 36) WHE REIN HELD THAT TRANSFER OF SURPLUS LOOM HOURS TO OTHER MILL OUT OF THOSE ALLOTTED TO THE ASSESSEE UNDER AN AGREEMENT FOR CONTROL OF PROD UCTION WAS CAPITAL RECEIPT AND NOT INCOME. BEING SO, THE CONSI DERATION RECEIVED BY THE ASSESSEE IS SIMILAR TO CONSIDERATION RECEIVE D BY TRANSFERRING OF LOOM HOURS. THE SUPREME COURT CONSIDERED THIS FA CT AND OBSERVED THAT TAXABILITY OF PAYMENT RECEIVED FOR SA LE OF LOOM HOURS BY THE ASSESSEE IS ON ACCOUNT OF EXPLOITATION OF CA PITAL ASSET AND IT IS CAPITAL RECEIPT AND NOT AN INCOME. SIMILARLY, IN TH E PRESENT CASE THE ASSESSEE TRANSFERRED THE CARBON CREDITS LIKE LOOM H OURS TO SOME OTHER CONCERNS FOR CERTAIN CONSIDERATION. THEREFORE , THE RECEIPT OF SUCH CONSIDERATION CANNOT BE CONSIDERED AS BUSINESS INCOME AND IT IS A CAPITAL RECEIPT. ACCORDINGLY, WE ARE OF THE OP INION THAT THE CONSIDERATION RECEIVED ON ACCOUNT OF CARBON CREDITS CANNOT BE CONSIDERED AS INCOME AS TAXABLE IN THE ASSESSMENT Y EAR UNDER CONSIDERATION. CARBON CREDIT IS NOT AN OFFSHOOT OF BUSINESS BUT AN OFFSHOOT OF ENVIRONMENTAL CONCERNS. NO ASSET IS GEN ERATED IN THE COURSE OF BUSINESS BUT IT IS GENERATED DUE TO ENVIR ONMENTAL CONCERNS. CREDIT FOR REDUCING CARBON EMISSION OR GR EENHOUSE EFFECT CAN BE TRANSFERRED TO ANOTHER PARTY IN NEED OF REDU CTION OF CARBON EMISSION. IT DOES NOT INCREASE PROFIT IN ANY MANNER AND DOES NOT NEED ANY EXPENSES. IT IS A NATURE OF ENTITLEMENT TO REDUCE CARBON EMISSION, HOWEVER, THERE IS NO COST OF ACQUISITION OR COST OF PRODUCTION TO GET THIS ENTITLEMENT. CARBON CREDIT I S NOT IN THE NATURE OF PROFIT OR IN THE NATURE OF INCOME. 25. FURTHER, AS PER GUIDANCE NOTE ON ACCOUNTING FO R SELF- 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 GENE RATING ENTITIES AS THEY ARE GENERATED AND HELD FOR THE PURPOSE OF SALE IN ORDINARY COURSE. EVEN THOUGH CERS ARE INTANGIBLE ASSETS THOS E SHOULD BE ACCOUNTED AS PER AS-2 (VALUATION OF INVENTORIES) AT A COST OR MARKET PRICE, WHICHEVER IS LOWER. SINCE CERS ARE RECOGNISE D AS INVENTORIES, THE GENERATING ASSESSEE SHOULD APPLY A S-9 TO RECOGNISE REVENUE IN RESPECT OF SALE OF CERS. 26. THUS, SALE OF CARBON CREDITS IS TO BE CONSIDER ED AS CAPITAL RECEIPT. THIS GROUND IS ALLOWED. I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.2223 2223 2223 2223/M/ /M/ /M/ /M/1 11 14 44 4 8 12. THE LD. DR HAS NOT BROUGHT ON RECORD ANY MATER IAL TO SHOW THAT THE ABOVE DECISION OF THE TRIBUNAL HAS BEEN EITHER MODI FIED OR REVERSED BY ANY HIGHER COURTS. THEREFORE, WE FIND NO REASON TO INTE RFERE WITH THE ORDER PASSED BY THE LD. CIT(A) ON THIS ISSUE AND DISMISS THE GROUND RAISED BY THE REVENUE. 13. IN THE RESULT, THE APPEAL OF THE REVENUE STAND S DISMISSED. ORDER PRONOUNCED ON FRIDAY, THE 12 TH OF DECEMBER, 2014 AT CHENNAI. SD/ - SD/ - (A. MOHAN ALANKAMONY) ACCOUNTANT MEMBER (V. DURGA RAO) JUDICIAL MEMBER CHENNAI, DATED, THE 12.12.2014 VM/- - ) ''+/0 10$+ /COPY TO: 1. %& / APPELLANT, 2. '(%& / RESPONDENT, 3. 2 ( ) /CIT(A), 4. 2 /CIT, 5. 03 ''+' /DR & 6. 4! 5 /GF.