USHDEV INTERNATIONAL LTD, MUMBAI V. ADDL CIT RG 2(3), MUMBAI

ITA 3294/MUM/2013

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 3568 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 1 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Assessment Year: 2009-2010
• Appeal Filed On: 29-04-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital receipt; Capital expenditure
• Section: 143(3); 145; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL F BENCH, MUM BAI BEFORE SRI JASON P. BOAZ, AM AND SRI SANDEEP GOSAIN , JM ITA NO.3912/MUM/2013 (ASSESSMENT YEAR: 2009-10) THE DY. COMMISSIONER OF INCOME TAX, RANGE-2 (3), R. NO.552, 5 TH FLOOR, AAYAKAR BHAVAN, M. K. ROAD, MUMBAI 400 020 VS. M/S. USHDEV INTERNATIONAL LTD., 6 TH FLOOR, NEW HARILEELA HOUSE, MINT ROAD, MUMBAI 400 001 PAN: AA A C U 1672 R APPELLANT .. RESPONDENT ITA NO.3294/MUM/2013 (ASSESSMENT YEAR: 2009-10) M/S. USHDEV INTERNATIONAL LTD., 6 TH FLOOR, NEW HARILEELA HOUSE, MINT ROAD, MUMBAI 400 001 VS. THE DY. COMMISSIONER OF INCOME TAX, RANGE-2 (3), R. NO.552, 5 TH FLOOR, AAYAKAR BHAVAN, M. K. ROAD, MUMBAI 400 020 PAN: AA A C U 1672 R APPELLANT .. RESPONDENT REVENUE BY MR. NEIL PHILIP, DR ASSESSEE B Y MR. VIJAY MEHTA, AR DATE OF HEARING 24 - 05 - 2016 DATE OF PRONOUNCEMENT 31 - 05 - 2016 O R D E R PER SANDEEP GOSAIN,JM : THESE ARE TWO APPEALS I. E. ITA NO. 3912/MUM/2013 B Y THE REVENUE AND ITA NO.3294/MUM/2013 BY THE ASSESSEE AR E FILED AGAINST THE COMMON ORDER OF THE LEARNED CIT(A)-6, MUMBAI DA TED 11-03-2013 PASSED IN APPEAL NO.CIT(A)-6/IT-159/2011-12 FOR ASS ESSMENT YEAR 2009- 10. THE SAME ARE HEARD TOGETHER AND ARE NOW BEING D ISPOSED OF THROUGH THIS CONSOLIDATED ORDER. ITA NO.3912 & 3294/MUM/20113 2 2. THE BRIEF FACTS OF THE CASE IN THE PRESENT CASE ARE THAT THE E-RETURN WAS FILED BY THE ASSESSEE ON 25-09-2008 DECLARING T OTAL INCOME AT RS.10,56,45,522/- AFTER CLAIMING DEDUCTION U/S 80IA OF THE ACT AT RS.3,41,72,995/-. THE RETURN WAS DULY PROCESSED U/S 143(1) OF THE ACT ON 15-02-2011. LATER ON, THE CASE WAS SELECTED FOR SCR UTINY UNDER CASS. THEREFORE, AFTER ISSUING NOTICES AND SEEKING REPLY FROM THE ASSESSEE ORDER OF ASSESSMENT WAS PASSED U/S 143(3) OF THE AC T BY THE AO ON 30- 12-2011. WHILE PASSING THE ASSESSMENT ORDER, THE IN COME FROM CARBON CREDITS OF RS.69,55,343/- WAS ADDED TO THE INCOME O F THE ASSESSEE FOR ASSESSMENT YEAR 2009-10. IN ADDITION, THE ASSESSEE S CLAIM FOR WRITE OFF OF EXPENDITURE INCURRED IN RELATION TO ABANDONED PROJE CTS WAS ALSO DISALLOWED AS IT WAS HELD BY THE AO THAT THESE EXPE NSES CONSTITUTE CAPITAL EXPENDITURE AND NOT DEDUCTIBLE FROM THE INCOME OF T HE ASSESSEE AS PER PROVISIONS OF THE INCOME TAX ACT. FURTHER, THE AO A LSO DISALLOWED INTEREST OF RS.3,46,58,302/- TREATING THE SAME AS ASSESSEES INCOME FROM OTHER SOURCES. AGGRIEVED BY THE ORDER OF THE AO, THE ASS ESSEE PREFERRED APPEAL BEFORE THE LEARNED CIT (A) AND THE LEARNED C IT (A) AFTER HEARING BOTH THE PARTIES HAS PARTLY ALLOWED THE APPEAL OF T HE ASSESSEE. IT WAS HELD THAT THE ADDITION MADE ON ACCOUNT OF UNSOLD CA RBON CREDITS AMOUNTING TO RS.69,54,343/- BY THE AO WAS FOUND TO BE NOT VALID AND THE AO WAS DIRECTED TO RESTRICT THE ADDITION TO THE EXT ENT OF THE COST OF CARBON CREDITS WHILE TREATING THE SAME AS STOCK-IN-TRADE O F THE ASSESSEE. AGGRIEVED BY THE ORDER OF THE LEARNED CIT (A), BOTH THE REVENUE AS WELL AS THE ASSESSEE PREFERRED THE PRESENT APPEALS BEFOR E US. ITA NO.3912 & 3294/MUM/20113 3 3. FIRSTLY, WE ARE TAKING UP THE APPEAL OF THE REVE NUE. REVENUES APPEAL IN ITA NO.3912/MUM/2013 FOR AY-200 9-10 GROUNDS NO.1 AND 4 OF THE REVENUES APPEAL ARE GENE RAL IN NATURE AND HENCE REQUIRE NO SPECIFIC ADJUDICATION. EFFECTIVE G ROUNDS NO.2 AND 3 ARE REPRODUCED HEREIN BELOW:- 2. ON THE FACTS AND CIRCUMSTANCES OF T HE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION ON AC COUNT OF UNSOLD CARBON CREDIT TREATING IT AS STOCK IN TRADE OF THE ASSESSEE, OVERLOOKING THE FACT THAT ACCORDING TO ME RCANTILE SYSTEM OF ACCOUNTING THE ASSESSEE WAS DUTY BOUND TO OFFER IT FOR TAXATION. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION ON AC COUNT OF UNSOLD CARBON CREDIT TREATING IT AS STOCK IN TRADE OF THE ASSESSEE, OVERLOOKING THE FACT THE A. O. HAD MADE T HE ADDITION REJECTING THE CHANGE IN THE METHOD OF ACCO UNTING ADOPTED BY THE ASSESSEE WITH REGARD TO TAXATION OF CARBON CREDIT. 4. BOTH THE ABOVE GROUNDS ARE INTERRELATED AND INTE RCONNECTED AND RELATING TO DELETION OF ADDITION ON ACCOUNT OF UNSO LD CARBON CREDITS TREATING IT AS STOCK-IN-TRADE OF THE ASSESSEE BY THE LEARNED CIT (A). 5. THE LEARNED DR APPEARING ON BEHALF OF THE REVENU E RELIED UPON THE ORDER OF THE AO AND SUBMITTED THAT THE LEARNED CIT (A) HAS ERRED IN DELETING THE ADDITION MADE BY THE AO ON ACCOUNT OF UNSOLD CARBON CREDITS TREATING IT AS STOCK-IN-TRADE OF THE ASSESSEE, OVER LOOKING THE FACT THAT ACCORDING TO MERCANTILE SYSTEM OF ACCOUNTING, THE A SSESSEE WAS DUTY BOUND TO OFFER IT FOR TAXATION. IT WAS FURTHER SUBM ITTED BY THE LEARNED DR THAT THE AO HAD MADE THE ADDITION REJECTING THE CHA NGE IN THE METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE WITH REGARD TO T AXATION OF CARBON ITA NO.3912 & 3294/MUM/20113 4 CREDITS. THE LEARNED DR FURTHER SUBMITTED THAT AS P ER THE PROVISIONS OF SECTION 145 OF THE ACT EVERY ASSESSEE HAVING INCOME CHARGEABLE UNDER THE HEAD PROFITS & GAINS FROM BUSINESS OR OTHER SOU RCES, HAS TO COMPUTE INCOME IN ACCORDANCE WITH EITHER IN CASS OR MERCANT ILE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. IT W AS FURTHER ARGUED BY THE LEARNED DR THAT THE ASSESSEE IN THE PRESENT CAS E HAS BEEN MAINTAINING BOOKS OF ACCOUNT ON MERCANTILE SYSTEM A ND THE STAND OF THE ASSESSEE THAT INCOME FROM CARBON CREDITS ALONE WOUL D BE MAINTAINED ON CASS BASIS IS NOT ACCEPTABLE AS MERCANTILE SYSTEM O F ACCOUNTING IS NOT ACCEPTABLE UNDER THE PROVISIONS OF THE INCOME TAX A CT. 6. ON THE OTHER HAND, THE LEARNED AR REPRESENTING T HE ASSESSEE RELIED UPON THE ORDER OF THE LEARNED CIT (A). 7. BEFORE WE COME TO THE CONCLUSION ON MERITS OF TH E CASE, IT IS NECESSARY TO ANALYZE THE ORDER PASSED BY THE LEARNE D CIT (A) WHILE DEALING WITH THE AFOREMENTIONED TWO GROUNDS RAISED BY THE REVENUE. THE LEARNED CIT (A) HAS DEALT WITH THESE TWO GROUNDS IN PARA 2.3 OF HIS ORDER. THE SAME IS REPRODUCED HEREIN BELOW:- 2.3 I HAVE GONE THROUGH THE ORDER OF THE AO, THE D ETAILED SUBMISSION OF THE APPELLANT AND STUDIED IN DETAIL T HROUGH INTERNET VARIOUS ASPECTS OF CARBON CREDIT, ACCOUNTING TREATM ENT AND TAXABILITY OF CARBON CREDIT. 2.3.1 WHAT IT CARBON CREDIT? THIS QUESTION IS VERY WELL ANSWERED IN THE WIKIPEDIA AT HTTP://EN.WIKIPEDIA.ORG/WIKI/CARB ON CREDIT AS UNDER: A CARBON CREDIT IS A GENERIC TERM FOR ANY TRADABLE CERTIFICATE OR PERMIT REPRESENTING THE RIGHT TO EMIT ONE TONE OF C ARBON DIOXIDE OR THE MASS OF ANOTHER GREENHOUSE GAS WITH A CARBON DIOXIDE EQUIVALENT (ICO2E) EQUIVALENT TO ONE TONE OF CARBON DIOXIDE. ITA NO.3912 & 3294/MUM/20113 5 CARBON CREDITS AND CARBON MARKETS ARE A COMPONENT O F NATIONAL AND INTERNATIONAL ATTEMPTS TO MITIGATE THE GROWTH I N CONCENTRATIONS OF GREENHOUSE GASES (GHGS). ONE CARBON CREDIT IS EQUAL TO ONE METRIC TONE OF CARBON DIOXIDE, OR IN SOME MARKETS, CARBON DIOXIDE EQUIVALENT GASES. CARBON TRADING IS AN APPLICATION OF AN EMISSION TRADING APPROACH. GREENHOUSE GAS EMISSIONS ARE CAPPED AND T HEN MARKETS ARE USED TO ALLOCATE THE EMISSIONS AMONG TH E GROUP OF REGULATED SOURCES. THE GOAL IS TO ALLOW MARKET MECHANISMS TO DRIVE IND USTRIAL AND COMMERCIAL PROCESSES IN THE DIRECTION OF LOW EMISSI ONS OR LESS CARBON INTENSIVE APPROACHES THAN USED WHEN THERE IS NO COST TO EMITTING CARBON DIOXIDE AND OTHER GHGS INTO THE ATMOSPHERE. SINCE GHG MITIGATION PROJECTS GENERATE CREDITS, THIS APPR OACH CAN BE USED TO FINANCE CARBON REDUCTION SCHEME BETWEEN TRADING PARTNERS AND AROUND THE WORLD. THERE ARE ALSO MANY COMPANIES THAT SELL CARBON CRED ITS TO COMMERCIAL AND INDIVIDUAL CUSTOMERS WHO ARE INTERES TED IN LOWERING THEIR CARBON FOOTPRINT ON A VOLUNTARY BASIS. THESE CARBON OFF SETTERS PURCHASE THE CREDITS FROM AN INVESTMENT FUND OR A C ARBON DEVELOPMENT COMPANY THAT HAS AGGREGATED THE CREDITS FROM INDIVIDUAL PROJECTS. BUYERS AND SELLERS CAN ALSO US E AN EXCHANGE PLATFORM TO TRADE, SUCH AS THE CARBON TRADE EXCHANG E, WHICH IS LIKE A STOCK EXCHANGE FOR CARBON CREDITS. THE QUALITY OF T HE CREDITS IS BASED IN PART ON THE VALIDATION PROCESS AND SOPHIST ICATION OF THE FUND OR DEVELOPMENT COMPANY THAT ACTED AS THE SPONS OR TO THE CARBON PROJECT. THIS IS REFLECTED IN THEIR PRICE; VOLUNTARY UNITS TYPICALLY HAVE LESS VALUE THAN THE UNITS SOLD THROU GH THE RIGOROUSLY VALIDATED CLEAN DEVELOPMENT MECHANISM. 2.3.2 CARBON CREDITS ARE GOODS AND COMMODITIES: ARE CERTIFIED EMISSION REDUCTION (CERS) CARBON CREDITS GOODS? (I) THE CARBON CREDIT (CER) TRADED AS COMMODITY AS THE FORWARD MARKETS COMMISSION HAS GRANTED TRADING PERM ISSION TO CARBON CREDITS AND CARBON CREDIT IS INCLUDED IN THE LIST OF COMMODITIES GRANTED TRADING PERMISSION IN THE OTHE R CATEGORY. THE MULTI COMMODITY EXCHANGE OF INDIA (MCX) ENTERED INT O AN ALLIANCE WITH CHICAGO CLIMATE EXCHANGE IN 2005 TO INTRODUCE CARBON TRADING IN INDIA, PROVIDING FURTHER LIQUIDITY AND GRATER EX PANSE TO THE MARKET. (II) THE RECENT NOTIFICATION ISSUED BY THE GOVERNME NT OF THE NATIONAL CAPITAL TERRITORY OF DELHI, NOTIFYING THE LEGAL POSITION WITH REGARD TO THE TAXABILITY OF CER HAS RAISED SEVERAL QUESTIONS AS TO WHETHER CARBON CREDITS ARE TO BE TREATED AS GOODS AND WHETHER IT IS ELIGIBLE TO TAX AND THAT THEY CANNOT BE CONSIDER ED AS ACTIONABLE ITA NO.3912 & 3294/MUM/20113 6 CLAIMS OR SECURITIES. THE NOTIFICATION EXPLAINS THA T IN SUBSTANCE CERS ARE TRADABLE COMMODITY. THEY HAVE A MARKET VAL UE, HAVING A READY MARKET, WITH WILLING BUYERS AND SELLERS AND A RE FREELY TRANSFERABLE AS OTHER MARKETABLE COMMODITIES. THUS CARBON CREDITS SHOULD BE CONSIDERED TO BE GOODS UNDER THE SALES TA X LAWS AND ANY PERSON/COMPANY/UNDERTAKING/ENTITY ENGAGED IN THE AC TIVITY OF SALE OR PURCHASE OF CARBON CREDIT IS A DEALER IN TERMS OF THE DEFINITION OF DEALER AS CONTAINED IN SECTION 2 (1) OF THE DVAT AC T, 2004. THE NOTIFICATION FURTHER EXPLAINS THAT UNDER SECTION 2( 1) (M) OF THE DVAT ACT, 2004, GOODS HAS BEEN DEFINED AS GOODS MEANS EVERY KIND OF MOVEABLE PROPERTY (OTHE R THAN NEWSPAPERS, ACTIONABLE CLAIMS, STOCKS, SHARES AND S ECURITIES AND INCLUDES- (I) LIVESTOCK, ALL MATERIAL, COMMODITIES, GRASS OR THINGS ATTACHED TO OR FORMING PART OF THE EARTH WHICH ARE AGREED TO BE SERVED BEFORE SALE OR UNDER A CONTACT OF SALE AND (II) PROPERTY IN GOODS (WHETHER AS GOODS OR IN SOME OTHER FORM) INVOLVED IN THE EXECUTION OF A WORKS CONTRACT, LEAS E OR HIRE- PURCHASE OR THOSE TO BE USED IN THE FITTING OUT, IM PROVEMENT OR REPAIR OF MOVABLE PROPERTY. IT IS FURTHER PERTINEN T TO MENTION ENTRY NO.3 OF IIIRD SCHEDULE, UNDER WHICH CERS ARE TO BE TREATED AS GOODS. ENTRY NO.3 OF IIIRD SCHEDULE READS AS FOLLOW S ENTRY NO.3 OF IIIRD SCHEDULE 01-04-2005 ALL TANGIBLE GOODS LIKE COPYRIGHT, PATENT, REP LICENSE, GOODWILL ETC. TO DRAW CONCLUSION, RELIANCE WAS PLACED ON SEVERAL JUDGMENTS OF THE HONBLE SUPREME COURT IN T HE MATER OF H. ANRAJ V. GOVERNMENT OF TAMIL NADU, [1986] 1 SCC 414, VIKASH SALES CORPO RATION & ANOTHER VS. COMMISSIONER OF COMMERCIAL TAXES & ANOT HER JT 1996 (5) SC 482, YASH OVERSEAS VS. GOVT. OF NCT OF DELHI & ORS. (JUDGMENT DATED 28.4.2006) AND SO ON. THE NOTIFICAT ION NO.256/CDVAT/2009/43 DATED 13.01.2010 ISSUED BY THE GOVERNMENT OF NATIONAL CAPITAL TERRITORY OF DELHI, CONCLUDED THAT CERTIFIED EMISSION RIGHTS (CARBON CREDITS) ARE TAXA BLE UNDER DVAT ACT, 2004 AND THE RATE APPLICABLE IS 4% AS THE SAID ITEM IS COVERED UNDER ENTRY NO.3 OF IIIRD SCHEDULE APPENDED TO THE DVAT ACT, 2004. IN THE LANDMARK CASE OF VIKAS SALES, THE QUESTION F OR CONSIDERATION BEFORE THE HONBLE SUPREME COURT WAS WHETHER THE TR ANSFER OF AN IMPORT LICENSE CALLED R. E. P. LICENSE/EXAM SCRIPT BY THE HOLDER THEREOF TO ANOTHER PERSON CONSTITUTES A SALE OF GOO DS WITHIN THE MEANING OF AND FOR THE PURPOSES OF THE SALES TAX EN ACTMENTS OF ITA NO.3912 & 3294/MUM/20113 7 TAMIL NADU, KARNATAKA AND KERALA AND WHETHER IT WAS EXIGIBLE TO TAX OR NOT. REPLENISHMENT LICENSE OR REP LICENSES W ERE ISSUED BY THE CENTRAL GOVERNMENT TO REGISTERED EXPORTERS FACI LITATING IMPORT OF ESSENTIAL INPUTS REQUIRED FOR THE MANUFACTURE OF TH E PRODUCTS EXPORTED. THESE LICENSES WERE MADE FREELY TRANSFERA BLE AND LAWFUL HOLDER OF THE LICENSE COULD EITHER IMPORT THE GOODS PERMITTED THEREUNDER OR SELL IT TO ANOTHER IN TURN. THUS SEVE RAL REGISTERED EXPORTERS STARTED TRADING IN THESE LICENSES AND MAD E PROFITS OUT OF THE SAME. THE TAX AUTHORITIES THUS CLAIMED THAT TRA NSFER OF SUCH LICENSES WAS SUBJECT TO SALES TAX AS THESE QUALIFIE D TO BE GOODS AS PER THE SALES TAX ACT. SEVERAL NOTABLE POINTS WERE MADE WHICH ARE RELEVANT IN CASE OF CARBON CREDITS AS WELL, WHICH A RE AS FOLLOWS: AS REP LICENSE DID NOT REQUIRE ANY ENDORSEMENT OR PERMISSION FROM THE LICENSING AUTHORITY, AND WERE G OVERNED BY THE ORDINARY LAW, REP COULD BE TRANSFERRED BY THE TRANS FEROR BY WAY OF A FORMAL LETTER TO THE TRANSFEREE AND CONFERRED UPON THE TRANSFEREE CHOATE RIGHT THAT WAS EXERCISABLE IMMEDIATELY, THES E LICENSES HAD INTRINSIC VALUE OF THEIR OWN WHICH WAS INDEPENDENT OF THE VALUE OF THE GOODS WHICH COULD BE IMPORTED. REP LICENSES COULD NOT BE CONTENDED TO BE ACTIONABL E CLAIMS, AS ACTIONABLE CLAIMS ARE CLAIMS TO ANY DEBT OR BENEFICIAL INTEREST IN THE MOVABLE PROPERTY WHETHER EXISTENT, ACCRUING, CONDITIONAL OR CONTINGENT AND THESE LICENSES CONFER RED RIGHT TO PURCHASE MATERIAL AND WERE NOT CLAIMS TO ANY DEBT. LASTLY, THESE LICENSES WERE BOUGHT AND SOLD FREELY IN THE MARKET, I.E. THEY HAD A READY MARKET FOR TRADE. FUR THER, IN CASE OF TATA CONSULTANCY SERVICES VS. STATE OF ANDHRA PRADE SH IT WAS, INTER ALIA, HELD AND WAS REITERATED IN CASE OF BSNL VS UO I [2006] 152 TAXMAN 135/282 ITR 273/ 145 SC 1, THAT ANYTHING THA T HAD THE FOLLOWING ATTRIBUTES WOULD BE REGARDED AS GOODS (A) ITS UTILITY; (B) CAPABLE OF BEING BOUGHT AND SOLD AND (C) CAPABLE OF BEING TRANSMITTED, TRANSFERRED, DELIVERED, STORED AND POS SESSED. THEREFORE CER BY VIRTUE OF FULFILLING THE ABOVE MEN TIONED ATTRIBUTES QUALIFIES TO BE CONSIDERED AS GOODS. 2.4 CREATION OF THE CARBON CREDIT INVOLVES COST- (I) THE PROCESS OF SETTING UP OF CARBON CREDIT PROJ ECT (AS ALSO SUBMITTED BY THE APPELLANT VIDE LETTER DATED 10.01. 2013) IS AS UNDER: 1. PREPARATION AND SUBMISSION OF PROJECT CONCEPT NO TE (PCN) AND PROJECT DESIGN DOCUMENT (PDD) ITA NO.3912 & 3294/MUM/20113 8 2. APPROVAL FROM NATIONAL CDM AUTHORITY (NCDMA), PA RT OF MINISTRY OF ENVIRONMENTAL AND FOREST. 3. VALIDATION BY DESIGNATED OPERATIONAL ENTITY (DOE ). 4. REGISTRATION OF UNFCC. 5. MONITORING AND REVIEW BY DOE. 6. ISSUANCE OF CER CERTIFICATION REPORT BY DOE. 7. ISSUANCE OF CER CERTIFICATES BY UNFCC. THE ENTIRE PROCEDURE REQUIRES INVOLVES INPUT FROM E XPERTS IN THE FIELDS OF LAW, ACCOUNTANCY, ENGINEERING, AND CONSUL TANCY ANY OBTAINING THEIR SERVICES INVOLVES COST. WHILE UNDER TAKING A CDM PROJECT AN ENTITY HAS TO GO THROUGH A LOT OF RESEAR CH AND DEVELOPMENT, DOCUMENTATION AND APPROVALS PROCESS AN D THE SAME IS RECOGNIZED BY ICAI AS FURTHER, INDICATED BELOW:- 2.5 ACCOUNTING TREATMENT- THE ACCOUNTING STANDARD BOARD OF THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI) HAS ALSO ISSUED AN EXPO SURE DRAFT OF THE GUIDANCE NOTE ON ACCOUNTING FOR SELF-GENERATED CERTIFIED EMISSION REDUCTIONS IN 2009 ENUMERATING THE ACCOUNT ING PRINCIPLES FOR CERS GENERATED BY AN ENTITY. THE EXPOSURE DRAFT PROVIDES FOR ACCOUNTING PRINCIPLES RELATING TO RECOGNITION, MEAS UREMENT AND DISCLOSURES OF CERS GENERATED UNDER THE CLEAN DEVEL OPMENT MECHANISM. CLEAN DEVELOPMENT MECHANISM BEING THE RE LEVANT MECHANISM ADOPTED IN INDIA FOR REDUCTION OF CARBON EMISSIONS, IT IS PERTINENT TO MENTION THAT IN A CDM MECHANISM, A DEV ELOPED NATION MAY INVEST IN A PROJECT IN DEVELOPING NATION, WHICH WOULD RESULT IN EMISSION REDUCTION. THE EMISSION REDUCTIONS ONCE CE RTIFIED BY THE CDM EXECUTIVE BOARD, UNDER THE PROTOCOL ARE CALLED CERTIFIED EMISSION REDUCTIONS (CERS) OR CARBON CREDITS AND AR E USED TO MEET NATIONS COMMITMENTS UNDER THE PROTOCOL. WHILE UNDE RTAKING A CDM PROJECT AN ENTITY HAS TO GO THROUGH A LOT OF RESEAR CH AND DEVELOPMENT, DOCUMENTATION AND APPROVAL PROCESS. AC COUNTING TREATMENT FOR CERS TAKING IN CONSIDERATION THE EXPO SURE DRAFT ISSUED BY ICAI SHOULD BE DONE IN THE FOLLOWING MANN ER: 1. EXPENSES IN THE RESEARCH AND DEVELOPMENT PHASE: WHILE UNDERTAKING THE PROJECT FOR REDUCTION IN CARBON EMI SSION, ANY COST INCURRED ON DEVELOPMENT SHOULD BE ACCOUNTED FOR AS ENUMERATED IN ITA NO.3912 & 3294/MUM/20113 9 AS 26 FOR INTANGIBLE ASSETS. COST INCURRED ON RECEI VING THE CER IS MEASURED WITH CERTAINTY AT THE TIME OF INCURRING TH OSE EXPENSES WHEREAS REVENUE RECOGNITION WILL HAPPEN ONLY AT T H E TIME OF SALE OF CERS. SO THERE IS MISMATCH OF IN ACCOUNTING FOR EXP ENSES AND REVENUE. 2. CERS HELD WITH THE CDM EXECUTIVE BOARD THE EXP OSURE DRAFT ON GUIDANCE NOTE ON ACCOUNTING FOR CARBON CRE DITS STATES THAT WHEN THE CERS ARE IN THE APPROVAL STAGE, THESE SHOU LD BE ACCOUNTED FOR AS PER THE PROVISIONS OF AS 29 AS CO NTINGENT ASSETS AND ONCE APPROVED SHOULD BE RECORDED IN THE BOOKS A S AN INTANGIBLE ASSET. THERE IS AN ANOMALY IN THE DRAFTI NG AS PARA 30 OF AS 29 SAYS THAT AN ENTERPRISE SHOULD NOT RECOGNIZE A CONTINGENT ASSET. HOWEVER, ONCE THE CER ARE APPROVED BY THE BO ARD, THESE SHOULD BE RECORDED AS INTANGIBLE ASSETS UNDER AS 26 AS THEY MEET THE CRITERIA OF INTANGIBLE ASSETS AS DEFINED IN T HE STANDARD, WHICH INCLUDES 1) IDENTIFIABILITY, 2) CONTROL OVER RESOUR CES AND 3) EXPECTATION OF FUTURE ECONOMIC BENEFITS FOLLOWING T O THE ENTERPRISE. 3. CERS HELD FOR SALE IN CASE AN ENTERPRISE POSSE SS CER WHICH ARE TO BE TRADED IN THE ORDINARY COURSE OF BU SINESS, I.E. THE ENTERPRISE HOLDS THE ASSET AS AVAILABLE FOR SALE THEN, THESE SHOULD BE ACCOUNTED FOR AS INVENTORY UNDER PROVISIONS OF A S2. PARA 8 OF THE AS 26 STATES THAT IF ANY ITEM UNDER THIS STANDA RD DOES NOT MEET THE DEFINITION OF INTANGIBLE ASSETS, THEN THE EXPEN DITURE TO ACQUIRE IT OR GENERATE IT IS INTERNALLY RECOGNIZED AS AN EXPEN SE WHEN IT IS INCURRED. THE INTENT OF THE ENTITY WOULD DETERMINE WHETHER THESE CREDITS SHOULD BE RECORDED AS INTANGIBLE ASSETS OR AS INVENTORY. 2.6 THE HYDERABAD ITAT IN THE CASE OF MY HOME POWER LTD. V CIT [ITA NO.1114/HYD.) OF 2009 DTD 2.11.2012] HELD THAT CARBON CREDITS ARE CAPITAL RECEIPTS AND ARE NOT TAXABLE. T HE DECISION OF THE HYDERABAD ITAT CANNOT BE USED AS A PRECEDENCE AS TH E SAME IS NOT APPLICABLE IN THE TERRITORIAL JURISDICTION OF M UMBAI AS HELD BY THE BOMBAY HIGH COURT IN CASE OF CIT VS- THANA ELECTRI CITY SUPPLY & CO. (206 ITR 727) (MUM) HELD, THE DECISION OF ONE HIGH COURT IS NEITHER BINDING PRECEDENT FOR ANOTHER HIGH COURT NO R FOR COURT OR TRIBUNALS OUTSIDES ITS OWN TERRITORIAL JURISDICTION . IT IS WELL SETTLED THAT THE DECISION OF A HIGH COURT WILL HAVE A FORCE OF B INDING PRECEDENT ONLY IN THE STATE OR TERRITORIES IN WHICH THE COURT HAS JURISDICTION. IN OTHER STATES OR OUTSIDE TERRITORIAL JURISDICTION OF THAT HIGH COURT IT MAY, AT BEST, HAVE ONLY PERSUASIVE EFFECT BECAUSE T HE DECISION SUFFERS FROM FACTUAL AND LOGICAL AND LEGAL ERRORS A S DISCUSSED BELOW: (I) THE ITAT HYDERABAD HELD THAT CARBON CREDIT IS I N THE NATURE OF AN ENTITLEMENT RECEIVED TO IMPROVE WORLD ATMOS PHERE AND ITA NO.3912 & 3294/MUM/20113 10 ENVIRONMENT REDUCING CARBON, HEAT AND GAS EMISSIONS . THE ENTITLEMENT EARNED FOR CARBON CREDITS CAN, AT BEST, BE REGARDED AS A CAPITAL RECEIPT AND CANNOT BE TAXED AS A REVENUE RE CEIPT. IT IS NOT GENERATED OR CREATED DUE TO CARRYING ON BUSINESS BU T IT IS ACCRUED DUE TO WORLD CONCERN. IT IS PERTINENT TO NOTE THA T WHETHER A RECEIPT IS CAPITAL OR REVENUE DOES NOT DEPEND ON FOR WHAT P URPOSE THE BUSINESS IS BEING CARRIED AND EVEN IF A RECEIPT IS GENERATED DUE TO WORLD CONCERN, THE SAME DOES NOT AUTOMATICALLY DET ERMINE THE NATURE OF THE RECEIPT. IF THE ARGUMENT OF ITAT HYDE RABAD IS FOLLOWED, THEN RECEIPTS OF ALL THE COMPANIES INVOLV ED IN PRODUCING POLLUTION CONTROL MACHINES AND EQUIPMENTS WOULD HAV E TO BE TREATED AS CAPITAL RECEIPT. SIMILARLY A DOCTOR OR A HOSPITAL MAY BE CONSIDERED FOR WORKING FOR IMPROVEMENT WORLD HEALT H OR AN ACTOR OR ENTERTAINER MAY BE CONSIDERED AS REDUCING THE AN XIETY AND STRESS LEVEL OF THE WORLD THEREFORE, TREATING THEIR RECEIPTS AS CAPITAL RECEIPT WOULD NOT BE LOGICAL AS MOST ECONOMIC ACTIV ITIES DOES CONTRIBUTE TOWARDS IMPROVEMENT OF SOME OR OTHER ASP ECT OF T HE WORLD AND THEREFORE, THE ARGUMENT OF THE ITAT HYDER ABAD THAT SINCE CARBON CREDITS ARE GENERATED DUE TO WORLD CONCERN T HEREFORE THE SAME IS CAPITAL RECEIPT IS FOUND TO BE NOT VERY LOG ICAL. (II) AS A MATTER OF FACT CARBON CREDITS ARE BEING CREATED BY UNDERTAKING LOT OF COSTS AS DISCUSSED AT PARA 2.4 A BOVE. FURTHER, THE GENERATION AND SELLER OF CARBON CREDITS ARE INV OLVED IN SUCH ACTIVITY BECAUSE THERE IS A MARKET FOR CARBON CREDI T AND CARBON CREDIT TRANSACTIONS LEAD TO GAIN TO THE PRODUCERS A ND TRADERS OF CARBON CREDIT. PRODUCERS AND TRADERS OF CARBON CRED ITS ARE NOT ONLY MOTIVATED BY WORLD CONCERN BUT ALSO ON ACCOUNT OF THE FACT THAT CARBON TRADING CAN BE PROFITABLY UNDERTAKEN. THUS, THE ITAT HYDERABAD IS NOT CORRECT IN HOLDING THAT THE AMOUNT RECEIVED FOR CARBON CREDITS HAS NO ELEMENT OF PROFIT OR GAIN AND IT CANNOT BE SUBJECTED TO TAX IN ANY MANNER UNDER ANY HEAD OF IN COME. (III) CARBON CREDITS ARE GOODS OR COMMODITIES AND A RE BEING SOLD IN VARIOUS COMMODITY EXCHANGES THROUGHOUT THE WORLD INCLUDING TWO COMMODITY EXCHANGES IN INDIA AS POINTED OUT ABOVE. THE ITAT HYDERABAD THEREFORE IS NOT CORRECT IN HOLDING THAT THE AMOUNT RECEIVED FOR PRODUCING AND/OR SELLING ANY PRODUCT, BI-PRODUCT OR FOR RENDERING ANY SERVICE FOR CARRYING ON THE BUSINESS. (IV) THE ITAT HYDERABAD AT PARA 25 OF THEIR ORDER H ELD AS UNDER: FURTHER, AS PER GUIDANCE NOTE ON ACCOUNTING FOR SE LF- GENERATED CERTIFIED EMISSION REDUCTIONS (CERS) ISSU ED BY THE INSTITUTED OF CHARTERED ACCOUNTANTS OF INDIA (I CAI) IN JUNE, 2009 STATES THAT CERS SHOULD BE RECOGNIZED IN BOOKS ITA NO.3912 & 3294/MUM/20113 11 WHEN THOSE ARE CREATED BY UNFCCC AND/OR UNCONDITION ALLY AVAILABLE TO THE GENERATING ENTITY. CERS ARE INVENT ORIES OF THE GENERATING ENTITIES AS THEY ARE GENERATED AND HELD FOR THE PURPOSE OF SALE IN ORDINARY COURSE. EVEN THOUGH CER S ARE INTANGIBLE ASSETS THOSE SHOULD BE ACCOUNTED AS PER AS-2 (VALUATION OF INVENTORIES) AT A COST OR MARKET PRIC E, WHICHEVER IS LOWER? SINCE CERS ARE RECOGNIZED AS INVENTORIES, THE GENERATING ASSESSEE SHOULD APPLY AS-9 TO RECOGNIZE REVENUE IN RESPECT OF SALE OF CERS. BUT THE CONCLUSION AT PARA 26 THAT THE SALE OF CAR BON CREDITS IS TO BE CONSIDERED AS CAPITAL RECEIPT IS IN CONTRAST TO THE FINDINGS OF PARA 25 AND NOT VERY LOGICAL AS WHEN THE INVENTORIE S ARE SOLD, THE SAME WOULD RESULT IN REVENUE RECEIPT. 2.7 IN VIEW OF THE ABOVE IT IS HELD THAT: (I) CARBON CREDITS ARE GOODS OR COMMODITIES, (II) UNSOLD CARBON CREDITS ARE STOCK IN TRADE OR IN VENTORY, (III) RECEIPTS ON SALE OF CARBON CREDIT ARE REVENUE RECEIPTS, (IV) THE ADDITION OF UNSOLD CARBON CREDITS AMOUNTIN G TO RS.69,54,343/- BY THE AO IS THEREFORE, FOUND TO BE NOT VALID, HOWEVER, THE ADDITION IS TO BE RESTRICTED TO THE CO ST OF CARBON CREDITS WHICH IS TO BE TREATED AS STOCK-IN-TRADE OF THE APP ELLANT. GROUND NO.1 IS PARTLY ALLOWED. 8. WE HAVE HEARD THE LEARNED COUNSELS OF BOTH THE P ARTIES AND HAVE ALSO PERUSED THE MATERIALS PLACED ON RECORD AS WELL AS THE ORDERS OF THE REVENUE AUTHORITIES. AFTER CONJOINT READING OF THE ORDERS OF THE REVENUE AUTHORITIES AND ANALYZING THE ORDER OF THE LEARNED CIT (A), WE ARE OF THE CONSIDERED VIEW THAT THE LEARNED CIT (A) HAS PASSED A WELL REASONED DETAILED ORDER TAKING INTO ACCOUNT THE DEFINITION O F CARBON CREDITS AND HAS ALSO CARRIED OUT ELABORATE RESEARCH TO FIND OUT AS TO WHETHER CARBON CREDITS ARE GOODS AND COMMODITIES. THE LEARNED CIT (A) WHILE CONSIDERING THE INVOLVEMENT OF COST HAS ALSO TAKEN INTO ACCOUNT THE ACCOUNTING ITA NO.3912 & 3294/MUM/20113 12 TREATMENT IN RESPECT OF EXPOSURE DRAFT OF THE GUIDA NCE NOTE OF ACCOUNTING OF SELF-GENERATED CERTIFIED EMISSION RED UCTION IN 2009 ISSUED BY THE ACCOUNTING STANDARD BOARD OF THE INSTITUTE O F CHARTERED ACCOUNTANTS OF INDIA (ICAI) AND HAS ALSO CONSIDERED THE ORDERS PASSED BY THE CO-ORDINATE BENCHES OF THIS TRIBUNAL. AFTER C ARRYING OUT DETAILED DISCUSSIONS, THE LEARNED CIT (A) IN PARA 2.7 OF HIS ORDER HAS RIGHTLY COME TO THE CONCLUSION THAT CARBON CREDITS ARE GOODS OR COMMODITIES AND UNSOLD CARBON CREDITS ARE STOCK-IN-TRADE OR INVENT ORIES. IT WAS FURTHER RIGHTLY HELD BY THE LEARNED CIT (A) THAT THE RECEIP TS ON SALE OF CARBON CREDITS ARE REVENUE RECEIPTS AND THEREFORE, THE ADD ITION MADE ON ACCOUNT OF UNSOLD CARBON CREDITS AMOUNTING TO RS.69,54,343/ - BY THE AO WAS NOT VALID AND, THEREFORE, THE LEARNED CIT (A) HAS RIGHT LY HELD THAT THE ADDITION MADE BY THE AO HAS TO BE RESTRICTED TO THE COST OF CARBON CREDITS WHILE TREATING THE SAME AS STOCK-IN-TRADE. NO NEW MATERIA LS OR ARGUMENTS HAVE BEEN PUT FORTH BEFORE US IN ORDER TO REBUT OR COUNT ER THE WELL REASONED FINDINGS RECORDED BY THE LEARNED CIT (A). IN VIEW O F THE ABOVE, WE FIND NO REASON TO DEVIATE FROM OR INTERFERE WITH THE FINDIN GS OF THE LEARNED CIT (A). ACCORDINGLY, WE UPHOLD THE SAME AND DISMISSED BOTH THE AFOREMENTIONED GROUNDS OF THE APPEAL OF THE REVENUE. 9. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISM ISSED. ITA NO.3912 & 3294/MUM/20113 13 ASSESSEES APPEAL IN ITA NO.3294/MUM/2013(AY-2008-0 9) 10. GROUND NO.2 OF THE ASSESSEES APPEAL IS GENERAL IN NATURE AND REQUIRES NO ADJUDICATION. THE EFFECTIVE GROUND NO.1 RAISED BY THE ASSESSEE IS AS UNDER: 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT (A) ERRED IN CONFIRMING THE ACTION OF T HE LEARNED ASSESSING OFFICER IN DISALLOWING THE CLAIM OF EXPEN DITURE AMOUNTING TO RS.1,12,41,111/- IN RELATION TO THE AB ANDONED PROJECTS BY MERELY STATING THAT THE JUDICIAL PRECED ENTS RELIED BY THE APPELLANT IN THE COURSE OF THE CIT (A) PROCE EDINGS RELATE TO EXPANSION OF EXISTING BUSINESS AND DOES N OT APPLY TO THE FACTS OF THE APPELLANT. THE APPELLATE ORDER PASSED BY THE LEARNED CIT (A) WITHOUT APPRECIATING THE FACTS OF T HE CASE BEING BAD IN LA W, THE SAME NEEDS TO BE QUASHED AND THE CLAIM OF THE APPELLANT FOR THE AFORESAID EXPENDITURE NEEDS TO BE ALLOWED. 11. IN ADDITION TO ABOVE, THE ASSESSEE HAS ALSO SUB SEQUENTLY MOVED AN APPLICATION BEFORE THE BENCH THROUGH ITS COUNSEL DA TED 31-07-2014 FOR FILING OF ADDITIONAL GROUNDS STATING THAT IN THE PR ESENT APPEAL FILED AGAINST THE ORDER OF THE CIT (A) ON THE POINT DECIDED AGAIN ST THE ASSESSEE, A GROUND CHALLENGING THE TREATMENT GIVEN CARBON CREDI T RECEIPTS WAS OMITTED TO BE TAKEN FOR WANT OF PROPER ADVICE AND THAT IT W AS THEREFORE, NECESSARY AND PRUDENT TO SEEK RELIEF ON THE AFORESAID COUNT B Y RAISING ADDITIONAL GROUNDS OF APPEAL. IT WAS FURTHER SUBMITTED THAT TH E ADDITIONAL GROUNDS OF APPEAL WAS RAISED ON PURE QUESTIONS OF LAW AND FOR ADJUDICATION OF THE SAME ALL THE FACTS ARE VERY MUCH AVAILABLE ON RECOR D. THEREFORE, IT WAS PRAYED THAT THE SAME MAY BE ADMITTED. THE ASSESSEE WHILE RAISING THE ADDITIONAL GROUNDS F URTHER RELIED UPON THE DECISIONS OF THE HONBLE APEX COURT RENDER ED IN THE CASE OF (I) ITA NO.3912 & 3294/MUM/20113 14 NATIONAL THERMAL POWER CORPORATION V. CIT [229 ITR 383 (SC)], (II) JUTE CORPORATION OF INDIA V. CIT [187 ITR 688 (SC)] AND (III) THE DECISION OF THE ITAT MUMBAI FULL BENCH RENDERED IN THE CASE OF AHME DABAD ELECTRICITY CO. LTD. VS. CIT [199 ITR 351 (BOM.) (FB). 12. OUT OF THE THREE ADDITIONAL GROUNDS RAISED BY T HE ASSESSEE IN THIS APPEAL, ADDITIONAL GROUND NO.3 IS GENERAL IN NATURE AND REQUIRES NO SPECIFIC ADJUDICATION. THE EFFECTIVE INTERRELATED & INTERCONNECTED ADDITIONAL GROUNDS NO.1 AND 2 ARE REPRODUCED HEREIN BELOW FOR REFERENCE:- 1. THE CIT (A) OUGHT TO HAVE HELD THAT THE CARBON CREDIT ENTITLEMENTS EARNED BY THE APPELLANT WERE CAPITAL R ECEIPTS AND, THEREFORE, WERE NOT EXIGIBLE TO TAX AS REVENUE RECEIPTS. 2. WITHOUT PREJUDICE TO THE ABOVE, THE CIT (A) HAS ERRED IN DIRECTING T HE ASSESSING OFFICER TO MAKE THE ADDITI ON TO THE EXTENT OF COST OF CARBON CREDIT TREATING THE SAME A S STOCK-IN- TRADE. THE CIT (A) OUGHT TO HAVE HELD THAT NO ADDIT ION WAS CALLED FOR. 13. THE LEARNED DR REPRESENTING THE REVENUE ON THE OTHER HAND OPPOSED THE APPLICATION MOVED BY THE ASSESSEE. 14. AFTER HEARING THE LEARNED COUNSELS REPRESENTING BOTH THE PARTIES AND CONSIDERING THE CONTEXT CONTAINED IN THE APPLIC ATION, WE ARE OF THE CONSIDERED VIEW THAT THE ADDITIONAL GROUNDS RAISED BY THE PRESENT APPLICATION ARE BASED ON PURE QUESTIONS OF LAW AND ARE EMANATING FROM THE FACTS ALREADY ON RECORD, THEREFORE, WE ADMIT TH E ADDITIONAL GROUNDS OF APPEAL FOR ADJUDICATION. ITA NO.3912 & 3294/MUM/20113 15 15. THE MAIN GROUND OF APPEAL RAISED BY THE ASSESSE E IS THAT THE LEARNED CIT (A) HAS ERRED IN CONFIRMING THE ACTION OF T HE AO IN DISALLOWING THE CLAIM OF EXPENDITURE AMOUNTING TO R S.1,12,41,111/- IN RELATION TO ABANDONED PROJECTS BY MERELY STATING TH AT THE JUDICIAL PRECEDENTS RELIED UPON BY THE ASSESSEE IN THE COURS E OF APPELLATE PROCEEDINGS RELATE TO EXPANSION OF THE EXISTING BUS INESS AND DO NOT APPLY TO THE FACTS OF THE ASSESSEE. THE LEARNED AR FURTHE R ARGUED THAT DURING THE FINANCIAL YEAR ENDED ON 31 ST MARCH, 2008 THE ASSESSEE HAD INCURRED CERTAIN EXPENSES AMOUNTING TO RS.1,12,41,111/- FOR NEW WIND MILL PROJECTS IN MAHARASTRA, KARNATAKA AND GUJARAT. THE EXPENDITURE IN RELATION TO THE WIND MILL PROJECTS WAS DEBITED TO C APITAL WORK-IN-PROGRESS ACCOUNT. HOWEVER, SINCE THESE PROJECTS WERE NOT FEA SIBLE THE EXPENSES WERE WRITTEN OFF TO THE PROFIT & LOSS ACCOUNT DURIN G THE FINANCIAL YEAR ENDED ON 31 ST MARCH, 2009 AND DURING THE COURSE OF ASSESSMENT PR OCEEDINGS FILED THE DETAILS OF THE EXPENSES EXPLAINING THE AS SESSEES INABILITY TO COMPLETE THE PROJECTS. HE FURTHER SUBMITTED THAT TH E AO DISREGARDED THE SUBMISSION OF THE ASSESSEE BY STATING THAT THE MAIN ISSUE TO BE CONSIDERED WAS WHETHER THE EXPENSES INCURRED WERE O F CAPITAL OR REVENUE IN NATURE OR WAS INCURRED FOR THE PURPOSE OF NEW LI NE OF BUSINESS OR FOR EXPANSION OF THE EXISTING BUSINESS. THE LEARNED AR SUBMITTED THAT THE CLAIM OF DEDUCTION OF EXPENDITURE IS ALLOWABLE IN COMPUTI NG THE TOTAL INCOME OF THE ASSESSEE AND HE RELIED UPON THE JUDGMENTS RENDE RED IN THE CASE OF (I) INDORAMA SYNTHETICS INDIA LTD. VS. CIT (2011) (333 ITR 18) (DEL) AND (II) CIT VS ESSAR OIL LTD. (2008) TIOL 530 HC BOM. APA RT FROM THAT, THE ITA NO.3912 & 3294/MUM/20113 16 LEARNED AR FURTHER RELIED UPON THE JUDGMENTS RENDER ED IN THE CASE OF (I) CIT VS. PRIYA VILLAGE ROAD SHOWS LTD. (2011) 332 IT R 594 (DELHI) (HIGH COURT AND APOLLO TRADING & FINANCE PVT. LTD. VS. DC IT 2008 TIOL 379 DEL. 16. ON THE OTHER HAND, THE LEARNED DR RELIED UPON T HE ORDERS OF THE REVENUE AUTHORITIES. 17. BEFORE WE COME TO THE MERITS OF THE CASE IT IS NECESSARY TO ANALYZE THE ORDER PASSED BY THE LEARNED CIT (A). WHILE DEAL ING WITH THE AFOREMENTIONED GROUNDS, THE FINDINGS RECORDED BY TH E LEARNED CIT (A) ARE MENTIONED IN PARA 2.3 OF HIS ORDER AND THE SAME ARE REPRODUCED HEREIN UNDER:- 2.3 I HAVE THROUGH THE ORDER OF THE AO AND THE SUB MISSION OF THE APPELLANT. THE DEDUCTION OF CAPITAL EXPENDITURE IS NOT ALLOWABLE U/S 37 OF THE INCOME-TAX ACT AND IN FACT NO CAPITAL EXP ENDITURE IS ALLOWABLE UNDER THE INCOME-TAX ACT UNLESS SPECIFICA LLY PROVIDED FOR EXAMPLE AS IN SECTIONS 35A, 35B(BOTH WITHDRAWN AFTE R 01.04.1998), 35ABB, 35AD, 35DD, 35DDA, 35E ETC. 2.3.1 FURTHER, THE EXPENDITURE OF THE APPELLANT IS CAPITAL EXPENDITURE OF THE APPELLANT ON SETTING UP OF THE W IND MILL WHICH IS A NEW LINE OF BUSINESS BEING EXPLORED BY THE APPELL ANT COMPANY. IT IS PERTINENT TO NOTE THAT THE CASE LAWS RELIED UPON BY T HE APPELLANT ARE PERTAINING TO EXPENDITURE OF SOME LINE OF BUSIN ESS NOT IN NEW LINE OF BUSINESS AS DISCUSSED HEREUNDER:- (I) IN CASE OF INDO RAMA SYNTHETICS INDIA LTD. VS C IT (333 ITR 18 DEL) THE CASE IS OF VERTICAL EXPANSION OF T HE PRESENT BUSINESS, (II) THE CASE OF CIT VS ESSAR OIL LTD. TIOL 530 SC- BOM IS OF EXPENDITURE ON TENDERS AND BIDS IN THE FIELD OF OI L EXPLORATION I.E. IN THE SAME LINE OF BUSINESS, ITA NO.3912 & 3294/MUM/20113 17 (III) THE CASE OF CIT VS PRIYA VILLAGE ROAD SHOWS L TD. (2011) 332 ITR 594 (DELHI) (HIGH COURT) IS REGARDING FEASI BLE STUDIES CONDUCTED BY THE ASSESSEE FOR THE EXISTING BUSINESS, (IV) IN THE CASE OF APOLLO TRADING & FINANCE PVT. L TD. VS DCIT 2008 TIOL 379 DEL IT WAS HELD THAT THE AO DID NOT LOOK INTO THE OTHER OBJECTS IN THE MEMORANDUM OF THE ASS OCIATION OF THE COMPANY AND CAME TO ERRONEOUS CONCLUSION THA T IT IS ENGAGED ONLY IN FINANCING AND INVESTMENT BUSINESS A ND IT WAS HELD THAT THE ACTUAL EXPENDITURE WAS IN PURSUAN T OF ITS REGULAR BUSINESS. THE DELHI HIGH COURT REFERRED TO THE CASE OF CIT VS KARNATAKA STATE INDUSTRIAL INVESTMENT COR PORATION 163 ITR 657 IN WHICH THE KARNATAKA HIGH COURT HELD THAT EXPENDITURE WAS INCURRED IN THE SAME LINE OF BUSINE SS OF PROMOTION TO PROMOTE AND OPERATE SCHEMES FOR INDUST RIAL GROWTH OF KARNATAKA. THE CASE OF CIT, TAMIL NADU- I I VS SESHASAYEE BROS P. LTD. (1981) 127 ITR 218 (MAD) WA S ALSO REFERRED IN WHICH IT WAS HELD THE ASSESSEES B USINESS WAS THE PROMOTION OF NEW VENTURE AND EXPENSES INCUR RED WERE INCIDENTAL TO SAME AND COULD NOT BE TREATED AS PRELIMINARY AND CAPITAL IN NATURE. (V) IN THE CASE OF ONGC VIDESH LTD. VS DCIT (2010) 127 TTJ 497 (DEL) THE DELHI HIGH COURT FOLLOWED THE ORDER O F BOMBAY HIGH COURT IN THE CASE OF CIT VS ESSAR OIL LTD. AS ALREADY DISCUSSED AT PARA 2 (II) ABOVE THE CASE OF ESSAR OI L LTD. WAS WITH RESPECT TO THE EXPENDITURE IN THE SAME LIN E OF BUSINESS AND SIMILARLY, THE ONGC DECISION WAS ON AC COUNT OF THE ASSESSEE WAS CONTINUOUSLY IN THE BUSINESS O F EXPLORATION AND PRODUCTION OF OIL, THE EXPENDITURE SO INCURRED WAS IN THE NORMAL COURSE OF BUSINESS. THUS IT IS OBVIOUS THAT THE FIVE CASE LAWS, THE DET AILS OF WHICH ARE FURNISHED BY THE APPELLANT IN ITS LETTER DATED 11.1 2.2012 AND THE AFORESAID AT (I) TO (II) HAS BEEN EXTRACTED OUT OF APPELLANTS SUBMISSION RELATES TO THE EXPENDITURE IN THE SAME L INE OF BUSINESS. 2.3.2 APPELLANTS EXPENDITURE FOR SETTING UP OF WIN DMILLS IN MAHARASHTRA, GUJARAT AND KARNATAKA WAS CAPITAL EXPE NDITURE AND WAS DEBITED TO CAPITAL WORK-IN-PROGRESS ACCOUNT AS SUBMITTED BY PARA 3.8 OF THE APPELLANTS SUBMISSION DATED 11.12. 2012. THE CAPITAL EXPENDITURE OF THE APPELLANT IS THEREFORE, NOT ALLOWABLE AS THE CAPITAL EXPENDITURE WAS TO SET UP NEW LINE OF B USINESS. GROUND 2 IS THEREFORE, DISMISSED. ITA NO.3912 & 3294/MUM/20113 18 18. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE ORDERS OF THE REVENUE AUTHORITIES. AFTER ANALYZING THE ORDERS OF THE AUTHORITIES BELOW AND PERUSAL OF THE DOCUMENTS PLACED ON RECORD BEFOR E US, WE ARE OF THE CONSIDERED VIEW THAT THE AO HAD RECORDED THE FACTUA LLY INCORRECT FINDINGS IN PARA 5.4 OF HIS ORDER WHEREIN THE AO HAS MENTION ED THAT TO INSTALL NEW WIND MILLS THE ASSESSEE WOULD HAVE TO ACQUIRE LAND FOR INSTALLING THE PLANT AND MACHINERY FOR SETTING UP OF ITS NEW WIND MILL. ON THE CONTRARY, THE AO HAS ALSO MENTIONED THAT THE ASSESSEE WAS ALREADY INVOLVED IN RUNNING THE BUSINESS OF STEEL TRADING AND POWER GEN ERATION. THE LEARNED CIT (A) HAS SIMPLY UPHELD THE FINDINGS OF THE AO BY AGAIN MENTIONING FACTUALLY INCORRECT FACTS TO THE EFFECT THAT THE EX PENDITURE INCURRED BY THE ASSESSEE WAS CAPITAL EXPENDITURE OF THE ASSESSEE ON SETTING UP OF THE WIND MILLS WHICH IS A NEW LINE OF BUSINESS BEING EX PLORED BY THE ASSESSEE COMPANY. THE LEARNED CIT (A) AGAIN FE LL IN ERROR WHILE NOTING THAT THE CASE LAWS RELIED UPON BY THE ASSESS EE PERTAIN TO INCURRING OF EXPENSES ON SAME LINE OF THE BUSINESS AND NOT FO R NEW LINE OF BUSINESS. IN THIS CONNECTION, IT IS PERTINENT TO ME NTION HERE THAT EVEN IN PARA 3 OF THE ASSESSMENT ORDER WHICH IS OPENING PAR AGRAPH, IT HAS BEEN CATEGORICALLY MENTIONED BY THE AO THAT THE ASSESSEE COMPANY WAS ENGAGED IN THE STEEL TRADING AND POWER GENERATION B USINESS AND EVEN IN THE COLUMN NATURE OF BUSINESS IT HAS BEEN CLEARLY MENTIONED THAT THE ASSESSEE WAS IN THE BUSINESS OF STEEL TRADING & PO WER GENERATION. THE LEARNED AR DREW OUR ATTENTION TO PAGE 10 AND 11 OF THE PAPER BOOK WHEREIN IT HAS BEEN CATEGORICALLY MENTIONED THAT TH E ASSESSEE WAS ITA NO.3912 & 3294/MUM/20113 19 ENGAGED IN THIS BUSINESS AND HAS ALREADY ESTABLISHE D 24 NOS. OF WIND MILLS AT DIFFERENT PLACES INCLUDING THE STATE OF TA MIL NADU, GUJARAT, MAHARASHTRA AND KARNATAKA AND THE TOTAL CAPITAL WOR K-IN-PROGRESS HAS ALREADY BEEN REFLECTED IN THE DOCUMENTS. WE HAVE AN ALYZED THE JUDGMENTS REFERRED TO BY THE LEARNED AIR IN THE CAS E OF (I) INDORAMA SYNTHETICS INDIA LTD. VS. CIT (2011) (333 ITR 18) ( DEL), (II) CIT VS ESSAR OIL LTD. (2008) TIOL 530 HC BOM AND (III) APOLLO TRADING & FINANCE PVT. LTD. VS. DCIT 2008 TIOL 379 DEL. FROM THE CO NJOINT READING OF THE JUDGMENTS AND DOCUMENTS PLACED ON RECORD AS WELL AS THE ORDERS OF THE REVENUE AUTHORITIES, WE ARE OF THE CONSIDERED VIEW THAT NO NEW ASSET WAS ACCRUED ON ACCOUNT OF THE EXPENDITURE INCURRED AND THE PROJECT WAS FOR VERTICAL EXPANSION OF THE PRESENT BUSINESS AND THE EXPENDITURE INCURRED WAS NOT FOR INDEPENDENT BUSINESS BUT THE A SSESSEE WAS ALREADY INTO THIS BUSINESS. THEREFORE, THE PRINCIPLE LAID D OWN IN THE AFOREMENTIONED JUDGMENTS AND THE FACTS CONTAINED TH EREIN ARE SIMILAR TO THE FACTS OF THE ASSESSEES CASE. THEREFORE, CONSID ERING THE ARGUMENTS AND THE PRINCIPLES MENTIONED JUDGMENTS WE ARE OF TH E CONSIDERED VIEW THAT SINCE THE ASSESSEE SATISFIED ALL THE CONDITION S AS MENTIONED ABOVE TO THE EFFECT THAT THE WIND MILLS WERE PART OF THE BUS INESS OF THE ASSESSEE AND THE EXPENDITURE INCURRED WAS IN RELATION TO SET TING UP OF NEW WIND MILLS. SINCE THE PROJECT WAS NOT FEASIBLE THE SAME HAD TO BE ABANDONED AND THE EXPENDITURE INCURRED WAS WRITTEN OFF IN THE PROFIT & LOSS ACCOUNT OF THE ASSESSEE. KEEPING IN VIEW THE AFORESAID FACTS, WE HEREBY DIRECT THE AO THAT THE CLAIM OF THE EXPENSES AMOUNTING TO RS.1 ,12,41,111/- BE ITA NO.3912 & 3294/MUM/20113 20 ALLOWED AS DEDUCTION WHILE COMPUTING THE TOTAL INCO ME OF THE ASSESSEE. RESULTANTLY, THESE GROUNDS OF APPEAL OF THE ASSESSE E ARE ALLOWED. 19. IN VIEW OF OUR DECISION ON THE ISSUE WHILE ADJU DICATING THE REVENUES APPEAL, THE ADDITIONAL GROUNDS RAISED BY THE ASSESSEE HAVE BECOME REDUNDANT AND AS SUCH THE FINDINGS RECORDED BY US IN THE REVENUES APPEAL ARE APPLICABLE IN THIS REGARD. 20. IN THE NET RESULT, THE APPEAL FILED BY THE ASSE SSEE IS ALLOWED. 21. IN THE RESULT, THE APPEAL FILED BY THE REVENUE STA NDS DISMISSED AND THE APPEAL FILED BY THE ASSESSEE STAN DS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 31/5/2016. SD/- SD/- (JASON P. BOAZ) (SANDEEP GOSAI) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI , DATED 31/5/2016 LAKSHMIKANTA DEKA/SR.PS LAKSHMIKANTA DEKA/SR.PS LAKSHMIKANTA DEKA/SR.PS LAKSHMIKANTA DEKA/SR.PS COPY OF THE ORDER FORWARDED TO : BY ORDER, ASSISTANT REGISTRAR ITAT, MUMBAI 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT (A), MUMBAI. 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY//