Eastman Spinning Mills Private Limited, Tiruppur V. ACIT, Tiruppur

ITA 352/CHNY/2014

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 81203 (ITAT-CHENNAI)
• Duration Of Justice: 7 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-10-2014
• Appeal Filed By: Assessee
• Bench Allotted: B
• Next Hearing Date: 09-10-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 14-02-2014
• Court: TRIBUNAL
• Department Lawyers: C V PAVANA KUMAR
• Assessee Lawyers: N VIJAY KUMAR
• Keywords: Capital asset; Business income; Cost of acquisition; Capital receipt

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, CHE NNAI . . . , !' , # $! % BEFORE DR. O.K. NARAYANAN, VICE PRESIDENT & SHRI VIKAS AWASTHY, JUDICIAL MEMBER . / I.T.A. NO. 352/MDS/2014 / ASSESSMENT YEAR : 2009-10 M/S.EASTMAN SPINNING MILLS PRIVATE LIMITED, NO.16-17, KUMAR NAGAR SOUTH 2 ND STREET, TIRUPPUR 641 603 [PAN: AAACE 4595 R] ( '& /APPELLANT) VS THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE, TIRUPPUR ( '('& /RESPONDENT) / APPELLANT BY : SHRI N.VIJAY KUMAR, CA., / RESPONDENT BY : SHRI C.V.PAVANA KUMAR, JCIT / DATE OF HEARING : 09-10-2014 ! / DATE OF PRONOUNCEMENT : 09-10-2014 $) / O R D E R PER VIKAS AWASTHY, J.M: THE APPEAL HAS BEEN FILED BY THE ASSESSEE IMPUGNING THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS)-II, C OIMBATORE, DATED 28-11-2013 RELEVANT TO THE ASSESSMENT YEAR 20 09-10. IN APPEAL, THE ASSESSEE HAS ASSAILED THE FINDINGS OF C IT(APPEALS) I.T.A. NO. 352/MDS/2014 2 REJECTING THE CLAIM OF THE ASSESSEE TO TREAT CLEAN DEVELOPMENT MECHANISM [CDM] RECEIPTS AS CAPITAL RECEIPTS. 2. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUF ACTURING OF YARN AND IS ALSO GENERATING POWER THROUGH WINDMI LLS. THE ASSESSEE FILED ITS RETURN OF INCOME FOR THE AY.2009 -10 ON 28-09-2009 DECLARING NIL INCOME. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY AND NOTICE U/S. 143(2) OF THE INCOME TAX ACT, 1961 (HEREIN AFTER REFERRED TO AS THE ACT) WAS IS SUED TO THE ASSESSEE ON 05-09-2008. IN ITS RETURN OF INCOME, T HE ASSESSEE HAD DISCLOSED INCOME FROM WIND MILL DIVISION AS ` 5,19,94,710/- AND TOTAL GROSS INCOME AFTER DEDUCTING LOSS FROM SP INNING DIVISION AS ` 2,48,67,705/-. THE ASSESSEE CLAIMED DEDUCTION OF ` 3,10,42,900/- U/S.80IA ON THE INCOME FROM WIND MILL DIVISION INCLUDING A SUM OF ` 1,26,15,447/- BEING INCOME FROM SALE OF CARBON CREDITS (CDM RECEIPTS). THE ASSESSING OFFIC ER HELD THAT THE INCOME FROM SALE OF CDM RECEIPTS ARE NOT ELIGIB LE FOR DEDUCTION U/S.80IA. THE ASSESSEE CARRIED THE ISSUE IN APPEAL BEFORE THE CIT(APPEALS). BEFORE THE FIRST APPELLATE AUTHORITY , THE ASSESSEE MADE AN ALTERNATE PLEA TO TREAT CDM RECEIPTS AS CAP ITAL RECEIPTS. THE CIT(APPEALS) REJECTED THE PRIMARY SUBMISSION TO ALLOW DEDUCTION U/S.80IA ON CDM RECEIPTS AS WELL AS ALTER NATE PLEA TO I.T.A. NO. 352/MDS/2014 3 TREAT THE SAME AS CAPITAL RECEIPTS. NOW, THE ASSES SEE HAS COME IN SECOND APPEAL BEFORE THE TRIBUNAL. 3. SHRI N.VIJAY KUMAR, APPEARING ON BEHALF OF ASSES SEE, SUBMITTED THAT THIS ISSUE HAS BEEN AGITATED BEFORE THE TRIBUNAL IN VARIOUS CASES. THE TRIBUNAL HAS REPEATEDLY HELD CD M RECEIPTS AS CAPITAL RECEIPTS. IN SUPPORT OF HIS CONTENTIONS, T HE LD. A.R. PLACED RELIANCE ON FOLLOWING DECISIONS:- (I) CIT V. M/S MY HOME POWER LTD. 2014 (6) TMI 82 AP HIGH COURT; (II) M/S MY HOME POWER LTD. V. DCIT 21 ITR (TRIB) 1 86 (HYD); (III) SRI VELAYUDHASWAMY SPINNING MILLS (P) LTD. V. DCIT IN I.T.A. NO. 582/MDS/2013 DECIDED ON 12.06.2013 ; AND (IV) M/S SRI AMBIKA COTTON MILLS LTD. V. DCIT IN I.T.A.NO.1836/MDS/2012 DECIDED ON 16.04.2013 4. ON THE OTHER HAND, SHRI C.V.PAVANA KUMAR, REPRES ENTING THE DEPARTMENT SUPPORTED THE ORDER OF CIT(APPEALS). TH E LD.DR IN SUPPORT OF HIS CONTENTIONS RELIED ON THE DECISION O F COCHIN BENCH OF THE TRIBUNAL IN THE CASE OF APOLLO TYRES LTD., V . ACIT REPORTED AS 31 ITR (TRIB) 477, WHEREIN, THE TRIBUNAL HAS HELD I NCOME FROM SALE OF CARBON CREDIT AS REVENUE RECEIPTS AND NOT ELIGIB LE FOR DEDUCTION U/S.80IA. I.T.A. NO. 352/MDS/2014 4 5. BOTH SIDES HEARD. WE HAVE PERUSED THE ORDERS OF THE AUTHORITIES BELOW AND EXAMINED THE DECISIONS ON WHI CH BOTH SIDES HAVE PLACED RELIANCE. THE ISSUE IN APPEAL HAS COME UP BEFORE TRIBUNAL IN SEVERAL CASES. THE HYDERABAD BENCH OF THE TRIBUNAL IN THE CASE OF M/S MY HOME POWER LTD. V. DCIT (SUPRA) HAS HELD CARBON CREDIT AS CAPITAL RECEIPTS. THE RELEVANT EX TRACT OF THE FINDINGS OF THE CO-ORDINATE BENCH ARE AS UNDER:- 24. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. CARBON CREDIT IS IN THE NATURE OF 'AN ENTITLEMENT' RECEIVED TO IMPROVE WORLD ATMOSPHERE A ND 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 REVEN UE RECEIPT. IT IS NOT GENERATED OR CREATED DUE TO CARRYING ON B USINESS BUT IT IS ACCRUED DUE TO 'WORLD CONCERN'. IT HAS BEEN M ADE AVAILABLE ASSUMING CHARACTER OF TRANSFERABLE RIGHT OR ENTITLEMENT ONLY DUE TO WORLD CONCERN. THE SOURCE O F CARBON CREDIT IS WORLD CONCERN AND ENVIRONMENT. DUE TO THA T THE ASSESSEE GETS A PRIVILEGE IN THE NATURE OF TRANSFER OF CARBON CREDITS. THUS, THE AMOUNT RECEIVED FOR CARBON CREDI TS HAS NO ELEMENT OF PROFIT OR GAIN AND IT CANNOT BE SUBJECTE D TO TAX IN ANY MANNER UNDER ANY HEAD OF INCOME. IT IS NOT LIAB LE FOR TAX FOR THE ASSESSMENT YEAR UNDER CONSIDERATION IN TERM S OF SECTIONS 2(24), 28, 45 AND 56 OF THE INCOME-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 C ANNOT BE I.T.A. NO. 352/MDS/2014 5 CONSIDERED AS A BI-PRODUCT. IT IS A CREDIT GIVEN TO THE ASSESSEE UNDER THE KYOTO PROTOCOL AND BECAUSE OF INTERNATION AL UNDERSTANDING. THUS, THE ASSESSEES WHO HAVE SURPLUS CARBON CREDITS CAN SELL THEM TO OTHER ASSESSEES TO HAVE CA PPED EMISSION COMMITMENT UNDER THE KYOTO PROTOCOL. TRANS FERABLE CARBON CREDIT IS NOT A RESULT OR INCIDENCE OF ONE'S BUSINESS AND IT IS A CREDIT FOR REDUCING EMISSIONS. THE PERSONS HAVING CARBON CREDITS GET BENEFIT BY SELLING THE SAME TO A PERSON WHO NEEDS CARBON CREDITS TO OVERCOME ONE'S NEGATIVE POI NT CARBON CREDIT. THE AMOUNT RECEIVED IS NOT RECEIVED FOR PRO DUCING AND/OR SELLING ANY PRODUCT, BI-PRODUCT OR FOR RENDE RING ANY SERVICE FOR CARRYING ON THE BUSINESS. IN OUR OPINIO N, CARBON CREDIT IS ENTITLEMENT OR ACCRETION OF CAPITAL AND H ENCE INCOME EARNED ON SALE OF THESE CREDITS IS CAPITAL RECEIPT. FOR THIS PROPOSITION, WE PLACE RELIANCE ON THE JUDGEMENT OF THE SUPREME COURT IN THE CASE OF CIT VS. MAHESHWARI DEV I JUTE MILLS LTD. (57 ITR 36) WHEREIN HELD THAT TRANSFER O F SURPLUS LOOM HOURS TO OTHER MILL OUT OF THOSE ALLOTTED TO T HE ASSESSEE UNDER AN AGREEMENT FOR CONTROL OF PRODUCTION WAS CA PITAL RECEIPT AND NOT INCOME. BEING SO, THE CONSIDERATION RECEIVED BY THE ASSESSEE IS SIMILAR TO CONSIDERATION RECEIVE D BY TRANSFERRING OF LOOM HOURS. THE SUPREME COURT CONSI DERED THIS FACT AND OBSERVED THAT TAXABILITY OF PAYMENT R ECEIVED FOR SALE OF LOOM HOURS BY THE ASSESSEE IS ON ACCOUNT OF EXPLOITATION OF CAPITAL ASSET AND IT IS CAPITAL REC EIPT AND NOT AN INCOME. SIMILARLY, IN THE PRESENT CASE THE ASSESSEE TRANSFERRED THE CARBON CREDITS LIKE LOOM HOURS TO S OME OTHER CONCERNS FOR CERTAIN CONSIDERATION. THEREFORE, THE RECEIPT OF SUCH CONSIDERATION CANNOT BE CONSIDERED AS BUSINESS INCOME AND IT IS A CAPITAL RECEIPT. ACCORDINGLY, WE ARE OF THE OPINION THAT THE CONSIDERATION RECEIVED ON ACCOUNT OF CARBO N CREDITS I.T.A. NO. 352/MDS/2014 6 CANNOT BE CONSIDERED AS INCOME AS TAXABLE IN THE AS SESSMENT YEAR UNDER CONSIDERATION. CARBON CREDIT IS NOT AN O FFSHOOT OF BUSINESS BUT AN OFFSHOOT OF ENVIRONMENTAL CONCERNS. NO ASSET IS GENERATED IN THE COURSE OF BUSINESS BUT IT IS GE NERATED DUE TO ENVIRONMENTAL CONCERNS. CREDIT FOR REDUCING CARB ON EMISSION OR GREENHOUSE EFFECT CAN BE TRANSFERRED TO ANOTHER PARTY IN NEED OF REDUCTION OF CARBON EMISSION. IT D OES NOT INCREASE PROFIT IN ANY MANNER AND DOES NOT NEED ANY EXPENSES. IT IS A NATURE OF ENTITLEMENT TO REDUCE C ARBON 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. SIMILAR VIEW HAS BEEN TAKEN BY THE CO-ORDINATE BENC H OF THE TRIBUNAL IN THE CASE OF SRI VELAYUDHASWAMY SPINNING MILLS (P) LTD. V. DCIT (SUPRA), M/S SRI AMBIKA COTTON MILLS LTD. V . DCIT (SUPRA) AND MANY OTHER SIMILAR CASES. 6. THE HONBLE ANDHRA PRADESH HIGH COURT IN THE APP EAL OF REVENUE IN I.T.T.A. NO.60 OF 2014 DECIDED ON 19-02- 2014 HAS UPHELD THE VIEW TAKEN BY THE HYDERABAD BENCH IN THE CASE OF M/S MY HOME POWER LTD (SUPRA). THE HON'BLE HIGH COURT OBSERVED: WE HAVE CONSIDERED THE AFORESAID SUBMISSION AND WE ARE UNABLE TO ACCEPT THE SAME, AS THE LEARNED TRIBUNAL HAS FACTUALLY FOUND THAT CARBON CREDIT IS NOT AN OFFSH OOT OF BUSINESS BUT AN OFFSHOOT OF ENVIRONMENTAL CONCERNS. NO ASSET I.T.A. NO. 352/MDS/2014 7 IS GENERATED IN THE COURSE OF BUSINESS BUT IT IS GE NERATED DUE TO ENVIRONMENTAL CONCERNS. WE AGREE WITH THIS FACTUA L ANALYSIS AS THE ASSESSEE IS CARRYING ON THE BUSINESS OF POWE R GENERATION. THE CARBON CREDIT IS NOT EVEN DIRECTLY LINKED WITH POWER GENERATION. ON THE SALE OF EXCESS CARBON CRE DITS THE INCOME WAS RECEIVED AND HENCE AS CORRECTLY HELD BY THE TRIBUNAL IT IS CAPITAL RECEIPT AND IT CANNOT BE BUS INESS RECEIPT OR INCOME. IN THE CIRCUMSTANCES, WE DO NOT FIND ANY E LEMENT OF LAW IN THIS APPEAL. 7. IN VIEW OF THE ABOVE, WE HOLD THAT THE AMOUNT RE CEIVED BY THE ASSESSEE ON ACCOUNT OF CDM (CARBON CREDITS) IS CAPITAL IN NATURE. THE IMPUGNED ORDER IS SET ASIDE, THE APPEA L IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT AT THE TIME OF H EARING ON THURSDAY, THE 09 TH OCTOBER, 2014 AT CHENNAI. SD/- SD/- ( . . . ) ( !' ) (DR. O.K. NARAYANAN) (VIKAS AWAS THY) '#$ / VICE PRESIDENT % &' / JUDICIAL MEMBER (% /CHENNAI, )& /DATED: 09 TH OCTOBER, 2014 TNMM &* +,-, /COPY TO: 1. /APPELLANT 2. /RESPONDENT 3. ./0 /CIT(A) 4. . /CIT 5. ,12 3 /DR 6. 245 /GF