Sudhan Spinning Mills (P) Ltd., Tiruppur V. JCIT, Tiruppur

ITA 616/CHNY/2013

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 4608 (ITAT-CHENNAI)
• Duration Of Justice: 4 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-08-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 28-08-2013
• Assessment Year: 2009-2010
• Appeal Filed On: 08-04-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ANIRUDH RAI
• Assessee Lawyers: T BANUSEKAR
• Keywords: Capital asset; Business income; Cost of acquisition; Capital receipt; Revenue expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER I.T.A. NO. 609/MDS/2013 (ASSESSMENT YEAR : 2009-10) THE DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE, TIRUPUR. (APPELLANT) V. M/S SUDHAN SPINNING MILLS P. LTD., 207/86, MANGALAM ROAD, KARUVAMPALAYAM, TIRUPUR. PAN : AADCS 0670 E (RESPONDENT) I.T.A. NO. 616/MDS/2013 (ASSESSMENT YEAR : 2009-10) M/S SUDHAN SPINNING MILLS P. LTD., 207/86, MANGALAM ROAD, KARUVAMPALAYAM, TIRUPUR. (APPELLANT) V. THE JOINT COMMISSIONER OF INCOME TAX, TIRUPUR RANGE, TIRUPUR. (RESPONDENT) REVENUE BY : SH. ANIRUDH RAI, CIT ASSESSEE BY : SH. T. BANUSEKAR, C A DATE OF HEARING : 28.08.2013 DATE OF PRONOUNCEMENT : 30.08.2013 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : THESE ARE CROSS APPEALS FILED BY THE REVENUE AND ASSESSEE RESPECTIVELY, DIRECTED AGAINST AN ORDER DATED 30.1. 2013 OF COMMISSIONER OF INCOME TAX (APPEALS)-II, COIMBATORE . I.T.A. NO. 609/MDS/13 I.T.A. NO. 616/MDS/13 2 2. REVENUE THROUGH ITS FIVE GROUNDS, HAS RAISED TWO ISSUES. FIRST IS REGARDING THE DIRECTIONS OF THE CIT(APPEALS) TO ALLOW THE CLAIM OF EXPENDITURE OF ` 2,69,27,870/- ON COMPACT DRAFTING SYSTEM AS REVENUE OUTGO. SECOND ISSUE IS REGARDING ALLOWANCE OF CLAIM UNDER SECTION 80-IA OF INCOME-TAX ACT, 1961 (IN SHORT 'TH E ACT') CONSIDERING THE INITIAL ASSESSMENT YEAR TO BE THE FIRST YEAR OF THE CLAIM AND NOT THE YEAR OF COMMENCEMENT OF BUSINESS. AS AGAINST THIS, ASSESSEE IS AGGRIEVED THAT CIT(APPEALS) CONFIRMED THE DISALLOWA NCE OF ITS CLAIM OF CARBON CREDIT OF ` 2,98,75,451/- AS CAPITAL RECEIPT, AND ITS CLAIM ON EXPENDITURE INCURRED FOR CARDING MACHINES. 3. SHRI ANIRUDH RAI, APPEARING FOR THE REVENUE, IN SUPPORT OF THE FIRST ISSUE, SUBMITTED THAT THE REPLACEMENT OF MACH INERY DONE BY THE ASSESSEE WAS IN SUBSTITUTE OF AN OLDER MACHINERY US ED IN MAKING YARN. THIS, ACCORDING TO HIM, IMPROVED THE QUALITY OF YARN. IT WAS A STATE OF THE ART SYSTEM THAT WAS INSTALLED. THEREF ORE, ACCORDING TO HIM, RATIO OF DECISION OF HON'BLE APEX COURT IN THE CASE OF CIT V. MANGAYARKARASI MILLS LTD. (315 ITR 114) CLEARLY APP LIED. LD. CIT(APPEALS) FELL IN ERROR IN GIVING RELIEF TO THE ASSESSEE IGNORING THIS DECISION OF HON'BLE APEX COURT. I.T.A. NO. 609/MDS/13 I.T.A. NO. 616/MDS/13 3 4. PER CONTRA, SHRI T. BANUSEKAR, LEARNED COUNSEL F OR THE ASSESSEE, SUPPORTED THE ORDER OF CIT(APPEALS). 5. WE HAVE VERIFIED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. ASSESSEE HAD, DURING THE YEAR, CLAIMED ` 2,69,27,870/- AS REVENUE OUTGO INCURRED ON COMPACT DRAFTING SYSTEM AND ` 1,72,40,931/- FOR PURCHASE OF EIGHT CARDING MACHINES. ASSESSING OFFI CER DISALLOWED BOTH THESE CLAIMS. ACCORDING TO HIM, IN VIEW OF TH E DECISION OF HON'BLE APEX COURT IN THE CASE OF MANGAYARKARASI MI LLS LTD. (SUPRA), SUCH EXPENDITURE COULD ONLY BE CONSIDERED AS CAPITA L OUTGO. LD. CIT(APPEALS) ON ASSESSEES APPEAL ALLOWED THE CLAIM OF THE ASSESSEE INSOFAR AS IT RELATED TO COMPACT DRAFTING SYSTEM, BASED ON THE DECISION OF CO-ORDINATE BENCH OF THIS TRIBUNAL IN I.T.A. NO. 1848/MDS/2011. HOWEVER, INSOFAR AS CLAIM OF CARDIN G MACHINES WAS CONCERNED, CIT(APPEALS) HELD THAT IT WAS RIGHTLY DI SALLOWED. WE FIND THAT THE CIT(APPEALS) HAD FOLLOWED THE DECISION OF CO-ORDINATE BENCH OF THIS TRIBUNAL IN ASSESSEE'S OWN CASE IN I.T.A. N O. 1848/MDS/2011 DATED 20.1.2012, WHEREIN CLAIM OF THE ASSESSEE ON C OMPACT DRAFTING SYSTEM WAS ALLOWED AS REVENUE EXPENDITURE. TRIBUNA L HAD GIVING THIS FINDING AFTER CONSIDERING THE DECISION OF HON' BLE APEX COURT IN THE CASE OF MANGAYARKARASI MILLS LTD. (SUPRA). THEREFO RE, WE DO NOT FIND I.T.A. NO. 609/MDS/13 I.T.A. NO. 616/MDS/13 4 ANY REASON TO INTERFERE WITH THE ORDER OF CIT(APPEA LS) WHICH FOLLOWED THE DECISION OF CO-ORDINATE BENCH OF THIS TRIBUNAL (SUPRA). INSOFAR AS EXPENDITURE OF CARDING MACHINES IS CONCERNED, THE C IT(APPEALS), IN OUR OPINION, RIGHTLY FOLLOWED THE DECISION OF HON'B LE APEX COURT IN THE CASE OF MANGAYARKARASI MILLS LTD. (SUPRA) AND HELD THAT IT GAVE ENDURING BENEFIT TO THE ASSESSEE AND WAS A CAPITAL OUTGO. 6. GROUND NOS.2 AND 4 OF THE REVENUE STAND DISMISSE D. 7. COMING TO ITS GROUND NOS.5 AND 6, WHICH ARE REGA RDING CLAIM OF THE ASSESSEE UNDER SECTION 80-IA OF THE ACT, WHICH HAS BEEN ALLOWED BY THE CIT(APPEALS), WE FIND THAT LD. CIT(APPEALS) FOLLOWED THE DECISION OF HON'BLE JURISDICTIONAL HIGH COURT IN TH E CASE OF VELAYUDHASWAMY SPINNING MILLS V. ACIT (231 ITR 368) . INITIAL ASSESSMENT YEAR COULD ONLY BE CONSIDERED AS THE FIR ST YEAR IN WHICH ASSESSEE HAD CLAIMED DEDUCTION UNDER SECTION 80-IA OF THE ACT, AND BY VIRTUE OF THE DECISION OF HON'BLE JURISDICTIONAL HIGH COURT (SUPRA), FOR THE PURPOSE OF CLAIMING DEDUCTION UNDER SECTION 80-IA, EACH UNIT HAS TO BE CONSIDERED INDEPENDENTLY. WE ARE OF THE OPINION THAT CIT(APPEALS) HAD RIGHTLY FOLLOWED THE DECISION OF H ON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF VELAYUDHASWAMY SPINNING M ILLS (SUPRA). 8. GROUND NOS.5 AND 6 OF THE REVENUE STAND DISMISSE D. I.T.A. NO. 609/MDS/13 I.T.A. NO. 616/MDS/13 5 9. COMING TO THE APPEAL OF THE ASSESSEE, ITS FIRST GRIEVANCE IS THAT THE CARBON CREDIT CLAIMED AS CAPITAL RECEIPT WAS CO NSIDERED AS REVENUE RECEIPT. LEARNED A.R. SUBMITTED THAT THE Q UESTION AS TO THE TREATMENT OF CARBON CREDIT HAD COME UP BEFORE CO-OR DINATE BENCH OF THIS TRIBUNAL IN THE CASE OF SRI VELAYUDHASWAMY SPI NNING MILLS (P) LTD. V. DCIT IN I.T.A. NO. 582/MDS/2013, AND STOOD DECIDED IN FAVOUR OF THE ASSESSEE. 10. PER CONTRA, LEARNED D.R. STRONGLY SUPPORTED THE ORDERS OF AUTHORITIES BELOW. 11. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. RECEIPT OF CARBON CREDITS, OTHERWISE KNOWN AS CLEAN DEVELOPMENT MECHANISM OF ` 2,98,75,451/- WAS CONSIDERED AS REVENUE IN NATURE BY THE LOWER AUTHORITIES. ISSUE REGARDING NATURE O F CARBON EMISSION CREDITS HAD COME UP BEFORE THIS TRIBUNAL IN THE CAS E OF SRI VELAYUDHASWAMY SPINNING MILLS (P) LTD. (SUPRA) IN I .T.A. NO. 582/MDS/2013 DATED 12 TH JUNE, 2013, COPY OF WHICH HAS BEEN PLACED AT PAPER-BOOK PAGES 48 TO 54. IT WAS HELD BY THIS TRIBUNAL AT PARAS 5 AND 6 OF ITS ORDER, AS UNDER:- I.T.A. NO. 609/MDS/13 I.T.A. NO. 616/MDS/13 6 5. WE HAVE HEARD SUBMISSIONS MADE BY THE REPRESENTATIVES OF BOTH THE SIDES AND HAVE GONE THR OUGH THE ORDERS OF THE AUTHORITIES BELOW. WE HAVE ALSO EXAM INED THE JUDGMENTS/ORDERS RELIED UPON BY THE REPRESENTATIVES OF BOTH THE SIDES. WE FIND THAT THE CASE OF THE ASSESSEE I S SQUARELY COVERED BY THE ORDER OF THE HYDERABAD BENCH OF THE TRIBUNAL IN THE CASE OF M/S. MY HOME POWER LIMITED VS. DCIT (SUPRA). THE HYDERABAD BENCH WHILE DEALING WITH THE SIMILAR ISSUE HAS HELD AS UNDER: 24. WE HAVE HEARD BOTH THE PARTIES AND PERUSED T HE 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 A S A REVENUE RECEIPT. IT IS NOT GENERATED OR CREATED DUE TO CARRYING ON BUSINESS BUT IT IS ACCRUED DUE TO 'WORL D CONCERN'. IT HAS BEEN MADE AVAILABLE ASSUMING CHARA CTER OF TRANSFERABLE RIGHT OR ENTITLEMENT ONLY DUE TO WO RLD CONCERN. THE SOURCE OF CARBON CREDIT IS WORLD CONCE RN AND ENVIRONMENT. DUE TO THE ASSESSEE GETS A PRIVILEGE IN THE NATURE OF TRANSFER OF CARBON CREDITS. THUS, THE AMO UNT 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 UNDER CONSIDERATION IN TERMS OF SEC TIONS 2(24), 28, 45 AND 56 OF THE INCOME-TAX ACT, 1961. C ARBON CREDITS ARE MADE AVAILABLE TO THE ASSESSEE ON ACCOU NT OF SAVING OF ENERGY CONSUMPTION AND NOT BECAUSE OF ITS BUSINESS. FURTHER, IN OUR OPINION, CARBON CREDITS C ANNOT BE CONSIDERED AS A BI-PRODUCT. IT IS A CREDIT GIVEN TO THE ASSESSEE UNDER THE KYOTO PROTOCOL AND BECAUSE OF INTERNATIONAL UNDERSTANDING. THUS, THE ASSESSEES WH O 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 RESULT OR INCIDENCE OF ONE'S BUSINESS AND IT IS A CREDIT F OR REDUCING EMISSIONS. THE PERSONS HAVING CARBON CREDI TS GET BENEFIT BY SELLING THE SAME TO A PERSON WHO NEEDS C ARBON I.T.A. NO. 609/MDS/13 I.T.A. NO. 616/MDS/13 7 CREDITS TO OVERCOME ONE'S NEGATIVE POINT CARBON CRE DIT. THE AMOUNT RECEIVED IS NOT RECEIVED FOR PRODUCING A ND/OR SELLING ANY PRODUCT, BI- PRODUCT OR FOR RENDERING ANY SERVICE FOR CARRYING ON THE BUSINESS. IN OUR OPINIO N, CARBON CREDIT IS ENTITLEMENT OR ACCRETION OF CAPITA L AND HENCE INCOME EARNED ON SALE OF THESE CREDITS IS CAP ITAL RECEIPT. FOR THIS PROPOSITION, WE PLACE RELIANCE ON THE JUDGEMENT OF THE SUPREME COURT IN THE CASE OF CIT V S. MAHESHWARI DEVI JUTE MILLS LTD. (57 ITR 36) WHEREIN HELD THAT TRANSFER OF SURPLUS LOOM HOURS TO OTHER M ILL OUT OF THOSE ALLOTTED TO THE ASSESSEE UNDER ANAGREEMENT FOR CONTROL OF PRODUCTION WAS CAPITAL RECEIPT AND NOT I NCOME. BEING SO, THE CONSIDERATION RECEIVED BY THE ASSESSE E IS SIMILAR TO CONSIDERATION RECEIVED BY TRANSFERRING O F LOOM HOURS. THE SUPREME COURT CONSIDERED THIS FACT AND OBSERVED THAT TAXABILITY OF PAYMENT RECEIVED FOR SA LE OF LOOM HOURS BY THE ASSESSEE IS ON ACCOUNT OF EXPLOIT ATION OF CAPITAL ASSET AND IT IS CAPITAL RECEIPT 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 CARBON CREDITS CANNOT BE CONSIDERED AS INCOME AS TA XABLE IN THE ASSESSMENT YEAR UNDER CONSIDERATION. CARBON CREDIT IS NOT AN OFFSHOOT OF BUSINESS BUT AN OFFSHOOT OF ENVIRONMENTAL CONCERNS. NO ASSET IS GENERATED IN TH E COURSE OF BUSINESS BUT IT IS GENERATED DUE TO ENVIRONMENTA L CONCERNS. CREDIT FOR REDUCING CARBON EMISSION OR GREENHOUSE EFFECT CAN BE TRANSFERRED TO ANOTHER PAR TY IN NEED OF REDUCTION OF CARBON EMISSION. IT DOES NOT I NCREASE PROFIT IN ANY MANNER AND DOES NOT NEED ANY EXPENSES . IT IS A NATURE OF ENTITLEMENT TO REDUCE CARBON EMISSION, HO WEVER, THERE IS NO COST OF ACQUISITION OR COST OF PRODUCTI ON TO GET THIS ENTITLEMENT . CARBON CREDIT IS NOT IN THE NATURE OF PROFIT OR IN THE NATURE OF INCOME . 25. FURTHER, AS PER GUIDANCE NOTE ON ACCOUNTING FOR SELF- GENERATED CERTIFIED EMISSION REDUCTIONS (CERS) ISSU ED BY I.T.A. NO. 609/MDS/13 I.T.A. NO. 616/MDS/13 8 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (IC AI) IN JUNE, 2009 STATES THAT CERS SHOULD BE RECOGNISED IN BOOKS WHEN THOSE ARE CREATED BY UNFCCC AND/OR UNCONDITION ALLY AVAILABLE TO THE GENERATING ENTITY . CERS ARE INVENTORIES OF THE GENERATING ENTITIES AS THEY ARE GENERATED AND H ELD FOR THE PURPOSE OF SALE IN ORDINARY COURSE. EVEN THOUGH CERS ARE INTANGIBLE ASSETS THOSE SHOULD BE ACCOUNTED AS PER AS- 2 (VALUATION OF INVENTORIES) AT A COST OR MARKET PR ICE, WHICHEVER IS LOWER. SINCE CERS ARE RECOGNISED 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 CONSIDERE D AS CAPITAL RECEIPT. THIS GROUND IS ALLOWED. THE RATIO LAID DOWN IN JUDGMENTS RELIED UPON BY THE LD. DR ARE NOT APPLICABLE IN THE FACTS AND CIRCUMSTANCES OF THE PR ESENT CASE, THEREFORE, THEY DO NOT SUPPORT THE CASE OF THE REVE NUE. 6. THE CO-ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF M/S. AMBIKA COTTON MILLS LIMITED VS. DCIT (SUPRA) WHILE DEALING WITH AN IDENTICAL ISSUE FOLLOWED THE DECISION OF THE HYD ERABAD BENCH OF THE TRIBUNAL IN THE CASE OF MY HOME POWER LIMITED VS. DCIT (SUPRA). RESPECTFULLY FOLLOWING THE DECISION OF TH E CO-ORDINATE BENCH, WE HOLD THAT THE CDM RECEIPTS ARE CAPITAL RE CEIPTS. ACCORDINGLY, THE ORDER OF THE CIT(A) IS SET ASIDE A ND THE APPEAL OF THE ASSESSEE IS ALLOWED. 12. IN THESE CIRCUMSTANCES, WE ARE OF THE OPINION T HAT THE LOWER AUTHORITIES FELL IN ERROR IN CONSIDERING THE CARBON CREDIT AS REVENUE RECEIPTS. THE ADDITION MADE IN THIS REGARD IS CANC ELLED. 13. THE ONLY OTHER ISSUE RAISED BY THE ASSESSEE IS REGARDING REPLACEMENT OF MACHINERY CONSIDERED AS CAPITAL OUTG O BY THE CIT(APPEALS). I.T.A. NO. 609/MDS/13 I.T.A. NO. 616/MDS/13 9 14. WE HAVE ALREADY DEALT WITH THIS ISSUE WHILE DEA LING WITH GROUND NOS.2 AND 3 OF THE REVENUE. WE HAVE HELD THAT CIT( APPEALS) WAS JUSTIFIED IN NOT ALLOWING THE CLAIM OF REPLACEMENT OF CARDING MACHINES. WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORD ER OF CIT(APPEALS), WHICH APPLIED THE DECISION OF HON'BLE APEX COURT IN THE CASE OF MANGAYARKARASI MILLS LTD. (SUPRA). 15. TO SUMMARIZE THE RESULT, APPEAL OF THE REVENUE IS DISMISSED, WHEREAS, THAT OF THE ASSESSEE IS TREATED AS PARTLY ALLOWED. ORDER WAS PRONOUNCED IN THE COURT ON FRIDAY, THE 30 TH OF AUGUST, 2013, AT CHENNAI. SD/- SD/- (CHALLA NAGENDRA PRASAD) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 30 TH AUGUST, 2013. KRI. COPY TO: (1) ASSESSEE (2) ASSESSING OFFICER (3) CIT(A)-II, COIMBATORE (4) CIT-III, COIMBATORE (5) D.R. (6) GUARD FILE