1
IN THE INCOME TAX APPELLATE TRIBUNAL
JAIPUR BENCH, JAIPUR
(BEFORE SHRI HARI OM MARATHA AND SHRI N.K. SAINI)
ITA No.503/JP/2012
Assessment year: 2007-08
PAN : AACCS 8796 G
M/s. Shree Cement Ltd. vs. The Addl. CIT
Bangur Nagar, P.B. No.33 Range-2
Beawar Jaipur
(Appellant) (Respondent)
ITA No.568/JP/2012
Assessment year: 2007-08
PAN : AACCS 8796 G
The ACIT vs. M/s. Shree Cement Ltd.
Circle- 2 Bangur Nagar
Jaipur Beawar
(Appellant) (Respondent)
ITA No.504/JP/2012
Assessment year: 2008-09
PAN : AACCS 8796 G
M/s. Shree Cement Ltd. vs. The ACIT
Bangur Nagar, P.B. No.33 Circle- 2
Beawar Jaipur
(Appellant) (Respondent)
ITA No.569/JP/2012
Assessment year: 2008-09
PAN : AACCS 8796 G
The ACIT vs. M/s. Shree Cement Ltd.
Circle- 2 Bangur Nagar
Jaipur Beawar
(Appellant) (Respondent)
http://www.itatonline.org
2
ITA No.505/JP/2012
Assessment year: 2009-10
PAN : AACCS 8796 G
M/s. Shree Cement Ltd. vs. The ACIT
Bangur Nagar, P.B. No.33 Circle- 2
Beawar Jaipur
(Appellant) (Respondent)
ITA No.570/JP/2012
Assessment year: 2009-10
PAN : AACCS 8796 G
The ACIT vs. M/s. Shree Cement Ltd.
Circle- 2 Bangur Nagar
Jaipur Beawar
(Appellant) (Respondent)
Department by: Shri A.K. Khandelwal
Assessee by : Shri D.B. Desai
Date of Hearing: 15-01-2014
Date of Pronouncement: 27-01-2014
ORDER
PER BENCH:-
There are six appeals, filed by the Assessee & Revenue against the
orders of CIT(Appeals), Ajmer relating to Assessment Years 2007-08,
2008-09 & 2009-10. Since common issues are involved in all the appeals,
for the sake of convenience and brevity, we are deciding them by a
common order.
http://www.itatonline.org
3
2. The learned Authorized Representative, Sri D. B Desai has filed
ground wise key submissions in relation to each of the six appeals. The
learned Departmental Representative has also filed written submissions in
relation to its appeals. All the appeals are now disposed off in the
following manner.
3. We will first take up the appeal filed by assessee for A.Y. 2007-08
in ITA 503/JP/12.
4. Ground No. 1 & 2 are on account of reduction in the claim for tax
holiday u/s 80IA of the Act in respect of Assessee’s Power Undertaking
as a result of modification in the Market Price of the power captively
consumed.
5. Briefly stated, the relevant material facts are that the Assessee has
claimed deduction u/s 80IA in respect of its Power Undertaking located
in the State of Rajasthan. Power generated by the Power Undertaking is
predominantly used by the assessee captively at its Cement Unit also in
Rajasthan. For computing the profitability of the power captively
consumed, in terms of provisions of section 80IA(8), the assessee has
considered the market value or Arm’s Length Value being the value at
which independent Power supplier, has sold power to Power Distribution
Companies (DISCOMs) in the State of Rajasthan. In the order u/s 143(3),
http://www.itatonline.org
4
the AO has instead applied rate (being Average Annual Landed Cost) at
which power is supplied by the State Electricity Grid to Assesse’s
Cement Unit and re-computed the deduction eligible u/s 80IA.
CIT(Appeals) has since upheld the action of the AO.
6. The Learned Authorised Representative in its key submissions has
stated as under:
1.0 Price adopted by the assessee is ‘Market Price’ & is in
accordance with Sec. 80-IA(8)
Vide Sec. 80-IA(8), power captively consumed by assessee
needs to be transferred at ‘market value’, which denotes
price which such goods would ordinarily fetch in the open
market. The price adopted by the Assessee is in terms of the
requirement of section 80-IA(8) of the Act as it contains
following basic features of an open market:
a. Determined based on transaction entered into between
independent parties i.e. Tata Power & DISCOM.
b. Price is determined independently by the demand and
supply forces.
c. Transactions are actual and real and not hypothetical or
fictitious.
d. Market environment in which transaction have taken
place is competitive and free.
e. Market price is transparent and available in public
domain.
f. Transactions are in very large volume and are fairly
representative
In the assessment order, the AO has nowhere disputed any
of the above facts or the fact that the price considered by
appellant is market price or arm’s length price. The AO has
merely substituted the above with another arm’s length
http://www.itatonline.org
5
price, namely ‘grid rate’, being the price at which grid has
supplied power to assessee.
2.0 Once assessee has adopted a particular Market Value,
Revenue’s prerogative is to verify whether the same
represents Market Value or not. The statute neither
contemplates, nor permits Revenue to substitute the same
with another ‘Market Value’
Sec 80IA(8) stipulates that assessee must adopt ‘Market
Value’ as the price at which goods or services from an
eligible unit are transferred to a non eligible unit. In the
open market, where a basket of ‘Market Values’ are
available, the law does not put any restriction on the
assessee as to which ‘Market Value’ it has to adopt. It is
purely assessee’s discretion. So long as the assessee has
adopted a ‘Market Value’ as the transfer price, that is
sufficient compliance of law. A.O. can adopt a different
value only where the value adopted by assessee does not
correspond to the ‘market value’. In the present case, the
AO has simply substituted one market value with another
market value which is neither permissible nor required
under the statute.
Hon’ble Mumbai Tribunal in ACIT –vs.- Maersk Global
Service Centre (I) Pvt. Ltd (2011) 133 ITD 543 (Mum) [at
Para 36] relying upon the decision of Special Bench of
Hon’ble Bangalore Tribunal in Aztec Software &
Technology Services Ltd. -vs.- ACIT (2007) 107 ITD 141
(Bang)(SB) has laid down the following principles:-
(i) Onus of demonstrating arms’ length price is on assessee.
Once such onus is discharged & still AO propose any
variation in the method of comparable of assessee, he
is required to show that the comparable selected by
assessee were, in fact, not comparable.
(ii) It is, therefore, manifest that the initial prerogative of
choosing the comparable cases is always that of
assessee. It is but natural also for the reason that the
assessee is the best judge to know the transactions
http://www.itatonline.org
6
undertaken & thus finding out the comparable cases
from the vast database available in the public domain.
(iii) Once this exercise is done, then the ball comes in the
Court of the Revenue. Then they have to examine
various aspects of the comparable cases submitted by
assessee with a view to test whether or not these are, in
fact, comparable. If AO agrees with the comparable
given by the assessee, the matter ends.
(iv) If he wants to exclude any of such comparable, then it
is for him to justify the exclusion by adducing cogent
reasons. It is not open to the AO to exclude the
comparable cases given by the assessee at his whims
and fancies.
The principles stated above in relation to determination of
arms’ length price are equally applicable for determination
of ‘Market Value’ for the purpose of section 80IA(8).
3.0 When basket of ‘Market Value’ are available, it is the
prerogative of the assessee to decide and adopt ‘Market
Value’
In the open market, where a basket of ‘Market Values’ are
available, the law does not put any restriction on the
assessee as to which ‘Market Value’ it has to adopt, which
is purely Assessee’s discretion. So long as the assessee has
adopted a ‘Market Value’ as the transfer price, that is
sufficient compliance of law. A.O. can adopt a different
value only where the value adopted by assessee does not
correspond to the ‘market value’.
It is a settled principle that where more than one view is
possible the view favorable to the assessee must be adopted.
Hon’ble Apex Court in CIT –vs- Vegetable Products Ltd.
(1973) 88 ITR 192 (SC) has held that when two reasonable
constructions of a taxing provision are possible, the
construction which favors the assessee must be adopted.
This is a well accepted rule of construction. On the above
principle, reliance is also placed on :-
http://www.itatonline.org
7
- Jaswant Rai –vs- CWT (1977) 107 ITR 477 (P&H) : Held
that the estimate made by adopting one method may
vary with the estimate made by adopting another
method. In such a situation, it looks fair & proper that
the benefit of the method which is favorable to the
assessee should be allowed to him.
- ACIT –vs- Bright Star Investment (P) Ltd (2009) 120 TTJ
498 (Mum) : Held that in the absence of specific
provision to deal with the present situation, two
formulas can be evolved to work out the profits and
gains on transfer of assets. One formula which has
been adopted by the A.O. & the other formula which is
adopted by the assessee. In the absence of a specific
provision, out of these two formulas, the formula which
is favorable to the asseessee should be accepted.
- Shantadevi Gaekwad –vs- DCIT (2012) 250 CTR 421
(Guj) : Held that when two equally efficacious and
acceptable data for the purpose of valuations are
available, the one which is beneficial to the assessee
should be preferred. This is a well settled principle
which should be followed.
4.0 It is a settled legal position that assessee is entitled to
arrange his affairs so that his taxes are low & it is the
prerogative of the assessee to do so
Hon’ble Apex Court in the landmark ruling of Vodafone
International Holdings B.V. –vs.- Union of India (2012) 341
ITR 1 (SC) have held that every taxpayer is entitled to
arrange his affairs so that his tax liability is optimised and
that he is not bound to choose those patterns, which
replenishes the treasury.
Similarly, courts have time & again held that where the law
is silent, it is the prerogative of the assessee to be
considered.
- CIT –vs- Reliance utilities & Power Ltd (2009) 313 ITR
340 (Bom) : Held that where there are both borrowed
funds as also interest free funds, discretion lies in the
http://www.itatonline.org
8
hands of the assessee for utilisation of those funds.
Hence, the presumption would arise that investment
would be out of interest free funds generated & not out
of borrowed funds. The court relied upon East India
Pharmaceutical works Ltd –vs- CIT (1997) 224 ITR
627 (SC) & Woolcombers of India Ltd –vs- CIT (1982)
134 ITR 219 (Cal)
- Whether any expenditure has been incurred for the
purposes of business or not is the sole prerogative of
the assessee. Revenue cannot sit on the chair of the
assessee to decide the prudence of expenditure
incurred. Reasonableness & commercial expediency
has to be judged from the point of view of assessee &
not department. Refer Shahzada Nand & Sons -vs.-
CIT (1977) 108 ITR 358 (SC) & J.K. Woollen
Manufactures -vs.- CIT (1969) 72 ITR 612 (SC)
5.0 When revised return is filed, it supplant the original return
& revised return alone has to be taken into consideration in
completing assessment. Refer CIT –vs- Arun Textile (1991)
192 ITR 700 (Guj), Dr S. B. Bhargava –vs- CIT (1982) 136
ITR 559 (All) & CCIT –vs- Machine Tool Corporation of
India Ltd (1993) 201 ITR 101 (Kar)
7. The crux of the above submissions of the Learned Authorised
Representative are -
a. In the present case, the fact that value considered by the
assessee is market value or arm’s length value, has not been
disputed by the AO. The AO has merely substituted the above
with another market price or arm’s length price.
b. With the reforms brought pursuant to Electricity Act 2003,
independent players have been provided open access. Thus,
electricity has a wider market since many independent players
have been given licence for transmission and/or distribution
and/or trading of power. These independent parties are required
to file statutory returns (of the transactions entered into by
them) with the Electricity Regulatory Commission which data is
http://www.itatonline.org
9
available in public domain. With the above, the assessee has a
‘basket’ of market values. In such situation, the question which
arises is that out of the various available market values which
value needs to be considered since each one fulfils the
requirement of market value. The assessee has adopted one of
the market values which is also at arm’s length and AO has
adopted another market value which is also at arm’s length. The
Learned Authorised Representative (AR) submits that AO’s
action is not tenable.
c. In support of the above proposition, the AR relied on various
decisions in similar situations including the decision of
Supreme Court in the case of CIT Vs. Vegetable Products Ltd
[1973] 88 ITR 192 [SC] & other High Court decisions as
referred above, wherein it has been held that when two equally
efficacious and acceptable data for the purposes of determining
value are available, the one which is beneficial to the assessee
should be preferred.
d. The AR further submitted that Hon’ble Supreme Court in the
case of Vodafone International Holdings Vs. UOI [2012] 341
ITR 1 [SC] have held that the taxpayer is entitled to arrange his
affairs so that his tax liability is optimized and he is not bound
to chose those patterns which replenishes the treasury.
e. Lastly, by way of examples in the case of borrowed funds &
own funds, reasonableness & commercial expediency of the
expenditure incurred for business purposes, it was submitted
that where law is silent it has been time & again held by the
courts that the discretion exercised by the assessee is to be
accepted.
8. In reply, the DR submitted that –
a. The assessee itself in the original return of income has
considered the grid rate as the market rate. It is by way of
revised return, the assessee has changed the method of
computing market value by adopting market value of power as
sold by independent power supplier.
http://www.itatonline.org
10
b. Since, the assessee itself is drawing power from the grid, the
same represents market price as it is the grid which is supplying
power not only to assessee but to other consumers.
c. He further argued that the assessee has adopted market price of
its choice in computing the transfer price & such discretion
cannot be allowed to the Assessee.
d. On the point of selection of price from the basket of market
values, the DR submitted that there is no such provision in the
act which gives assessee such prerogative. The assessee has to
select market value as per Sec 80IA (8) as on the date of
transfer such that it would ordinarily fetch such price in the
open market.
e. Since, assessee itself is drawing power from the State grid on
regular basis, Grid rate is the best market price available which
should be adopted for computing deduction u/s 80IA.
9. Against the above submissions of the Department, the AR for the
assessee in the rejoinder submitted that –
a. The contention that assessee has picked & chosen only those
transactions which have higher rates is not factually correct. In
determining the market price, the assessee has considered all
transactions where the power distribution or trading company
has supplied power in the State of Rajasthan since the
assessee’s unit is in Rajasthan as could be seen from the Paper
Book pages 30-32. Other transactions are not relevant as they
pertain to other States, i.e. Madhya Pradesh, Maharashtra etc.
b. The assessee has taken the weighted average rate of all
transactions undertaken by the said power distribution or
trading company in the State of Rajasthan and not only those
transactions with the higher rate.
c. As regards the submission that Grid rate represents the market
price, the AR submitted that the assessee has never contended
that the Grid rate (being Average Annual Landed Cost) at which
electricity is being supplied by State Electricity Board does not
represent market price. Equally it is also not in dispute that the
http://www.itatonline.org
11
rate adopted by the assessee also represents market price as it is
between independent parties, volumes of transaction are
substantial, the transactions are actual and real and not
hypothetical or fictitious & data regarding the same are
available in public domain. Further, the fact that the same does
represent market price has also not been disputed by any of the
authorities. In fact the same can never be disputed since it
represents actual arm’s length transaction being entered
between unrelated parties. Hence, in such situation, where there
are two or more sets of market price available, so long as the
Assesse has adopted a price which represents ‘market price’,
Revenue cannot compel the assessee to adopt another market
price.
d. In Sri Velayudhaswamy Spinning Mills Pvt. Limited –vs- DCIT
[ITA No. 850(Mds)/2011] & other decisions, it has been held
that price at which the Grid has purchased power from the
Power Unit of the Assesse does not constitute market value
although the price at which Grid has sold power to the Assessee
does constitute market value. Extending the said principle the
AR further submitted that even the price at which third party
has purchased power from the Power Unit of the Assessee,
which is mostly its power sold when not required by the Cement
Unit, does not constitute ‘market value’ to be adopted in valuing
the power supplied by the said Power Unit to the Cement Unit.
In light of above, it was submitted by AR that the disallowance made by
the AO is not justified and since not in accordance with the law, the same
needs to be deleted.
10. We have heard the rival submissions and perused the evidence on
record. We have also gone through the facts of the case, assessment order,
order of CIT(Appeals), the principles and the judicial decisions relied
upon and documents produced by both the parties. At the outset, we find
that the revised return filed by the Assessee has been accepted by the AO
http://www.itatonline.org
12
by clear finding in the Assessment Order. Once revised return is validly
filed & accepted, the original return is non-est, as it is completely
substituted by the revised return. Now let us deal with ‘Market Value’. On
perusal of the assessment order & all other records, we find that facts with
regard to adaptation of ‘market value’ are clear. The assessee has adopted
a ‘value’ which is market value and the department has substituted the
same by another value. The department is contending that the ‘market
value’ as adopted by AO is the most appropriate since it represents price
charged by the State Grid to various customers including the assessee.
Hence, the same should be considered. The AR of the assessee submits
that the value adopted by assessee represents ‘market value’ since it is
based on real transactions between unrelated parties and the details for the
same are available in public domain. The issue before us is whether in
such situations where there are two or more market values available and if
the Assessee has adopted a ‘value’ which is ‘market value’, whether it is
permissible for the Revenue to still replace the same by another ‘market
value’.
11. At this stage, it is necessary to refer to the relevant provisions of the
Act i.e. Sec 80IA(8), which states that -
“Where any goods or services held for the purposes of the
eligible business are transferred to any other business carried
http://www.itatonline.org
13
on by the assessee, or where any goods or services held for the
purposes of any other business carried on by the assessee are
transferred to the eligible business and, in either case, the
consideration, if any, for such transfer as recorded in the
accounts of the eligible business does not correspond to the
market value of such goods or services as on the date of
transfer, then for the purposes of the deduction under this
section, the profits and gains of such eligible business shall be
computed as if the transfer, in either case, had been made at
the market value of such goods or services as on that date”
Explanation – For the purposes of this sub-section, “market
value”, in relation to any goods or services, means the price
that such goods or services would ordinarily fetch in the open
market.”
12. On perusal of the above, it could be clearly seen that the Statute
provides that the assessee must adopt ‘Market Value’ as the transfer price.
In the open market, where a basket of ‘Market Values’[say like,
independent third party transactions, grid price (average annual landed
cost at which grid has sold power to the assessee), Power Exchange Price
for the relevant period etc.] are available, the law does not put any
restriction on the assessee as to which ‘Market Value’ it has to adopt, it is
purely assessee’s discretion. So long as the assessee has adopted a
‘Market Value’ as the transfer price, that is sufficient compliance of law.
AO can adopt a different value only where the value adopted by assessee
does not correspond to the ‘market value’. Even if assessee’s Cement Unit
has purchased power, also from the Grid or that assessee’s Power Unit has
also partly sold its power to grid or third parties that by itself, does not
http://www.itatonline.org
14
compel the assessee or permit the Revenue, to adopt ONLY the ‘grid
price’ or the price at which the Eligible Unit has partly sold its power to
grid or third parties, as the ‘market value’ for captive consumption of
power to compute the profits of the eligible unit. Any such attempt is
clearly beyond the explicit provisions of Section 80IA(8) of the Act.
Underlying principles forming the basis of our findings given here in
before in this order are also supported by the decision of Special Bench of
Hon’ble Bangalore Tribunal in Aztec Software & Technology Services
Ltd. Vs. ACIT [2007] 107 ITD 141 [Bang][SB] as well as Mumbai
Tribunal decision in the case of ACIT Vs. Maersk Global Service Centre
(I) Pvt. Ltd [2011] 133 ITD 543 [Mum] wherein while interpreting the
Transfer Pricing provisions, the courts have held that it is the assessee
who is the best judge to know the transactions undertaken & thus finding
out the comparable cases from the vast database available in the public
domain. Once the assessee has adopted the same, the AO has to examine
whether the same is market price or not. AO has the power to adopt the
market price only when the price adopted by the assessee does not
correspond to market value. In the present case, we find that the assessee
has adopted a rate at which actual transactions have been undertaken by
unrelated entities. The volumes of transaction as relied upon are also
substantial and hence it cannot be said that the assessee has hand picked
http://www.itatonline.org
15
some transactions, which are beneficial to it. The DR submitted that since
the assessee has itself drawn power from the grid, the grid rate represents
the ‘best market value’ & hence the same should only be adopted. We are
not agreeable to the above contention of the department. No doubt the grid
rate is market value but there is no concept of ‘best’ market value in law.
If by using the said adjective, Revenue seeks to infer that grid rate is the
only market value in the present context, such inference is also clearly not
tenable. Further, in case there are options, the option favorable to the
Assessee is to be adopted. This is a well settled principle of law laid down
by courts time and again including Supreme Court in the case of CIT Vs.
Vegetable Products Ltd. [1973] 88 ITR 192 [SC] and other High Courts as
pointed out by the AR.
13. In the light of the aforesaid, we hold that –
(a) the value adopted by the Assesse be it value as per
independent third party trading transactions or as per Power
Exchange (IEX etc.) or any other independent transaction (for
the relevant period and which has taken place in the relevant
area where the eligible unit is located) constitute ‘market
value’ in terms of explanation to Section 80IA(8);
(b) the value at which State Grid has sold power to the Cement
Unit of the Assessee (average annual landed cost) also
constitute ‘market value’ in terms of explanation to Section
80IA(8) but the value at which State Grid or third party has
purchased power from the Power Unit of the Assessee, which
represents its power which is sold when not required by the
Cement Unit, does not constitute ‘market value’ in terms of
http://www.itatonline.org
16
explanation to Section 80IA(8). It is the ‘principle’ and not the
‘quantum’ which is deciding factor;
(c) where a basket of ‘market values’ are available for the relevant
period and relevant geographical area where the eligible unit is
situated, the assessee has discretion to adopt any one of them
as market value; and
(d) If the value adopted by the assessee is ‘market value’ as
explained above, it is not permissible for Revenue to
recompute the profits & gains of the eligible unit by
substituting the said value (as adopted by the Assesse) by any
other ‘market value’.
14. Accordingly, we delete the disallowance as made by the AO in
order u/s 143(3) on account of deduction u/s 80IA of the Act and hence
the grounds 1 & 2 are accordingly decided in favor of the assessee.
15. Ground No. 3 of the assessee relates to disallowances of Rs.
16,00,000/- confirmed by CIT(Appeals) on account of expenditure
incurred towards gifts. The AO in the assessment order had disallowed
expenditure on gifts of Rs. 47,11,876/- holding the same as not related to
the business of the assessee. The Ld. CIT(Appeals) following the
decision of Tribunal vide order dated 23rd
Dec. 2009 in assessee’s own
case for A.Y. 2003-04 in I.T.A No. 942/JP/08 allowed relief of Rs.
31,11,876/- and restricted the disallowance to Rs. 16,00,000/-. We find
that facts for the year under consideration are similar with the facts of
earlier year. Following the decision of Tribunal dated 23rd
Dec. 09, the
disallowance confirmed by the CIT(Appeals) is reasoned one and hence
http://www.itatonline.org
17
we do not find any infirmity therein. Accordingly, ground no. 3 of the
appeal preferred by the assessee is dismissed.
16. Ground No. 4 of the assessee relates to disallowance of telephone
expenses of Rs. 1,00,000/- confirmed by CIT(Appeals) considering the
same as personal in nature. We find that Tribunal in A.Y. 2003-04 in ITA
No. 751 /JP/07 vide order dated 23rd
Dec. 2009 had set aside the issue to
the file of the A.O. to examine the contention of the assessee as there
cannot be disallowance of personal expenditure in the hands of the
company. Accordingly, following the order of earlier year, we set aside
this ground to the file of the AO to verify the same after giving
oppurtunity to the assessee before deciding the issue. This ground of the
assessee is therefore allowed for the statistical purposes only.
17. Now we take up the departmental appeal for AY 2007-08 vide ITA
No. 568/Jp/12.
18. Ground 1 is on account of deleting the disallowance made by AO
on account of Sales Tax subsidy by treating the same as capital receipt
instead of revenue receipt. Brief facts are that assessee has credited to the
Profit & Loss account subsidy received under Rajasthan Investment
Promotion Scheme, 2003 (RIPS) vide Notification No. F4(18)FD/Tax
Div/2001 dated 02-12-2005. The above subsidy is arising due to
http://www.itatonline.org
18
expansion in capacity (annual) from 26 Lakhs MT to 41 Lakh MT at Ras,
Rajasthan effective from 21-12-2005 and from 41 Lakhs MT to 86 Lakhs
MT towards (a) further expansion at Ras, Rajasthan (15 lakh MT) and (b)
Khuskheda, Rajasthan (30 Lakh MT) both effective from 26-03-2007 and
in all cases, subsidy is for seven years from the respective
commencement date noted above. The same has been claimed as Capital
Receipt in computing total income under regular provisions of the Act as
well as in computing book profit u/s 115JB. In the assessment order u/s
143(3), the Assessing Officer has considered above receipt as revenue in
nature based on stand taken by him in earlier years. Ld. CIT(Appeals)
has since deleted the addition relying on the order of ITAT in assessee’s
own case for earlier years.
19. The Learned AR submits as under :-
“The issue is squarely covered in favor of assessee by the decision
of Hon’ble Jaipur Tribunal in its own case for AY 2006-07 vide
order dated 09-09-2011 in ITA No. 635/Jp/2010.
Hon’ble Tribunal has examined the scheme in great depth & has
given following key findings -
(i) The ‘purpose’ of granting incentive was to accelerate the
industrial growth.
(ii) Hon’ble Tribunal has relied upon CIT –vs.- Ponni Sugars &
Chemicals Ltd. (2008) 306 ITR 392 (SC) and held that
whether any incentive is capital or revenue would depend
upon the ‘purpose’ for which subsidy is granted. If the
‘purpose’ of the subsidy is to enable the assessee to run the
http://www.itatonline.org
19
business more profitably then the incentive is on revenue
account and if the object of the subsidy is to enable the
assessee to set up a new unit or expand the existing unit then
the incentive is on capital account.
(iii) Based on the purpose test as to why the incentive has been
granted, the Hon’ble Tribunal have held that incentive under
RIPS, 2003 is provided to the assessee to set up a new unit or
carry out expansion and not for running the business more
profitably.
Issue also covered in favor of assessee by principles laid down in
various other decisions
Present issue is also settled in favour of assessee by following
judicial pronouncements of the Hon’ble Apex Court, High Courts
and Special Bench of ITAT:-
Supreme Court
- CIT –vs.- Ponni Sugar & chemicals Ltd. (2008) 306 ITR 392
(SC)
High Courts
- CIT –vs.- Siya Ram Garg (HUF) (2011) 237 CTR 321 (P&H)
- Shree Balaji Alloys and others –vs.- CIT (2011) 333 ITR 335
(J&K)
- CIT –vs.- Rasoi Limited (ITA No. 258 of 2001)(Cal)
- DCIT -vs.- Inox Leisure Ltd. [2013] 30 taxmann.com 127 (Guj)
ITAT Special Bench
- DCIT –vs.- Reliance Industries Ltd. (2004) 88 ITD 273
(Mum)(SB)”
20. The DR during the course of the hearing filed written submission
as below:-
http://www.itatonline.org
20
“The appellant herein submits the following written arguments
in addition to the verbal arguments to be taken during the
course of hearing in the above appeal.
Ground No. 1 (common in all the appeals) – Deleting the
addition of sales tax subsidy (for A.Y. 07-08 Rs. 46.22 Crs, A.Y.
08-09 Rs. 80.40 Crs & A.Y. 09-10 Rs. 40.53 Crs) under regular
assessment as well as u/s 115JB, by treating the same as capital
receipt instead of revenue receipt.
The Ld. CIT(A) while deciding the issue in favour of the
assessee company has relied upon the decision of the Hon’ble
ITAT in assessee own case for A.Y 03-04 order dated
23.12.2009 and A.Y. 2004-05 to 06-07 order dated 09.09.2011.
The appeals for the said order are pending before the Hon’ble
Jurisdictional High Court. However, most respectfully, I would
like to bring the following facts for kind consideration of
Hon’ble Members, on the subject.
The facts of the case are as under:
1. The assessee company had commenced its commercial
productions in May 1985 with an installed capacity of 6 lacs
M.T. In F.Ys 02-03, it has increased its installed capacity
from 20 lacs M.T. to 26 lacs M.T (by expanding its business)
for availing the benefits under R.S.T/C.S.T Exemption
Scheme 1998 (Sr. 1131). As per scheme the assessee is
entitled for exemption of payment of sales tax for a period of
11 years i.e 1.5.02 to 30.04.13. As per the eligibility
certificate issued in this regard, on form C dated 12.9.02 by
Sales Tax Officer, Spl. Circle, Ajmer, at column no. 8
interalia includes the following facts:-
Details for exemption from tax
A. Percentage of exemption from tax liability – as per co. No. 3
sr. 1 of Annex. B*.
B. Eligible fixed capital investment on ** - Rs. 15,727.66 lacs
C. Maximum limit of years – 11 years
http://www.itatonline.org
21
D. Quantum of exemption of sales tax - Rs. 15,727.66 lacs
* Annexure B
S.No. Type of Units Extent of the percentage of
exemption from total tax
liability
Maximum
exemption in
terms of
percentage of
eligible fixed
capital
investment
Maximum
time limit of
availing
exemption
from tax
1. New Units other than
the units mentioned at
items 2 and 3 and units
going in for expansion
or diversification
1st year 100%
3rd
year 80%
5th
year 60%
7th year 50%
9th
year 40%
11th
year 30%
2nd
year 90%
4th
year 70%
6th
year 50%
8th year 40%
10th
year
30%
Eleven years
** The eligible fixed capital investment meant for
investment in cost of land, cost of new building, cost of
new p.m and other fixed assets. This clearly indicate that
the sales tax subsidy has been allowed against capital
assets for expansion of assesses existing business.
The facts of the case are that the assessee company has
collected the sales tax from its customers against sales of
manufactured goods and credited the same in its books of
account. Here the source of subsidy is sales tax, collected from
the customers against sales of goods is in the nature of revenue
and the assessee has credited its books of account accordingly.
In view of these facts, the same was liable to be treated as
revenue receipt for the purpose of computing normal income as
well as book profit, as per provision of section 115JB of I.T Act
1961. This view gets support from decision of the Hon’ble S.C
in the case of Sahney Steel and Press Works Ltd. (1997) 228
ITR 0253 (SC), where in Hon’ble Supreme Court, inter alia,
held as under:
“If payments in the nature of subsidy from public funds
are made to the assessee to assist him in carrying on his
trade or business, they are trade receipts. The character
of the subsidy in the hands of the recipient-whether
revenue or capital will have to be determined, having
regard to the purpose for which the subsidy is given. The
http://www.itatonline.org
22
source of the fund is quite immaterial. However, if the
purpose is to help the assessee to set up its business or
complete a project the monies must be treated as having
been received for capital purposes. But if monies are
given to the assessee for assisting him in carrying out the
business operations and the money is given only after
and conditional upon commencement of production, such
subsidies must be treated as assistance for the purpose of
the trade.
A notification was issued by the Andhra Pradesh
Government that certain facilities and incentives were to
be given to all the new industrial undertakings……, with
investment capital (excluding working capital) not
exceeding Rs. 5 crores. The incentives were to be allowed
for a period of five years from the date of commencement
of production. Concession was also available for
subsequent expansion of 50 per cent. And above of
existing capacities, …..
The incentives would be limited to a period of five years
from the date of commencement of production; the
incentives were to be given by way of refund of sales tax
…..
The assessee was free to use the money in its business
entirely as it liked and was not obliged to spend the
money for a particular purpose. The subsidies had not
been granted for production of, or bringing into existence
any new asset. The subsidies were granted year after
year, only after the setting up of the new industry and
commencement of production. Such a subsidy could only
be treated as assistance given for the purpose of carrying
on of the business of the assessee. The subsidies were of
revenue nature and would have to be taxed accordingly.”
The facts of the above case are exactly matching with the case
of the assessee under question. In this case also the assessee
has expanded its installed capacity by more than 25% of
existing capacity and sales tax exemption was allowed from
date of first sale and not mere setting up / expanding of new
units. This means that exemption has been allowed by the
government by way of sales tax subsidy, only after starting its
commercial production to assist it in carrying on its trade or
http://www.itatonline.org
23
business. This fact get supports from the decision of the
Hon’ble ITAT Bench “D” Delhi in I.T Appeal no. 1404(Del) of
2007 in the case of M/s L G Electronics India Pvt. Ltd. V/s
Addl. CIT range-4, New Delhi, which inter alia held that the
sales tax subsidy availed by the assessee is a revenue receipt
since it is not linked with setting up of industry rather linked
with the production and first sale means assessee has collected
this amount embodied in dealer price in ordinary course of
business and the decision of the special bench in the case of
Reliance industries is not applicable to the facts of the case.
In spite of these facts, the assessee has treated the sales tax
subsidy as capital receipt, by claiming the fact that RST/CST
Exemption Scheme 1998 is meant for acquiring new assets to
expand the existing business. It has further relied on the 2
major decision of the Hon’ble S.C in the case of Ponni Sugars
and Chemicals Ltd. (2003) 260 ITR 0605 (Mad.) and decision
of the Special Bench in the case of Reliance Industries (2003-
TIOL-14- ITAT-MUM-SB).
The decision of Hon’ble Supreme Court in the case of Ponni
Sugars & Chemical Ltd., A.Y. 89-90, is not comparable with the
facts of the case under question, as the incentive/subsidy
provided under the scheme was exclusively for the purpose of
repayment of loan borrowed from Public Financial Institutions,
for acquiring fixed assets (used for new/expansion of business).
The assessee was liable to submit every year (by 31st Dec.)
subsidy utilization certificate from C.A. to show that the monies
had been so utilized. Failure to submit the utilization certificate
would result not only in the termination of scheme but also in
recovery of incentive/subsidy allowed to the assessee. Whereas
in the case of assessee such conditions are not applicable.
Secondly, the Hon’ble Supreme Court has decided this issues
for A.Y 89-90 i.e. prior to introduction of provision of
explanation 10 of section 43(1) of I.T. Act 1961. Likewise the
decision of Hon’ble Special Bench, ITAT, Mumbai in the case
of Reliance Industries (A.Y 85- 86) which is also not applicable
in the case under question for the facts discuss above and also
in the light of decision of Hon’ble ITAT, Bench ‘D’ Delhi in the
case of M/s L.G Electronics India Ltd. Addl. CIT, Range-4
Delhi(2010) TIOL-222-ITAT-Del.
http://www.itatonline.org
24
Alternatively, the assessee company has treated the S.T subsidy
as capital receipt, on the ground that the same has been
received against investment made in the eligible fixed assets for
expanding of its existing business, then how come the assessee
company has not reduced such subsidy (claimed to have been
received against eligible assets as per certificate issued by sales
tax officer) from the actual cost of the assets, as the cost of the
assets to that extend has not been met by the assessee. These
facts have been made abundantly clear, in the explanation 10 of
sub section 1 of the section 43 of IT Act, 1961, which read as
under:
“where a portion of the cost of an asset acquired by the
assessee has been met directly or indirectly by the
Central Govt. or a State Govt. or any authority
established under any law or by any other person, in the
form of a subsidy or a grant or reimbursement (by
whatever name called), then, so much of the cost as is
relatable to such subsidy or grant or reimbursement shall
not be included in the actual cost of the asset to the
assessee:
Provided that where such subsidy or grant or
reimbursement is of such nature that it cannot be directly
relatable to the asset acquired, so much of the amount
which bears to the total subsidy or reimbursement or
grant the same proportion as such asset bears to all the
assets reimbursement is so received, shall not be
included in the actual cost of the asset to the assessee.”
In spite of the above amendment, with effect from
A.Y.1999-2000, the assessee has not reduced such subsidy from
the cost of the assets, thereby claimed excess depreciation in
the form of revenue Expenditure, in the profit & loss account.
Thus, on one hand the assessee company has not credited the
sales tax subsidy as revenue income and on other hand it has
claimed revenue expenditure in the form of depreciation in
respect of those assets for which the government has met the
cost by way of sales tax subsidy. It has resulted in excess claim
of depreciation in respect of those assets for which the assessee
has not incurred the cost. In this regard I would like to bring to
your kind notice that the intention of the legislator for
amending the provision of Section 43(1) was that the assessee
http://www.itatonline.org
25
should not claim dual benefits i.e. one by not showing the sales
tax subsidy as revenue income and another by claiming
depreciation on those assets for which subsidy has been
granted by the government. This is clear from the Legislative
history- 1998-Explanation 10 which was inserted by the
Finance (No.2) Act, 1998, with effect from 1-4-1999.The Board
Circular explains the amendment in paragraph 22.2 in
following words:
“where a portion of the cost of an assets acquired by the
assessee has been met directly or indirectly by the Central
Govt. or a State Govt. or any authority established under any
law or by any other person, in the form of a subsidy or a grant
or reimbursement (by whatever name called), then, so much of
the cost as is relatable to such subsidy or grant or
reimbursement shall not be included the actual cost of the
assets to the assessee. Cost incurred/payable by the assessee
alone could be the basis for any tax allowance. This
explanation further provides that where such subsidy or grant
or reimbursement is of such nature that it cannot be directly
relatable to the asset acquired, so much of the amount which
bears to the total subsidy or reimbursement or grant the same
proportion as such asset bears to all the assets in respect of or
with reference to which the subsidy or grant or reimbursement
is so received, shall not be included in the actual cost of the
asset to the assessee.
Explanation 10 to section 43(1) was introduced to nullify the
judgment of the Hon’ble Supreme Court in the case of CIT vs.
P. J. Chemicals Ltd.(1994) 210 ITR 830, where it was held that
subsidy granted by the Govt. as an incentive for setting up
industries in backward area at an percentage of cost of capital
assets in not a payment for meeting any portion of the cost of
the capital assets within the contemplation of section 43(1) of
the I.T. Act 1961 and the same is not to be deducted in
computation of actual cost of the assets for the purpose of grant
of depreciation allowance, etc.
Position of subsidy up to assessment year 1998-99: Up to A.Y.
1998-99: Upto A.Y. 1998-99 if the subsidy was given by the
Govt. for any particular asset, it was deductible from the cost of
the said asset, whereas if a subsidy was given to set up an
http://www.itatonline.org
26
industrial unit in a backward area, etc. it was not deductible
from the cost. It was treated as a capital receipts.
From the above facts it is seen that the assessee has not reduced
the cost of the assets to the extent of the sales tax subsidy
received, their by claimed excess depreciation as explained in
the earlier paras. On the other hand, inspite of crediting the
subsidy received in its book’s of account, has not been offer for
tax under normal computation of Income as well as book profit
u/s 115JB of the I.T. Act. Keeping in view, the above facts, the
subsidy received by the assessee is revenue in nature and
therefore, liable to be assessed as revenue receipts in all the
three assessment years, under reference.”
21. In rejoinder, Ld. AR pointed out that the details of expansion noted
by Ld. DR as above, are in relation to the earlier expansion under the
1998 Scheme. Further expansion thereafter has taken place as recorded in
Para 18 above and Incentive/Subsidy for the same has been granted under
the 2003 Scheme, which has also been duly considered by this Tribunal
while deciding departmental appeal for earlier years. We note that in Para
17 of the order of this Tribunal for AY 2006-07 in ITA No. 635/JP/2010,
Incentive/Subsidy granted under both the 1998 Scheme as well as 2003
Scheme have been duly considered. Learned Authorized Representative
for the assessee further submitted that all issues raised by the Revenue as
above have been duly considered by this Tribunal while deciding this
matter in earlier years in its combined order dated 9.9.2011 [at Page 4-9
of its order in ITA No. 614/JP/10 (AY 2004-05) and at Page 33 & 35 of
its order in ITA No. 615& 635/JP/2010 (AY 2005-06 & 2006-07)]. Since,
http://www.itatonline.org
27
the issues under consideration are identical for earlier years, which the
DR has also accepted during the course of the hearing, the departmental
appeal may be quashed.
22. We have considered rival contentions and verified the facts, order
of AO and the CIT (Appeals) and gone through the orders of earlier years
as relied upon by the AR and the submissions of the DR. The DR has also
confirmed that issues in the current year are identical to that of earlier
years. With the help of reasoning given in the orders by this Tribunal for
earlier years in assessee’s own case [AY 2004-05 to AY 2006-07 in ITA
No. 614,615 & 635/Jp/2010] and respectfully following the same, we
reject the argument of the department and hold that receipt on account of
Sales Tax subsidy is capital in nature & not chargeable to tax. This
ground of revenue is thus dismissed.
23. Ground No. 2 of the Revenue’s appeal relates to the relief granted
by CIT(Appeals) on account of expenditure incurred on gifts following
the decision of Tribunal in assessee’s own case for earlier years. We have
already held while dealing with the assessee’s appeal, that the
disallowance confirmed and relief granted by the CIT(Appeals) on
account of expenditure incurred on gifts is a reasoned one. Accordingly,
this ground of the Revenue is dismissed.
http://www.itatonline.org
28
24. Ground No. 3 of the Revenue’s appeal relates to grant of interest
u/s 244A on MAT credit. During the course of the hearing, DR argued
that interest u/s 244A arises to the assessee where the refund is out of any
tax paid u/s 115WJ or collected at Source u/s 206C or paid by way of
Advance Tax or treated as paid u/s 199. Under Section 199 of the Act,
tax deducted at source is considered as paid on behalf of the assessee.
Hence, assessee cannot be granted interest u/s 244A on refund arising out
of MAT Credit. The AR of the assessee submits that refund would arise
only out of taxes paid by the assessee by way of TDS or Advance
Payment etc & not out of MAT Credit. MAT credit is granted as
reduction from tax liability and thereafter tax payable is computed.
Hence, reliance of DR on Section 199 is totally misplaced. It was further
submitted by AR that the issue is squarely covered in the favour of the
assessee by the decision of Hon’ble Bombay High Court in the case of
CIT -vs- Apar Industries reported in [2010] 323 ITR 411 [Bom].
25. After considering the arguments advanced by both parties on this
issue, we find that the issue is covered in favour of the assessee by the
decision of Hon’ble Bombay High Court in case of Apar Industries
(supra) wherein the Hon’ble Court has held that interest u/s 244A is
allowable on the refund of prepaid taxes after giving credit of brought
http://www.itatonline.org
29
forward MAT u/s 115JAA. We also notice that on this issue, Hon’ble
Delhi High Court in the case of CIT Vs. Bharat Aluminium Co. Ltd
[2011] 242 CTR 366 [Del], after considering the proviso to Section
115JAA(2) observed that since the MAT credit is available for
adjustment and set off on the first date of the previous year even before
the instalment of advance tax is due on the current income, the advance
tax liability has to be worked out on the current income only after the
adjustment and set off of MAT credit brought forward from earlier years
and therefore interest under Section 244A is payable to the assessee if
refund arises from advance tax paid by it. Respectfully following the
above decisions of Hon’ble High Courts, we hold that the assessee is
entitled to interest u/s 244A on refund arising to the assessee after MAT
credit. Consequently, this ground raised by the Revenue is dismissed.
26. Now we take up the assessee’s appeals for AY 2008-09 in ITA No.
504/JP/2012.
27. Ground No. 1 & 2 in this appeal are same as Ground 1 & 2 for AY
2007-08 on deduction u/s 80IA. The Learned Authorised Representative
for the assessee submitted that for AY 2008-09, the facts are similar to
the facts for AY 2007-08. In this year also the assessee has considered
the value at which independent power supplier has sold power to
http://www.itatonline.org
30
DISCOMs during the relevant period in the State of Rajashthan where
the eligible unit is located, as the market value of the power captively
consumed by the Cement Unit of the Assessee. These grounds have been
extensively dealt with in Para 2 to 14 above while dealing with
Assessee’s Appeal for AY 2007-08 in ITA No. 503/JP/12 and in the light
of our findings recorded therein, we hold that the disallowance in this
year also needs to be deleted. Assessee’s Grounds are therefore allowed
and corresponding disallowance u/s 80IA is deleted.
28. Ground No. 3 of the assessee relates to disallowances of Rs.
19,00,000/- confirmed by CIT(Appeals) on account of expenditure
incurred towards gifts. The facts in this ground are also similar to the
facts as discussed in AY 2007-08. With the help of same reasonings, we
uphold the part relief allowed and part disallowance confirmed by the
CIT(Appeals). Accordingly, ground no. 3 of the appeal preferred by the
assessee is dismissed.
29. Ground No. 4 of the assessee relates to disallowance of telephone
expenses of Rs. 1,00,000/- confirmed by CIT(Appeals). The facts in this
ground are similar to the facts as discussed in A.Y. 2007-08.
Accordingly, following the order of earlier year, we set aside this ground
to the file of the AO for verifying the same after giving opportunity to the
http://www.itatonline.org
31
assessee before deciding the issue. This ground of the assessee is
therefore allowed for the statistical purposes only.
30. Ground No 5 & 6 are as to whether Receipt from Carbon Credit of
Rs. 16,02,32,595/- is capital receipt or revenue receipt.
31. Briefly stated in order to address the threats caused by global
warming the Kyoto Protocol, an international agreement linked with
United Nations Framework Convention on Climate Change [UNFCCC]
was adopted in 1998. This protocol commits developed countries to limit
and reduce their Green House Gases (GHG) [Carbon di-oxide, Methane,
Nitrous Oxide, Hydrofluorocarbons, Sulphur Hexa fluoride etc.]
emissions. Clean Development Mechanism (CDM), is one of the three
mechanisms designed to assist the developed countries to meet their
GHG emissions targets.
32. Under CDM, a developed country can invest in GHG mitigation
project in a developing country by way of equity, loan or any other
financing mechanisms. The mitigation project, in turn generates emission
reduction that subsequently gets verified & certified by an independent
party. Above reduction in emission of GHG is acknowledged by issuing a
certificate known as CERs or Carbon Credits.
http://www.itatonline.org
32
33. The Assessee’s “Optimum Utilization of Clinker” is one of the
CDM projects undertaken & registered with UNFCCC. It is duly verified
and certified by the Det Norske Veritas Certification Ltd. The project
entails reduction of clinker content of the Portland Pozzolanic Cement
(PPC) produced by increasing Fly Ash content in the cement. The project
activity would therefore reduce direct on-site emissions from
clinkerisation & direct off site emissions from power generation at the
thermal power plants, per unit of cement produced. The above project
has generated CERs against which the assessee has received Rs.
16,02,32,595/- during the year under consideration which has been
claimed as ‘capital receipt’.
34. In the assessment order, the Assessing Officer has held that (a)
Carbon Credit is not a capital receipt, (b) cost of acquisition of Carbon
Credit is NIL & (c) entire receipt is taxable as capital gain. However, in
the computation, it has been added as Business income. Learned
CIT(Appeals) has held that receipt from CER’s is in the nature of benefit
arising from the business of the assessee and is taxable as ‘Business
Income’ u/s Sec 28(iv) of the Act.
35. The AR for the assessee submits as under :-
(a) Issue squarely covered in Assessee’s favour by the decisions
of Hon’ble Tribunal:
http://www.itatonline.org
33
The issue under consideration is squarely covered by the decision
of Hon’ble Hyderabad Tribunal in favour of assessee in the case of
My Home Power Ltd. –vs.- DCIT (2013) 151 TTJ 616 (Hyd)
wherein it has been held that receipt on account of carbon credit is
not in the nature of profit or in the nature of income and hence has
to be considered as capital receipt. After examining the matter in
detail the Hon’ble Tribunal in the said case have held as under -
“Carbon credit is in the nature of 'an entitlement' received to
improve world atmosphere and 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 receipt. It is not generated or created due 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 credit is world
concern and environment. Due to that the assessee gets a privilege
in the nature of transfer of carbon credits. Thus, 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
income. It is not liable for tax for the assessment year under
consideration in terms of sections 2(24), 28, 45 and 56 of the
Income-tax Act, 1961. Carbon credits are made available to the
assessee on account of saving of energy consumption and not
because of its business. Further, in our opinion, carbon credits
cannot 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 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 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 point carbon credit. The amount received
is not received for producing and/or selling any product, bi-
product or for rendering any service for carrying on the business.
In our opinion, carbon credit is entitlement or accretion of capital
and hence income earned on sale of these credits is capital receipt.
For this proposition, we place reliance on the judgment of the
Supreme Court in the case of CIT v. Maheshwari Devi Jute Mills
Ltd. (57 ITR 36) wherein it is held that transfer of surplus loom
http://www.itatonline.org
34
hours to other mill out of those allotted to the assessee under an
agreement for control of production was capital receipt and not
income. Being so, the consideration received by the assessee is
similar to consideration received by transferring of loom hours.
The Supreme Court considered this fact and observed that
taxability of payment received for sale of loom hours by the
assessee is on account of exploitation 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 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 opinion that the
consideration received on account of carbon credits cannot be
considered as income as taxable 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 the
course of business but it is generated due to environmental
concerns. Credit for reducing carbon emission or greenhouse
effect can be transferred to another party in need of reduction of
carbon emission. It does not increase profit in any manner and
does not need any expense. 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 is not in the
nature of profit or in the nature of income.”
The principles stated above have been accepted and followed by
the Chennai Bench of the Hon’ble Tribunal in the case of Sri
Velayudhaswamy Spinning Mills (P.) Ltd. – vs.- DCIT (2013) 40
taxmann.com 141 (Chennai) and Ambika Cotton Mills Ltd. -vs.-
DCIT (2013) I.T.A. No.1836/Mds/2012(Chennai)
(b) No Provision under the Income Tax Act to tax Carbon Credit
Proposed Direct Tax Code (DTC) vide clause 33(2)(xi) specifically
provides for taxability of Carbon Credit as Business receipts &
chargeable to tax. Similar provision is not present under the current
Income Tax Act ’1961.
Apex Court in Vodafone International Holdings –vs.- UOI 341 ITR
1 (2012) SC while deciding an issue on international taxation made
a comparative analysis of the provisions of Direct Taxes Code
(DTC) Bill, 2010 and Income Tax Act, 1961 and have held that
http://www.itatonline.org
35
treatment of any particular item in different manner in the 1961
Act and DTC serves as an important guide in determining
taxability of the said item. Since similar provision for taxability is
not present in the current statute, clear inference can be drawn that
the above income is not chargeable to tax under the Income Tax
Act, 1961.
36. The DR on the other hand relied on the order of the lower
authorities and states that receipt on account of carbon credit is related to
the business of the assessee and the assessee has undertaken activities
which has resulted in the receipt on account of carbon credits. Hence, the
amount so received has to be considered as related to the business of the
assessee and should either be considered as revenue receipts chargeable
to tax as business income, or the net amount after deduction of
expenditure if any, incurred for the same should be considered as
chargeable to tax under the head capital gains.
37. In reply the AR submits that carbon credit in the present case has
been awarded due to reduction in emission of green house gases
consequent to the Optimum Utilization of Clinker project undertaken by
the assessee. The assessee has been provided entitlement/incentive in the
form of carbon credit. Hence, this receipt does not have the element of
income or profit embedded to it. Further, the above incentive has been
granted as per Kyoto Protocol to incentivize the industry in the
developing countries for reduction of carbon emission. Hence, the same
http://www.itatonline.org
36
needs to be considered as capital receipt not chargeable to tax. As regards
the contention of the DR that the same is chargeable to tax as business
income or as Capital Gains, the AR submitted that the above issue has
already been considered by the Hon’ble Hyderabad Tribunal that the said
receipt is not chargeable to tax as it does not fall u/s 2(24), 28, 45 and 56
of the Act.
38. We have heard the rival submissions and perused the evidence on
record. We find that the Appellate Tribunal in My Home Power Ltd Vs.
DCIT [supra], have, after detailed examination, concluded that the
receipts from Carbon credit are capital in nature. We are inclined to
follow the said decision and the other two decisions of Chennai Tribunal
in Sri Velayudhaswamy Spinning Mills (P.) Ltd. Vs. DCIT [supra] and
Ambika Cotton Mills Ltd. Vs. DCIT (supra) where also it has been held
that receipt on account of Carbon Credit is capital in nature & neither
chargeable to tax under the head Business Income nor liable to tax under
the head Capital Gains. Our above view is also supported by the decision
of Supreme Court in the case of Vodafone International Holdings Vs.
UOI [supra] wherein Supreme Court has held that treatment of any
particular item in different manner in the 1961 Act and DTC serves as an
important guide in determining the taxability of said item. Since DTC by
virtue of the deeming provisions specifically provides for taxability of
http://www.itatonline.org
37
carbon credit as business receipt and Income Tax Act does not do so, our
view gets duly fortified by the principles stated in the above decision of
Supreme Court. Accordingly this ground of the assessee is allowed and
the addition made by the AO is deleted.
39. Ground No. 7 of the assessee relates to disallowance of profit on
sale of fixed assets of Rs. 11,63,403/- & profit on sale of investment of
Rs. 4,13,50,483/- in computing book profit u/s 115JB. This issue is
covered against the assessee by the decision of Hon’ble Tribunal in its
own case vide order dated 23rd
Dec. 2009 in I.T.A No. 942/JP/08.
Respectfully following the above decision of Tribunal, this ground of the
assessee is dismissed.
40. Ground No. 8 is on account of disallowance of carbon credit in
computing Book Profit u/s 115JB of the Act. This issue stands covered on
principle in favour of the Assessee vide the order of the Hon’ble ITAT
dated 9th
Sept. 2011 for AY 2004-05, 2005-06 and 2006-07 in Appellant’s
own case in ITA No. 614, 615 and 635/Jp/2010. Hon’ble Tribunal in the
said case have held that capital receipt in the form of Sales tax Subsidy,
needs to be excluded in computation of Book Profit all the more since
they don’t have any element of profit embedded in it. We find that Carbon
Credit is also capital receipt, which does not have any element of profit
http://www.itatonline.org
38
embedded in it. Even Hyd. Tribunal in My Home Power Ltd.(Supra) have
upheld the above principles. Hence, in present case, receipt on account of
carbon credit, being purely capital in nature needs to be excluded in
computation of Book Profit. The AO is accordingly directed to delete the
addition made on account of Carbon Credit in computing Book Profit u/s
115JB of the Act. This ground is accordingly decided in favor of the
assessee.
41. Now we take up the Revenue’s appeal for AY 2008-09 vide ITA
No. 569/JP/2012.
42. Ground No. 1 is on account of disallowance of Sales Tax Incentive
as capital receipt. The facts of the above issue are identical to Ground No.
1 for AY 2007-08 of the Revenue’s appeal. This ground has been
extensively dealt with above while dealing with the Revenue’s appeal for
AY 2007-08 in ITA No. 568/Jp/2012 and in the light of our findings
recorded therein, we hold that the subsidy received by the assessee is
capital receipt and this Ground of the department is accordingly
dismissed.
43. Ground No. 2 of the Revenue relates to the relief granted by
CIT(Appeals) on account of expenditure incurred on gifts following the
decision of Tribunal in assessee’s own case for earlier year. We have
http://www.itatonline.org
39
already held while dealing with the assessee’s appeal, that relief granted
and disallowance confirmed by the CIT(Appeals) on account of
expenditure incurred on gifts is a reasoned one. Accordingly, this ground
of the Revenue is dismissed.
44. Ground No. 3 is on account of deletion of disallowance of Sales
Tax incentive as capital receipt in Book Profit computation u/s 115JB of
the Act. This issue is also covered in favour of the Assessee vide the order
of the Hon’ble ITAT dated 9th
Sept. 2011 for AY 2004-05, 2005-06 and
2006-07 in Appellant’s own case in ITA No. 614, 615 and 635/Jp/2010.
Hon’ble Tribunal in the said case have held that capital receipt in the form
of Sales tax Subsidy, needs to be excluded in computation of Book Profit.
Relying upon the above orders of ITAT in assessee’s own case, this
ground of the department is dismissed.
45. Now we take up Assessee’s appeals for AY 2009-10 in ITA No.
505/JP/2012.
46. Ground No. 1 & 2 are on deduction u/s 80IA and substantively
similar to corresponding Grounds for AY 2007-08 & 2008-09. The AR
for the assessee submitted that since in the relevant previous year,
transaction values from Power Exchange (IEX) were available from June
28, 2008 onwards, the assessee has adopted (a) for the period up to June
27, ‘08, the market value in relation to independent third party
http://www.itatonline.org
40
transactions as in earlier years and (b) for the period from June 28, ‘08 to
March 31, 2009, IEX market price for power sale in N2 region which
includes the State of Rajasthan. In the assessment order, the AO has
accepted the assessee’s basis upto June 27 ’08 as per (a) above. However,
for the period from June 28, ’08 to August 29,’08 he has adopted IEX
market value for power sold on the Power Exchange [by adopting all
India Rate instead of N2 region rate applicable to Rajasthan where
Assessee’s Unit is located] and for the subsequent period, the AO has
adopted rate at which power is sold by the assessee’s Power Unit to third
parties, when not required by its Cement Unit. We have extensively dealt
with the dispute on adaptation of market value for power captively
consumed in Para 2 to 14 above while dealing with Assessee’s Appeal for
AY 2007-08 in ITA No. 503/JP/12 and in the light of our findings and
decision recorded in Para 13 above, we hold that the disallowance in this
year also needs to be deleted. Assessee’s Grounds are therefore allowed
and corresponding disallowance u/s 80IA is deleted.
47. Ground No. 3 of the assessee relates to disallowance of telephone
expenses of Rs. 1,00,000/- confirmed by CIT(Appeals). The facts of this
issue are exactly similar to the facts as discussed in AY 2007-08.
Accordingly, with the help of the reasonings given in earlier year, we set
aside this ground to the file of the AO to verify the same after providing
http://www.itatonline.org
41
opportunity to the assessee. This ground of the assessee is therefore
allowed for the statistical purposes only.
48. Ground No. 4 & 5 of the assessee related to disallowance of
receipts from Carbon Credit as revenue receipt. Facts of this issue is
identical to Ground No. 5 & 6 for AY 2008-09. This grounds have been
extensively dealt with while dealing with Assessee’s appeal for AY
2008-09 in ITA No. 504/Jp/2012. With the help of the reasonings given
for AY 2008-09, we hold that the receipts are capital in nature.
Asseessee’s grounds are therefore allowed and corresponding addition is
deleted.
49. Ground No. 6 of the assessee relates to disallowance of telephone
expenses of Rs. 2,00,000/- in computing book profit. The facts are that
the A.O. made disallowance on account of telephone expenses both
under normal provisions as well as in computing Book Profit under MAT
without assigning any reason. CIT(Appeals) held that as the same is
disallowable under normal provisions and the A.O. is justified in making
disallowance under MAT as well. The AR of the assessee pointed out
that while computing Book Profit no adjustment can be made apart from
those specified in Explanation to Sec 115JB of the Act. Since telephone
expenses are not specified, such disallowance is not permissible in
computing Book Profit u/s 115JB of the Act. We agree with the view of
http://www.itatonline.org
42
the Learned AR and hold that disallowance of telephone expenses needs
to be deleted in Book Profit u/s 115JB of the Act. Accordingly, this
ground of the assessee is allowed.
50. Ground No. 7 is on account of disallowance of carbon credit in
computing Book Profit u/s 115JB of the Act. This ground has been
extensively dealt with while dealing with Assessee’s appeal for AY
2008-09 in ITA No. 504/Jp/2012. With the help of the reasonings given
for AY 2008-09, we hold that the receipts on account of Carbon Credit
are capital in nature devoid of any profit element and are to be excluded
in computing Book Profit u/s 115JB. The AO is accordingly directed to
delete the addition made on account of Carbon Credit in computing Book
Profit u/s 115JB of the Act. Accordingly, this ground of the assessee is
allowed.
51. Now, we take up the Revenue’s appeal for AY 2009-10.
52. Ground No. 1 & 2 are on account of treatment of sales tax
subsidy as capital receipt and also excluding the same in computing
Book Profit u/s 115JB of the Act. The above grounds are identical as
per Ground 1 & 3 for AY 2008-09 in ITA No. 569/Jp/2012. Following
our decision in said year, these grounds of the department are
dismissed.
http://www.itatonline.org
43
53. In the result, the assessee’s appeals for AY 2007-08, 2008-09 &
2009-10 vide ITA No. 503/JP/2012, 504/JP/2012 & 505/JP/2012 are
partly allowed and partly allowed for statistical purposes and departmental
appeals vide ITA No. 568/JP/2012, 569/JP/2012 & 570/JP/2012 are
dismissed.
Order Pronounced in the open Court on 27- 01-2014
Sd/- Sd/-
(N.K. SAINI) (HARI OM MARATHA)
ACCOUNTANT MEMEBR JUDICIAL MEMBER
Jaipur
Dated: 27th JAN 2014
Copy forwarded to:-
1.M/s. Shree Cement Ltd., Beawar
2. The Addl. CIT, Range-2, Jaipur / ACIT, Circle- 2, Jaipur
3. The ld. CIT(A)
4. The ld. CIT By Order 5. The ld. DR
6. The Guard File (ITA Nos. 503/JP/2012
ITAT, Jaipur
http://www.itatonline.org