2017 (8) TMI 1337 - HC - Income Tax

Sales tax subsidy received by the assessee in the form of sales tax exemption not to be included in book profit u/s 115JB - nature of receipt - MAT computation - Held that - Sales tax subsidy received is nothing but capital investment by investing huge amount. See Commissioner of Income Tax Ajmer, New Central Revenue Building, Statue Circle, Jaipur (Raj) Versus Shri Cement Ltd - 2017 (8) TMI 1336 - RAJASTHAN HIGH COURT . Eligibility to benefit under Section 80IA for the value of the goods or services - Held that - a) the value adopted by the Assessee 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 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 . Accordingly, we delete the disallowance on account of deduction u/s 80IA - Decided in favor of the assessee Sale proceeds received by the company from the sale of Certified Emission Reduction (CER) pertaining to Carbon Credit - revenue or capital receipt - 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 (2012 (1) TMI 52 - SUPREME COURT OF INDIA) 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 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. This ground of the assessee is allowed

Summary

Issues Involved:
1. Sales tax subsidy inclusion in book profit under Section 115JB.
2. Determination of market value for the purpose of Section 80IA(8).
3. Taxability of sale proceeds from Certified Emission Reduction (CER) as capital receipt.

Issue-wise Detailed Analysis:

Issue 1: Sales Tax Subsidy Inclusion in Book Profit under Section 115JB
The first issue pertains to whether the sales tax subsidy received by the assessee should be included in the book profit under Section 115JB. This issue was already decided in favor of the assessee in a previous case (D.B. I.T.A. No.204/2010). Consequently, the court upheld that the sales tax subsidy should not be included in the book profit under Section 115JB, as the subsidy was intended to enhance production, employment, and sales in Rajasthan, which are post-operational activities.

Issue 2: Determination of Market Value for the Purpose of Section 80IA(8)
The second issue concerns the determination of the market value of goods or services for the purpose of Section 80IA(8). The Tribunal had reversed the findings of the CIT(A) and allowed the assessee's claim, which was contested by the department. The court noted that the assessee had adopted a market value based on independent third-party transactions and power exchange rates, which fulfilled the conditions of an open market price. The Tribunal found that the value adopted by the assessee was a market value within the meaning of Section 80IA(8), and the department could not substitute it with another value unless the adopted value did not correspond to the market value. The court upheld the Tribunal's decision, stating that the assessee’s choice of market value, if fulfilling the statutory conditions, could not be rejected by the revenue.

Issue 3: Taxability of Sale Proceeds from Certified Emission Reduction (CER) as Capital Receipt
The third issue was whether the sale proceeds from CERs should be treated as capital receipts and thus not taxable under the head of "business income" or "capital gains." The Tribunal had concluded that the receipts from Carbon credits are capital in nature, supported by the decision in My Home Power Ltd. Vs. DCIT and other similar cases. The court agreed with the Tribunal, referencing the Supreme Court’s decision in Vodafone International Holdings Vs. UOI, which indicated that the treatment of items under different tax laws serves as an important guide in determining taxability. Since the Direct Tax Code (DTC) specifically provides for the taxability of carbon credits as business receipts, and the Income Tax Act does not, the court upheld that the sale proceeds from CERs are capital receipts and not taxable under the Income Tax Act.

Conclusion:
The court dismissed the appeal, answering all issues in favor of the assessee and against the department. The sales tax subsidy should not be included in book profit under Section 115JB, the market value for Section 80IA(8) should be determined based on the assessee's choice if it meets statutory conditions, and the sale proceeds from CERs are capital receipts not taxable under the Income Tax Act.