2014 (7) TMI 1295 - AT - Income Tax

Character of the expenditure - Revenue or capital expenditure - payment for executing export commitment spanning over a period of 10 years - assessee company instead of creating the facilities in its own premises, selected M/s. Cibi International to shoulder the responsibility of the production of knitted garments utilizing their facilities and to improve the facilities - HELD THAT - A clear nexus is apparent between the payment of ₹ 650 lakhs to M/s. Cibi International and the business interests of the assessee company. Therefore, it is clear that the assessee company has made the payment to M/s. Cibi International on the basis of the business agreement for the purpose of carrying on of its business more effectively and more economically. In such circumstances, it is not possible to hold that the assessee has acquired an enduring benefit by creating new capital asset by making payment to M/s. Cibi International. In fact, the assessee has made the payment to M/s. Cibi International for the purpose of executing its export commitment spanning over a period of 10 years. The expenditure is, therefore, incurred for running the business and not for creating the facilities to run the business. Therefore, we find that the payment made by the assessee company is an expenditure allowable under sec.37 of the Act. - Decided in favour of assessee. Deduction under sec.80IA - exclusion of receipts from trading of carbon credit and insurance claim while computing the deduction - HELD THAT - We are bound to follow the judgment of CIT vs. M/s. My Home Power Ltd. 2014 (6) TMI 82 - ANDHRA PRADESH HIGH COURT to hold that the receipts in the hands of the assessee generated out of sale of excess carbon credit are in the nature of capital receipts and, therefore, not includible in the computation of taxable income. Once the entire receipts are excluded from the computation of income itself, there is no question of any separate argument of sec.80IA deduction. As far as carbon credit receipt is concerned, the issue is decided in favour of the assessee. Therefore, the Assessing Officer is directed to exclude the carbon credit receipts from the computation of assessee s income. Quantum of deduction u/s 80IA - Initial assessment year in which the assessee claimed deduction under sec.80IA - Whether depreciation of earlier years (which already have been absorbed) cannot be notionally carried forward and considered in computing the quantum of deduction under sec.80IA? - HELD TJAT - This issue is already covered by the judgment of CIT v. Velayuthasamy Spinning Mills 2010 (3) TMI 860 - MADRAS HIGH COURT . As the Revenue has filed an SLP before the Hon ble Supreme Court, the Revenue is free to keep such issues alive and file appeals before the appropriate court. But as on today, the issue is covered by the decision of the Hon ble jurisdictional High Court, we find that the order of the Commissioner of Income-tax(Appeals) is just and proper in law - Decided against revenue

Summary

Issues Involved:
1. Disallowance of the claim of Rs. 650 lakhs paid by the assessee to M/s. Cibi International.
2. Exclusion of receipts from trading of carbon credit and insurance claim while computing the deduction under sec.80IA.
3. Determination of the initial assessment year for sec.80IA deduction and the treatment of depreciation of earlier years.

Issue-wise Detailed Analysis:

1. Disallowance of the Claim of Rs. 650 Lakhs Paid by the Assessee to M/s. Cibi International:
The assessee contended that the payment of Rs. 650 lakhs to M/s. Cibi International was made under a business agreement to ensure the necessary operational facilities for fulfilling a substantial export order. The Assessing Officer disallowed the deduction, asserting that the payment resulted in an enduring benefit and was thus capital in nature. The Commissioner of Income-tax (Appeals) upheld this view, stating that a new capital asset was created for the exclusive use of the assessee. However, upon review, it was determined that the facilities were created at M/s. Cibi International's premises, not the assessee's, and the payment was made to carry on the business more effectively and economically. The Tribunal concluded that the payment was a business expenditure allowable under sec.37 of the Act and directed the deletion of the addition of Rs. 650 lakhs.

2. Exclusion of Receipts from Trading of Carbon Credit and Insurance Claim While Computing the Deduction Under Sec.80IA:
The assessee argued that receipts from trading carbon credits should be excluded from taxable income. The Hon'ble Andhra Pradesh High Court in CIT vs. M/s. My Home Power Ltd. held that income from the sale of excess carbon credits is a capital receipt and not business income. Following this precedent, the Tribunal directed the exclusion of carbon credit receipts from the computation of the assessee's income. Regarding the insurance claim, the assessee did not press the issue, and it was thus rejected.

3. Determination of the Initial Assessment Year for Sec.80IA Deduction and Treatment of Depreciation of Earlier Years:
The Revenue challenged the Commissioner's decision that the initial assessment year for sec.80IA deduction was 2005-06 and that depreciation of earlier years should not be notionally carried forward. This issue was addressed by the Hon'ble Madras High Court in CIT v. Velayuthasamy Spinning Mills, which supported the assessee's position. The Tribunal upheld the Commissioner's order, noting that the Revenue could keep the issue alive through appeals but must adhere to the current jurisdictional High Court ruling.

Conclusion:
The appeal filed by the assessee was partly allowed, with the Tribunal directing the deletion of the Rs. 650 lakhs addition and exclusion of carbon credit receipts from income computation. The appeal filed by the Revenue was dismissed, affirming the initial assessment year and treatment of depreciation as determined by the Commissioner of Income-tax (Appeals).