2018 (5) TMI 1902 - AT - Income Tax

Carbon Credit receipt - characterization of income - revenue or capital receipt - HELD THAT - This issue is squarely covered in favour of the assessee by decision of Hon ble Jurisdictional High Court of Gujarat in the case of Pr.CIT vs. Kalpataru Power Transmission Ltd 2017 (3) TMI 392 - GUJARAT HIGH COURT we find that the assessee has neither received the Carbon Credit during the year and nor accounted for on the basis of accrual however the same is in the nature of Capital Receipts therefore respectfully following the ratio laid down in the above decision by Hon ble Jurisdictional High Court the addition made to be deleted - Decided in favour of assessee. Nature of expenditure - expenses of consumption and replacement of stores and spares - revenue or capital expenditure - HELD THAT - As considered the facts and perused material available on record and found that the AO has accepted this issue in its setaside assessment order for A.Y. 1999-2000 passed u/s.143(3) read with section 250. Since the revenue has accepted this issue in the set-aside assessment proceedings therefore we do not find any infirmity in the order of CIT(A). Accordingly this ground of Revenue is dismissed. Disallowance on account of depreciation claimed on assets given on lease under mere financial arrangement by assessee who was not engaged in the leasing business - HELD THAT - We held that it is an operative lease and not a financial lease hence the disallowance based on the same lease agreement are allowable as deduction. Further the AO has allowed the depreciation claimed by the assessee. Hence following the decision of ITAT for A.Y 2008-09 2017 (5) TMI 1686 - ITAT AHMEDABAD the order of the CIT(A) is upheld accordingly this ground of Revenue is dismissed. Additional depreciation claim u/s.32(1)(iia) on wind mill - AO has disallowed the claim of the additional depreciation on the ground that wind mill does not produce article or thing but generates electricity whereas the provisions of section 32 (1)(iia) requires that the assessee should produce article or thing - HELD THAT - It is now a settled position as held by the Hon ble Supreme Court in the case of CST Madhya Pradesh Indore vs. Madhya Pradesh Electricity Board Jabalpur 1968 (11) TMI 85 - SUPREME COURT and Diamines and Chemicals Ltd. 2013 (12) TMI 373 - GUJARAT HIGH COURT that the process of generation of electricity is akin to manufacture of an article or thing the assessee in the instant case satisfy the requirement that it is engaged in the business of manufacture or production of an article or thing. In light of above the assessee is held entitled to the additional claim of depreciation on the power plant and the windmill installed during the year. Hence we do not find any infirmity in the order of CIT(A) hence this ground of the Revenue is dismissed. Disallowance on account of expenditure claimed towards donation on the ground of corporate social responsibility in contravention to section 37(1) - expenditure not expended wholly and exclusively for the purpose of business or profession - HELD THAT - We find that the expenditure has been incurred on account of various relief materials like food items kerosene blankets etc. to the flood affected people of Bihar. Therefore this expenditure has been incurred on behest of the State Government of Gujarat as the assessee is a public undertaking of Gujarat Government. The assessee is conscious of its corporate social responsibility and makes contributions in the ordinary course of its business towards socially useful activities and in view of very nature the expenditure incurred for corporate social responsibility is allowable as business expenditure as it was incurred for making the image of the company and towards its social responsibility reliance placed on the decision of Apex Court in the case of Shri Venkata Satyanarayana Rice Mills Contractors Co. vs. CIT 1996 (10) TMI 2 - SUPREME COURT wherein contribution to the public welfare fund at the instance of the Government Authorities was allowed as the deduction on the ground that it was motivated by commercial contribution. Disallowance of loss on fertilizer bonds being received in lieu of subsidy which was invested by assessee to earn interest income - HELD THAT - Loss on allotment of fertilizers bond as incurred on account of difference between market value as on the date of allotment and face value of the bond. Therefore the assessee in fact has received subsidy amount of face value of bonds but the market value of bonds on the date of allotment/receipt of subsidy in the form of bond. Hence the contention of the AO that it is notional loss is not correct. Further we find that in A.Y. 2008-09 the AO has already allowed the loss of 7, 71, 16, 280/- incurred on allotment of 8.30% and 7.95% bond as business loss or revenue loss. Therefore the actual loss of 18, 62, 04, 574/- is allowable as business loss. With regard to loss of 37, 77, 73, 348/- is concerned the bonds are received in lieu of subsidy which was the additional sale price received from Government of India. The appellant company had offered to tax the subsidy accordingly as part of the sale price therefore the realisation to additional sale price by way of subsidy in the form of fertilizer bonds does not make bond an investment because the bonds were never acquired by the assessee as investment for capital but as debt and also shown as current assets. Accordingly the loss offered on allotment of bonds and actual sale of the bonds cannot be considered as capital loss but has to be allowed as business loss u/s. 28 read with section 37 of the Act Disallowance on account of depreciation of goodwill by wrongly applying Apex Court s decision when in fact no goodwill was created on account of merger of NCPA - HELD THAT - This issue regarding depreciation of goodwill was claimed to have been covered by the order of Tribunal in assessee s own case for A.Y. 2007-08. However the same by way of additional ground which was admitted and the issue was restored to the file of the CIT(A). Similarly this ground was also restored to the file of the CIT(A) TDS u/s 194H - disallowance of dealers sales made to them - AO has treated the discount as commission which ought to have been subjected to TDS and therefore disallowed u/s.40(a)(ia) - HELD THAT - the copy of purchase register from the books is also placed thus the consistent method of conducting transaction and accounting thereof established that the sales and purchase transactions are between the assessee company and dealer is on principle to principle basis. This is the trade of the assessee company which they follow from so many years therefore the sales are made to dealers is of principle to principle basis. Hence goods is transferred to dealers upon its sales and dealer is the debtor of the company for all practical purposes dealer is liable to pay sale consideration to the assessee irrespective of he receives payment from customers or not. Therefore the CIT(A) has rightly held that the this is not a commission payment to the dealers which is also supported by the decision of Ahmedabad Stamp Vendors Association 2002 (6) TMI 32 - GUJARAT HIGH COURT

Summary

Issues Involved:
1. Taxability of Carbon Credit as Revenue Income
2. Disallowance of Revenue Expenditure on Stores and Spares
3. Disallowance of Depreciation on Assets Given on Lease
4. Disallowance of Additional Depreciation on Windmill
5. Disallowance of Expenditure on Corporate Social Responsibility
6. Disallowance of Loss on Fertilizer Bonds
7. Disallowance of Depreciation on Goodwill
8. Disallowance of Discount to Dealers as Commission

Issue-wise Detailed Analysis:

1. Taxability of Carbon Credit as Revenue Income:
The assessee argued that the Carbon Credit income of ?5,10,73,986/- should be treated as capital receipt and not taxable. The Assessing Officer (AO) disagreed, treating it as revenue receipt, noting that the income was credited in the Profit and Loss Account. The CIT(A) upheld the AO's view, but the Tribunal, referencing the Gujarat High Court's decision in Pr.CIT vs. Kalpataru Power Transmission Ltd., concluded that Carbon Credit income is capital in nature and thus not taxable. The appeal on this ground was allowed in favor of the assessee.

2. Disallowance of Revenue Expenditure on Stores and Spares:
The AO disallowed ?2,55,82,153/- of expenses on stores and spares, treating them as capital expenditure. The CIT(A) deleted this disallowance, noting that similar expenses were treated as revenue expenditure in earlier years. The Tribunal upheld the CIT(A)'s decision, referencing past acceptance of such expenses as revenue expenditure by the AO.

3. Disallowance of Depreciation on Assets Given on Lease:
The AO disallowed depreciation on leased assets, treating the lease as a financial arrangement. The CIT(A) and the Tribunal, referencing earlier decisions and the Gujarat High Court's affirmation, concluded that the lease was operational, allowing the depreciation claim.

4. Disallowance of Additional Depreciation on Windmill:
The AO disallowed additional depreciation on windmills, arguing they do not produce articles or things. The CIT(A) allowed the claim, referencing the Gujarat High Court's decision in Diamines and Chemicals Ltd. and the Madras High Court's decision in CIT vs. VTM Ltd., which considered electricity generation as manufacturing. The Tribunal upheld this view, allowing the additional depreciation.

5. Disallowance of Expenditure on Corporate Social Responsibility:
The AO disallowed ?39,00,000/- spent on flood relief kits, arguing it was not for business purposes. The CIT(A) allowed the expenditure, referencing similar allowances in past cases and the Gujarat High Court's decision. The Tribunal upheld this decision, recognizing the expenditure as part of the company's corporate social responsibility and thus allowable.

6. Disallowance of Loss on Fertilizer Bonds:
The AO treated the loss on fertilizer bonds as capital loss. The CIT(A) allowed the loss as business loss, noting the bonds were received as subsidy and not investment. The Tribunal upheld this, referencing the Supreme Court's decision in Patnaik & Co. Ltd. and the ITAT's decision in Gujarat State Fertilizers and Chemicals Ltd., recognizing the loss as business loss.

7. Disallowance of Depreciation on Goodwill:
The AO disallowed depreciation on goodwill arising from a merger. The CIT(A) allowed the depreciation, referencing the Supreme Court's decision in CIT vs. Smifs Securities Ltd., which recognized goodwill as a depreciable asset. The Tribunal restored the issue to the CIT(A) for re-examination in light of this decision.

8. Disallowance of Discount to Dealers as Commission:
The AO treated discounts to dealers as commission, requiring TDS. The CIT(A) held the transactions were on a principal-to-principal basis, not requiring TDS. The Tribunal upheld this, referencing the Gujarat High Court's decision in Ahmedabad Stamp Vendors Association vs. Union of India, recognizing the discounts as not commission.

Conclusion:
The Tribunal allowed the appeal of the assessee on several grounds, recognizing various expenses and losses as business-related and thus allowable. The Revenue's appeal was partly allowed, with some issues remanded for further examination. The detailed analysis and references to past judicial decisions played a crucial role in the Tribunal's conclusions.