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2016 (5) TMI 793 - HC - Income TaxSale of carbon credits - revenue or capital receipt - Tribunal quashing the order under Section 263 - whether he consideration received from the sale of carbon credits is not derived from the eligible business undertakings? - Held that - In the case of Commissioner of Income Tax v. Maheshwari Devi Jute Mills Ltd. 1965 (4) TMI 10 - SUPREME Court , wherein the question came up for consideration before the Apex Court as to whether by sale of loom-hours, the amount received could be termed as capital receipt or the income out of business. In the said decision, the Apex Court held that the amount received out of sale of loom-hours can be termed as capital receipt and not income out of business. When the carbon credit is generated out of environmental concerns, and it is not having the character of trading activity, the Tribunal has rightly held that it is capital receipt and it is not income out of business and hence, not liable to pay income tax. Once it is found that the amount realized by sale of carbon credit is not taxable as profit, naturally it will have no adverse effect on the Revenue. It is settled legal position that one of the requirements for exercise of power under Section 263 of the Act, is that the order passed by the lower authority should not only be erroneous, but should also be prejudicial to the interest of the Revenue, which is lacking in the present case and rightly found so by the Tribunal. No substantial question of law - Decided against revenue
Issues Involved:
1. Justification of the Tribunal in quashing the order under Section 263 of the Income Tax Act. 2. Nature of sale proceeds of carbon credits as capital or revenue. 3. Reliance on the judgment passed by the jurisdictional High Court in CIT v. D.G. Gopala Gowda and its impact on the case. Detailed Analysis: Issue 1: Justification of the Tribunal in Quashing the Order under Section 263 The Tribunal quashed the order under Section 263 of the Income Tax Act, emphasizing that both conditions for invoking Section 263 must be fulfilled: the order must be erroneous and prejudicial to the interest of the Revenue. The Tribunal referenced the broader tests from the case of M/s Khatiza S. Oomerbhoy Vs. ITO, Mumbai, which include: - The necessity for the CIT to record satisfaction that the AO's order is erroneous and prejudicial. - Section 263 cannot correct every mistake but only those that are erroneous and prejudicial. - An incorrect assumption of facts or law suffices for the order to be erroneous. - Orders passed without application of mind fall under erroneous orders. - Not every loss of revenue is prejudicial if the AO adopts a permissible course under the law. - The CIT cannot substitute his estimate of income for that of the AO if the AO has exercised quasi-judicial power in accordance with the law. - The CIT must have material on record for satisfaction. - If the AO has made inquiries and is satisfied with the assessee's explanation, the decision cannot be termed erroneous. The Tribunal also relied on the High Court's decision in CIT v. D.G. Gopala Gowda, which upheld that even if an order is erroneous, it must also be prejudicial to the interest of the Revenue for Section 263 to be invoked. Issue 2: Nature of Sale Proceeds of Carbon Credits The Tribunal treated the sale proceeds of carbon credits as capital in nature. The ITAT Hyderabad and subsequently the Andhra Pradesh High Court held that carbon credits are an entitlement received to improve the environment and are not generated from business activities. They are considered capital receipts, not taxable as revenue receipts. The Tribunal referenced the case of CIT vs. Maheshwari Devi Jute Mills Ltd., where the Supreme Court held that transfer of surplus loom hours was a capital receipt. Similarly, the Andhra Pradesh High Court in Commissioner of Income Tax-IV v. My Home Power Ltd. affirmed that carbon credits are not an offshoot of business but of environmental concerns, thus constituting capital receipts. The Tribunal also noted that the sale of carbon credits does not increase profit from business activities and does not involve any cost of acquisition or production, further supporting the classification as capital receipts. Issue 3: Reliance on Judgment in CIT v. D.G. Gopala Gowda The Tribunal relied on the judgment in CIT v. D.G. Gopala Gowda, which established that for Section 263 to be invoked, the order must be both erroneous and prejudicial to the Revenue. The Tribunal found that even if the assessment order was erroneous, it did not result in any tax liability, making it revenue neutral and not prejudicial to the interest of the Revenue. This reliance was justified as it demonstrated that the conditions for invoking Section 263 were not met, thereby supporting the Tribunal's decision to quash the order. Conclusion The High Court dismissed the appeal, affirming the Tribunal's decision. It concluded that the sale of carbon credits is a capital receipt arising from environmental concerns, not business activities, and thus not taxable. The Tribunal's reliance on previous judgments and its detailed analysis of Section 263's conditions were upheld, leading to the dismissal of the appeal as meritless.
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