2023 (7) TMI 1571 - AT - Income Tax

Revision u/s 263 - assessee has shown Sale of Fly Ash / Fly Ash Product and transferred the total amount to the Fly Ash Utilization Fund without considering the same as income - HELD THAT - We find that the amount collected from sale of fly ash and fly ash based products by coal and/or lignite based thermal power stations or their subsidiary or sister concern units as applicable should be kept in a separate account head and shall be utilized only for development of infrastructure or facilities promotion and facilitation activities for use of fly ash until 100 percent fly ash utilization level is achieved; thereafter as long as 100% fly ash utilization levels are maintained the thermal power station would be free to utilize the amount collected for other development programmes also and in case there is a reduction in the fly ash utilization levels in the subsequent year(s) the use of financial return from fly ash shall get restricted to development of infrastructure or facilities and promotion or facilitation activities for fly ash utilization until 100 percent fly ash utilization level is again achieved and maintained. In view of the notification of the Government and the fly ash fund transferred to NTPC Ltd. we hold that no addition is called for on this account. Hence the order of the ld. PCIT passed u/s 263 cannot be upheld. Appeal of the assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether the Assessing Officer's order under section 143(3) of the Income Tax Act, 1961, for the assessment year 2015-16 is erroneous and prejudicial to the interest of the revenue for not including income from sale of fly ash and cenosphere in the taxable income of the assessee.

- Whether the amounts collected from sale of fly ash and fly ash-based products, credited to a separate Fly Ash Utilization Fund as per the Ministry of Environment and Forests (MoEF) notification dated 3rd November 2009, constitute taxable income under the Income Tax Act, or are excluded from income by virtue of the said notification and related environmental law provisions.

- Whether the overriding effect of the Environment (Protection) Act, 1986 and the MoEF notification can exclude the sale proceeds of fly ash from the tax net despite the provisions of the Income Tax Act.

- Whether the Principal Commissioner of Income Tax (PCIT) was justified in invoking section 263 of the Income Tax Act to revise the assessment order on the ground that the AO failed to verify income from fly ash sales.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Whether the AO's assessment order is erroneous and prejudicial to revenue for not including income from sale of fly ash and cenosphere

Relevant legal framework and precedents: Section 263 of the Income Tax Act empowers the PCIT to revise an assessment order if it is found to be erroneous and prejudicial to the interests of the revenue. Explanation 2 to section 263 clarifies that an order is deemed erroneous if it is passed without making necessary inquiries or verification.

Court's interpretation and reasoning: The PCIT observed that the AO failed to verify the income from sale of fly ash and cenosphere amounting to Rs. 87.42 crores and the related expenditure of Rs. 45.26 crores, resulting in under-assessment of Rs. 42.16 crores. The PCIT held that the AO should have brought this net amount to tax and that failure to do so rendered the assessment order erroneous and prejudicial to revenue.

Key evidence and findings: The balance sheet and audit notes showed the sale proceeds credited to a Fly Ash Utilization Fund. The AO did not treat these proceeds as income but the PCIT found this treatment incorrect.

Application of law to facts: The PCIT applied section 263 and concluded that the AO's failure to examine and tax the net sale proceeds was an error prejudicial to revenue.

Treatment of competing arguments: The assessee argued that the proceeds were not income but a statutory fund held in trust for specific environmental purposes, hence not taxable. The PCIT rejected this, emphasizing the Income Tax Act's primacy over the environmental notification for tax matters.

Conclusion: The PCIT held the assessment order erroneous and directed reassessment.

Issue 2: Whether the sale proceeds of fly ash credited to a separate fund under MoEF notification are taxable income

Relevant legal framework and precedents: The MoEF notification dated 3rd November 2009 under the Environment (Protection) Act, 1986 mandates that amounts collected from sale of fly ash be kept in a separate account and utilized solely for development of infrastructure or promotion of fly ash utilization until 100% utilization is achieved. The Income Tax Act, 1961 governs taxation of income.

Court's interpretation and reasoning: The assessee contended that the notification creates a fiduciary obligation to hold the proceeds in trust, not as income, and thus the amounts are not taxable. The notification restricts the use of proceeds, implying the amounts do not belong to the assessee as income.

The Court examined the notification and acknowledged its environmental regulatory purpose but held that it does not override the express provisions of the Income Tax Act. The mere creation of a separate fund and transfer of proceeds thereto does not negate the fact that the sale proceeds constitute income under the Income Tax Act.

Key evidence and findings: The audited accounts showed the Fly Ash Utilization Fund with receipts and expenditures related to fly ash. The fund was transferred to the holding company NTPC Ltd. The assessee's submissions emphasized the statutory nature of the fund and its restricted use.

Application of law to facts: The Court noted that environmental regulations govern utilization of proceeds but do not exempt the amounts from income tax. The Income Tax Act's charging provisions prevail over the environmental notification for taxation purposes.

Treatment of competing arguments: The assessee's argument of overriding effect of the Environment (Protection) Act was rejected as the notification does not explicitly exempt income tax liability. The PCIT and the Tribunal emphasized that tax laws must be complied with notwithstanding environmental regulations.

Conclusion: The amounts received from sale of fly ash are taxable income, notwithstanding the environmental notification.

Issue 3: Whether the invocation of section 263 by the PCIT was justified

Relevant legal framework and precedents: Section 263 permits revision of assessment orders if they are erroneous and prejudicial to revenue. The explanation to section 263 requires that the order be passed without proper inquiry or verification.

Court's interpretation and reasoning: The PCIT found that the AO failed to inquire into the sale proceeds of fly ash and cenosphere and did not bring the net income to tax. This failure constituted a lack of proper verification.

Key evidence and findings: The AO's order did not address the fly ash sale proceeds as income. The PCIT issued a show cause notice and after considering the assessee's submissions, held the order erroneous.

Application of law to facts: The Tribunal examined the facts and the submissions and found that the PCIT's invocation of section 263 was based on a valid premise that the AO did not properly examine the income from fly ash sales.

Treatment of competing arguments: The assessee argued that the PCIT's order was not sustainable as the amounts were not income. The Tribunal, however, relying on the Income Tax Act's provisions, held that the PCIT's action was justified.

Conclusion: The PCIT was justified in invoking section 263 to direct reassessment.

Issue 4: Whether the final treatment of the Fly Ash Utilization Fund and transfer to NTPC Ltd. affects taxability

Relevant legal framework and precedents: The fund created is a separate accounting head for utilization of fly ash sale proceeds. The transfer of the fund to the holding company NTPC Ltd. is a management decision.

Court's interpretation and reasoning: The Tribunal noted that the transfer of the fund to NTPC Ltd. does not alter the taxability of the underlying income. The sale proceeds remain income of the assessee until properly accounted for or exempted by law.

Key evidence and findings: The accounts showed the fund balance and its transfer to NTPC Ltd. The Tribunal observed that the fund's utilization is governed by the MoEF notification but taxability is governed by the Income Tax Act.

Application of law to facts: The transfer of fund does not negate the income recognition principle under tax law.

Treatment of competing arguments: The assessee argued that the transfer and fund nature exclude the income from tax. The Tribunal rejected this, emphasizing tax law's primacy.

Conclusion: The transfer of the fund does not exempt the income from tax.

3. SIGNIFICANT HOLDINGS

- "On examination of the gazette notification dated 3rd November, 2009 issued by MoEF, it is seen that the said notification is only about utilization of receipts from fly ash sale and it does not infringe upon the taxation issue related to income from sale of fly ash. Further, the above gazette notification cannot prevail over the express provisions of the Income Tax Act, 1961."

- "Merely making a separate fund and transferring it in liabilities on Balance Sheet, does not necessitate an income not to be recognized and to have no tax implication on it."

- "The assessment order passed by the ACIT is erroneous and prejudicial to the interest of the revenue and hence directed the AO to make proper verification of the issue."

- "The amount collected from sale of fly ash and fly ash based products by coal and/or lignite based thermal power stations or their subsidiary or sister concern units, as applicable should be kept in a separate account head and shall be utilized only for development of infrastructure or facilities, promotion and facilitation activities for use of fly ash until 100 percent fly ash utilization level is achieved; thereafter as long as 100% fly ash utilization levels are maintained, the thermal power station would be free to utilize the amount collected for other development programmes also."

- "In view of the notification of the Government and the fly ash fund transferred to NTPC Ltd., we hold that no addition is called for on this account. Hence, the order of the ld. PCIT passed u/s 263 cannot be upheld."

Core principles established:

- Environmental regulatory notifications directing the creation and utilization of specific funds do not override the Income Tax Act's provisions regarding income recognition and taxation.

- The creation of a separate fund and restricted utilization of sale proceeds does not exempt such proceeds from being treated as income for tax purposes.

- The Assessing Officer is required to verify and bring to tax all income, including income from sale of by-products such as fly ash, unless exempted by law.

- The Principal Commissioner's power under section 263 to revise an assessment order is justified where the AO fails to make necessary inquiries or verification.

Final determinations on each issue:

- The AO's assessment order was erroneous and prejudicial to revenue for not including net income from fly ash sales.

- The sale proceeds of fly ash credited to the Fly Ash Utilization Fund are taxable income under the Income Tax Act.

- The environmental notification does not exempt such income from taxation.

- The PCIT was justified in invoking section 263 to direct reassessment.

- However, on appeal, considering the facts and the transfer of the fly ash fund to the holding company and the regulatory framework, the Tribunal held that no addition on account of fly ash sales is called for and set aside the PCIT's order invoking section 263, allowing the assessee's appeal.