2024 (12) TMI 1053 - AT - Income Tax

Characterization/Nature of receipt - Sales Tax/ VAT subsidy received by the assessee - revenue or capital receipt - as argued subsidy received by the assessee is purely linked to production of goods and not to capital expenditure undertaken by the assessee - HELD THAT - Tribunal in 2021 (1) TMI 732 - ITAT MUMBAI for AYs 2012-13 2011-12 held that subsidy received by the assessee under the new package scheme incentive of 1993, was solely for the purpose of setting up of SSI unit in the backward area for which it has received special capital incentive computed on the basis of fixed capital investment actually made by the assessee and, therefore, the same is capital in nature and hence, not taxable. Thus, the finding and conclusion given by the Commissioner (Appeals) is upheld and, accordingly, ground no.1, raised by the Revenue is dismissed. Income from sale of carbon credit should be treated as capital in nature therefore not liable to tax. Decided in favour of assessee. Deduction u/s 80IA certified in Form 10B in respect of rail system developed, operated and maintained by the assessee - The undisputed fact is that, if the assessee had not transported its goods through Railways then, it had to transport the same by road thereby incurring higher cost. The cost of road freight shown at Rs. 48 Crores is based on the actual expenditure incurred in earlier year when the goods were transported by road. It is also an admitted fact that in order to curtail transport and logistics cost incurred for transportation of raw materials as well as furnished goods being cement, the assessee has developed an integrated rail system for Unit-I at Satna, M.P. The deduction u/s 80IA of the Act has been computed by following the savings approach wherein the revenue of the Rail System was computed by taking excess of the road freight handling charges payable for transportation of goods by road to the nearest rail head, over the tariff payable for transportation of goods from the railway siding to the rail head, determined as per the tariff notified by the Indian Railways, proportionate to the actual distance upto the nearest rail head. A perusal of the chart exhibited elsewhere shows that the assessee has computed the revenue calculating the difference between the cost of transporting the goods by road and by India Railways. Also see Jindal Steel and Power Ltd. 2023 (12) TMI 417 - SUPREME COURT We find that in the case of Assam Carbon Products 2005 (12) TMI 212 - ITAT CALCUTTA-A assessee was completely justified in valuing the internal transfer for captive consumption of NH coke (i.e., transfer of NH coke to Unit-II) at the landed cost. For arriving at such price, the sole way out was to obtain the quotation from the company s erstwhile foreign supplier - Decided against revenue.

Summary

Issues Involved:

1. Classification of Sales Tax/VAT subsidy as capital or revenue receipt.
2. Classification of income from the sale of carbon credits as capital or revenue receipt.
3. Methodology for determining market value for computation of deduction under Section 80-IA.

Detailed Analysis:

Issue 1: Classification of Sales Tax/VAT Subsidy

The primary issue was whether the Sales Tax/VAT subsidy received by the assessee should be classified as a capital receipt or a revenue receipt. The revenue argued that the subsidy was linked to the production of goods and not to capital expenditure, thereby qualifying it as a revenue receipt. However, the assessee contended that the subsidy was a capital receipt, applying the "purpose test" established in the Supreme Court cases of Ponni Sugars & Chemicals Ltd. and Sahney Steel and Press Works Ltd. The Tribunal upheld the assessee's position, referencing previous decisions where subsidies aimed at encouraging the establishment of industries in backward areas were deemed capital in nature. The Tribunal concluded that the subsidy was intended to assist in setting up new units or expanding existing ones, thus qualifying it as a capital receipt.

Issue 2: Classification of Income from Sale of Carbon Credits

The second issue concerned whether income from the sale of carbon credits should be treated as a capital receipt. The revenue considered it a revenue receipt, arguing that carbon credits are linked to the business activity and are tradable commodities. The assessee, however, maintained that such income is capital in nature. The Tribunal referred to consistent rulings from various High Courts, including the Andhra Pradesh and Karnataka High Courts, which treated income from carbon credits as capital receipts. The Tribunal, aligning with these precedents, ruled in favor of the assessee, classifying the income from carbon credits as a capital receipt.

Issue 3: Methodology for Determining Market Value for Section 80-IA Deduction

The third issue revolved around the method used to determine the market value for the computation of deduction under Section 80-IA. The assessee used a "savings approach," calculating revenue based on the cost savings from using a rail system instead of road transport. The revenue challenged this approach, arguing that it was an estimate and led to inflated revenue figures. The Tribunal, however, found the savings approach valid, citing judicial precedents that supported the use of cost savings as a basis for determining market value. The Tribunal concluded that the approach was justified, as it reflected the actual economic benefit derived from the rail system, and upheld the assessee's method for computing the deduction under Section 80-IA.

In conclusion, the Tribunal dismissed the revenue's appeal, affirming the CIT(A)'s order that classified the sales tax subsidy and carbon credit income as capital receipts and validated the savings approach for Section 80-IA deductions.