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2025 (4) TMI 1462 - HC - Income TaxRevision u/s 263 - addition on account of sale of fly ash and cenosphere - Assessee claimed that it had not earned any income as it had deposited the entire sale proceeds of fly ash which was received from NTPC in a fly ash utilization fund and had also furnished the same - HELD THAT - There is no question of the Assessee having earned any income. The fly ash did not belong to the Assessee but to its holding company NTPC. The Assessee had only sold the fly ash and utilized part of the funds as mandated and made over the balance funds to NTPC. No infirmity with the decision of the ITAT that the Assessee had not earned any income on account of sale of fly ash which was provided by NTPC. In New Horizon Sugar Mills Pvt. Ltd 1998 (4) TMI 41 - MADRAS HIGH COURT Madras High Court had upheld the decision of the learned ITAT holding that the amount set apart towards Molasses Storage Reserve Fund is required to be excluded from the total income of the assessee. The said decision was rendered bearing in mind the Molasses Control (Amendment) Order dated 06.02.1972 which required that the amount for construction of molasses storage tank was to be kept separately. The assessee had no power to spend the said amount the same was required to be spent only in accordance with the directions issued by the Government. The appeal preferred against the said order was also dismissed by the Supreme Court in view of the orders passed in similar matter permitting the Revenue to withdraw the appeals. As Assessee was not free to utilize the sale proceeds of fly ash as the same was required to be used for specified purposes which as stated above did not result in the Assessee acquiring any asset. No substantial questions of law.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Court were: A. Whether the Income Tax Appellate Tribunal (ITAT) was justified in holding that no addition of Rs. 42,16,04,786/- was warranted on account of sale of fly ash and cenosphere by the Assessee. B. Whether the ITAT was correct in accepting the precedence of the Gazette Notification issued by the Ministry of Environment and Forests over the provisions of the Income Tax Act, 1961. C. Whether the ITAT erred in ignoring the Supreme Court decision in Tuticorin Alkali Chemicals vs. Commissioner of Income Tax, which held that tax is attracted at the point when income is earned and is not dependent on its destination or manner of utilization. 2. ISSUE-WISE DETAILED ANALYSIS Issue A: Justification of ITAT's decision to reject addition on sale of fly ash Relevant legal framework and precedents: The assessment was made under the Income Tax Act, 1961, with Section 263 invoked by the Principal Commissioner of Income Tax (PCIT). The precedent referred to was Commissioner of Income-Tax v. New Horizon Sugar Mills Pvt. Ltd., where amounts set apart in a reserve fund (Molasses Storage Reserve Fund) were excluded from total income because the assessee had no control over the funds and they were to be used only as directed by the government. Court's interpretation and reasoning: The Court examined the nature of the fly ash utilization fund maintained by the Assessee. The fund was credited with the sale proceeds of fly ash, which was provided by its holding company, NTPC. The Assessee maintained a separate earmarked account for these proceeds, used exclusively for infrastructure development and promotion of fly ash utilization as mandated by government notifications. The Court noted that expenses related to fly ash activities were debited to this fund and not to the Assessee's profit and loss account. Key evidence and findings: The Court reviewed the fund's ledger, which showed substantial balances credited from sales and corresponding debits for expenses, including cost of fly ash products, employee benefits, and administration expenses related to fly ash utilization. The balance in the fund was ultimately transferred to NTPC. The Assessee demonstrated that it did not claim these expenses as deductions elsewhere, thereby not inflating its taxable income. Application of law to facts: The Court found that the Assessee did not earn any income from the sale of fly ash because the fly ash belonged to NTPC, and the Assessee was merely acting as a conduit to sell and utilize the proceeds as per statutory requirements. The Court relied on the principle from New Horizon Sugar Mills that funds earmarked for specific government-mandated purposes, over which the assessee has no free control, do not constitute income. Treatment of competing arguments: The Revenue argued that the Assessee had recovered general expenses from the sale proceeds and thus should be taxed on the amount. However, the Court noted the absence of any evidence to show that these expenses were claimed twice or that the Assessee had any beneficial interest in the fund. The Revenue's failure to produce relevant records further weakened its position. Conclusions: The ITAT's decision to reject the addition was upheld. The Assessee did not earn taxable income from the sale of fly ash, as the proceeds were utilized strictly for prescribed purposes and the balance transferred to the holding company. Issue B: Precedence of Ministry of Environment and Forests Gazette Notification over Income Tax Act provisions Relevant legal framework: The Notifications under the Environment (Protection) Act, 1986, particularly those dated 14.09.1999 (amended 27.08.2003) and 03.11.2009, mandated utilization of fly ash by thermal power plants and prescribed the manner of handling sale proceeds. Court's interpretation and reasoning: The Court accepted the Gazette Notifications as binding statutory instruments that regulated the use and sale of fly ash and the application of proceeds. The Notifications required the sale proceeds to be kept in a separate account and used exclusively for infrastructure development and promotion of fly ash utilization until 100% utilization was achieved. The Court held that these statutory provisions effectively governed the treatment of such proceeds and their taxability. Application of law to facts: The Assessee complied with the Notifications by maintaining a separate fly ash utilization fund and using the proceeds as mandated. The Court found that the ITAT was justified in giving precedence to these Notifications over the general provisions of the Income Tax Act, as the Notifications specifically addressed the handling of fly ash proceeds. Treatment of competing arguments: The Revenue contended that the Income Tax Act provisions should prevail over the Notifications. However, the Court noted that the Notifications were issued under a special environmental statute and had a specific regulatory purpose, which the Income Tax Act did not explicitly override. Conclusions: The ITAT was correct in accepting the Gazette Notifications as prevailing over the Income Tax Act provisions in this context. Issue C: Applicability of Supreme Court decision in Tuticorin Alkali Chemicals case Relevant legal framework and precedent: The Supreme Court in Tuticorin Alkali Chemicals held that tax is attracted at the point when income is earned and is not dependent on its destination or utilization. The Court emphasized that the nature of income at accrual is determinative for taxability. Court's interpretation and reasoning: The Court distinguished the present case on facts from Tuticorin Alkali Chemicals. Here, the Assessee did not earn income in the true sense, as it did not have ownership or beneficial interest in the fly ash or the proceeds. The proceeds were mandated to be used for specific purposes and were not available for the Assessee's free use or profit. The Court held that the principle in Tuticorin Alkali Chemicals did not apply where the entity acted merely as a custodian or conduit for funds earmarked under statutory obligations. Application of law to facts: The Court applied the principle that taxability depends on the nature of the amount and the rights of the assessee. Since the Assessee had no beneficial interest and the proceeds were utilized as per statutory mandate, no income had accrued to it. Treatment of competing arguments: The Revenue argued that the ITAT ignored binding Supreme Court precedent. The Court rejected this submission, emphasizing that the facts and legal context differed materially, justifying a different conclusion. Conclusions: The ITAT was correct in not applying the Tuticorin Alkali Chemicals ruling to the facts of this case. 3. SIGNIFICANT HOLDINGS The Court held: "There is no question of the Assessee having earned any income. The fly ash did not belong to the Assessee, but to its holding company - NTPC. The Assessee had only sold the fly ash and utilized part of the funds as mandated and made over the balance funds to NTPC." "In the facts of the present case as well, the Assessee was not free to utilize the sale proceeds of fly ash as the same was required to be used for specified purposes, which as stated above, did not result in the Assessee acquiring any asset." "We do not find any infirmity with the decision of the learned ITAT that the Assessee had not earned any income on account of sale of fly ash, which was provided by NTPC." "No substantial questions of law arise for consideration of this court." Core principles established include:
Final determinations:
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