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TMI Blog2017 (12) TMI 119X X X X Extracts X X X X X X X X Extracts X X X X ..... n credits from the computation of book profit u/s 115JB - Held that:- The carbon credit is credited to the Profit & Loss account held to be capital receipts and not exigible to tax as held by Hon’ble jurisdictional High Court in My Home Power Ltd.[supra]. Hence respectfully following the view taken by the Coordinate Bench, we direct the AO to exclude the sale of carbon credits for the purpose of computation of book profits u/s 115JB of IT Act. Appeal of the assessee on this ground is allowed. - I.T.A.No.651/Vizag/2014, I.T.A.No.42/Vizag/2015 And C.O. No.18/Vizag/2015 - - - Dated:- 29-11-2017 - SHRI V. DURGA RAO, JUDICIAL MEMBER AND SHRI D.S. SUNDER SINGH, ACCOUNTANT MEMBER For The Assessee : Shri G.V.N. Hari, AR For The Revenue : Shri T.S.N. Murthy, DR ORDER PER D.S. SUNDER SINGH, Accountant Member: These cross appeals filed by the assessee and the revenue are directed against order passed by the Commissioner of Income Tax (Appeals) {CIT(A)}, Visakhapatnam vide ITA No.632/2013-14/ACIT C- 4(1), VSP/2014-15 dated 14.11.2014. The cross objections filed by the assessee is in support of the order of the CIT(A). 2. The brief facts of the case are that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see's case, the income from sale of carbon credits and sale of ash cannot be said to be derived from its power generation business so as to claim the deduction u/s.80IA. The A.O. also felt that the decision relied upon by the assessee of the Hon ble ITAT, B Bench, Hyderabad in the case of My Home Power Ltd. Vs. DCIT is not applicable to the facts of the case. Accordingly, the income received on sale of carbon credits of ₹ 8,43,74,059/- and sale of Ash of ₹ 13,83,730/- were added back to the total income of the assessee. 3. Aggrieved by the order of the AO, the assessee went on appeal before the CIT(A) challenging the reopening of the assessment order as well as the additions made by the AO on merits. Ld.CIT(A) held that the reopening of assessment is valid applying the ratio laid down by Hon ble Kerala High Court in the case of Innovative Foods Ltd. Vs. UOI [356 ITR 319]. With regard to carbon credits credited to Profit Loss A/c the Ld.CIT(A) followed the judgement of Hon ble AP High Court in the case of CIT vs My Home Power Ltd. ITTA No.60 of 2014 dated 19/02/2014and allowed the appeal of the assesse. With regard to the sale of Ash the Ld.CIT(A) held that sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivilege in the nature of transfer of carbon credits. Thus, the amount received for carbon credits has no element of profit or gain and it cannot be subjected to tax in any manner under any head of income. it/s not liable for tax for the assessment year under consideration in terms of sections 2(24), 28, 45 and 56 of the income-tax Act, 1961, Carbon credits are made available to the assessee on account of saving of energy consumption and not because of its business. Further, in our opinion, carbon credits cannot be considered as a b/-product it is a credit given to the assessee under the Kyoto Protocol and because of international understanding. Thus, the assessee's who have surplus carbon credits can sell them to other assesses to have capped emission commitment under the Kyoto Protocol Transferable carbon credit is not a result or incidence of one's business and it is a credit for reducing emissions. The persons having carbon credits get benefit by selling the same to a person who needs carbon credits to overcome ones negative point carbon credit. The amount received is not received for producing and/or selling any product, b/-product or for rendering any service for carry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Valuation of inventories) at a cost or market price, whichever is lower. Since CERs are recognized as inventories, the generating assessee should apply AS-9 to recognize revenue in respect of sale of CERs.. 7.1 The Hon ble Jurisdictional High Court in the case of My Home Power Ltd., upheld the view taken by Hon ble ITAT, Hyderabad and the relevant part of the order is extracted as under : We have considered the aforesaid submission and we are unable to accept the same, as the learned Tribunal has factually found that Carbon Credit is not an offshoot of business but an offshoot of environmental concerns. No asset is generated in the course business but it is generated due to environmental concerns. We agree with this factual analysis as the assessee is carrying on the business of power generation. The Carbon Credit is not even directly linked with power generation. On the sale of excess Carbon Credits the income was received and hence as correctly held by the Tribunal it is capital receipt and it cannot be business receipt or income. In the circumstances, we do not find any element of law in this appeal. Facts of the case are similar and the order of the jurisdi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ale of ash which is a direct bi - product. The Ld. AR further argued that the Hon ble Apex Court s decisions in the case of CIT Vs. Liberty India [317 ITR 218] which is related to DEPB entitlements and is one step away from the business activity and the judgement in the case of CIT Vs. Pandian Chemicals Ltd. is with regard to the interest payment and CIT Vs. Kiran Enterprises is with regard to subsidy and the above case laws have no application in the assessee s case. Since the sale of ash is profit derived from the unit, eligible for deduction u/s 80IA, the Ld.AR submitted that the assessee is entitled for deduction and requested to set aside the order of the Ld.CIT(A) and allow the appeal of the assessee. 13. On the other hand, Ld.DR supported the orders of the lower authorities. 14. We have heard both the parties and perused the material placed on record. As submitted by the Ld.AR, the facts of the Hon ble Apex Court s decisions relied upon by the A.O. in the case of CIT Vs.Liberty India and CIT Vs. Pandian Chemicals, CIT Vs. Sterling Foods (supra) are on different footing and distinguishable. The case laws relied upon by the AO in the case of CIT Vs. Kiran Enterprises is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessing officer to exclude the same from the computation of total income under the regular provisions of the Act. As a natural fall out of the relief granted by the learned CIT(A), the sale proceeds of carbon credits need to be excluded from the computation of even for book profits u/s 115JB of the Act. However, such a direction was not given by the learned CIT(A). There cannot be two different treatments for the same receipt for the same assessment year, one for computation of book profit and the other for computation of total income under the regular provisions. If a receipt is a revenue receipt it would be so for both the purposes and vice versa. As such, the order of the Ld.CIT(A) in not holding the capital receipt in the form of sale of carbon credit is to be excluded from the computation of book profit is erroneous. Ld.AR submitted that for this reason, this ground of appeal has arisen from the order of the Ld.CIT(A) and is therefore included in the grounds of appeal filed before the Hon ble ITAT as forming part of Form No.36. 16. On the other hand, Ld.DR opposed the admission of additional ground. 17. We have heard both the parties. As per the Hon ble AP High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the carbon credits are capital receipts, hence, during the pendency of the appeal, the assessee raised the grounds for exclusion of carbon credits. As per the provisions of Income Tax and the principles of accounting, all the revenue receipts and revenue expenditure form part of trading in Profit Loss account. The capi tal receipts are not the income of the assessee. While computing the income u/s 115JB of I.T.Act all the capital receipts required to be excluded from the computation of income for the purpose of 115JB of I.T.Act. The issue whether capital receipts can be excluded from the computation of book profit, if the assesse had included the same as part of book profit, whether the exclusion is possible or not was considered in detail by the Coordinate Bench of ITAT Kolkata in DCIT Vs. Binani Industries [137 DTR 185] (Kol)(Trib) and decided the issue in favour of the assesse. For ready reference, we extract the relevant paragraphs of the order of the Tribunal as under : 2.1. The brief facts of this issue is that the assessee filed its original return of income on 30.9.2009 disclosing total income at Rs Nil under normal provisions of the Act and declaring book pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x. However, the same has been duly credited in the profit and loss account as an extraordinary item and the said profits after such extraordinary items has been approved by the shareholders in the annual general meeting of the assessee company. 4.3.1. The Learned AR submitted before us that the basic intention behind introduction of the provisions of section 115J of the Act has been explained by the Hon'ble Kerala High Court. The constitutional validity of the provisions of section 115J of the Act was tested by the Hon'ble Kerala High Court in the case of Karimtharuvi Tea Estates Ltd. v. Dy. CIT [2001] 247 ITR 22/[2000] 113 Taxman 514, wherein it was held that :- The object of the insertion of section 115J of the Income Tax Act, 1961, was to ensure levy of minimum tax on what are known as prosperous zero tax companies . Under the scheme of the section, where the total income of companies as computed under the provisions of the Income Tax Act, in respect of the previous year relevant to the assessment year is less than 30 percent of their book profits, the total income of such companies chargeable to income tax for the relevant previous year is treated as income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15JA / 115JB of the Act as the case may be. 4.3.2. It was further contended by him that the Rule of Purposive Construction to be followed. He pointed out that the facts in the instant case was that the assessee issued share warrants for which payments were received by it in several phases. The applicant refused to pay the instalments as agreed upon and accordingly the assessee company chose to forfeit the amounts already paid by him. The assessee had credited the same in its profit and loss account as an extraordinary item and derived the current year profits under the Companies Act. The assessee sought to reduce the same from the computation of book profits u/s 115JB of the Act as the same is not the real profit of the assessee. According to him, what is to be seen is that whether the forfeiture of share warrants amounting to ₹ 12,65,75,000/- would enter the stream of income definition which is an inclusive definition u/s 2(24) of the Act. According to him when it is not disputed that forfeiture of share warrants is a capital receipt and cannot be subjected to tax and there is no provision to tax the same under the provisions of the Act, it would be just and fair to ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It only intended to bring to tax zero tax companies pay some tax due to availing of various concessions and incentives which are provided in the statute. Hence the Rule of Purposive Construction should be given to the intention behind introduction of provisions of section 115J / 115JA / 115JB of the Act so that it doesn't gets defeated. 4.4. It was submitted that the subject mentioned receipt comprising of forfeiture of share warrants amounting to ₹ 12,65,75,000/- is not chargeable to tax as it is undisputably a capital receipt, the same would not be liable to be taxed u/s 115JB of the Act merely because it is credited in the profit and loss account by the assessee. In this regard, he pointed out the two different nature of receipts that might arise to an assessee. According to him there is a basic dichotomy between receipts which are not taxable at all and receipts which are taxable but subject to exemption/deduction on fulfilling certain conditions. The receipt stated in the former case would never enter the stream of taxation even under the book profits u/s 115J/115JA/115JB of the Act going by the intention of the said provisions. However, the receipt stated in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would enter the stream of taxation u/s 115JB of the Act. It only said that the capital gains derived by the assessee were subjected to exemption u/s 47(iv) of the Act which would be liable for taxation u/s 115JB of the Act and more so it is credited in the profit and loss account of the assessee. It was submitted that here the Rule of Harmonious Construction would also come into play. First of all, the receipt should per se be taxable under the Act. It does not matter if the same is eligible for deduction / exemption under any other provisions such as section 47(iv) of the Act. In such a scenario, the capital gains which is exempt would be liable for MAT. This goes in consonance with the true intention behind introduction of provisions of section 115J of the Act as enumerated supra. According to him, therefore, this decision does not in any way even remotely contemplate to bring to tax any receipt which is not chargeable at all to tax under the provisions of the Act. Hence a thin line of difference needs to be drawn between a receipt which is not taxable from its inception and that which is not taxable pursuant to claim of deduction/exemption. As stated earlier, the former case wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax Subsidy received by the Assessee of ₹ 18,48,85,506 in the form of Sales Tax Exemption was a capital receipt not a revenue receipt, ignoring the basic purpose for which the same was given which itself provides that the subsidy was given to the Assessee to enhance the production, employment sales in the state of Rajasthan, which are all post operational actvities. From the above it could be clearly seen that Hon'ble High Court admitted only the ground as to whether the impugned subsidy was a capital receipt or a revenue receipt. Hon'ble High Court has not admitted the ground of the Revenue against relief granted by Tribunal under section 115JB of the Act on above capital receipt. Therefore, respectfully following the decision of Jurisdictional High Court and the Tribunal in Assessee's own case for AY 2003- 04 we see no reasons to take any other view on the matter different from the conclusions arrived at by this bench in favour of the Assessee, as far as exclusion from book profit under section 115JB is concerned, that now stands affirmed by the Hon'ble Rajasthan High Court and we are in respectful agreement with the same. 13.2. Our above v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held by the Apex Court in the case of Padmaraje (supra) and in the light of our fact finding as above, clearly not includible in P L account prepared under Part II Part III of Schedule VI to the Companies Act. 13.5 The genesis of Sec 115J, thereafter section 115JA and now section 115JB was to ensure that the assessee, while making profit from operations, should not enjoy tax free status due to various deductions available under the Income Tax Act. There was never any intention of the legislature to tax what is not income at all. In a recent decision, the Hon'ble Apex Court in the case of Indo Rama Synthetics (I) Ltd. v. CIT [2011] 330 ITR 363 (SC) has held that the object of MAT provisions is to bring out the real profit of the companies. The thrust is to find out the real working results of the company. Inclusion of receipt in the computation of MAT would defeat two fundamental principles, it would levy tax on receipt which is not in the nature of income at all and secondly it would not result in arriving at real working results of the company. The real working result can be arrived at only after excluding this receipt which has been credited to P L a/c and not otherw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Special Bench in the case of Rain Commodities (supra), which incidentally has been relied upon by DR. On examination of the said order, we find that at Para 17 (last sub-para) Para 18, after considering the decision of Supreme Court in Apollo Tyres Ltd. (supra), Special Bench have held that if Profit Loss account is not in accordance with Part II III of Schedule VI to the Companies Act, it is permissible to alter the net profit so as to make it in accordance with Part II III of Schedule VI, which is the starting point for computation of 'Book Profit' in terms of section 115JB. We have concluded in Para 13.4 above, that inclusion of sales tax subsidy in the Profit and Loss is not in accordance with Schedule VI, Part II III. Hence it implies that needful adjustment to exclude the same is not only permissible, but is mandatory so as to make the Profit Loss Account compliant, with the basic requirement of Section 115JB. 13.10 Our view per Para 13.8 above is also supported by, the decision of Mumbai Tribunal in the case of Bombay Diamond (supra) that of Bangalore Tribunal in the case of Syndicate Bank (supra) [both analysed in Para 12.1 above], where als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und Nos. 1 to 5 are allowed. The assessee gets relief of ₹ 27,70,880/- and consequent interest being 10% of the amount received by the assessee on sale of carbon credit of ₹ 2,77,08,800/-. ( b) Decision of Mumbai Tribunal in the case of Shivalik Venture (P) Ltd v. Dy. CIT [2015] 70 SOT 92/60 taxmann.com 314, wherein it was held that : 23. We shall now examine the second contention urged by the assessee, viz., since the profit arising on transfer of a capital asset by a company to its wholly owned subsidiary company is not treated as income u/s 2(24) of the Act and since it does not enter into computation provision at all under the normal provisions of the Act, the same should not be considered for the purpose of computing book profit u/s 115JB of the Act. 26. We shall now examine the scheme of the provisions of sec. 115JB of the Act. It is pertinent to note that the provisions of sec. 10 lists out various types of income, which do not form part of Total income. All those items of receipts shall otherwise fall under the definition of the term income as defined in sec. 2(24) of the Act, but they are not included in total income in view of the provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w of the definition of income given u/s 2(24) of the Act. Further, we notice that the Special bench did not have occasion to consider the argument urged before us that the profits and gains arising on transfer of a capital asset by a holding company to its wholly owned Indian Company does not fall under the definition of income at all u/s 2(24) of the Act and hence the same does not enter into the computation provisions of the Act at all. We are impressed by the arguments advanced in this regard and we have also extensively dealt with the relevant provisions and also about the scheme of the provisions of sec. 115JB of the Act. We are of the view that the said contentions distinguish the decision rendered by the Special Bench in the case of Rain Commodities Ltd. (supra). On merits also, we have earlier seen that the assessee herein has attached a note in the notes forming part of accounts and in the case before the Special bench, no such notes has been inserted, which fact was specifically noted by the Special bench. Hence on this factual aspect also, the decision rendered by the Special bench is distinguishable. 28. In view of the foregoing discussions, we find merit in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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