R.P. Tolani, J.M.:— These are group of two appeals by the assessee and a cross-appeal by the Department, all appeals preferred against the order of the ld. Commissioner of Income-tax (Appeals)-I, Baroda dated 07.06.2012 for AY 2009-2010.
2. ITA No. 1912/Ahd/2012 for AY 2009-10 is the appeal preferred by the assessee against the confirmation of ld. CIT(A) in upholding the action of AO in granting interest u/s 244A only till the date of signing order and not till the date of refund. The ld. Counsel for the assessee, looking at the smallness of the amount, did not press the ground; hence this appeal is accordingly dismissed.
3. Adverting to the cross-appeals for AY 2009-10, one common ground raised in both the appeals pertains to disallowance of income and expenses out of the interest free income u/s 14A r.w.s. Rule 8D on exempt income of Rs. 3,18,472/-. In this regard, the effective ground raised by both parties in respective appeals revolves around:—
Ld. CIT(A) erred in law and on facts in partly reducing the disallowance u/s 14A from Rs. 75,02,592/- to Rs. 25,66,000/-. The assessee is aggrieved on retention of Rs. 25,66,000/- and revenue is aggrieved on relief of Rs. 49,36,592/- (Rs. 75,02,592/- minus Rs. 25,66,000/-).
3.1 The assessee in its grounds of appeal has taken following issues in its support:—
a) The assessee had own funds which were more than sufficient for the purpose of making investments;
b) The Assessing Officer had not reached appropriate satisfaction as required under law for invoking the provisions of Sec. 14A;
c) CIT(A) erred in considering gross interest for the purpose of computation of disallowance u/s 14A.
3.2 At the outset, it may be mentioned that both the Revenue as well as assessee raised following additional grounds of appeal. Revenue's additional ground reads as under:—
“On the facts and in the circumstances of the case and in law, the ld. CIT(Appeals) erred in directing the Assessing Officer to reduce the amount transferred to debenture redemption reserve from the book profit u/s 115JB of the Act without appreciating that the provisions of Explanation (1) to sub-clause (i) to (iii), (vii), (viii) to clause (2) to Section 115JB do not permit the such adjustments from the book profit.”
3.3 The assessee also has filed following two additional grounds:—
“1. On the facts and in the circumstances of the case and in law, the ld. CIT(Appeals) erred in treating the income from realization of carbon credits Rs. 1,32,59,006/- as taxable revenue receipt.”
“2. On the facts and in the circumstances of the case and in law, the ld. CIT(Appeals) erred in confirming AO's action in adding the disallowance u/s 14A r.w.r. 8D of the Act while computing book profits u/s 115JB of the Act.”
3.4 Both the parties are relied on the judgments of Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT, reported in (1998) 229 ITR 383 (SC) & Jute Corporation of India Limited v. CIT, [1991] 187 ITR 688 (SC) for admission of additional grounds. Both parties contend that the they are legal grounds and do not require verification of new facts. Revenue's additional ground is adjunct to its main Ground No. 3. Qua assessee's additional ground No. 1, ld. Counsel for the assessee contends that the issue in question is squarely covered in its favor by following judgments of Hon'ble AP and Karnataka High courts:—
a. Commissioner Of Income-Tax v. My Home Power Ltd., [2014] 46 taxmann.com 314/365 ITR 82 (AP)
b. CIT v. Subhash Kabini Power Corporation Ltd., [2016] 69 taxmann.com 394 (Karnataka)
3.5 The additional ground No. 2 of assessee relates to AO's action in adding the disallowance u/s 14A r.w.r. 8D of the Act while computing book profits u/s 115JB of the Act. This ground is consequential to the corresponding main ground raised in assessee's and Revenue's appeals.
3.6. After hearing both the parties, we are inclined to admit the additional grounds raised by the Revenue and assessee relying upon the judgments in the case of National Thermal Power Co. Ltd. and Jute Corporation of India Limited (supra).
4. The brief facts pertaining to respective grounds about disallowance u/s 14A r.w.r. 8D are—the assessee earned tax free income of only Rs. 3,18,472/-, out of which an amount of Rs. 2,00,000/- was suo moto disallowed in computation of income towards administrative expenditure attributable to the earning of the exempt income. The ld. AO, however, proposed to apply Rule 8D which was resulting in huge disallowance. The assessee contended that its exempt dividend income was meager Rs. 3,18,472/-, the investments therein were acquired in earlier years out of huge own noninterest bearing funds in the form of share capital, reserve and surplus etc. The dividend thus was earned on old investments which are out of non-borrowed funds and reserves. The detailed submissions were made along with case laws available till that time. Ld. AO, however, did not agree and passed the assessment order on 05.07.2011 and notionally worked out a figure on proportionate basis for disallowance and made the disallowance by following observations:—
“….. Since the assessee itself disallowed an amount of Rs. 2,00,000/-, remaining disallowance of Rs. 75,02,592/- is added to the income of the assessee. The disallowance is also made in book profit u/s 115JB of the Income Tax Act.”
5. Aggrieved, the assessee preferred First Appeal where the ld. CIT(A) gave part relief to the assessee by holding that the judgment of Kerala High Court in the case of CIT v. Smt. Leena Ramchandran, (2011) 10 Taxman.com 109 (Kerala) and decision of Mumbai Special Bench of ITAT in the case of ITO v. Daga Capital Management Pvt Ltd., (2008) 119 TTJ (Mum) SB (289) were applicable. The assessee's contention that the exempt income being only incidental to main intention of holding shares was not acceptable and non recording of satisfaction about suo motu disallowance by ld. AO was not a relevant contention.
5.1. Ld. CIT(A) gave partial relief broadly by making observations:—
(i) Appellant's contention that investments in shares were exclusively made out of interest free funds including cash operating profit of current year cannot be accepted since appellant did not maintain separate accounts for such activity and the bank account used was common. Where it is not possible to establish one to one nexus between source of investment and the investment made, it would be justified to apportion interest as per Rule 8D.
(ii) Appellant's contention that only net interest be considered for apportionment under Rule 8D and the interest receipts of Rs. 984.74 lakh be excluded from gross interest of Rs. 4990.87 lakh for the purpose of apportionment under Rule 8D; ….
……Interest receipts have no connection with expenditure in relation to exempt income and cannot therefore, be set off against interest expense for the purpose of Rule 8D(2)(ii).
(iii) Appellant's contention that interest on loans for specific purposes be not considered for apportionment under Rule 8D is however, acceptable since under Rule 8D(2)(ii), what is to be apportioned is interest, which is not directly attributable to any particular income or receipt. Accordingly, interest on ECBs (Rs. 545.24 lakh), interest for debentures for Acquisition (Rs. 810 lakh) and interest on packing credit loan (Rs. 376.57 lakh) totaling to Rs. 1731.81 lakh is directed to be excluded for the purpose of apportionment under Rule 8D(2)(ii) subject to verification by the Assessing Officer of quantum of interest on such loans.
5.2. In view of these observations, the disallowance of Rs. 75,02,592/- made by the Assessing Officer was reduced to Rs. 25,66,000/-. Aggrieved, both the parties are in appeal.
6. The ld. Counsel for the assessee, at the outset, relied upon the judgment of Hon'ble Gujarat High Court in the case of Commissioner Of Income-Tax v. Corrtech Energy P. Ltd., reported in [2015] 372 ITR 97 (Guj), for the proposition that the disallowance of expenses cannot exceed the exempt income which accrued to the assessee. This view is further fortified by the Hon'ble Delhi High Court judgment in the case of Joint Investments Pvt. Ltd. v. Commissioner Of Income Tax, reported in [2015] 372 ITR 694 (Delhi). Thus, in the assessee's case, even if all other contentions of the assessee are not accepted, the disallowance in any case cannot exceed Rs. 3,18,472/-, i.e. the exempt income of the year.
6.1 The assessee suo moto disallowed an amount of Rs. 2 lakhs. The ld. AO has not recorded any reasons as to how he is not satisfied in terms of Rule 8D. Reliance is placed on Hon'ble Delhi High Court judgment in the case of Commissioner Of Income Tax-Vi v. Taikisha Engineering India Ltd., reported in (2015) 370 ITR 338 (Delhi).
6.2 Ld. Counsel for the assessee contends that disallowance u/s 14A read with rule 8D cannot made in the instant case inasmuch as the investments in shares/securities are old and not made out of borrowed funds. The assessee owns interest free funds in the form of share capital accumulated profit and reserves, which far too much exceeded the exempt income which is placed on paper book Page 120 & 121. The accumulated share capital, reserves and surplus amount to Rs. 32,699.06 lakhs as against the such investments of only Rs. 794.24 lakhs. Though all the details were furnished with the ld. AO; however, the burden of nexus has been arbitrarily shifted on the assessee. The Hon'ble Gujarat High Court in the case of CIT v. Hitachi Home and Life Solutions (I) Ltd., reported in [2014] 41 taxmann.com 540 (Guj.), has squarely held that the burden to prove the nexus lies on the Assessing Officer to rebut the assessee's claim by establishing necessary nexus in this behalf by following observations:—
“8. Moreover, specific findings of the Tribunal that the Assessing Officer has failed to establish nexus between the borrowed funds and the investment and that the specific averment of the assessee has not been rebutted by the Assessing Officer that the investment had been made from own interest free funds and not from the borrowed funds, no error much less substantial error is committed in so holding by both the authorities.”
6.3 On the issue of own funds being more than the tax free investments, a plethora of judgments are relied on, including various judgments of Hon'ble jurisdictional High Court as under:—
i) India Gelatine and Chemicals Limited (Tax Appeal No. 276 & 277—Guj HC);
ii) CIT v. Hitachi Home & Life Solutions (I) Ltd. (Tax Appeal No. 948 of 2012—21 Taxman 109 (Guj HC)) (2014);
iii) CIT v. Torrent Power Ltd. (363 ITR 474/222 Taxman 367 (Guj HC)) (2014);
iv) CIT v. Gujarat State Fertilizers & Chemicals Ltd. (101 DTR 175/217 Taxman 229/358 ITR 323 (Guj HC)) (2013);
v) Gujarat Power Corporation Limited (2011) (Appeal No. 1587 of 2009—44 taxmann.com 359 (Guj HC)),
vi) Gujarat Industrial Development Corporation Ltd. 0218 Taxman 0142 (Guj);
vii) UTI Bank Limited in Tax Appeal No. 118 of 2013—215 Taxman 8 (Guj HC);
viii) Suzlon Energy Limited—Tax Appeal No. 223 of 2013, 215 Taxmann 272 (Guj. HC);
Further reliance in also placed on following Hon'ble Bombay High Court judgments:—
i) HDFC Bank Ltd. (Appeal No. 330 of 2012) (Bom HC)
ii) Reliance Utilities and Power Limited, 18 DTR 1 (Bom HC)
7. Ld. Departmental Representative, on the other hand, supported the orders of the authorities below.
8. We have heard the rival contentions, perused the material available on record and gone through the orders of the authorities below. As the facts emerge, we find that the assessee's own funds, i.e., equity, reserve and surplus funds amounting to Rs. 32,699.06 lakhs far exceed the tax free investments. The impugned investments are old and out of own funds have not been rebutted. Relying on the Hon'ble Gujarat High Court judgments in the case of Hitachi Home and Life Solutions (I) Ltd. (supra), Torrent Power Ltd. (supra) and other judgments mentioned above, we are of the view that when the assessee possesses own funds much more than the tax free investments, the disallowance u/s 14A read with Rule 8D cannot be made. There is also merit in the plea of ld. Counsel on the count that the burden of establishing the nexus has been wrongly attributed to the assessee and it was for the Assessing Officer to rebut the assessee's contention and demonstrate that the tax free investments were not from own funds but from borrowed funds. In the absence of such rebuttal, it cannot be assumed that the assessee made tax free investments out of borrowed funds. The assessee has suo moto offered Rs. 2 lakhs out of income of Rs. 3,18,472/- as disallowed u/s 14A of the Act. In view of our foregoing observations and relying on Hon'ble Gujarat High Court judgments, we are of the view that no disallowance beyond what has been suo moto disallowed by the assessee can be made. In the result, the assessee's ground in this behalf is allowed and that of Revenue is dismissed.
9. The other grounds raised by the Revenue are as under:—
1. On the facts and in the circumstances of the case and in law, the ld. CIT(Appeals) erred in deleting addition of Rs. 6,93,435/- made u/s 40A(2)(b) of the Act, failing to appreciate that interest is not charged at market rate on advances to subsidiary in spite of the fact that assessee is paying huge amount of interest.
2. On the facts and in the circumstances of the case and in law, the ld. CIT(Appeals) erred in directing the AO to allow amount of Rs. 750 lacs transferred to debenture redemption reserve for computing book profit u/s 115JB of the Act.
10. Apropos the disallowance u/s 40A(2)(b) of the Act, the advances in question were given to 100% foreign subsidiary for a very short period in the course of business to protect its long term business interest. In view of the business exigencies, the interest was not charged. However, for TP purposes, the assessee disallowed interest of six months at LIBOR of 2% in its computation of income. Ld. AO, however, proposed to disallow the same u/s 40A(2)(b) of the Act also. The assessee objected on the ground that Section 40A(2)(b) disallowance is attracted when there is some payment of expenditure by assessee to any specified associated concerns. In the given facts, no payment of any expenditure was made by the assessee to the associated concerns; there being no expenditure, the question of disallowance u/s 40A(2)(b) does not arise. Ld. Assessing officer, however, without appreciating the assessee's contentions made the disallowance. Ld. CIT(A) in First Appeal held that there was no expenditure incurred by the assessee and Section 40A(2)(b) was not applicable and deleted the addition by following observations:—
“3.2. I have considered facts of the case and appellant's submissions. Appellant did not charge interest on loan given to its foreign subsidiary. Since claim of expenditure in respect of related party is not involved, section 40A(2)(b) has no application in this case. Disallowance, if any could be made of interest attributable to such loan out of total interest claimed u/s. 36(1)(iii) of the Income tax Act. However, lending money to foreign subsidiary i.e. an associated enterprise amounts to an ‘international transaction’ under section 92B. Provisions of Chapter X are therefore applicable and any income arising from the international transaction is to be computed having regard to Arm's Length Price. Appellant complied with statutory requirements in this regard by duly reporting the transaction in Form 3CEB and by providing required information in respective columns of the form. Appellant benchmarked arm's length nature of the transaction by using CUP method and applied interest rate of 3.8% being six month's LIBOR + 2% to compute arm's length price. The same was justified since the loan was in foreign currency. Interest rate on a foreign currency loan cannot be compared with interest rate on a rupee loan. Appellant added interest of Rs. 2,95,920/- to its income being the Arm's Length Price of interest on loan to its subsidiary in compliance to requirements of Chapter X of the Income tax Act. AO's action in computing interest @ 12% thereby making addition u/s. 40A(2)(b) of Rs. 6,93,435/- cannot therefore be sustained. Addition of Rs. 6,93,435/- is deleted.”
11. Aggrieved, the Revenue is in appeal.
12. Ld. Departmental Representative relied on the order of the Assessing Officer. Ld. Counsel for the assessee, in rejoinder, vehemently contends Section 40A(2)(b) is applicable only when the assessee makes payment of any expenditure to associated concerns. In this case, there is no such expenditure. The ld. CIT(A) has rightly given the relief. Reliance is placed on the decision of Co-ordinate Bench of Ahmedabad Tribunal in the case of Micro Ink Ltd. v. CIT, reported in [2016] 157 ITD 132 (Ahd).
13. We have heard the rival contentions, perused the material available on record and gone through the orders of the authorities below. It is not disputed that the assessee has not paid any expenditure to which Section 40A(2)(b) can be attracted. In our considered view, ld. CIT(A) has rightly appreciated the factual and legal aspects and held that Section 40A(2)(b) is not applicable. His order is upheld and this ground of the Revenue's appeal is dismissed.
14. The other remaining ground of the Revenue relates to Section 115JB. This ground was taken by the assessee before the ld. CIT(A) by way of additional ground in view of the subsequent judgment rendered by various judicial authorities in favour of the assessee. Assessee relied on the judgments of Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT, reported in (1998) 229 ITR 383 (SC) & Jute Corporation of India Limited v. CIT, [1991] 187 ITR 688 (SC). The ld. CIT(A) admitted the ground and forwarded the assessee's submission to ld. Assessing Officer. The Assessing Officer submitted a remand report dated 28.05.2012, which in essence objected to the assessee's claim that the debentures were issued and the proceeds received by the assessee were not treated as income; consequently when the loan capital was returned, it was capital expenditure not deductable in view of clause (b) of Explanation 1 to Section 115JB of the Act. The ld. CIT(A) relied on the decisions of Hon'ble Kolkata Bench of ITAT in the case of IOL Ltd., Lucknow ITAT Bench decision in the case of Hindalco Ltd. and Hon'ble Bombay High Court judgment in the case of CIT v. Raymond Ltd., [2012] 21 taxmann.com 60 (Bom.) and allowed the deduction by following observations:—
“Further, Lucknow Bench of ITAT in the case of Hindalco Industries Ltd. in ITA Nos. 715/Luc/01 & 749/Luc/01 through Orders dated 21.4.2010/21.9.2010 followed decision by ITAT Kolkota in the case of IOL Ltd. 81 TTJ (Cal) 525, decision dated 25.2.2009 in the case of Raymond Ltd. by ITAT Bench, Mumbai [2009-TIOL-343-ITAT-MUM] and decision dated 1.10.2007 by ITAT, Mumbai, ‘B’ Bench in ITA No. 5189/Mum/2001 in the case of Mangalore Refinery & Petrochemicals Ltd. to decide the issue regarding deduction of debenture redemption reserve from book profits u/s section 115J(1) in assessee's favour. Clauses (b) & (c) of Explanation 1 below section 115JB(1) are identical to similar clauses in section 115JA and section 115J. Ratio of decisions in the cases of Raymond Ltd., IOL Ltd. and Hindalco Ltd. (supra) would therefore be applicable to deduction of Debenture Redemption Reserve for computing book profits u/s. 115JB. AO's contention that section 115JB has been amended due to insertion of Explanation to clause (b), due to which decision in the case of National Rayon Corporation Ltd. (1997) 142 CTR (SC) 202 would not be applicable is not tenable since there has been no such amendment in clause (b) or (c) of Explanation 1 below section 115JB(1). Assessing Officer's contention that liability on capital account cannot be charged to profit & loss account is not tenable in view of decisions by Hon'ble High Court of Bombay in the case of Raymond Ltd. (supra) and Hon'ble ITAT, Kolkata in the case of IOL Ltd. (supra) allowing deduction of Debenture Redemption Reserve for computing book profits under similar provision, i.e. sections 115JA/115J. Following decisions in the case of Raymond Ltd. (supra), IOL Ltd. (supra) and Hindalco Ltd. (supra), amount of Rs. 7.5 crore transferred to debenture redemption reserve is directed to be allowed as deduction for computing book profits u/s 115JB in appellant's case. This ground of appeal is allowed.”
14.1 The ld. Counsel for the assessee contends that the ITAT, Ahmedabad Benches has considered all the aspects on this issue in the case of Genus Electrotech Ltd. in ITA Nos. 2826 & 2840/Ahd/2012 vide order dated 11.05.2016, wherein it was held that debt redemption fund is to be reduced by working out the book profits by following observations:
“17. Having heard the rival contentions and having perused the material on record, we find that the issue is indeed covered by the decision of Hon'ble Bombay High Court, in the case of CIT v. Raymonds Ltd. [(2012) 71 DTR 265 (Bom)] wherein Their Lordships have inter alia observed as follows:
2. Re question (a): Section 115JA of the Income Tax Act, 1961 provides in subsection (2) that every assessee, being a company shall for the purpose of the section prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956. The explanation to the Section provides that for the purpose of the section, “book profit” means the net profit as shown in the profit and loss account for the relevant previous year prepared under subsection (2) as increased inter alia by “(b) the amounts carried to any reserves by whatever name called”. Part III of Schedule VI to the Companies Act, 1956 provides inter alia in Clause 7(1)(b) that, “the expression “reserve” shall not include any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets or retained by way of providing for any known liability”.
3. The nature of a Debenture Redemption Reserve (DRR) has been considered by the judgment of the Supreme Court in National Rayon Corporation Ltd. v. Commissioner Of Income Tax . [(1997) 227 ITR 764]. The Supreme Court after adverting to the provisions of Clause 7 of Part III to Schedule VI of the Companies Act, 1956 held that “the basic principle is that an amount set apart to meet a known liability cannot be regarded as reserve”. Where a company issues debentures, the liability to repay arises the moment the money is borrowed. By issuing debentures a company takes a loan against the security of its assets. Though the loan may not be repayable in the year of account, the obligation to repay is a present obligation. Hence any money set apart in the accounts of the company to redeem the debenture has to be treated as monies set apart to meet a known liability. Consequently, debentures have to be shown in the balance sheet of a company as a liability. Being monies set apart to meet a known liability, a Debenture Redemption Reserve cannot be regarded as a reserve for the purpose of Schedule VI to the Companies Act, 1956. In National Rayon Corporation, the Supreme Court followed its earlier decision in Vazir Sultan Tobacco Co. Ltd. v. CIT [[1981] 132 ITR 559], in holding that since the concept of reserve and of a provision is well known in commercial accountancy and is used in the Companies Act, 1956, while dealing with the preparation of balance sheets and profit and loss accounts the meaning of that concept would have to be gathered from the meaning attached in the Companies Act itself. The following observations of the Supreme Court are of significance:
“The debentures were nothing but secured loans. Merely because the debentures were not redeemable during the accounting period, the liability to redeem the debentures did not cease to exist. It was redeemable or repayable at a future date. But it was a known liability. In the form of balance-sheet prescribed by the Act in Schedule VI, the secured loans have to be shown under the heading “liabilities”. Secured loans include (1) debentures, (2) loans and advances from banks, (3) loans and advances from subsidiaries, and (4) other loans and advances. The secured loans might not be immediately repayable, but the liability to repay these loans is an existing liability and has to be shown in the company's balance-sheet for the relevant year of account as a liability. Amounts set apart to pay these loans cannot be “reserve”. The interpretation clause of the balance-sheet in Schedule VI of the Companies Act specifically lays down that reserves shall not include any amount written off or retained by way of providing for a known liability.”
4. The mere fact that a Debenture Redemption Reserve is labeled as a reserve will not render it as a reserve in the true sense or meaning of that concept. An amount which is retained by way of providing for a known liability is not a reserve. Consequently, the Tribunal was correct in holding that the amount which was set apart as a Debenture Redemption Reserve is not a reserve within the meaning of Explanation (b) to Section 115JA of the Income Tax Act, 1961.
18. We, therefore, uphold the plea of the assessee, and direct the Assessing Officer to grant the relief accordingly.”
14.2 Ld. Departmental Representative relied on the order of the Assessing Officer.
15. We have heard the rival contentions, perused the material available on record and gone through the orders of the authorities below. The entire issue has been discussed by the Co-ordinate Bench in the case of in the case of Genus Electrotech Ltd. (supra) and held that the debt redemption fund is to be excluded while computing the book profits u/s 115JB of the Act. Following the judgment of the Tribunal (supra) and in view of the aforesaid other judicial pronouncements, we see no infirmity in the order of the ld. CIT(A) which is upheld. This ground of the Revenue is also dismissed.
15.1 Since this revenue ground is dismissed, consequentially, the additional ground raised by the Revenue, as admitted by us being only adjunct to this issue of computation of book profit u/s 115JB, also stands dismissed.
16. In the result, the Revenue's appeal is dismissed.
17. The remaining ground of assessee's appeal reads as under:—
On the facts and in the circumstances of the case and in law, the ld. CIT(Appeals) erred in considering rate other than the selling price charged by distribution licensee companies for working out profit of captive power plant u/s 80IA(4)(iv) of the Act.
17.1 Ld. Counsel for the assessee contends that the issue in question stands covered in favour of the assessee in its own case by the judgment of Hon'ble Gujarat High Court vide a consolidated order dated 20.07.2016 in Tax Appeal No. 471 to 474 of 2009, In Tax Appeal No. 471 and 473, the common question of law referred to by the Revenue is as under:—
“Whether the Appellate Tribunal was right in law and on facts in not appreciating that deduction u/s 80IA(4) is not allowable to the assessee for generating power for captive consumption?”
17.2 The ITAT allowed the assessee's claim u/s 80IA(4) at the rate of selling price charged by Gujarat State Electricity Board and other distributing companies from its captive power plant. Against the order of the Tribunal, the Revenue preferred the appeal before the Hon'ble Gujarat High Court and the above question of law was framed. The Hon'ble Gujarat High Court while holding in favour of assessee, relied on a host of judgments including ACIT, Bharuch Circle, Bharuch v. Pragati Glass Works Pvt Ltd. decided on 25.09.2012 and Commissioner Of Income Tax-Iv (S) v. Shah Alloys Ltd. Opponent(S), decided on 22.11.2011 in Tax Appeal No. 2092 of 2010. The Hon'ble Gujarat High Court further relied on the judgment of Calcutta High Court in the case of CIT v. Kanoria Chemicals & Industreis Ltd., [2013] 35 taxmann.com 566 (Calcutta), wherein the Court has held as under:—
““It is price at which assessee transferred electricity generated by it eligible business to its other business which would be considered for purpose of computation of profits and gains of eligible business in terms of section 80-IA(8) and not lesser price at which surplus electricity was sold to Electricity Board.”
17.3 Relying on all these judgments, by detailed observations, the Hon'ble Gujarat High Court upheld the claim of the assessee and dismissed the Revenue's ground in this behalf by following observations:—
“11. We have considered the submissions made by the learned counsel for the parties. We have also considered the case laws cited by the learned counsel for the assessee. Taking into consideration the judements of this court and other High Courts, cited above, we are of the opinion that the Tribunal has rightly allowed the claim of the assessee. In that view of the matter, we do not find any infirmity in the order of the Tribunal. Therefore, we answer question (C) and (D) in favour of the assessee and against the revenue.”
17.4 The ld. Departmental Representative, on the other hand, relied upon the order of the authorities below.
18. We have heard the rival contentions, perused the material available on record and gone through the orders of the authorities below. In view of the Hon'ble Gujarat High Court judgment on the same issue in assessee's own case, the issue in question that the assessee is eligible for computation of deduction u/s 80IA(4) on the rates charged by it at selling price is no more res integra. Respectfully following the Hon'ble Gujarat High Court judgment in assessee's own case (supra), this ground of the assessee is allowed.
19. Adverting to the additional ground No. 1 in respect of income from realization of carbon credits, which is taxed as Revenue receipt. The ld. Counsel for the assessee, at the outset, contends that the Hon'ble Karnataka High Court in the case of CIT v. Subhash Kabini Power Corporation Ltd., [2016] 69 taxmann.com 394 (Karnataka) dealt with the issue at length and relied on various judicial pronouncements, holding income received from realization of carbon credits as capital in nature. The Hon'ble Karnataka High Court in paragraph 6 of its order (supra) has dealt with the issue at length and squarely held that the carbon credits are generated out of environmental concerns which does not have any character of trading activity; therefore, any receipt from an activity which is not a trading activity is capital in nature by following observation:—
“6. At this stage, we may also refer to the decision of the Andhra Pradesh High Court, which has been relied upon by the Tribunal in the impugned order. More or less, identical question was raised and the Andhra Pradesh High Court in the case of Commissioner Of Income-Tax v. My Home Power Ltd. [(2014) 46 Taxmann.com 314 (Andhra Pradesh), at paragraph No. 3 observed thus:
“3. 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 off shoot of business but an offshoot of environmental concerns. No asset is generated in the course of 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.”
The aforesaid shows that the Andhra Pradesh High Court has confirmed the view of the Tribunal that Carbon Credit is not an offshoot of business, but an offshoot of environmental concerns. No asset is generated in the course of business, but it is generated due to environmental concerns. It was also found that the carbon credit is not even directly linked with the power generation and the income is received by sale of the excess carbon credits. It was found that the Tribunal has rightly held that it is capital receipt and not business income.
7. As such, in our view, when the issue is already covered by the decision of the Andhra Pradesh High Court, wherein the view taken by the Tribunal of Hyderabad Bench has been followed in the present case, one may say that no substantial question of law would arise for consideration.
8. However, Mr. K.V. Aravind, learned counsel appearing for the appellant/Revenue, relied upon the provisions of Section 28 of the Act and contended that if any benefit or perquisite or credit is generated from the business, the same would be a profit from business and is taxable. Therefore, the same cannot be termed as capital receipt, but business income. In his submission, it was stated that on account of running the business of power generation, carbon credit is earned, which is marketable and therefore, it is an income out of business.
9. We cannot accept the said submission for the simple reason that earning of carbon credit is not the business of the assessee nor the same is generated as a by product on account of business activity of power generation, but it is earned on account of concern for environment carbon credit is generated on account of employment of good and viable practices by the assessee.
10. Mr. Aravind, learned counsel for the Revenue also relied upon the decision of the Apex Court in the case of Oberoi Hotel Pvt. Ltd. v. Commissioner Of Income Tax . [(1999) 103 Taxman 236 (SC)] and another decision in the case of Kettlewell Bullen & Co. Ltd. v. Commissioner of Income Tax [(1964) 53 ITR 261] and contended that unless there is any adverse effect to the trading structure of the business, the income received cannot be termed as capital receipt.
11. In our view, the aforesaid decisions are of no help to the Revenue for the reason that to find out whether the particular amount received is a capital receipt or income out of business, there cannot be any standard yardstick or a straight-jacket formula as observed by the Apex Court in the case of Empire Jute Co. Ltd. (Supra). The facts of the aforesaid two decisions of the Apex Court in the case of Kettlewell Bullen as well as Oberoi Hotel were concerning the issue of contract and the effect on the trading activity, which was undertaken pursuant to the contract. Therefore, such observations made by the Apex Court can not be applied to the fact situation in the present case. Hence, the said decisions are of no help to the appellant/Revenue.
12. Considering the above, we find that 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.
19.1 The Hon'ble High Court further relied on the judgment of Hon'ble Andhra Pradesh High Court in the case of Commissioner Of Income-Tax v. My Home Power Ltd., [2014] 46 taxmann.com 314/365 ITR 82 and the judgment of Hon'ble Karnataka High Court in the case of CIT v. D.G. Gopala Gowda, [2013] 354 ITR 501, which have taken the same view on realization of carbon credits as capital receipt. There is no contrary judgment and the two Hon'ble High Courts, i.e. Andhra Pradesh High Court and Karnataka High Court, having taken a concurrent view on this matter, are to be followed in judicial discipline.
19.2 The ld. Departmental Representative, on the other hand, contends that the realization from carbon credits has been treated by the assessee itself as revenue income and offered to tax and in fact in actualities they are revenue receipt. However, no adverse judgment on this has been cited.
20. We have heard the rival contentions, perused the material available on record and gone through the orders of the authorities below. The additional ground stands already admitted. The duty of the ITAT is to ensure that fair, just and proper assessment is made. Merely because the assessee was of the opinion that the receipt was Revenue in nature cannot act as an estoppels against it when the law as interpreted by Hon'ble High Courts takes a view at variance with the assessee. The law is settled that the Revenue cannot stand benefited from a tax which is not leviable in right earnest. We find merit in the contentions of the ld. Counsel for the assessee that the Hon'ble Karnataka High Court in the case of Subhash Kabini Power Corporation Ltd. (supra) and the Hon'ble Andhra Pradesh High Court in the case of My Home Power Ltd. (supra), have taken a view that the carbon credit realization is capital in nature. No contrary judgment is cited. Therefore, respectfully following these judgments, this additional ground of the assessee in respect of realization of carbon credit as capital receipt is allowed. Thus, this additional ground is accordingly allowed.
21. Apropos second additional ground, while deciding the issue about disallowance u/s 14A read with Rule 8D in assessee's and Revenue's appeal, we have held that the amount in question stands restricted to only Rs. 2 lakhs. We have allowed the ground of the assessee in respect of redemption reserves. The issue in question is only a notional disallowance; therefore, it will not be justified to disallow this expenditure of Rs. 2 lacs while computing the book profit u/s 115JB of the Act. In view thereof, the second additional ground of the assessee is also allowed.
22. In the result, assessee's appeal bearing ITA No. 1912/Ahd/2012 is dismissed; assessee's appeal bearing ITA No. 1913/Ahd/2012 is allowed and the Revenue's appeal bearing ITA No. 1939/Ahd/2012 is dismissed.
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