DWARIKESH SUGAR INDUSTRIES LTD, MUMBAI v. ASSESSING OFFICER , NFAC, MUMBAI, Income Tax Appellate Tribunal, Judgment, Law, casemine.com

Factual and Procedural Background

The assessee is M/s. Dwarikesh Sugar Industries Ltd. (DSIL), engaged in manufacturing sugar and allied products, with by-products such as molasses and bagasse. For the assessment year 2017-18 the assessee reported certain specified domestic transactions (Form 3CEB) including power transfer to sugar units and allocations of expenses. The Transfer Pricing Officer (TPO) made an adjustment of Rs.39,84,42,988/- for profit attributable to non-eligible units. Separately, the Assessing Officer (AO) disallowed a claim of the assessee regarding sale proceeds of Renewable Energy Certificates (RECs) (also referred to as carbon credits) amounting to Rs.8,90,53,500/-, treating those receipts as revenue in nature and taxable; the assessee had treated them as capital receipts and not offered them to tax. The AO, following directions of the Dispute Resolution Panel (DRP), framed the assessment (after allowing brought forward unabsorbed depreciation of Rs.21,45,52,898/-) which resulted in a nil income assessment except for the disputed additions. The assessee filed this appeal before the Income Tax Appellate Tribunal, Mumbai Bench "K" (ITA No.562/M/2022) challenging the impugned order dated 28.01.2022 (DRP directions) and consequential assessment order (AO order dated 23 Feb 2022 under sections 143(3), 144C(13) read with 144B). The matter was heard on 17.05.2022 and pronounced on 05.07.2022 before Judicial Member Shri Kuldip Singh and Accountant Member Shri Baskaran BR.

Arguments of the Parties

Appellant's Arguments

The assessee contended that the sale proceeds of RECs amounting to Rs.8,90,53,500/- are capital receipts and therefore not taxable as business income.

The assessee argued that, in consequence of treating the REC sale as capital receipt, related expenses of Rs.1,17,40,018/- incurred to earn REC receipts ought to be allowed as deductions (the AO denied these after treating the receipt as revenue).

The assessee disputed levy of interest under sections 234B and 234D, and the initiation of penalty proceedings under section 270A for alleged under-reporting of income of Rs.8,90,53,500/-. (These were included among the grounds of appeal raised by the assessee.)

The assessee placed reliance on an earlier, co-ordinate Tribunal decision in its own case (ITA No.312/M/2019 for AY 2015-16) which decided the identical issue in the assessee's favour, and urged the Tribunal to follow that decision.

Respondent's / Revenue's Position

The Assessing Officer and the DRP treated the sale proceeds of RECs (Rs.8,90,53,500/-) as revenue in nature and therefore taxable, disallowing the assessee's claim of capital receipt.

The DRP recorded that although a co-ordinate Bench had decided the identical issue in favor of the assessee for AY 2015-16, the Revenue had not accepted that decision and intended to challenge it in the Bombay High Court; accordingly, the DRP stated it would refrain from granting relief to the assessee "to keep the issue alive" since the Revenue has no right of appeal against the DRP order to the Tribunal under section 253 of the Act. (This position appears in the DRP's findings reproduced in the impugned order.)

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
CIT v. My Home Power Ltd., (2014) 365 ITR 082 (Andhra Pradesh High Court)	The principle that carbon credits (or similar environmental credits) are an offshoot of environmental concerns, not generated as an asset in the ordinary course of the taxpayer's business, and therefore such receipts can constitute capital receipts rather than business income.	The Tribunal relied on the Andhra Pradesh High Court's factual and legal analysis: that carbon credits were not directly linked to the core business activity (power generation in that case) and no asset was generated in the course of business; applying that analysis, the Tribunal treated the sale proceeds of RECs as capital receipts and followed the holding to delete the addition.
ITA No.312/M/2019 (Dwarikesh Sugar Industries Ltd. — Tribunal, order dated 24.05.2021) for AY 2015-16	Co-ordinate Bench decision applying the My Home Power Ltd. principle to hold that sale proceeds of carbon credits/RECs were capital receipts (mutatis mutandis to the facts of the assessee).	The Tribunal in the present appeal treated the co-ordinate Bench decision as directly on point. The present Bench followed the co-ordinate Bench's finding (which itself followed My Home Power Ltd.) and deleted the addition of Rs.8,90,53,500/- made by the AO/TPO.

Precedent

Rule or Principle Cited For

Application by the Court

CIT v. My Home Power Ltd., (2014) 365 ITR 082 (Andhra Pradesh High Court)

The principle that carbon credits (or similar environmental credits) are an offshoot of environmental concerns, not generated as an asset in the ordinary course of the taxpayer's business, and therefore such receipts can constitute capital receipts rather than business income.

The Tribunal relied on the Andhra Pradesh High Court's factual and legal analysis: that carbon credits were not directly linked to the core business activity (power generation in that case) and no asset was generated in the course of business; applying that analysis, the Tribunal treated the sale proceeds of RECs as capital receipts and followed the holding to delete the addition.

ITA No.312/M/2019 (Dwarikesh Sugar Industries Ltd. — Tribunal, order dated 24.05.2021) for AY 2015-16

Co-ordinate Bench decision applying the My Home Power Ltd. principle to hold that sale proceeds of carbon credits/RECs were capital receipts (mutatis mutandis to the facts of the assessee).

The Tribunal in the present appeal treated the co-ordinate Bench decision as directly on point. The present Bench followed the co-ordinate Bench's finding (which itself followed My Home Power Ltd.) and deleted the addition of Rs.8,90,53,500/- made by the AO/TPO.

Court's Reasoning and Analysis

The Tribunal's analysis proceeded in these principal steps, based only on the content of the opinion:

The Tribunal noted the factual matrix: the assessee's business, the generation of by-products, the TPO's and AO's adjustments including the disputed REC sale of Rs.8,90,53,500/-, and the procedural history culminating in the appeal to the Tribunal.

The Tribunal identified the "sole question" for determination: whether the REC sale proceeds are revenue receipts or capital receipts (the assessee claimed capital receipt; AO/DRP treated them as revenue).

The Tribunal observed that an identical issue had already been decided in favour of the assessee by a co-ordinate Bench (ITA No.312/M/2019 for AY 2015-16, order dated 24.05.2021), which itself followed the decision of the Andhra Pradesh High Court in CIT v. My Home Power Ltd. (2014) 365 ITR 082 (AP).

The Tribunal reviewed the DRP's justification for denying relief — the DRP had refused to follow the co-ordinate Bench on the stated basis that the Revenue had chosen to challenge the co-ordinate Bench's decision in the Bombay High Court and, because Revenue has no right of appeal to the Tribunal against a DRP direction under section 253, the DRP refrained from granting relief "to keep the issue alive." The Tribunal expressly criticised this approach as being without proper judicial discipline and described such a reason as "highly uncalled for" from senior DRP members.

On the substantive point, the Tribunal accepted the factual and legal reasoning in My Home Power Ltd.: carbon credits/RECs arose as an offshoot of environmental concerns, were not generated as an asset in the course of the assessee's business, and were not directly linked to the core business activity. Applying that reasoning (and following the co-ordinate Bench decision that applied it to the assessee's own facts in AY 2015-16), the Tribunal concluded that the sale proceeds are capital in nature and cannot be treated as business receipts or income.

Accordingly, the Tribunal held that the addition of Rs.8,90,53,500/- made by the TPO/AO on account of sale of RECs/carbon credits was unsustainable in law and ordered it to be deleted.

Holding and Implications

Core Ruling: The appeal is allowed and the addition of Rs.8,90,53,500/- made by the TPO/AO on account of sale of Renewable Energy Certificates (RECs)/carbon credits is deleted as such receipts are held to be capital in nature.

Practical consequences and implications (as set out in the opinion):

Direct effect on the parties: The Tribunal deleted the disputed addition of Rs.8,90,53,500/-, thereby allowing the assessee's claim that the REC sale proceeds are capital receipts; the appeal filed by the assessee was allowed accordingly.

On broader precedent: The Tribunal followed the co-ordinate Bench decision in the assessee's own case for AY 2015-16 and the Andhra Pradesh High Court decision in CIT v. My Home Power Ltd. The opinion does not purport to lay down a new principle of law; it applies existing judicial authorities to the facts before it.

No further directions or orders on the other grounds (expenses disallowance of Rs.1,17,40,018/-, interest under sections 234B/234D, or penalty under section 270A) are explicitly set out in the operative portion of the judgment beyond the deletion of the REC-related addition; the opinion's operative outcome is the deletion and allowance of the appeal on the REC issue.

Order pronounced in open court on 05.07.2022. Members: (Baskaran BR) Accountant Member; (Kuldip Singh) Judicial Member.

DWARIKESH SUGAR INDUSTRIES LTD, MUMBAI v. ASSESSING OFFICER , NFAC, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL,

MUMBAI BENCH "K", MUMBAI

BEFORE SHRI BASKARAN BR, ACCOUNTANT MEMBER

AND

SHRI KULDIP SINGH, JUDICIAL MEMBER

ITA No.562/M/2022

Assessment Year: 2017-18

M/s. Dwarikesh Sugar Industries Ltd., 511, Maker Chamber – V, 211, Nariman Point, Mumbai – 400 021 PAN: AABCD 8192N	Vs.	The Assessing Officer, National Faceless Assessment Centre, Delhi
(Appellant) (Respondent)

Present for:

Assessee by : Shri Jayesh Dadia, A.R. Revenue by : Shri Sambit Mishra, D.R. Date of Hearing : 17 . 05 . 2022 Date of Pronouncement : 05 . 07 . 2022

O R D E R

Per : Kuldip Singh, Judicial Member:

The appellant, M/s. Dwarikesh Sugar Industries Ltd. (DSIL) (hereinafter referred to as 'the assessee') by filing the present appeal, sought to set aside the impugned order dated 28.01.2022 passed by Dispute Resolution Panel [hereinafter referred to as the DRP] qua the assessment year 2017-18 on the grounds inter alia that :-

"Dwarikesh Sugar Industries Ltd., the Appellant herein, begs to prefer this appeal against the order dated 23^rdFebruary, 2022, passed by the Learned Assessing Officer, National Faceless Assessment Centre, Delhi (hereinafter referred to as "the Learned Assessing Officer") under section 143 (3) r/w. Section 144C (13) r/w. Section 144B of the Income Tax Act, 1961 (hereinafter referred to as "the

Act") in pursuance to the directions issued by the Hon'ble Dispute Resolution Panel - 1, Mumbai - 2 (hereinafter referred to as "the Hon'ble DRP") dated 28^th January, 2022 under section 144C (5) of the Act on the following grounds :

1. The Learned Assessing Officer erred in law and on facts in treating a sum of Rs.8,90,53,500/- in respect of sale of Renewable Energy Certificates (RECs) as revenue receipt as against capital receipt claimed by the Appellant, following the Hon'ble DRP's directions which having noted several judicial pronouncements including that of Hon'ble Mumbai Tribunal for Assessment Year 2015 - 16 in the Appellant's own case which are in favour of the Appellant, decided this issue against the Appellant just to keep the issue alive as the Revenue has no right of appeal to the Hon'ble Tribunal, under section 253 of the Act.

2. After treating above sum of Rs. 8,90,53,500/- in respect of sale of Renewable Energy Certificates (RECs) as revenue receipt, the Learned Assessing Officer erred in law and on facts in not allowing a sum of Rs. 1,17,40,018/- being expenses wholly and exclusively incurred by the Appellant to earn REC receipts as a deduction.

3. The Learned Assessing Officer erred in law and on facts in levying interest under section 234 B and 234D of the Act.

4. The Learned Assessing Officer erred in law and on facts in initiating penalty proceedings under section 270A of the Act for the alleged under - reporting of income of Rs. 8,90,53,500/- being sale price of Renewable Energy Certificates (REC).

The Appellant prays that reliefs on the aforesaid grounds be allowed and order of the Learned Assessing Officer be modified accordingly. The Appellant craves leave to add to, alter amplify or delete any of the aforesaid grounds of appeal at or before the hearing."

2. Briefly stated facts necessary for adjudication of the controversy at hand are : assessee M/s. Dwarikesh Sugar Industries Ltd. (DSIL) is into the business of manufacturing of sugar and allied products. DSIL's business portfolio also comprises of molasses and bagasse which are either generated as a residue or a by-product of sugar production process. During the year under

assessment assessee entered into specified domestic transactions as reported in form 3CEB viz. power transfer to sugar units, stream transfer to sugar units, purchase of raw materials and allocation of expenses. Partly declining the transfer pricing study conducted by the assessee as to finding its specified domestic transactions at arms length the Ld. Transfer Pricing Officer (TPO) proceeded to make adjustment of Rs.39,84,42,988/- towards profit of eligible units, which represents the amount of profit attributable to non eligible units. However, other transactions entered into by the assessee found to be at arms length.

3. Assessee carried the matter before the Ld. DRP by way of raising objections who has partly allowed the same.

4. Pursuant to the order passed by the Ld. TPO/Ld. DRP, Assessing Officer (AO) made addition of Rs. Rs.39,84,42,988/- on account of arms length price of the specified domestic transaction. The AO also made addition of Rs.8,90,53,500/- (carbon credits) by disallowing the claim of the assessee qua sale of Renewable Energy Certificates (REC) of Rs.8,90,53,500/- as capital receipt which was not offered to tax by the assessee and thereby framed the assessment at nil income by allowing the balance brought forward unabsorbed depreciation of Rs.21,45,52,898/- under section 143(3) read with section 144C (13) read with section 144B of the Income Tax Act, 1961 (for short 'the Act').

5. Feeling aggrieved with the impugned order passed by AO/DRP/TPO the assessee has come up before the Tribunal by way of filing present appeal.

6. We have heard the Ld. Authorised Representatives of the parties to the appeal, perused the orders passed by the Ld. Lower Revenue Authorities and documents available on record in the light of the facts and circumstances of the case and law applicable thereto.

7. From the facts narrated above and grounds raised by the assessee the sole question arises to be determined in this case is:

"As to whether an amount of Rs.8,90,53,500/- received by the assessee on account of sale of Renewable Energy Certificate (REC) carbon credits as revenue receipt or a capital receipt as claimed by the assessee."

8. AO/DRP disallowed the claim of the assessee claiming the sale of REC of Rs.8,90,53,500/- as capital receipt being not offered to tax by holding that the same is a revenue receipt and is liable to be subjected to tax.

9. At the very outset, the Ld. A.R. for the assessee brought to the notice of the Bench that identical issue has already been decided in favour of the assessee in its own case in ITA No.312/M/2019 for A.Y. 2015-16. This fact is also clear for the findings returned by Ld. DRP in the impugned order as under:

"FINDINGS OF THE DRP FOR GROUND No. 3

13.1 The submissions of the assessee are considered. It is seen that though the Mumbai ITAT has decided this issue in favour of the assessee for the A.Y. 2015-16, Revenue has not accepted the same, and taken a decision to challenge the order of the ITAT in Bombay High Court. Considering that Revenue has no right to file appeal against the order of DRP, to keep the issue alive, the panel refrains from granting relief to the assessee."

10. We have perused the order passed by co-ordinate Bench of the Tribunal in assessee's own case in ITA No.312/M/2019 for

A.Y. 2015-16 order dated 24.05.2021 which is on identical issue and decided the same in favour of the assessee by following the decision rendered by Hon'ble Andhra Pradesh High Court in case of CIT vs. My Home Power Ltd. (2014) 365 ITR 082 (AP) by returning following findings:

"7. Considered the submissions of the learned Counsel for both the parties and perused the material on record. While going through the judicial pronouncements relied upon by the learned Counsel for the assessee, we find that the issue for our adjudication is squarely covered by the aforesaid decisions relied upon by the learned Counsel wherein in one of the cases relied upon in CIT v/s My Home Power Ltd., [2014] 365 ITR 082 (AP) (supra) filed by the Revenue, the Hon'ble Andhra Pradesh High Court held that the Tribunal had factually found that Carbon Credit was not off-shoot of business but off-shoot of environmental concerns and no asset was generated in course of business but it was generated due to environment concerns. Further we find that the Hon'ble A.P. High Court agreed with the factual analysis as the assessee carried on business of power generation and Carbon Credit was not even directly linked with power generation. It is held that on sale of excess Carbon Credits income was received and the Tribunal correctly held that it is capital receipt and could not be a business receipt or income. As a matter of convenience, the observations of the Hon'ble A.P. High Court in CIT v/s My Home Power Ltd., [2014] 365 ITR 082 (AP) (supra) is reproduced below:-

"ITAT have considered the aforesaid submission and ITAT 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 of business but it is generated due to environmental concerns". ITAT 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."

8. Since the issue in hand is mutatis mutandis covered by the aforesaid decision of the Hon'ble A.P. High Court as well as other decisions referred to above, respectfully following the same, we uphold the order of the learned Commissioner (Appeals) by dismissing the ground raised by the Revenue."

11. When the identical issue has already been decided by the co-ordinate Bench of the Tribunal in assessee's own case for A.Y. 2015-16 (supra) in favour of the assessee, it is beyond comprehension as to how the Ld. DRP has not followed the same on the pretext that "the Revenue has not accepted the same and taken a decision to challenge the order of ITAT in Bombay High Court to keep the issue alive and as such the panel refrains from granting relief to the assessee". Such type observation on flimsy grounds are highly uncalled for from such a senior officers of DRP who are expected to follow the judicial discipline.

12. Following the order passed by the co-ordinate Bench of the Tribunal in assessee's own case for A.Y. 2015-16 (supra), which is based upon the decision rendered by Hon'ble Andhra Pradesh High Court in case of My Home Power Ltd. (supra), we are of the considered view that sale of REC (carbon credits) income received by the assessee is a capital receipt and could not be a business receipt or income nor it is directly linked with the business of the assessee nor any asset is generated in the course of business but it is generated due to environmental concern. Therefore, addition made by Ld. TPO/AO to the tune of Rs.8,90,53,500/- on account of sale of RECs/carbon credits during the year under assessment is not sustainable in the eyes of law, hence, ordered to be deleted. Consequently, the appeal filed by the assessee is allowed.

Order pronounced in the open court on 05.07.2022. Sd/- Sd/-

(BASKARAN BR) (KULDIP SINGH)

ACCOUNTANT MEMBER JUDICIAL MEMBER

Mumbai, Dated: 05.07.2022. * Kishore, Sr. P.S.

Copy to: The Appellant The Respondent

The CIT, Concerned, Mumbai The CIT (A) Concerned, Mumbai The DR Concerned Bench //True Copy//

By Order

Dy/Asstt. Registrar, ITAT, Mumbai.

ITA 562/MUM/2022

DWARIKESH SUGAR INDUSTRIES LTD, MUMBAI v. ASSESSING OFFICER , NFAC, MUMBAI

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant's Arguments

Respondent's / Revenue's Position

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

DWARIKESH SUGAR INDUSTRIES LTD, MUMBAI v. ASSESSING OFFICER , NFAC, MUMBAI

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