2014 (7) TMI 180 - AT - Income Tax

Tribunal rules in favor of assessee, determining Carbon Emission Reduction Certificate gains as nontaxable capital receipts.

The Tribunal allowed the appeal of the assessee, setting aside the CIT's order passed under section 263. It held that the assessment order was not ... Jurisdiction of the CIT in invoking powers u/s 263 of the Act – Held that:- The CIT has considered the assessment order passed u/s 143 of the Act to be erroneous and prejudicial to the interests of the revenue for non-consideration of certain issues as raised in the show cause notice issued u/s 263 of the Act - the assessee has not only explained queries raised by the AO, but, has also substantiated it with necessary documentary evidence - the AO have conducted necessary enquiry and completed the assessment after applying his mind to the facts and materials on record, assessment order passed cannot be considered to be erroneous and prejudicial to the interests of the revenue as the condition precedent for invoking jurisdiction u/s 263 is not satisfied – Relying upon Malabar Industrial Co. Ltd. Versus Commissioner of Income-Tax [2000 (2) TMI 10 - SUPREME Court] - the assessment order passed cannot be considered to be erroneous and prejudicial to the interests of the revenue for subjecting it to revisional proceeding u/s 263 of the Act. Grant of deduction u/s 80IA of the Act - Gain derived from sale of carbon remission reduction certificates – Part of business income or not – Held that:- The amount received on sale of CERCs being capital in nature – Following The Commissioner of Income Tax – IV, Hyderabad Versus M/s. My Home Power Ltd. [2014 (6) TMI 82 - ANDHRA PRADESH HIGH COURT] - it cannot be treated as income of the assessee in the first place - the assessee has treated it as revenue receipt, receipt being in the nature of capital cannot be treated as income - even if AO has allowed the deduction on the amount u/s 80IA treating it as revenue income, no prejudice was caused to the revenue - one of the condition for invoking jurisdiction u/s 263 was not satisfied. Claim of reimbursement of taxes from AP TRANSCO – Computation of book profit u/s 115JB of the Act – Held that:- The Tribunal in the case of the same assessee has directed the AO to delete the addition - it cannot also be considered for the purpose of computing book profit of the assessee u/s 115JB of the Act as it does not accrue as income of the assessee for the assessment year - the AO taking note of the order passed by the Tribunal on the issue has added the income on protective basis only - since the amount was not treated as income in the books of account the same also cannot be considered under the provisions of section 115JB, which is to be computed based on P&L A/c of the assessee company. Only because the view taken by the AO does not appear to be correct to the CIT, it cannot be said that such view is erroneous and prejudicial to the interests of the revenue - though the CIT has observed that the view taken by the AO is not correct, but, he himself has not expressed in detail why he considers it to be incorrect - on going through the provision contained u/s 43A and relying upon CIT Vs. Woodward Governor India P. Ltd. [2009 (4) TMI 4 - SUPREME COURT] – the view taken by the AO is not one of the possible view - the CIT was not justified in treating the assessment order to be erroneous and prejudicial to the interests of revenue – Decided in favour of Assessee. Issues Involved:1. Allowance of employee compensation expenses2. Allowance of carbon emission reduction certificates3. Difference in claim of short-term capital gains4. Difference in the amounts shown under liabilities no longer required5. Allowance of provision made for fringe benefit tax6. Reimbursement of taxes by APTRANSCO7. Allowance of deduction u/s 80IA of the ActDetailed Analysis:1. Allowance of Employee Compensation Expenses:This issue was not specifically addressed in the detailed analysis provided in the judgment.2. Allowance of Carbon Emission Reduction Certificates:The assessee received Rs. 13,17,46,040 from the sale of Carbon Emission Reduction Certificates (CERCs) and treated it as revenue receipt, claiming deduction u/s 80IA. The CIT held that the gain from CERCs had no direct nexus to the business of power generation and thus denied the deduction. The Tribunal referred to the ITAT Hyderabad Bench's decision in My Home Power Ltd. Vs. DCIT, which held that gains from CERCs are capital receipts and not taxable. Thus, the CIT's finding was deemed legally unsustainable.3. Difference in Claim of Short-Term Capital Gains:This issue was not specifically addressed in the detailed analysis provided in the judgment.4. Difference in the Amounts Shown Under Liabilities No Longer Required:This issue was not specifically addressed in the detailed analysis provided in the judgment.5. Allowance of Provision Made for Fringe Benefit Tax:This issue was not specifically addressed in the detailed analysis provided in the judgment.6. Reimbursement of Taxes by APTRANSCO:The assessee had an agreement with AP Transco for the reimbursement of taxes paid. The CIT held that the AO failed to include Rs. 12,18,50,000 while computing income under section 115JB. The Tribunal noted that the ITAT had previously ruled that reimbursement of advance tax paid cannot be considered income accrued to the assessee, thus it cannot be included in the book profit under section 115JB.7. Allowance of Deduction u/s 80IA of the Act:The CIT directed the AO not to grant deduction u/s 80IA on gains from the sale of CERCs, arguing they were not part of business income. The Tribunal found that the AO had conducted necessary inquiries and had allowed the deduction after proper application of mind. The Tribunal held that the assessment order was not erroneous or prejudicial to the interests of the revenue.Exercise of Jurisdiction u/s 263:The Tribunal examined whether the CIT was justified in invoking jurisdiction u/s 263. The Tribunal concluded that the AO had conducted necessary inquiries, and the assessment order was passed after applying his mind to the facts and materials on record. The Tribunal held that merely because the AO did not detail his inquiries in the assessment order does not make it erroneous or prejudicial to the revenue. The Tribunal relied on the Supreme Court's decision in Malabar Industrial Co. Ltd. Vs. CIT and the AP High Court's decision in Spectra Shares and Scrips Pvt. Ltd. Vs. CIT to support this view.Conclusion:The Tribunal set aside the CIT's order passed u/s 263, holding that the assessment order was not erroneous or prejudicial to the interests of the revenue. The appeal of the assessee was allowed.