TaxTMI 
TaxTMI 
2023 (6) TMI 1025
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....ute Resolution Panel dated 29.06.2022, and the amount of Rs. 4,57,32,318/- paid to ZYLO international has been wrongly treated as bogus expenditure u/s 69C and further the amount of Rs. 17,77,26,000/- received on account of sale/ transfer of Recs/ESCs has been wrongly treated as business income. 2. That in the facts fit circumstances of the case, the Ld. AO NFAC has erred on facts fit law in making the addition of Rs. 17,77,26,000/- received on account of sale/transfer of RECs/ESCs, in pursuance of directions of Dispute Resolution Panel dated 29.06.2022, while recording the finding that the claim of the assessee u/s 115BBG is being rejected despite the fact that the claim made in the return of income was modified during the course of assessment proceedings and in the objections filed before the DRP that the receipts from sale/transfer of RECs/ESCs are capital receipts which are not liable to tax. 2.1. That in the facts & circumstances of the case, the Ld. AO NFAC has erred on facts fit law in making the addition of Rs. 17,77,26,000/-, in pursuance of directions of Dispute Resolution Panel dated 29.06.2022, by treating the receipts from sale/transfer of RECs/ESCs a....
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....69C, in pursuance of directions of Dispute Resolution Panel dated 29.06.2022, by treating the payment of Rs. 4,57,32,318/- to ZYLO International as Bogus without appreciating the evidence filed by the assessee during the course of proceedings before the Dispute Resolution Panel. 5. That in the facts 8t circumstances of the case, the Ld. AO NFAC has erred on facts & law in making the addition of Rs. 4,57,32,318/- u/s 69C, in pursuance of directions of Dispute Resolution Panel dated 29.06.2022, by treating the payment of Rs. 4,57,32,318/- to ZYLO International as Bogus because the DRP has issued the directions for enhancement of income without making any independent inquiry. 5.1. That the Ld. AO NFAC has erred on facts & law invoking the provisions of section 115BBE of the Act and charging the special rate of tax, which is highly unjustified. 6. That the appellant craves leave to add or amend the grounds of appeal before the appeal is finally heard or disposed of." 3. Tersely, we advert the fact of the case. The assessee-company is manufacturer of writing and printing paper, having factory premises at village Rupana situated at Muktsar Sahib. The assesse....
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....the assessee, Mr Sudhir Sehgal, filed a written submission which are kept in the record. Mr Sehgal first placed that the assessee earned Rs. 17,77,26,000/- by transferring of the RECs and ESCs credit during the impugned year which is capital in nature. Though in the return the assessee claimed it u/s 115BBG and paid the tax in special rate. 5.1 Mr Sehgal, ld. AR invited our attention in APB pages 7 to 15, the copy of the letter dated 26.09.2021 submitted before the revenue related to claim made in which income earned from RECs/ESCs. The relevant part of the assessee's submission is extracted as below: 5.2 Mr Sehgal, ld. AR further explained the details about the sale of renewable energy certificate (REC and ESCarts), the relevant part is extracted as below: "2. Receipts on sale of Renewable Energy Certificates [REC] & ESCERTS [Addition made as per directions of the DRP]: Before we specifically, deal with the above said ground of appeal, it is important to give the 'brief profile' of the company and the business carried on by it which is as under: a. The assessee is a public company engaged in the manufacturing of 'writing & printing paper', having f....
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....('RPO') through a market-based instrument aimed at addressing the mismatch, between availability of renewable energy resources in state and the requirement of the obligated entities to meet the RPO. h. Under the REC mechanism, the units/undertakings/entities, which are not using 'renewable energy resources' are required to purchase, at a cost, RECs, to compensate its RPO. This mechanism helps in promoting use of 'renewable energy resources' and in sustaining the non-renewable energy resources. i. The company engaged in generation of electricity from use of 'renewable energy sources' is required to apply for registration for issuance of certificates and thereafter, transferable certificates are issued by Central Agency of MNRE. j. The CERC Regulations also provide that the certificates issued to an eligible entity can also be placed for dealing in any of the 'Power Exchanges' as the certificate holder may consider appropriate, and such certificate shall be available for dealing in accordance with the Rules and Byelaws of such Power Exchange at a value pre-determined by the Power Exchange. Similarly, ESCERTS are also issued for the conservation of energy an....
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....ons of law. Section 115BBG deals with Income from sale of Carbon Credit does not take within its ambit the income from sale of RECs/ESCs: '115BBG, Tax on income from transfer of carbon credits. ~{i) Where the toad income of an assessee includes any income by way of transfer of carbon credits, the income-tax payable shall be the aggregate of- (a) the amount of income-tax calculated mi die income by way of transfer of carbon credits, at the rate of ten per cent; and (b) the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the amount of income referred to in clause (a). (2) Notwithstanding anything contained in this Act mi deduction In respect of any expenditure or allowance stud! be allowed to the assessee under any provision of this Act in computing his income referred to in clause (a) of sub-section (1). Explanation, -For the purposes of this section 'carbon credit" in respect of one unit shall mean reduction of one tonne of carbon dioxide emissions or emissions of its equivalent gases which is validated by die United Nations Framework on Climate Change and which can be traded In mar....
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....ppear out to the blue. A series of conscious decision are thus required to be taken by the assessee in order to get the RECs/ESCs and to considerations of REC/ESCs therefore have an integral part of the business activity. The generation of RECS is thus on account of business activity and the same must be included in business income. As per section 28 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 income from other sources, but business income. Since on account of running the business of paper manufacturing for which power is an essential and compulsory requirement, RECs were earned which is marketable and is sold, therefore, it is an income out of business. It is hereby established that the REC/ESCs are a sresult of the assessee's business. The Panel, therefore, finds no infirmity in the order of the AO. 9.2 Thus following the directions of the Hon. DRP, the addition of Rs. 17,77,26,000/- is made to the total income as business income and the assessee's claim under section 115BBG is rejected." 6.1 The ld. DR further argued and placed the order of the ....
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....hus, they are taxable. It is a settled law that a receipt, which is not in the character of income as defined in Section 2(24) of the Act and not chargeable to tax u/s 4 r.w.s. 5 cannot be brought in the ambit of tax and, thus, it is a capital receipt only. This view has been taken into consideration by the 'Jaipur Bench' of the ITAT in ITA No. 403 &404/ JP/2019 in which, the decision of the Andhra Pradesh High Court as cited supra in the case of CIT vs. My Home Power Ltd. as cited above and also of the Hon'ble Rajasthan High Court in the case of CIT vs. Shree Cement Ltd. dated 22.08.2017 and the finding has been reproduced that since the source of the Carbon Credit is the World Concern and Environment and due to this, the assessee gets a privilege in the nature of transfer of Carbon Credit and cannot be liable for tax in terms of Section 2(24), (28) (45) & (56). It has further been held that the Carbon Credits are on the account of savings of energy consumption and not on business. Even while rendering this judgment, the Jaipur Tribunal has discussed the provisions of 115BBG and, thus, since as on the day also, RECs/ESCs are not part of Section 2(24) and, hence, it is a capital....
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....e parties only in relation to the assessment for that year and the decisions given in an assessment for an earlier year are not binding either on the assessee or the department in a subsequent year, this rule is subject to limitations, for there should be finality and certainty in all litigations including litigation arising out of the Income Tax Act and an earlier decision on the same question cannot be reopened." 8. The ld. AR further respect fully relied on the orders of the Hon'ble Apex Court and High Court which are as follows: - 8.1. The relince was placed on following judgments related nature of income as capital receipt:- 8.1.1. Ambika Cotton Mills Ltd. v. Deputy Commissioner of Income-tax, [2013] 40 taxmann.com 171 (Chennai - Trib.) "15. This leaves us with the issue regarding addition of Rs. 15,51,913. Undisputedly, the only strife between the parties is that per assessee it is liable to be taxed in the assessment year 2010-11 which is opposed by the Revenue who states that since it is a case of mercantile system of accounting, the amount has to be taxed in the impugned assessment year. We notice and even the Assessing Officer holds that necessary intima....
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....of 1960, decided on September 13, 1962, in which a Division Bench of the Allahabad High Court answered a similar question relating to taxability of payments received for sale of "loom-hours" by the respondent in an assessment year with which we are not concerned in these appeals. The court in that case ignoring the view in the judgments under appeal held that "loom-hours" did not form the fixed profit-making structure of the respondent and it was not correct to say that the capital structure of the business was 220 looms multiplied by the number of hours per week for which the machinery was entitled to work. The "loom-hours" had in the view of the court nothing to do with the capital structure of the business and there was nothing to show that the defect in the preparatory section which rendered the "loom-hours" un-utilisable was permanent. It was always open to the respondent to acquire the necessary yarn from outside and thereby utilise the remaining quota of "loom-hours" in manufacturing jute, and if the respondent preferred not to procure yarn and chose to sell the surplus "loom-hours" and thus ensure profit for itself without incurring any risk, the receipt by disposal of a co....
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.... that, if an assessee company is in receipt of a 'capital receipt' which is not chargeable to tax at all, that is, it does not fall within any of the charging section or can be classified under any heads of income under the Income Tax Act, then same cannot be treated as part of net profit as per Profit & Loss account or reckoned as 'working result' of the company of the relevant previous year and consequently, cannot be held to be taxable as 'book profit' under MAT in terms of section 115JB. Accordingly, our conclusion remains the same that, the capital surplus on account of waiver of dues neither is nether taxable nor can be included in computation of book profit u/s 115JB." 8.2.3. Principal Commissioner of Income-tax, Central-2, Kolkatav.Ankit Metal & Power Ltd, [2019] 109 taxmann.com 93 (Calcutta) "28. The third issue involve in the instant appeal which requires adjudication is whether the action of Tribunal entertaining / allowing the claim which was made by the assessee before the Assessing Officer by filing a revised computation instead of filing a revised return since the time to file the revised return was lapsed, for claiming to tr....
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.... ii) APB page nos. 185 to 199proof related to payment received in bank account, iii) APB page nos. 201 to 206, the copy of bank statements related to reflection of transaction, received from the party. iv) APB page nos. 207 to 210, TDS Certificate in Form 16A related to deduction of tax at source. The ld. AR fully denied that the assessee had no transaction with the RolmexInternational, as alleged by the revenue. The ld. AR placed that the details as below: "18. Addition of Rs. 4,57,32,318/- on account of alleged bogus and ingenuine expenditure Facts * As stated above the assessee is a public company engaged in the manufacturing of writing and printing paper having its factory premises in village Rupana, situated in District of Sri. Muktsar Sahib [Punjab] which is a rural area. * The turn over of the assessee company is in the range of 622 Crores in FY 2017-18 relevant to AY 2018-19 and for the purpose of arranging orders for sale of writing and printing paper, the assessee has engaged the services of agents to procure the orders for which the commission is paid.[P&L Account/ balance sheet on PB-6A-6D] * This is a perma....
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....rm 16A issued to the above stated entity along with confirmation of Zylo International & ledger account were placed on record during the course of proceedings u/s 148. * The Jurisdictional AO, without making any independent inquiry, shared the information with the DRP vide letter dated 12.04.2022 but the DRP issued the SCN for enhancement, through e-mail, for the first time on 27th June, 2022 and the assessee was allowed time up to 28.06.2022 to respond to the same and The order making enhancement was passed by the DRP on 29.06.2022." 11. The ld AR fully relied on Explanatory notes to Finance Bill, 2012 which is reproduced as below. "Explanatory notes to Finance Bill, 2012 clarifies the above stated view of the courts. Dispute Resolution Panel (DRP) had been constituted with a view to expeditiously resolve the cases involving transfer pricing issues in the case of any person having international transactions or in case of a foreign company. It has been provided under sub-section (8) of section 144C that DRP may confirm, reduce or enhance the variations proposed in the draft order of the Assessing Officer. In a recent judgement, it was held tha....
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....nd the assessment must be confined to those items of income which were the subject-matter of the original assessment. 50. In course of time, Union Tyres was doubted. In. Sardari Lal & Co., (supra) the same issue-whether the appellate authority has the power under section 251 to discover a new source of income-was referred to a Full Bench. After examining the authorities holding the fielding on that issue, the learned Full Bench has held that the inevitable conclusion is that whenever the question of taxability of income from a new source of income is concerned, which had not been considered by the assessing officer, the jurisdiction to deal with the same in appropriate cases may be dealt with under section 147, or section 148, or even section 263 of the Act if requisite conditions are fulfilled. It is inconceivable, according to Sardari Lal, that in the presence of such specific provisions, a similar power is available to the first appellate authority. Eventually, Sardari Lal upheld the decision in Union Tyres." The ld AR mentioned that the Hon'ble Delhi High Court has held in the case of CIT vs. Sardari Lal & Co [2001] 251 ITR 864 that the first appellate authority has....
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....ce tax and payment by account payee cheques and declaration for such sum as income by payees supports the claim of the appellant that services have been duly rendered by payees, the same is duly eligible for deduction. As regards the judgment in the case of Modi Industries Ltd. v. CIT [1993] 200 ITR 3291 (Delhi), the same is wholly inapplicable as that was a case where the assessee has claimed deduction in respect of commission paid to S.E. Corporation on account of their services. In that case, it was found that Corporation had not employed any person who was shown to possess the necessary experience and qualification that it had no godown of its own and it used to draw the goods from the sales office of the assessee and that the Corporation did not have the physical resources necessary to have carried out its duties. In the instant case, there is neither any evidence to that effect and, nor any material to support such a hypothesis. On the contrary, it is a case where summons were not issued to such parties and in such circumstances considering the evidence on record, it is incorrect to suggest that, services have not been rendered. Hence, such judgment too has no application to ....
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....nts have been made to M/s Zylo International, whose ledger account in the books of the assessee was filed to evidence the transaction. Since the proceeding for AY 2018-19 was pending before this Panel, the AO forwarded this information to this Panel which was confronted to the assessee. The assessee has merely reiterated the submission made before the AO. However, it is noticed from the copies of bank account wo, 171911100004049 is not in the name of Zylo International but in the name of Rolmex International. Thus, unilateral copies, of ledger account do not negate ar dilute the- evidentiary value of the bank statement and the information received. It is clear that these transactions are made to Rolmex International from the account of the assessee through RTGS. Therefore, there remains no doubt that the payment has been made to Rolmex international whose alleged prop, Sh. Jaswant Singh Is a labourer and man of no means. In that view of the matter, the Panel concurs with the view of the AO that the aforesaid transactions are entered by the assessee company are Rolmex International, and not with Zylo International The(r), the invoices filed by the assessee in the name of Zylo Intern....
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....us Oxide and Fluorinated gases, are a primary polluter of the environment. (i) The carbon credits are of two types. The first type of carbon credits is validated by united nation Framework on Climate Change under Kyoto Protocol and are taxable u/s 115BBG of the Act at special rate. (ii) That under the Kyoto Protocol to the United Nations framework convention on climate change, it was mutually agreed by the participant counties to reduce emission of Green House Gases/ Carbon foot print the credit is given to the assessee reducing such emissions under the Kyoto Protocol and because of international understanding. (iii) The second type of carbon credits are of voluntary nature & are regulated by independent body Verra which was founded in 2007 by environmental and business leaders who saw the need for greater quality assurance in voluntary carbon markets. (iv) The assessee company is dealing in a second type of carbon credits which are of voluntary nature and are not regulated by United Nations Framework Convention on climate change. 15.3. Basics of Renewable Energy Certificates Another way to help to reduce carbon footprints has been de....
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....lus under any of the three schemes can sell them to another assessee. d) Moreover, transferable credits of all the three modes of incentive does not result into and are not incidence of one's business and these are credit for reducing emission. The person having credits under any of the above stated schemes get benefited by selling the same to persons who needs to offset carbon footprint because of one's negative points under any of the modes of incentives. e) The amount is not received, in any of the modes of incentive, by producing or selling any product, by-product or rendering any services for carrying on the business and the credit under any of the three modes is entitlement or accretion of capital and hence income earned on sales of these is a capital receipt. f) That credit under any above said modes of incentive is not an off shoot of business, but it is generated due to environmental concerns and no asset is generated in the course of business, but it is generated due to environmental concern and the credit for reducing carbon emission or greenhouse effect can be transferred to any other party to reduce carbon emission. 16. The assessee claime....
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....ssessee. The addition cannot be on basis of surmises and conjectures. We respectfully relied on the order of Hon'ble Apex Court Umacharan Shaw & Bros(supra). In our considered view the addition amount to Rs. 4,57,332,318/- is quashed. 17. Considering the above discussion, the Ground nos. 1 & 6 are general in nature. The Ground no-3 is not pressed. The Ground nos. 2,4 & 5 are allowed. 18. In the result, the appeal of the assessee bearing ITA No. 193/Asr/2022 is allowed. Order pronounced in the open court on 13.06.2023 ============= Document 1 Satia Industries Limited Assessment proceedings for AY 2018-19 Reply Show Cause Notice 26 September 2021 The National Faceless Assessment Centre, Income Tax Department Delhi Dear Sir, Ref: PAN: Asst. Year: Sub: Satia Industries Limited ('the assessee' or 'the Company') AACC57233A 2018-19 Reply of notice number - ITBA/AST/F/143(3)(SCN)/2021-22/ 1035797143(1) issued under Section 142(1) of the Income-tax Act, 1961 ('the Act') With reference to the captioned subject, we wish to submit that the company has received the captioned notice dated 22 September 2021 requiring the company ....
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....nce of certificates and thereafter, transferable certificates are issued by Central Agency of MNRE. The CERC Regulations also provide that the certificates issued to an eligible entity can also be placed for dealing in any of the Power Exchanges as the certificate holder may consider appropriate, and such certificate shall be available for dealing in accordance with the Rules and Byelaws of such Power Exchange at a value pre-determined by the Power Exchange. Similarly, ESCerts are also issued for the conservation of energy and the same can be sold on the Power Exchange regulated by the Government. It is submitted that RECS/FSCerts are the Indian version of Carbon Credits, which are recognized internationally which are issued in order to promote the ways and means to conserve environment. The Assessee is a public company engaged in the manufacturing of writing and printing paper having factory premises in the village Rupana situated Distt. Shri Muktsar Sahib which is an 'Agro' based area. The Company also has a co-generation captive power division in which electricity is generated from renewable energy sources i.e., biofuels which include....
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....is not received for producing and/or selling any product, by-product or for rendering any service for carrying on the business, REC is entitlement or accretion of capital and hence receipts earned on sale of these credits is capital receipt. A.13 For this proposition, we place reliance on the judgment of the Supreme Court in the case CIT v. Maheswari Devi Jute Mills Ltd. [1965] 57 ITR 36 (SC) wherein it is held that transfer of surplus loom hours to other mill out of those allotted to the assessee under an agreement for control of production was capital receipt and not income. Being so, the consideration received by the assessee is similar to consideration received by transferring of loom hours. The Supreme Court considered this fact and observed that taxability of payment received for sale of loom hours by the assessee is on account of exploitation of capital asset and it is capital receipt and not an income. Similarly, in the present case the assessee transferred the RECS/ESCerts like loom hours to some other concerns for certain consideration. Therefore, the receipt of such consideration cannot be considered as business income; and the s....
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....wever, it is submitted before the office of your goodself that section 115BBG only provides for the rate of taxation on the income arising from the transfer of 'Carbon Credits'. It may be noted that section 115BBG is not a 'charging section' and does not create any kind of charge on the purported income said to be derived from the transfer of Carbon Credits. A.20 It is a well settled principle of law that for subjecting any income to tax, a charge has to be created on such income through a charging provision in the statute. However, in the present case, only a rate of tax has been provided in section 115BBG without making any amendment to section 2(24) whereby the definition of 'income' has not been amended to include the income arising from the transfer of 'Carbon Credits". A.21 In the absence of any charging provisions in relation to the taxability of 'Carbon Credits', the machinery provisions of section 115BBC fail and thus, the section does not have any operational relevance. A.22 Moreover, it is submitted that that RECS/ESCerts are similar in nature as that of Carbon Credits, but the same are issued by Indian Government rather than bei....
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....Act is attracted; but is only toward providing an alternative basis for computing the income. A.28 The Hon'ble Cochin Tribunal in the case of ACIT vs. The Nilgiri Tea Estate Ltd. (37/ Coch/ 2014) held that any income, which does not fall within the purview of "Total Income' under section 5 of the Income-tax Act, cannot be taxed under any other provisions of the Act. A.29 Similar view has also been upheld by Hon'ble Mumbai Tribunal in the case of Shivalik Venture (P.) Ltd. vs. DCIT [2015] 60 taxmann.com 314 (Mumbai - Trib.). The Hon'ble Tribunal held as follows: Quote "In view of the foregoing discussions, the profit arising on transfer of capital asset by assessee to its wholly owned Indian subsidiary company is liable to be excluded from the net profit., ie., the net profit disclosed in the profit and loss account should be reduced by the amount of profit arising on transfer of capital asset and the amount so arrived at shall be taken as net profit as shown in the profit and loss account for the purpose of computation of book profit under Explanation 1 to section 115JB. Alternatively, since the said profit does not fall under the def....
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.... Kolkata Tribunal, in the case of Sutlej Cotton mills Ltd. vs. Asstt. CIT [1993] 45 ITD 22 (Cal.) (SB), held that a particular receipt, which is admittedly not an income cannot be brought to tax under the deeming provisions of section 115] of the Act, as it defies the basic intention behind introduction of provisions of section 115JB of the Act. A.34 Similarly, the Hon'ble Kolkata Tribunal, in the case of Sipca India (P.) Ltd. vs. Dy. CIT [2017] 80 taxmann.com 87 (Trib.) considered a similar issue and held that when, a particular subsidy in question is not in the nature of income, it cannot be regarded as income even for the purpose of book profit under section 115JB of the Act. Though credited in the profit and loss account, it has to be excluded for arriving at the book profit under section 115JB of the Act. A.35 Similar principle of law has been upheld by the Hon'ble Mumbai Tribunal in the case of ACIT vs. JSW Steel Ltd. [2019] 112 taxmann.com 55 (Mumbai). A.36 Considering the above judicial precedents, and on the basis of decision of Apex Court in the case of Padmaraje R Kadambande vs. CIT (supra) it is submitted that the receipts fr....
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....uded the income in its return for a particular year, it cannot confer jurisdiction on the department to tax that income in that year even though legally such income did not pertain to that year". Unquote A.40 Further, in the case of Pt. Sheo Nath Prasad Sharma vs. CIT, 66 ITR 647 (All.), it was held that it is the duty of the A.O. to determine whether a particular receipt is taxable as income or not. Just because the assessee has shown the receipt as income in his return, it does not make him liable to tax thereon. The relevant part of the judgement on pp.651 & 652 of the Report is reproduced as follows: Quote "It seems to me, however, that the order of the Commissioner rejecting the previous applications, on the mere ground that the petitioner had shown the income in his return, Document 8 is erroneous. The Commissioner was bound to apply his mind to the question whether the petitioner was taxable on that income. The Income tax Officer is entitled under section 23 (1) to make an assessment on the basis of the return if he is satisfied, without requiring the presence of the assessee or the production of evidence in support of the return, ....