Perpetual Energy Systems Limited,, ... vs Department Of Income Tax

ITA No.1583/Hyd/14 : Assessment year 2009-10

Income Tax Officer, V/s. M/s. Perpetual Energy Systems Ward 16(2), Hyderabad Limited, Hyderabad

(PAN - AABCP 4299 E )

(Appellant) (Respondent)

Appellant by : Shri Rajat Mitra, DR

Respondent by : Shri V.Raghavendra Rao

Date of Hearing 24.2.2015 Date of Pronouncement 26.2.2015

ORDER

Per P.M.Jagtap, Accountant Member :

This appeal filed by the assessee is directed against the order of the ld CIT(A) V, Hyderabad dated 16.6.2014, whereby he deleted the disallowance of Rs.1,71,27,547 made by the Assessing Officer on account of the assessee's claim for deduction under S.80IA.

2. The assessee in the present case is a company, which is engaged in the business of power generation using agro-waste. The return of income for the year under consideration was filed by it on 26.9.2009, declaring total income of Rs.'Nil" under the normal provisions of the Act and book profit of Rs.2,40,11,593 under S.115JB of the Act. In the process of its activity of power generation by using agro waste, the assessee company had received carbon credits. The said carbon credits were sold by the assessee to a foreign company, viz. M/s. EDF Trading Ltd, London, 2 ITA No.1583/Hyd/2014 M/s. Perpetual Energy Systems Limited, Hyderabad

England for Rs.4,28,78,7817. The said amount of sale proceeds of carbon credits was included by the assessee for the purpose of computing the profits eligible for deduction under S.80IA. The said deduction under S.80IA as worked out by the assessee and claimed in the return of income for the year under consideration was Rs.1,71,27,547. During the course of assessment proceedings, the claim of the assessee for deduction under S.80IA was examined by the Assessing Officer and on such examination, he held that the income generated by the assessee from sale of carbon credits, not being 'derived from' its industrial undertaking, was not eligible for deduction under S.80IA. In this regard, he relied on the various judicial pronouncements, including the decisions of the Hon'ble Supreme Court in the cases of Cambay Electric Supply Industrial Co. Ltd. V/s. CIT (113 ITR 84); Sterling Foods Ltd. V/s. CIT(237 ITR 579); and in Pandian Chemicals Ltd. V/s. CIT (262 ITR 278). Accordingly, the claim of the assessee for deduction under S.80IA was disallowed by the Assessing Officer in the assessment completed under S.143(3) vide order dated 31.10.2011 passed under S.143(3) of the Act.

3. Against the order passed by the Assessing Officer under S.143(3), an appeal was preferred by the assessee before the learned CIT(A) disputing the disallowance made by the Assessing Officer on account of its claim for deduction under S.80IA. During the course of appellate proceedings before the learned CIT(A), additional grounds were raised by the assessee claiming that the sale of carbon credits constituted capital receipts, as held by the Hyderabad Bench of the Tribunal in the case of My Home Power Ltd. Hyderabad V/s. DCIT (ITA No.1114/Hyd/2009 dated 2.11.2012), and the same therefore, was not liable to be included at all in the total income of the assessee. The learned CIT(A) admitted the additional grounds raised by the assessee and decided 3 ITA No.1583/Hyd/2014 M/s. Perpetual Energy Systems Limited, Hyderabad

the issue raised therein in favour of the assessee by holding that although the assessee was not entitled for deduction under S.80IA in respect of sale of carbon credits as held by the Assessing Officer, receipts from sale of carbon credits being in the nature of capital receipts as held by the Tribunal in the case of My Home Power Ltd. Hyderabad (supra), the same was not liable to be included in the total income of the assessee at all. He therefore, deleted the disallowance made by the Assessing Officer under S.80IA, although on a different count.

4. Aggrieved by the order of the learned CIT(A), Revenue has preferred this appeal before the Tribunal on the following grounds-

"1. The learned CIT(A) erred in holding that the income from sale of carbon credits as capital receipt, while the assessee itself has treated as revenue receipts and credited to the P&L A/c.

2. The additional ground of the assessee that the income from sale of carbon credit is a capital receipt is only an afterthought of the assessee, knowing well that it is not eligible for deduction u/s. 80IA and the learned CIT(A) ought not have admitted it.

3. Any other ground that may be urged at the time of hearing."

5. We have heard the arguments of both the sides and also perused the relevant material on record. As regards the ground No.1, it is observed that the issue raised therein relating to the determination of nature of the receipts from carbon credits is squarely covered in favour of the assessee on merits by the decision of the Tribunal in the case of My Home Power Ltd. Hyderabad (supra), which has been subsequently upheld by the Hon'ble Andhra Pradesh High Court in CIT V/s. My Home Power Ltd. Hyderabad (365 ITR 82), vide its order dated 2.11.2012 passed in 4 ITA No.1583/Hyd/2014 M/s. Perpetual Energy Systems Limited, Hyderabad

ITA No.1114/Hyd/2009, after discussing all the relevant aspects as under-

"24. We have heard both the parties and perused the material on record. Carbon credit is in the nature of "an entitlement" received to improve world atmosphere and environment reducing carbon, heat and gas emissions. The entitlement earned for carbon credits can, at best, be regarded as a capital receipt and cannot be taxed as a revenue receipt. It is not generated or created due to carrying on business but it is accrued due to "world concern". It has been made available assuming character of transferable right or entitlement only due to world concern. The source of carbon credit is world concern and environment. Due to that the assessee gets a privilege in the nature of transfer of carbon credits. Thus, the amount received for carbon credits has no element of profit or gain and it cannot be subjected to tax in any manner under any head of income. It is not liable for tax for the assessment year under consideration in terms of sections 2(24), 28, 45 and 56 of the Income-tax Act, 1961. Carbon credits are made available to the assessee on account of saving of energy consumption and not because of its business. Further, in our opinion, carbon credits cannot be considered as a bi- product. It is a credit given to the assessee under the Kyoto Protocol and because of international understanding. Thus, the assessees who have surplus carbon credits can sell them to other assessees to have capped emission commitment under the Kyoto Protocol. Transferable carbon credit is not a result or incidence of one's business and it is a credit for reducing emissions. The persons having carbon credits get benefit by selling the same to a person who needs carbon credits to overcome one's negative point carbon credit. The amount received is not received for producing and/or selling any product, bi-product or for rendering any service for carrying on the business. In our opinion, carbon credit is entitlement or accretion of capital and hence income earned on sale of these credits is capital receipt. For this proposition, we place reliance on the judgement of the Supreme Court in the case of CIT vs. Maheshwari Devi Jute Mills Ltd. (57 ITR

36) wherein 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 5 ITA No.1583/Hyd/2014 M/s. Perpetual Energy Systems Limited, Hyderabad

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 carbon credits like loom hours to some other concerns for certain consideration. Therefore, the receipt of such consideration cannot be considered as business income and it is a capital receipt. Accordingly, we are of the opinion that the consideration received on account of carbon credits cannot be considered as income as taxable in the assessment year under consideration. 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. Credit for reducing carbon emission or greenhouse effect can be transferred to another party in need of reduction of carbon emission. It does not increase profit in any manner and does not need any expenses. It is a nature of entitlement to reduce carbon emission, however, there is no cost of acquisition or cost of production to get this entitlement. Carbon credit is not in the nature of profit or in the nature of income.

25. Further, as per guidance note on accounting for Selfgenerated Certified Emission Reductions (CERs) issued by the Institute of Chartered Accountants of India (ICAI) in June, 2009 states that CERs should be recognised in books when those are created by UNFCCC and/or unconditionally available to the generating entity. CERs are inventories of the generating entities as they are generated and held for the purpose of sale in ordinary course. Even though CERs are intangible assets those should be accounted as per AS-2 (Valuation of inventories) at a cost or market price, whichever is lower. Since CERs are recognised as inventories, the generating assessee should apply AS-9 to recognise revenue in respect of sale of CERs.

26. Thus, sale of carbon credits is to be considered as capital receipt. This ground is allowed."

6. The above decision rendered by the Tribunal, as noted above, has been subsequently upheld by the Hon'ble Andhra Pradesh High Court, vide its judgment reported in 365 ITR 82, holding that the proceeds on sale of excess carbon credits is a 6 ITA No.1583/Hyd/2014 M/s. Perpetual Energy Systems Limited, Hyderabad

capital receipt. The issue involved in this appeal of the Revenue thus is squarely covered in favour of the assessee on merits by the decision of the jurisdictional High Court in the case of My Home Power Ltd (supra) and respectfully following the same, we hold that the amount of sale proceeds from carbon credits received by the assessee cannot be included in its income, being in the nature of a capital receipt. Consequently, there would be no positive income from the business of generation of power in the hands of the assessee for the year under consideration and therefore, the question of claiming any deduction under S.80IA or making disallowance on account of such deduction does not arise. We therefore find no infirmity in the impugned order of the learned CIT(A) deleting the disallowance made by the Assessing Officer under S.80IA and upholding his impugned order on this issue, we dismiss ground No.1 of the Revenue's appeal.

7. As regards the issue raised by the Revenue in ground No.2 challenging the action of the learned CIT(A) in admitting the additional grounds raise by the assessee claiming the receipts from sale of carbon credits as of capital nature and hence not liable to tax, it is observed that the issue raised by the assessee in the additional grounds before the learned CIT(A) was directly linked with the issue of disallowance made by the Assessing Officer under S.80IA as raised in the original ground and as rightly submitted by the assessee before the learned CIT(A), the same was going to the root of the matter involved in the appeal of the assessee. Moreover, the adjudication of the issue raised by the assessee in the additional grounds did not require investigation of any new facts, as submitted by the assessee before the learned CIT(A) and all the relevant facts necessary for adjudicating the same having been already available on record, we are of the view that the learned CIT(A) was fully justified in admitting the additional 7 ITA No.1583/Hyd/2014 M/s. Perpetual Energy Systems Limited, Hyderabad

grounds raised by the assessee, relying on the principles laid down by the Hon'ble Supreme Court in the case of National Thermal Power Corporation (229 ITR 383). The issue raised by the assessee in the additional ground filed before the learned CIT(A), thus, was very much relevant for the purpose of disposing of the appeal of the assessee on the issue of deduction under S.80IA and the learned CIT(A), in our opinion, was well within his powers to admit the additional grounds raised by the assessee in accordance with the provisions of S.250(5) and adjudicate upon the same. In that view of the matter, we find no merit in ground No.2 of the Revenue's appeal and accordingly dismiss the same.

8. In the result, appeal of the Revenue is dismissed.

Order pronounced in the court on 26th February, 2015

Sd/- Sd/-

(Asha Vijayaraghavan) (P.M.Jagtap) Judicial Member Accountant Member

Dt/- 26th February, 2015

Copy forwarded to:

1. M/s. Perpetual Energy Systems Limited, 8-2-684/2/A, NSL Icon, Plot No.1, to 4, 45h Floor, Raod No.12, Banjara Hills, Hyderabad

2. Income Tax Officer Ward 16(2), Hyderabad

3. Commissioner of Income-tax(Appeals) V Hyderabad

4. Commissioner of Income-tax IV , Hyderabad

5. Departmental Representative, ITAT, Hyderabad.

B.V.S