GUJARAT FLUOROCHEMEICALS LTD,,BARODA vs. THE DY.CIT.,CIRCLE-1(1)(1),, BARODA

सुनवाई क� तार�ख/Date of Hearing : 25/04/2019 घोषणा क� तार�ख /Date of Pronouncement : 28 /06/2019 O R D E R

PER RAJPAL YADAV, JUDICIAL MEMBER :

Asstt.Year 2008-09 9 135/Ahd/2015 Assessee 13.11.2014 31.12.2010 Asstt.Year 2008-09 Penalty Order

10 2365/Ahd/2012 Assessee 22.08.2012 30.12.2011 Asstt.Year 2009-10 11 No.2546/Ahd/2012 Revenue 22.08.2012 30.12.2011 Asstt.Year 2009-10 12 No.106/Ahd/2016 Revenue 30.10.2015 22.02.2013 Asstt.Year 2010-11 13 No.548/Ahd/2016 Revenue 30.10.2015 22.02.2013 Astt.Year 2010-11 14-15 116 and Assessee 30.10.2015 22.02.2013 117/Ahd/2016 19.11.2015 14.03.2013 Asstt.Year 2010-11 and 2011-12

3. First we take appeal of the Revenue in A.Y.2005-06, and if any ground taken by the assessee or revenue found to be inter-connected with the issue agitated by the Revenue in this assessment year, then we would take all such grounds together. First issue raised by the Revenue is that the ld.CIT(A) has erred in deleting disallowance out of village development expenses. This issue has been agitated by the Revenue in ground no.1 (Asstt.Year 2005-06 to 2008-09) and in ground no.2 (Asstt.Years 2009-10 and 2010-11). The assessee has debited expenditure of Rs.11,08,85,007/-; Rs.17,68,678/-; Rs.90,583/-; Rs.22,212/-; Rs.69,017/- and Rs.1,94,282/- in the Asstt.Years 2005-06 to 2010-11. Firstly, facts on all vital points on this issue are common in all the assessment years. For the sake of reference, we take up the facts from Asstt.Year 2005-06.

4. The ld.AO has issued show cause notice to the assessee inviting its explanation as to why the expenditure incurred towards village development should not be disallowed. The assessee had contended that in order to maintain cordial relationship with residents of and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 4 - surrounding village of its factory, it has to undertake certain development activities. Such activities are also required under corporate social responsibility. Therefore, it has constructed/repaired village roads, given assistance to the schools and contribution towards local festivals. These activities create harmonious atmosphere with the management of the assessee-company vis-à-vis residents in that area. The ld.AO has disallowed this expenditure on the ground that either these expenditures were in the nature of donation or in the nature of gratuitous payments. There was no business exigency in incurring these expenditures. Dissatisfied with the disallowance, the assessee carried the matter in appeal before the ld.CIT(A). The ld.CIT(A) has deleted the disallowance by observing that similar expenditure were disallowed by the AO in earlier year, which were deleted by the CIT(A).

5. Before us, the ld.counsel for the assessee contended that identical disallowance were made in the Asstt.Years 1999-2000, 2002-03 upto 2004-05. The Tribunal has upheld the deletion of such disallowance. He has placed on record copies of the Tribunal’s order passed in (Asstt.Year 1999-2000); ITA No.898, 1111 and 1108/Ahd/2009 (Asstt.Year 2002-03); ITA No.4 and 33/Ahd/2007 (Asstt.Year 2003-04); ITA No.4515 & 4563/Ahd/2007 (Asstt.Year 2003-04 and 2004-05). The ld.DR, on the other hand, relied upon the orders of the ld.AO.

6. On due consideration of the above facts, we are of the view that in order to earn goodwill of the people residing in the neighbor-hood area and to keep social relations with residents, assessee company has to incur certain expenditure, which would ultimately facilitate the and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 5 - assessee’s business, otherwise there would be friction or law and order situation which would arise if it adopt continuous unfriendly approach with the residents residing in the surrounding areas. In order to show good gesture, it has repaired certain village roads and given donations during social occasions. To our mind, such incurrence of expenditure are essential in running factory smoothly and the ld.CIT(A) has rightly deleted disallowance. It is also pertinent to note that in the past similar expenditures were claimed, which have been allowed by the ld.CIT(A), and orders of the ld.CIT(A) were upheld by the ITAT. Taking into consideration this consistent approach in the past, we do not see any reason to interfere in the orders of the ld.CIT(A). This issue is decided against the Revenue. All the grounds raised by the Revenue on this issue, in these assessment years are rejected.

7. Next issue is against deletion of disallowance on account of contribution to Refrigerant Gas Manufacturer Association. This issue has been agitated in ground no.2 in the Asstt.Years 2005-06 and 2008-09, and ground no.1 in the Asstt.Years 2009-10 and 2010-11.

8. Grievance of the Revenue is that the ld.CIT(A) has erred in deleting the disallowance of Rs.15,90,270/-; Rs.10,87,365; Rs.15,453/-; Rs.6100/-; Rs.2,00,000/- and Rs.1,94,282/- in the Asstt.Years 2005-06 to 2010-11 respectively.

9. Assessee has debited above expenditure in respective assessment years in its profit & loss account as contribution to Refrigerant Gas Manufacturer Association. The ld.AO confronted the assessee to show reasons, as to why these expenses should not be disallowed. The and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 6 - assessee submitted its reply and contended that similar expenses were claimed in the Asstt.Year 2003-04 which has been allowed by the ld.CIT(A). However, the ld.AO was not satisfied with the explanation of the assessee, and he disallowed its claim. We find that order of the ld.CIT(A) in the Asstt.Year 2003-04 was upheld by the Tribunal in & 33/Ahd/2007. Finding recorded by the Tribunal on this issue reads as under:

“10. We have heard the rival submissions, carefully perused the orders of the authorities below and considered the materials on record before us along with the paper book submitted by the assessee. On perusal of the records, it is apparent that this issue has been decided by ITAT Ahmedabad "A" Bench while adjudicating revenue's appeal in in assessee's case for AY 2000-01 cited supra in favour of the assessee and against the revenue vide order dated 17-02- 2012 where in the Tribunal in Para 31 of the order has held as under: "31. We have heard the rival contentions and perused the facts of the case. We concur with the view of the Ld. CIT(A) for the reasons that the payment is not a one-time contribution but a recurring one and such contributions have not resulted in creation of any asset for the assessee nor even for the association. There are very few members as only few companies are manufacturing refrigerant gases. Hence, the pro rata expenditure is large. They have enclosed balance-sheet and income expenditure account of the association to show that there has been no creation of any capital asset. On going through the income and expenditure account and balance-sheet of REGMA, the assets are mainly kept in the bank account and the expenses are for advertisement investigation charges, traveling etc., there is a positive balance left over which is kept in the bank account. The other members besides the assessee are SRF Ltd. of Delhi, M/s. Chemplast Sanmar Ltd. of Chennai, Naveen Flouorine Industries in Mumbai. In short, it is an association on the lines of trade association which look after the welfare of its members and takes up the issues relating to their activities. They call for contributions the basis of projected expense. For this, also correspondence was filed before the Ld. CIT(A) to show that these amounts are requested by circular letters after taking a decision and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 7 - during REGMA meetings. The amounts are duly paid by cheques to Gujarat Flurochemicals Ltd. the association which is based in New Delhi. The details in these correspondences show that the association which is a new one has put away Rs.5 lakhs which is in a corpus fund and the balance has been kept for meeting earlier expenses back- log and current and projected expenses. In short, the association keeps making a collection and calling it a corpus from which it incurs the expenditure. In our view, whatever name called the amount is collected for the purpose of defraying expense of the association. The assessee has no right to any of the sums. No capital asset is being build up in the association from which the assessee can derive any benefit. Therefore, such payment has to be treated as expenditure in the line of business and deductible u/s. 37(1). It is not the AO's contention that relevant services were not rendered or that there was any other motive for making such payment. In the circumstances and facts, we find no infirmity in the order of Ld. CIT(A). Thus ground No.4 of the Revenue is dismissed." 10.1 Since the facts of the present case on this issue are similar and identical as in the assessment years 2000-01 and 2001-02, following the decision of our Co-ordinate Bench in AY 2000-01 and 2001-02 cited supra, we uphold the order of the learned CIT(A) and dismiss this ground of appeal of the revenue.”

10. There is no disparity on facts. In the past, similar expenditures have been allowed to the assessee. Therefore, respectfully following the order of the ITAT (supra) in earlier years, we do not see any reasons to interfere in the orders of the CIT(A) on this issue. All these grounds are rejected.

11. Ground No.4, 4 and 3 in the Asstt.Year 2005-06 to 2007-08: Grievance of the Revenue in these grounds is that the ld.CIT(A) has erred in deleting the disallowance of loss occurred due to fluctuation of foreign exchange amounting to Rs.73,054/-; Rs.1,65,75,256/-; Rs.2,16,23,967/- in the Asstt.Years 2005-06 to 2007-08 respectively. The and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 8 - facts on vital points are common. For the facility of reference, we take the facts from the Asstt.Year 2005-06.

12. On scrutiny of the accounts, it revealed to the AO that he assessee has claimed Rs.6,73,054/- (net) on account of foreign exchange fluctuations loss due to translation of foreign currency transactions at the year end. The AO issued a show cause notice inviting explanation of the assessee as to why this claim be not disallowed. The assessee contended that Accounting Standard 11 authorise it to re-state all outstanding foreign exchange trading liabilities/assets as on the last date of the financial year at the exchange rate applicable on that date. Accordingly, it has to determine the loss or gain. It made reference to the decision of Hon’ble Delhi High Court in the case of CIT Vs. Woodword Governor India P.Ltd., and Others to demonstrate that such claim was not notional or contingent, rather it was a determined loss/gain. The ld.AO did not accept this contention of the assessee and held that such claim by the assessee is notional one and does not allowable. On appeal, the ld.CIT(A) has allowed such claim of the assessee by following the order of the ITAT passed in earlier years.

Capital Gain or business income:

16. During the course of hearing, we have directed the ld.counsel for the assessee to compile details in tabular form indicating various factors required to be visualized for forming the opinion, whether activities of purchase and sales of shares is to be treated as business activity or simplicitor as investment. On our directions, the ld.counsel for the assessee filed such details in tabular form. The details are also on the record scattered in different orders of the Revenue authorities. They are also available in seven volumes of the paper book filed by the ld.counsel and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 11 - for the assessee. For the facility of reference, and taking into consideration the relevant details in more scientific manner, we have directed the assessee to submit such details in tabular forms. It is also pertinent to note that the facts on all vital points are common except variation in quantum. We will be taking up the facts mainly from the Asstt.Year 2005-06 and 2008-09 because order of the ld.CIT(A) in the Asstt.Year 2005-06 on this issue is in favour of the assessee, which has been followed upto the Asstt.Year 2007-08. However, in the Asstt.Year 2008-09, the ld.CIT(A) did not concur with his predecessor and given a different finding. Therefore, it is imperative upon us to look his point of view of reasoning before forming a consolidated opinion on this activity for all these years. At the time of hearing, the ld.CIT-DR pointed out that written note was submitted by the then CIT-DR, Shri Ravindra I Patel vide letter dated 22.9.2015. In this letter, the ld.CIT-DR relied upon a large number of decisions whose copies have been placed on record. He relied upon this note, which reads as under: “It is respectfully submitted that ground no.(5) relates to AO's action of treating the claim of the assessee for capital gain arising from purchase and sale of shares/units of mutual funds as business income. In support of AO's action, following judicial pronouncements are submitted for kind consideration of Hon'ble Bench. 1) Manoj Kumar Samdaria Vs. CIT [228 Taxman 63 (Supreme Court)] Section 28(i), read with section 45 of the Income-tax Act, 1961 - Business income - chargeable as (Business income v. Capital gains: Share transactions) -Assessment year 2007-08 - Assessee declared income arising from sale of shares as short-term capital gain - Tribunal found that assessee had regularly dealt in purchase and sale of share which indicated period of holding to be very short and that he earned only a meager amount of dividend while gains from sale of shares was Rs.65.45 lakhs - High Court upheld order of Tribunal that income arising from sale of shares was assessable as business income - Whether special leave petition filed against impugned order was to be dismissed - Held, yes [in favour of revenue]. l.a) Manoj Kumar Samdaria Vs. CIT [223 Taxman 245 (Delhi)] and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 12 -

Section 28(i), read with section 45 of the Income-tax Act, 1961 - Business income - chargeable as (Share transactions) - Assessment year 2007-08 - Assessee declared income arising from sale of shares as short-term capital gain - Assessee had opening investment of Rs.1 crore in shares - During year under consideration shares worth Rs.4.10 crore had been sold while shares of Rs.4.9 crore were purchased –Tribunal found that assessee had regularly dealt in purchase and sale of share which indicated period of holding to be very short and that he earned only a meager amount of dividend of Rs.21,952 while gains from sale of shares was Rs.65.45 lakh - whether Tribunal. After analyzing turnover of shares, nature of transactions i.e. duration ot holding, proportion of income derived as dividend to investment made, had rightly held that income arising from sales of shares was assessable as business income - Held, yesfparas 7 & 8] [infavour of revenue].

2). New Jehangir Vakil Mills Co.Ltd. Vs. CIT [49 ITR 137 (Supreme Court)]

Section 28(i) of the Income-tax Act, 1961 [Corresponding to section 10(1) of the Indian Income-tax Act, 1922] - Business income - chargeable as - Assessment year 1945-46 - Whether extent to which a decision given bv ITO for one assessment year affects or binds a decision for another year, doctrine of res judicata or estoppels by record does not apply to such decisions - Held, yes - Whether circumstance that in earlier assessment relating to 1943 assessee was treated as investor, would not estop assessing authorities from considering, for purpose of computation of profits of 1944, as to when trading activity of assessee in shares began and, therefore, finding of assessing authorities that trading activity of assessee in shares began in 1943 and profits on sale of shares computed on basis of said find was justified - Held, yes

3) CIT Vs. Sutlej Cotton Mills Supply Agency Ltd. [100 ITR 706 (Supreme Court)]

Section 2(13) of the Income-tax Act, 961 - Business - Adventure in nature of trade - Assessment year 1956-57 - Assessee company purchased shares and sold part of it -Assessee claimed that shares were purchased by way of investment and profit amount to capital gains - Tribunal found as of fact that assessee purchased shares out of borrowed fund and did not make sale on account of any pressing necessity - Whether on facts dominant intention of assessee being to make profit by resale of shares and not to make investment. Tribunal was correct in holding that transaction was adventure in nature of trade - Held, yes

4) CIT Vs. Central News Agency (P) Ltd. [ 53 taxmann.com 305 (Delhi)]

Section 45 read with section 28(i), of the Income-tax Act, 1961 - Capital gains -Chargeable as (Capital gain v. business income/dealing in Mutual fund units) -Assessment year 2005-06 - Assessee - company had shown certain short- term capital gain on sale of mutual fund units - Assessing Officer taxed said income as business income - On appeal, Commissioner(Appeals) upheld order of Assessing Officer but Tribunal held that profit on sale of mutual fund and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 13 - units was assessable as capital gain -whether since Tribunal had not determined whether any dividend had been received on units and frequency and volume of said transactions so as to know actual intention of assessee, matter was to be remanded to Tribunal for fresh consideration - Held, yes [para 9] [Matter remanded].

5. DCIT, Circle-3(1) Vs. Smt.Deepaben Amitbhal Shah [99 ITD 219 (AMD)]

Section 28(i) of the Income-tax Act, 1061 - Business income - Chargeable as -Assessment years 1992-93 to 1995-96 - Whether where looking into volume, frequency, continuity and regularity of transactions of purchase and sale in shares by assessee, it could be inferred that those transactions must have been entered into by assessee with a profit motive and not for purpose of investment, income arisen to assessee from such transactions would be assessable under head 'Profits and gains of business or profession' - Held, yes, Whether merely because shares were acquired by assessee from primary market and assessee had to wait for two to three months for allotment process, transaction could be held to be a non-business transaction - Held, no -Whether fact that shares purchased from secondary market were transferred in name of assessee, would make transaction as non-business transaction - Held, no

6. Smt.Harsha N.Mehta Vs. DCIT [ 43 SOT 332 (Mumbai)]

Section 28(i), read with section 45, of the Income-tax Act, 1061 - Business income - Chargeable as - Assessment year 2005-06 - During relevant assessment year, assessee filed her return showing income from sale and purchase of shares under head 'Capital Gains' - Assessing Officer did not agree with treatment given by assessee and treated said income as business income - On appeal, Commissioner (Appeals) partly accepted assessee's claim - On instant appeal, it was seen that during relevant period assessee had made 37 transactions in 35 scrips - It was also noticed that shares were held for a few days and in very few cases for a few months but in no case period of holding was exceeding 200 days - Whether activity of frequent buying and selling of shares over a short span of period had to be treated as business being adventure in nature of trade and, thus, income arising from said transactions was to be treated as business income and not as capital gain - Held, yes

7. Anand M.Fatehpuria HUF Vs. ACIT [ 153 ITD 145 (Mumbai)]

Section 28(i), read with section 45, of the Income-tax Act, 1061 - Business income - Chargeable as [Share dealings] - Assessment year 2008-09 - Assessee was an investor for past several years - During previous year, he sold certain shares and claimed gain arising on sale of shares as short-term capital gain - Assessing Officer treated said gain as business income - Commissioner (Appeals) held transactions to constitute business activity and accordingly upheld order of Assessing Officer - Assessee was maintaining same set of books of account for both its business transactions and purported investment activity out of same common pool of funds - All transactions of assessee were imbued with same profit motive, which continued not only and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 14 - throughout year, but also from year to year - Whether findings by Commissioner (Appeals), that share transactions represented business transactions deserved to be affirmed - Held, yes [para 3] [Partly in favour of assessee].

Whether said transactions in shares had resulted in business profits assessable as such in bonds of assessee - Held, yes 2. Without prejudice to above discussed judicial pronouncements, a kind attention is drawn to provisions of S.73 Explanation which creates a legal fiction (deeming provision) to treat transactions of purchase and sale of shares as speculation business. It is true that S.73 relates losses but legislative intention is clear that purchase and sale of shares by a company (other than excluded categories) has to be treated as speculation business. Accordingly, there cannot be dispute to treat impugned transactions as business.

“13. After considering above rulings we cull out following principles, which can be applied on the facts of a case to find out whether and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 16 - transaction(s) in question are in the nature of trade or are merely for investment purposes:

(1) What is the intention of the assessee at the time of purchase of the shares (or any other item). This can be found out from the treatment it gives to such purchase in its books of account. Whether it is treated stock-in-trade or investment. Whether shown in opening/closing stock or shown separately as investment or non-trading asset.

(2) Whether assessee has borrowed money to purchase and paid interest thereon? Normally, money is borrowed to purchase goods for the purpose of trade and not for investing in an asset for retaining.

(3) What is the frequency of such purchase and disposal in that particular item? If purchase and sale are frequent, or there are substantial transaction in that item, if would indicate trade. Habitual dealing in that particular item is indicative of intention of trade. Similarly, ratio between the purchases and sales and the holdings may show whether the assessee is trading or investing (high transactions and low holdings indicate trade whereas low transactions and high holdings indicate investment).

(4) Whether purchase and sale is for realizing profit or purchases are made for retention and appreciation its value? Former will indicate intention of trades and latter, an investment. In the case of shares whether intention was to enjoy dividend and not merely earn profit on sale and purchase of shares. A commercial motive is an essential ingredient of trade.

(5) How the value of the items has been taken in the balance sheet? If the items in question are valued at cost, it would indicate that they are investments or where they are valued at cost or market value or net realizable value (whichever is less), it will indicate that items in question are treated as stock-in-trade. (6) How the company (assessee) is authorized in memorandum of association/articles of association? Whether for trade or for investment? If authorized only for trade, then whether there are separate resolutions of the board of directors to carry out investments in that commodity? And vice verse.

7. It is for the assessee to adduce evidence to show that his holding is for investment or for trading and what distinction he has kept in the records or otherwise, between two types of holdings. If the assessee is able to discharge the primary onus and could prima facie show that particular item is held as investment (or say, stock-in-trade) then onus would shift to Revenue to prove that apparent is not real.

and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 17 -

8. The mere fact of credit of sale proceeds of shares ( or for that matter any other item in question) in a particular account or not so much frequency of sale and purchase will alone will not be sufficient to say that assessee was holding the shares (or the items in question) for investment.

(a) The first test is whether the initial acquisition of the subject-matter of transaction was with the intention of dealing in the item, or with a view to finding an investment. If the transaction, since the inception, appears to be impressed with the character of a commercial transaction entered into with a view to earn profit, it would furnish a valuable guideline. and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 18 -

(b) The second test that is often applied is as to why and how and for what purpose the sale was effected subsequently.

(c) The third test, which is frequently applied, is as to how the assessee dealt with the subject-matter of transaction during the time the asset was the assessee. Has it been treated as stock-in-trade, or has it been shown in the books of account and balance sheet as an investment. This inquiry, though relevant, is not conclusive.

(d) The fourth test is as to how the assessee himself has returned the income from such activities and how the Department has dealt with the same in the course of preceding and succeeding assessments. This factor, though not conclusive, can afford good and cogent evidence to judge the nature of the transaction and would be a relevant circumstance to be considered in the absence of any satisfactory explanation.

(e) The fifth test, normally applied in case of partnership firms and companies, is whether the deed of partnership or the memorandum of association, as the case may be, authorizes such an activity. (f) The last but not the least, rather the most important test, is as to the volume, frequency, continuity and regularity of transaction of purchase and sale of the goods concerned. In a case where there is repetition and continuity, coupled with the magnitude of the transaction, bearing reasonable proposition to the strength of holding then an inference can readily be drawn that the activity is in the nature of business.”

20. In the light of the above, let us examine the facts of the assessee’s case. The first test propounded by the ITAT, Lucknow Bench as well as by the Hon’ble Gujarat High Court is, what was the intention of the assessee at the time of purchase of shares or any other time. The intention can be gathered from the treatment an assessee gives to such purchase in its books of accounts viz. whether it is to be treated as stock- in-trade or investment. On this account, the assessee has submitted as under: and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 19 -

2011-12 Rs.60,75,000/- Rs.15,59,83,907/-

2006-07 3.47 (including 52.81 8.07 64.63 LTG Rs.1.22) 2007-08 11.46 - 26.67 38.12 (including LTG Rs.2.73) 2008-09 11.87 - 48.04 59.91 (including LTG Rs.7.64) During the year, the company has incurred 2009-10 loss of Rs.7.33 cores on sale of investments. 2010-11 6.29 (including - (-) 6.01 0.28 LTG Rs.6.29) Capital loss 37.37(including - 5.67 43.04 2011-12 LTG Rs.32.59)

29. The ld.counsel for the assessee further relied upon the following decisions: i) ACIT Vs. Shah Investor’s Home Ltd., (ITAT, Ahmedabad Bench) ii) DCIT Vs. Tejas Securities, IT(SS)A.531, 532/Ahd/2011 dated 22.3.2016 (ITAT, Ahmedabad. iii) CIT Vs. Nita M. Patel, 42 taxmann.com 125 (Gujarat) iv) CIT Vs. Smt. Datta Mahendra Shah, 62 taxmann.com 325 (Bombay) v) Seer Finlease P.Ltd. Vs. ACIT, Ahmedabad ITA No.3326/Ahd/2009 and others order dated 17.3.2015, ITAT, Ahmedabad.

vi) CIT Vs. Kapur Investments P.Ltd. 61 taxmann.com 91 (Kar) vii) and others in the case of Alembic Ltd. Vs. DCIT, order dated 9.12.2016 (ITAT, Ahmedabad.) and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 24 - viii) Gajjala Madhusudhan Reddy Vs. ITO, 39 taxmann.com 157 (ITAT, Hyderabad) ix) DCIT Vs. UMIL Share & Stock Broking Services Ltd., 96 taxmann.com 168 (Kol-Trib.) x) PCIT Vs. Bhanuprasad D. Trivedi, HUF, 87 taxmann.com 137 (Gujarat) xi) PCIT Vs. Bhhanuprasad D. Trivedi HUF, 94 taxmann.com 114 (SC)

He has placed on record copies of the above decisions.

30. We have duly gone through all these details. In the first test i.e. how to find out intention of the assessee that it has purchased shares for investment purpose, the assessee has pointed out that in the books of accounts, it has treated these shares in the investment account. It has not valued the shares at the end of the year at cost or market value whichever is less, rather it has valued them at the cost of acquisition. This treatment in the account is being given when the shares are being purchased in investment account. The assessee has also pointed out that provisions made for diminution in value of investment has been added back in the computation of income. While taking note of the assessee’s submissions submitted in tabular form, we have specifically noted the figures. While differing with the conclusions of the CIT(A) in the Asstt.Years 2005-06 to 2007-08, the ld.CIT(A) in the Asstt.Year 2008-09 recorded that fact of recording transaction in the books of accounts etc. in a particular manner by the appellant was to justify the nature of transaction to be “investment”. Merely because the assessee has given a particular treatment to the share transaction in its books of accounts, does not prove the nature of transaction to be a particular kind, and overall conduct of the assessee has to be seen. It appears that CIT(A)

and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 25 - failed to appreciate the requirement for maintaining accounts and the assessee has to give a particular treatment, and that treatment is one of the corroborative factors for indicating its intention. The ld.CIT(A) just brushed aside these circumstances on the ground that these treatment for valuing the shares at cost at the end of the closing year was done by the assessee so that it can demonstrate its purchase and sale as investment. This is the basic requirement, which an assessee has to follow for maintaining investment portfolio. It has given that very treatment in the accounts. There is nothing with the ld.CIT(A) on this aspect to differ with the conclusions of the predecessor in earlier years.

31. The next reason assigned by the assessee for terming its purchase of shares as investment that it has not borrowed funds for making investment. The ld.CIT(A) in the Asstt.Year 2008-09 has observed that the assessee had incurred interest expenditure of Rs.27.64 cores during the year. The assessee has not submitted separate accounts showing incurrence of expenditure for investment specific. The assessee has pointed out the volume of funds available with it in the shape of reserves and surplus. For example, in the Asstt.Year 2008-09, the share capital was Rs.1099 lakhs. The Reserves and surplus was Rs.1,21,844 lakhs. Gross investment in the Asstt.Year 2008-09 is Rs.51,861 lakhs. All these details have been compiled by the assessee in tabular form and available on page no.1 of the synopsis. This indicates that all funds were far more than the gross investment in that year. Similar is the position in all other years. Investment is far less than own funds available in the shape of share capital and reserves and surplus, therefore, if these figures are appreciated in the light of Hon’ble Bombay High Court and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 26 - decision in the case of CIT Vs. Reliance Utilities & Powers Ltd., 313 ITR 340 (Bombay), then it would reveal that one has to draw an inference that the assessee must have made investment out of its own funds. The ld.CIT(A) cannot reject this argument simply for the reason that the assessee has incurred interest expenditure of Rs.27.64 cores. But this expenditure is attributable to manufacturing activities also. The ld.CIT(A) ought to have visualized the complete details of funds before assigning this reasoning for differing with the ld.CIT(A) in other assessment years.

32. Next reasons which emerges out from the order of the ld.CIT(A) in the Asstt.Year 2008-09 is that there were large number of share transacted by the assessee including in terms of scrip as well as in terms of transactions. The ld.CIT(A) also observed that if weighted average holding period is taken into consideration, then for the purpose of short capital gain it is 86 days. The ld.CIT(A) also took note of the purchases made by the assessee in the Asstt.Year 2003-04 to 2008-09. He observed that since there is a rising trend in purchase of the shares, it shows that the assessee was trading in the shares. No doubt volume of investment is higher, but it is to be appreciated in the light of total investment made by the assessee in the mutual funds, in the bonds for earning interest income. The ld.CIT(A) himself agreed with the contentions of the assessee even in the Asstt.Year 2008-09, as far as investment in mutual funds are concerned. She has accepted that gain on sale of mutual fund was to be assessed under the head “capital gain”. This finding is being challenged in ground no.3 in the Asstt.Year 2008-09, 2009-10 and ground no.1 in the Asstt.Year 2010-11 by the Revenue. The higher volume is and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 27 - because some of the investments were made by the assessee for strategic holding in the sister concerns, and therefore, this one factor alone be not construed that the assessee was trading in shares. It is pertinent to observe that when any explanation or a defence of an assessee based on number of facts supported by evidence and circumstances required consideration whether explanation is sound or not must be determined not by considering the weight to be attached to each single fact in isolation but by assessing the cumulative effect of all the facts in their setting as a whole. If all the factors discussed above are considered conjunctively then it would give an inference that the investments made by the assessee were for the purpose of achieving long term benefit and on sale of such investment any gain or loss is required to be assessed under the head “capital gain”. Similarly, we do not find force in the grounds of appeal raised by the Revenue that on sale of mutual fund profit be assessed as isness income. The ld.CIT(A) has rightly held that on sale of mutual fund only capital gain arise to the assessee.

33. As far as decisions relied upon by the ld.CIT-DR are concerned, we have gone through the decisions. It is observed that each decision is given on the particular fact of that case. We have already observed that on this issue, whether the assessee is a trader or an investor, there are large numbers of decisions available. In the case laws cited by the ld.counsel for the assessee, Judicial Member (herein) is party to two of the cases viz. Shah Investor’s Home Ltd., and Seer Finlease P. Ltd. (supra). All these cases were being decided by keeping in mind specific fact situation in them. The tests propounded in large numbers of cases have already been considered by us. Therefore, the ld.CIT(DR) could and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 28 - not buttress the reasoning of the ld.CIT(A) in the Asstt.Year 2008-09 which has been followed in subsequent years with help of these case laws. We have considered specific reasons assigned by the ld.CIT(A) for differing with conclusions of his predecessor in earlier years. In view of the above discussion, we hold that gain arising on sale of shares or mutual fund is to be taxed in all these years as long term capital gain/short term capital gain. Orders of the ld.CIT(A) in the Asstt.Year 2005-06, 2006-07 and 2007-08 are upheld, whereas the finding of the ld.CIT(A) in the Asstt.Year 2008-09 upto the Asstt.Year 2011-12 are set aside. The finding of CIT(A) in Asstt.Year 2008-09, 2009-10 and 2010-11 that on sale of mutual funds, capital gain is to be assessed in the hands of assessee, is upheld, and ground of Revenue i.e. ground no.3 in Asstt.Year 2008-09, 2009-10 and ground no.1 in the Asstt.Year 2010-11 are rejected.

Similarly, all the grounds of Revenue in the Asstt.Year 2005-06 to 2007-08 challenging the finding of the ld.CIT9A) on this issue are rejected; whereas all the grounds of assessee in all the remaining years are allowed. In other words, in all these years assessee be treated as investors and on sale of shares/mutual funds, profit/loss be assessed under the head capital gain/loss. The ld.AO shall give effect accordingly.

, the assessee has pleaded that the ld.CIT(A) has erred in confirming disallowance of Rs.60 lakhs out of expenses on professional fees. The ld.counsel for the assessee, at the time of hearing, contended that if the ground of appeal raised by the and 1380/Ahd/2009 and 13. Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 29 - Revenue in ground no.5 i.e. gain from transaction of securities amounting to Rs.16,59,53,272/- are being taxed as capital gain, and not as business income, as raised by the Revenue is rejected, and order of the ld.CIT(A) is being upheld, then disallowance of Rs.60 lakhs out of expenses on professional fees deserves to be confirmed. He pointed out that adjudication of this ground is subject to the decision of the Tribunal on the ground of Revenue’s appeal. In the foregoing paragraphs, we have rejected the Revenue contentions and upheld order of the CIT(A) that gains from transactions of securities are to be taxed as capital gain, therefore, the expenditure towards professional fees whose disallowance was upheld by the ld.CIT(A), deserves to be upheld. Accordingly, ground no.4 raised by the assessee in the Asstt.Year 2005-06 is rejected.

35. Ground no.3 in ground no.5 in the ITA No.1379/Ahd/2009.

36. In both these grounds, issue involved is, what amount requires to be disallowed under section 14A of the Income Tax Act. The ld.AO has disallowed interest expenses of Rs.1,11,47,727/-, out of that the ld.CIT(A) has deleted the disallowance of Rs.91,63,869/-. Grievance of the Revenue is that the ld.CIT(A) has erred in deleting this disallowance, whereas grievance of the assessee in ground no.5 of its appeal is that the ld.CIT(A) has erred in confirming the disallowance of Rs.19,83,585/-.

37. Brief facts of the case are that the assessee has shown dividend income of Rs.5,32,00,000/-. The AO though treated the activity of the assessee of sale and purchase of shares as trading activity, he assessed the profit on share transaction as business income, but on protective and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 30 - basis, he disallowed expenditure of Rs.62,56,732/- out of professional fees and Rs.1,11,47,627/- on account of interest expenses. He observed that if at any appellate stage the same is held taxable under the heading “capital gain” then disallowance under section 14A should require to be made and this disallowance would be worked out accordingly. The ld.CIT(A) has held that profit on share transaction is to be assessed as capital gain. We have upheld this finding of the ld.CIT(A) while rejecting the ground of appeal taken by the Revenue in the above discussion. Therefore, we are required to adjudicate what amount ought to be disallowed under section 14A of the Act. A perusal of the record would indicate that the ld.AO has made disallowance under two heads; (a) out of professional fees, and (b) out of interest expenses. As far as out of professional fee of Rs.62,56,732/- is concerned, this disallowance has been confirmed by the ld.CIT(A) at Rs.60 lakhs. It has been challenged by the assessee in ground no.4 of ITA No.1379/Ahd/2009. We have discussed this issue while dealing with the issue, whether the assessee was indulged in share trading or its activities were of investments. We have confirmed this disallowance, after taking note of the submissions made by the ld.counsel for the assessee. Out of interest expenditure, the ld.AO has worked out the disallowance at Rs.1,11,47,727/-. He worked out this disallowance with help of the following formula:

Investment ---------------- × Interest paid = Total Assets

Rs.224,70,48,357 ----------------------- × 2,13,03,954 = 1,11,47,727 and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 31 -

Rs.42942,39,902

38. The ld.CIT(A) has re-appreciated this aspect and observed that the assessee was having sufficient amount of share capital, reserves & surplus. It has earned profit at Rs.45 crores. Hence, no direct interest expenditure was required to be disallowed. The ld.CIT(A) confirmed the addition at Rs.19,83,858/- on the ground that these interest expenditure has a direct nexus with investment.

39. With the assistance of the ld.representatives, we have gone through the record. We find that the ld.AO has worked out disallowance on the basis of a formula. He failed to note that interest free funds available with the assessee were far more than the gross investment. Gross investment in Asstt.Year 2005-06 was Rs.28,769 lakhs, whereas share capital, reserves & surplus available with the assessee was of Rs.49,379 lakhs. This fund is far more than the investment. It can safely be harboured that interest bearing funds was not invested by the assessee. Apart from the above, the assessee has earned profit at Rs.45 crores. It has also received compensation under Montreal Protocol of Rs.8.96 crores. The ld.CIT(A) has observed that its borrowings decreased to the extent of Rs.40 crores, and also investment decreased by Rs.34 crores. In such situation interest expenses were not required to be calculated on the basis of an estimation using the above formula. While confirming the disallowance of Rs.19,83,858/- is concerned, the finding of the ld.CIT(A) is that it “it was fairly pointed out that on the basis of direct nexus the interest amount of Rs.19,83,858/- is in respect of investments. This amount worked out without prejudice to the stand that no disallowance is required out of interest on the basis of and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 32 - submissions made earlier.” Though the ld.CIT(A) has observed that this expenses has a direct nexus, but it is neither discernible from the assessment order nor from the CIT(A)’s order. Major part of the expenses i.e. Rs.91,63,869/- has been deleted by the CIT(A) by following judgment of Hon’ble Bombay High Court in the case of Reliance Utilities and Powers P.Ltd. (supra) on the basis that the assessee was having more interest free funds, than the investment. In this situation, part expenditure cannot be culled out unless a direct nexus has been demonstrated. It is neither discernible in the assessment order nor in the CIT(A)’s order. We have extracted relevant finding of the ld.CIT(A). In view of the above discussion, we are of the view that this disallowance is not discernible. Consequently, ground of appeal

raised by the Revenue is rejected, whereas ground of appeal raised by the assessee is allowed. The disallowance of Rs.19,83,858/- stands deleted. No other ground remained in the appeal of the Revenue for the Asstt.Year 2005-

06. Therefore, stands dismissed.

40. Now we take remaining grounds of assessee’s appeal i.e. for the Asstt.Year 2005-06.

41. In the first ground of appeal, the assessee has pleaded that the ld.CIT(A) has erred in confirming the addition of Rs.17,86,644/- which according to the ld.Revenue authorities accrued on account of interest on refund.

Ground No.3 in Asstt.Year 2005-06:

46. Ground No.4. In this ground, grievance of the assessee is that the ld.CIT(A) has erred in confirming the disallowance of Rs.60 lakhs out of expenses of professional fees. This ground is inter-connected with ground no.2 of assessee’s appeal i.e. for the Asstt.Year 2006-07. The grievance of the assessee in both the years relates to disallowance of Rs.60 lakhs (each year) out of the expenses of professional fees. We have considered this issue while dealing with the ground agitated on the ground that profit on sale of shares is required to be assessed as capital gain or business income. We have upheld disallowance in the Asstt.Year 2005-06. Once capital gain is required to be assessed on sale of shares then expenses attributable to exempt income are required to be disallowed under section 14A of the Act. We have discussed this issue, while disposing of ground no.3 of the Revenue’s appeal for the Asstt.Year 2005-06 and ground no.4 of the and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 35 - assessee’s appeal. We have upheld the disallowance of Rs.60 lakhs incurred by the assessee on professional fees for taking care of the investment which would give rise to the dividend income, which will be exempt from tax. Similar logic is applicable in the Asstt.Year 2006-07 also. Hence, expenditure of Rs.60 lakhs out of professional fees deserves to be disallowed. This ground is rejected in both the years i.e. Asstt.Year 2005-06 and 2006-07.

47. No ground is remained for adjudication in both these assessment years. Appeal of the assessee in the Asstt.Year 2005-06 is partly allowed. : (Revenue’s appeal for the Asstt.Year 2006-07)

bearing no.2 in raised by the assessee. As far as disallowance out of interest expenditure is concerned, the ld.CIT(A) has deleted this disallowance. We find that gross investment by the assessee in the Asstt.Year 2006-07 is of Rs.53,081 lakhs. It has reserves & surplus of Rs.71,153 lakhs. Thus, it has far more interest free funds than the investment. We find that the ld.CIT(A) has noticed the profit earned during the year at Rs.97 crores. Compensation received under Montreal Protocol at Rs.8.68 crores. The ld.CIT(A) thereafter made reference to the decision of Hon’ble Bombay High Court in the case of Reliance Utilities & Power P.Ltd. (supra) and observed that if the share capital and reserves & surplus including profit for the current year are higher than the amount of investment, no disallowance is required out of interest expenditure. We have upheld verbatim finding in the Asstt.Year 2005-06 in the foregoing paragraphs. Therefore, taking into consideration our discussion on this issue in the Asstt.Year 2005-06, we do not find any merit in this ground of appeal. It is rejected. No ground remained in the appeal of the Revenue in the Asstt.Year 2006-07. It is dismissed. and 1380/Ahd/2009 and 13. Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 37 -

Sr.No. Particulars Amount 1. Securities Transaction tax 72,42,127 2. Demat charges 5,88,448 3. PMS 25,27,072 and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 38 -

4 Consultancy fees for equity 84,18,000 research 5 Out of other expenses – estimated 25,00,000/- Total 2,12,75,647/-

60. We delete the disallowance worked out by the AO on estimate basis. The disallowance already made by the assessee itself was sufficient to take care of the expenditure. Therefore, ground no.1 of the assessee’s appeal is allowed.

With regard to the assessment year 2013-14, the ld.DRP has observed that there is a little change in the statutory provision by virtue and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 43 - of section 80IA(8). The arm’s length price of the goods sold by the assessee in the alleged captive power plant has to be determined. The ld.DRP thereafter observed that the TPO has determined value of the goods and services sold by its eligible units. According to the TPO captive power plant and electricity distributing companies are to be pitted at different pedestal. According to the DRP, there is a material difference between captive power plant as a seller and distribution/transmission entity. Thus, differences are both in terms of functions performed as well as asset used. In the case of distribution and transmission entities, apart from assets used for generation of electricity huge investments have gone in laying in transmission and distribution infrastructure. These investments and related transmission and distribution function are totally missing in the CPP. It also observed that sale of electricity is regulated activity, thus, as per the law, CPP could have sold to a distribution licensee (through transmission utility). The benchmarking of sale of CPP at the rate at which non-eligible units brought electricity from the grid is thus incorrect. The ld.DRP under this misconception construed that the rate at which electricity supply-companies are purchasing the electricity should be applied for benchmarking the value of electricity sold by the CPP to its manufacturing units. In other words, the DRP was of the view that non-eligible units cannot be taken for the benchmarking for determining the value at which electricity was sold by the CPP. DRP has emphasized that manufacturing units could have different source of procurement of electricity; say – from CPP or from electricity boards. But as electricity producer, in a CPP, it could only be sold to distribution licensee holder. In this way, the ld.DRP observed that value of electricity cannot be benchmarked by adopting the rate at which manufacturing units of the assessee has been purchasing the electricity, rather, according to the DRP, the rate at which supplier companies are purchasing the electricity ought to be applied.

Before us, the ld.counsel for the assessee contended that this controversy has been silenced by the Hon’ble Gujarat High Court in the case of CIT, Gujarat Alkalis and Chemicals Ltd. He placed on record copy of the Hon’ble High Court’s decision and contended that for the purpose of computation of deduction admissible under section 80IA market price of the electricity supplied by a CPP is to be determined by adopting rate at which manufacturing unit has been purchasing the electricity from the open market. The ld.DR, on the other hand relied upon the order of the DRP, but unable to controvert the contentions raised by the assessee. and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 44 -

“3. Since both the issues are covered by various judgments of this Court, we do not find it necessary to record facts at any length. Division Bench of this Court by judgment dated 22.11.2011 in Tax Appeal No.2092/2010 in somewhat similar controversy observed as under : and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 45 -

3. With respect to Question [B], the issue pertains to sub Section (8) of Section 80IA of the Income Tax Act, 1961. The assessee had a CPP Unit generating electricity, which was supplying it to a general unit. The electricity generated is being supplied to other consumers also. The CPP unit charged Rs. 5.40 ps. per unit from the general unit. The Assessing Officer applying sub-Section (8) of Section 80IA restricted the same to Rs. 5.32 ps. per unit and, thereby, restricted the deductions claimed by the assessee under Section 80IA of the Act. This restriction was primarily on the basis that the rate of Rs. 5.40 ps. charged by Gujarat Electricity Board ( GEB" for short) was inclusive of 8 paise per unit of electricity duty. This component of electricity duty the Assessing Officer discarded for the purposes of ascertaining market value of the electricity generated by the CPP Unit and supplied to its general unit.

4. CIT (Appeals) confirmed the view of the Assessing Officer on the same line of reasoning. The Tribunal, however, on further appeal by the assessee, reversed the orders passed by the Revenue authorities referring to and relying upon the decisions of other Tribunals. The Tribunal was of the opinion that the market value of the electricity supplied by the CPP Unit to the general unit would be the same being charged by GEB from the consumers.

5. Counsel for the Revenue contended that the component of 8 paise per unit was the electricity duty which GEB was not authorized to retain but had to pass on to the Government. In essence, GEB was only collecting 8 paise per unit as electricity duty for and on behalf of the Government. He submitted that the market value of the electricity should be reckoned on Rs. 5.32 ps. per unit as was done by the Revenue authority.

6. Issues are thus considered on number of occasions by the Court and held against the Revenue. Questions are answered against the Revenue. Both the tax appeals are therefore, dismissed.”

This judgment of Hon’ble High Court is directly on the issue. Hon’ble Court has considered section 80IA(8), therefore, it is not and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 48 - justifiable at the end of ld.DRP to ignore the judgment of Hon’ble jurisdictional High Court.

There is no disparity on facts. Therefore, respectfully following the order of the Tribunal in the Asstt.Years 2012-13 and 2013-14 passed in and 2744/Ahd/2017, we do not find any merit in this ground of appeal. It is rejected.

66. Ground no.7(a) & (b): In this ground of appeal, grievance of the Revenue is that the ld.CIT(A) has erred in deleting the addition of Rs.3,95,56,650/- which was added by the AO by deleting the claim of capital loss made in the revised return of income.

“(i) The appellant company subscribed fresh cumulative redeemable preference shares of face value of Rs. 100/- each amounting to Rs. 18.83 crores (18,83,000 shares). These shares carried better terms for the assessee in as much as at the time of redemption at the end of the 5th year, i.e., in the FY 2011-2012, the shares would be redeemed at a premium of Rs. 35/- per share. Instead of carrying 5% dividend as earlier, the new preference shares carried 1% dividend and additional premium of Rs. 47- per share for every year during which the share was not redeemed. and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 49 -

(ii) IGSL redeemed the 18,83,000/- preference shares of Rs. 100/- each at the face value for total consideration of Rs. 18.83 crores.

(iii) This redemption was financed by the receipt of equivalent sum of Rs. 18.83 crores from the assessee as at (i) above.

(iv) The appellant had paid Rs. 18.83 crores for subscribing the 5% preference shares in 2002 and during this previous year it received back the same amount of Rs. 18.83 crores by way of redemption. Thus, there was no gain or loss per se in the transaction. The only loss was on account of indexation of the cost of acquisition.

(v) This long term capital loss has been carried forward to the subsequent years and not been set off against any taxable income.”

69. Ground no.8: This ground is connected with ground no.2 of the assessee’s appeal and ground no.4 of Revenue’s appeal in Asstt.Year 2008-09. Revenue has pleaded in these ground that the ld.CIT(A) has erred in deleting addition of Rs.77,23,66,644/- and Rs.59,74,86,404/- in Asstt.Year 2007-08 and 2008-09 respectively. These amounts were added by the AO on account of disallowance of depreciation with aid of section 40(a)(ia) r.w.s. 194C of the Act. On the other hand, the assessee has pleaded that provisions of section 40(a)(ia) of the Act does not apply to the purchase of capital assets and consequentially to the depreciation. In other words, the short issue involved in all these grounds is that on acquisition of capital asset, if an assessee failed to deduction TDS, then, can depreciation be disallowed to the assessee by holding that expenses incurred for acquiring the capital asset is not admissible for capitalisation on the basis of interpretation of section 194C and 40(a)(ia) of the Act.

“12.2 I have considered the submissions of the Id. AR and the facts of the case/ The disallowance of the claim of depreciation in respect of wind mills (wind turbine generators) has been made by the AO on the ground that tax was not deducted at source in respect of payment for the supply of such wind mills by the contractor M/s Vestas Wind Technologies (I) Pvt. Ltd (VWTIPL). The provisions of section 40a(ia) specify that certain amounts shall not be allowed as a deduction in computing the income chargeable under the head "profits and gains of business and profession", unless tax has been deducted from such payments at the prescribed rates. Such amounts include interest, commission, brokerage, rent, royalty, fees for professional or technical services, and amounts payable to resident and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 53 - contractor or a sub-contractor for carrying out any work on which tax was deductible at source under Chapter XVII-B. Chapter XVII-B deals with collection and recovery of tax. Part B of this chapter deals with deduction of tax at source. Section 194 C deals with payments to contractors. 12.3 In the instant case, clearly the impugned payments were not in respect of payment of interest, commission, brokerage, rent, royalty, fees, etc., but related to payments made to a supplier/contractor. Hence, the only applicable portion of the section would be in respect of "carrying out of any work by a contractor or subcontractor on which tax is deductible at source."

12.4 The assessment year in question is AY 2007-08. Hence the applicable provisions would be those which prevailed before the amendment of section 194C w.e.f. 1.10.2009 by Finance (No. 2) Act, 2009. As per the pre-amended provisions, any person responsible for paying any sum to any resident for carrying out any work shall at the time of credit of such sum to the account of the contractor or at the time of payment thereof deduct tax at the rates specified therein.

12.5 From a reading of section 194C as well as section 40(a)(ia), it is clear that the essence of liability to deduct tax arises from the carrying out of any work. "Work" has not been defined in the section. However, Explanation III of the pre-amended section 194C provided an inclusive definition of "work" so as to include advertising, broadcasting and telecasting, carriage of goods and catering. In the amended provisions, w.e.f. 1.10.2009, in clause (iv) "work" has been defined to include

"(e)' manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer, but does not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer. "

12.6 For the AY 2007-08, i.e. the year under consideration, no tax was deductible in respect of supply of goods, whether manufactured with inputs from the purchaser or otherwise. Hence on this ground alone the transaction of supply of wind turbine generators would be outside the purview of section 194C. However, it is instructive to refer to Board's Circular issued on this subject. The Circular No. 681 dt. 8.3.1994 relates and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 54 - to TDS u/s 194C. In this circular, the CBDT, after considering the judgement of the Supreme Court in the case of Associated Cement Co. Ltd. v CIT, 201 ITR 435, laid down certain guidelines with regard to the applicability of the provisions of section 194C. Inter-alia, it provided as follows:

"(vi) The provisions of this section will not cover contracts for sale of goods.

(a) Since contracts for the construction, repair, renovation or alteration of buildings or dams or laying of roads or airfields or railway lines or erection or installation of plant and machinery are in the nature of contracts for work and labour, income-tax will have to be deducted from payments made in respect of such contracts. Similarly, contracts granted for processing of goods supplied by Government or any other specified person, where the ownership of such goods remains at all times with the Government or such person, will also fall within the purview of this section. The same position will obtain in respect of contracts for fabrication of any article or thing where materials are supplied by the Government or any other specified person and the fabrication work is done by a contractor.

(b) Where, however, the contractor undertakes to supply any article or thing fabricated according to the specifications given by Government or any other specified person and the property in such article or thing passes to the Government or such person only after such article or thing is delivered, the contract will be a contract for sale and as such outside the purview of this section. "

12.7 Thus, it has been clearly stated by the Board that the guidelines relating to the provisions of tax deduction at source u/s 194C would not cover contracts for sale of goods, but would only be confined to contracts for fabrication of article or thing. Where the fabrication is carried out with materials supplied by the other specified persons and the fabrication work alone is done by the contractor, in such case tax would have to be deducted from the payment made in this regard. However, where the supply of any article or thing is the subject matter of the transaction and such article or thing is fabricated according to the specifications given by the specified persons, and no material is supplied by such specified persons, and the property in such article or thing passes to such person and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 55 - only after the said article or thing is delivered, then the contract will be a contract for sale and thus outside the purview of section 194C. In the instant case, no material has been supplied by the assessee. The article or thing has been supplied by M/s. VWTIPL in accordance with the specifications given by the assesse. The property in the goods passed only after delivery by the supplier to the assessee and payment by the assessee to the supplier. Hence by applying the criteria laid down by the Board, the transaction in question would appear to be a contract of sale and not a contract for carrying out of any work.

12.8 At the same time I find that on very similar facts, the ITAT, Hyderabad Bench had occasion, in the case of Power-Grid; to examine the nature of works contract in contradistinction to sales contract. In that case also, as in the present case, the contract was bifurcated into two parts, i.e. contract for supply of equipment and contract for erection and commissioning of the said equipment. The applicability of the provisions of section 194C was the issue there, as here. The ITAT in that case held as under (head notes):-

"TDS - Under s. 194C - Works contract vis-a-vis contract for sale -If equipment are manufactured as per the design, engineering etc. supplied by the supplier, it -would not result in a works contract especially when all the materials belong to the supplier even though it produced a tailor made product - Erection portion being subsequent to passing of title by execution of supply portion, it cannot be said that the erection portion controls the supply portion even though fulfillment of erection contract is a condition precedent to fulfillment of supply contract — As the title in the equipment manufactured as per the design, engineering, etc supplied by assessee passed on to the assessee before commencement of the erection contract and assessee had entered the same in its stock register before issuing the same for erection, it was a contract of sale not attracting s. 194C - Assessee having already deducted tax at source qua the erection portion, provisions of s.194C shall not apply to remaining sale portion "

12.9 Similarly, this issue was also considered by the ITAT Delhi Bench in the case of Haryana Power Generation Corporation. In that case too the issue related to whether TDS provisions were applicable in the case of a composite contract for supply of equipment and erection and and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 56 - commissioning of the equipment. The Delhi Bench held as under (Head notes) :-

"TDS - Under s. 194C - Composite contract or separate contracts — Primary and dominant object of assessee being to purchase the material, i.e. two ESP s for its power plant, the contract for supply of material, freight, insurance and supply of spare parts constituted separate contract from, the. contract for civil work .of erection .and , .. commissioning of the plant though there is only one common purchase order - AO was not justified in treating the assessee-in-default by treating the two contracts as composite contract - AO directed to rework the TDS accordingly - Further, if the tax has already been paid by the contractor, the assesssee could not be treated in default under s. 201"

12.10 Having regard to the provisions of law as contained in section 40(a)(ia) and 194C, the Boards view in the matter as expressed in Circular No. 681 and the decisions of the Hyderabad and Delhi Benches of ITAT as above, I am of the opinion that the impugned transaction amounted to a contract for sale of 14 numbers of wind turbine generators worth Rs. 149.37 crores and a separate contract for erection and commissioning of the WTGs for sum of Rs. 3.92 crores. The assessee has already deducted tax at source in respect of the payment of Rs. 3.92 crores. As noted above, the provisions of Chapter-XVIIB would not be applicable in the case of sale of goods. Hence it is held that the AO was not correct in disallowing the claim of depreciation for failure to deduct tax at source on payments pursuant to such contract of sale. Disallowance of depreciation amounting to Rs.77,23,66,644/- is therefore directed to be deleted.”

s together. and 1380/Ahd/2009 and 13. Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 59 -

“13.2 I have considered the submissions of the Id. AR and the facts of the case. I find that the AO has noted that the invoices raised by McKinsey & Co in respect of consultancy services provided by them were in the name of M/s Inox and not in the name of the asessee. However, it is seen that the appointment letter dt. 4.9.2006 by which McKinsey & Co were appointed as consultant for identifying suitable business opportunities for growth of the assessee company as well as the group company, has been signed by Shri Deepak Asher, Group Head (Corporate Finance) on the letterhead of the assessee company (GFL). The discussion papers were also addressed by M/s McKinsey & Co to GFL. The report was also submitted to GFL. Hence the conclusion of the AO that the consultancy was unrelated to the assessee (GFL) is not strictly speaking correct. The assessee's Group is known as Inox Group. Therefore., it would not be correct to say that the entire expenditure was unrelatable to the assessee company. Subsequent to the submission of the report by McKinsey & Co, the assessee, set up a subsidiary company under the name and style of Inox Wind Ltd., for the purpose of manufacture of windmills (WTG). At and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 60 - the same time, the AOs observation that the invoices were raised in the name of the group company has not been controverted: This suggests that the group as a whole gained by commissioning the report from McKinsey & Co. Accordingly, in my view it would be fair to consider 20% of the expenditure on consultancy to be relatable to the assessee company (GFL). Regarding the other aspect, it is held that the assessee has rightly capatilised this amount and allocated the same to the capital cost of wind mills. The AO is therefore directed to allow 20% of Rs. 5,10,17,2897- as part of capital cost of wind mill and the disallowance of the balance of Rs. 4,08,13,8317- is confirmed.”

next financial year and the payment was received partly in March 2008 and partly in April 2008. Thus, the terms & conditions of the Share Purchase Agreement dt. 1.2.2008 were not complied with. In fact, the remaining conditions in this Share Purchase Agreement including schedule of transfer of balance shares and also receipt of additional amount of Rs 97,97,500/- by way of revenue sharing arrangement (as per para 3.5 of the Share Purchase Agreement) etc. was also not adhered to and in fact, the Share Transfer Agreement was not given effect to in substance. Since, the contract of sale, i.e Share Purchase Agreement dated 1.2.2008 was not followed in substance and the IGSL shares were actually transferred in FY 2008-09 i.e. on 9.4.2008, the date of transfer cannot be accepted to be in FY 2007-08. It is held that AO was justified^ in not allowing capital gains loss in respect of shares of IGSL in AY 2008-09.

5.2.1 However, there is merit in appellant's contention that addition of Rs.1,75,31,935/- under the head 'business income' was not required and instead long term capital gains are to be increased to the extent set off was claimed in this year i.e. Rs.45,79,704/- and balance loss of Rs.1,38,00,981/- is not allowed to be carried forward, due to transaction not having taken place in this year. AO is directed to modify the addition/disallowance accordingly. Further, as per the Share Purchase Agreement dated 1.2,2008, the rate at which all the shares held by appellant group were to be transferred to HISL was Rs.2.03 per equity share and Rs.13.4 per preference share. On being asked about the basis for these values, appellant company submitted that no valuation was done to arrive at the aforesaid values and consideration was fixed on mutual consent with the purchaser. Even this consideration fixed as per the Share Purchase Agreement was finally not adhered to and the remaining shares were transferred at a much lesser value through Addendum signed on 2.4.2010 i.e. at a value of Rs.0.01 per equity share and Rs.0.04 per preference share. Since the transaction has resulted in huge loss, sale rate of shares is an issue to be examined by the AO in relevant AYs. ;

Ground No.2 and 3:

Ground no.4:

Particulars Amount(Rs) Sr. No. I) Securities Transaction tax I2985I2S Demat Charges 2) 1423333

3) PMS fees 4994001 Consultancy Fees for Equity Research Services 4) 1572760 5) Out of other expenses- As estimated by Management 5000000 TOTAL 25975022

Ground No.5

Ground no.6:

raised by the Revenue i.e. ground no.5 as well as ground no.9 of Revenue’s appeal in the Asstt.Year 2006-07. Considering our finding, this ground of appeal is allowed because we have held that the assessee is entitled to capitalize total fees and entitled to claim depreciation on such amount. There cannot be any bifurcation. and 1380/Ahd/2009 and 13. Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 71 - (Asstt.Year 2009-10):

98. In ground no.3: Revenue has pleaded that the ld.CIT(A) has erred in holding that adjustment made on account of disallowance under section 14A cannot be made in the book profit under section 115JB of the Act. The ld.counsel for the assessee at the very outset submitted that Special Bench of the Tribunal in the case of ACIT Vs. Vireet Investments P.Ltd., 165 ITD 27 (SB) has held that no adjustment on account of 14A disallowance can be made in the book profit for the purpose of section 115JB. It is also pertinent to note that we have dealt with this issue in the Asstt.Year 2012-13 and 2013-14. Following the decision of the Special Bench, we have held that no such amount can be included in the book profit. Therefore, we do not find any merit in this ground of and others raised by the Revenue. Hence, this appeal is rejected. and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 72 - ITA No.548/Ahd/2016:

100. In these appeals contained common issue relates to determination of expenditure required to be disallowed for the purpose of section 14A r.w. rule 8D of the Income Tax Rules.

Asstt.Year 2009-10 and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 73 -

Sr. Particulars Amount(Rs) No. 1) Securities Transaction tax 11,04,236 2) Demat Charges 2,81,742 3) PMS fees 6,77,405 4) Consultancy Fees for Equity Research 1,12,360 Services 5) Out of other expenses- As estimated by 50.00,000 Management TOTAL 71,75,743 Asstt.Year 2010-11 Sr. Particulars Amount(Rs) No. 1) Securities Transaction tax 14,51,893

2) Demat Charges 1,66,573 3) Out of other expenses – as estimated by 75,00,000 Management Total 91,18,466 Asstt.Year 2011-12:

Sr. Particulars Amount(Rs) No.

1) Securities Transaction tax 23,60,273

2) Demat Charges 2,81,917 3) PMS fees 3,09,370 and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 74 -

3) Out of other expenses – as estimated by 75,00,000 Management Total 1,04,51,560

(i) Amount of expenses directly attributable to income : Rs.71,75,743/- (as submitted by the assessee) (ii) Interest expenses incurred which is not directly attributable to any particular income or receipts, amounts as computed with the formula = A x B / C A . Interest : Rs. 49,99,97,000/- B : Average investment : Rs. 526,10,38,500/- C: Average assets : Rs.1794,35,02,000/-

Rs.49,99,97,000 x Rs.526,10,38,500 : Rs.14,65,99,223/- Rs.1794,35,02,000 (iii) 0.5% of Average Investment (0.5% on Rs. 526,10,38,500/-) : Rs. 2,63,05,193/- : Rs.18,00,80,159/- Total Disallowance Since the assessee itself disallowed an amount of Rs.71,75,743/-, remaining disallowance of Rs. 17,29,04,416/- is added to the total income of the assessee.”

Asstt.Year 2010-11:

“(i)Amount of expenses directly attributable to income : Rs.91,18,466/- (as submitted by the assessee) (ii) Interest expenses incurred which is not directly attributable to any particular income or receipts, amounts as computed with the formula = A x B / C : Rs. 48,03,33,000/- A : Interest :Rs. 6,27,19,94,500/- B : Average investment C : Average assets : Rs.2090,05,18,500/- Rs.48,03,33,000 x Rs.627,19,94,500 : Rs. 14,41,42,196/- Rs.2090,05,18,500 (iii) 0.5% of Average Investment (0.5% on Rs. 627,19,94,500/-) : Rs. 3,13,59,973/- Total Disallowance : Rs. 18,46,20,600/- and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 75 -

Since the assessee itself disallowed an amount of Rs.91,18,466/-, remaining disallowance of Rs.17,55,02,134/- is added to the total income of the assessee.”

Asstt.Year 2011-12:

(i)Amount of expenses directly attributable to income : 1,04,51,560/- (as submitted by the assessee) (ii) Interest expenses incurred which is not directly attributable to any particular income or receipts, amounts as computed with the formula = A x B / C A : Interest : Rs.34,54,64,000/- B : Average investment : Rs.659,75,75,000/- : Rs.2314,04,63,000/- C : Average assets Rs.34,54,64,000 x Rs.659,75,75,000 : Rs.9,84,95,205 /- Rs.2314,04,63,000 (iii) 0.5% of Average Investment : Rs. 32987875/- (0.5% on Rs. 659,75,75,000) : Rs. 13,14,83,080/- Total Disallowance Since the assessee itself disallowed an amount of Rs.1,04,51,560/-, remaining disallowance of Rs.12,10,31,520/- is added to the total income of the assessee. (Addition: Rs.12,10,31,520)

105. No other ground in Asstt.Year 2009-10, hence, this appeal is treated as partly allowed. Similarly, no other ground remained in the Asstt.Year 2010-11. This also is treated as partly allowed.

106. Ground No.2 of this appeal is common in 116 and 117/Ahd/2016 (Asstt.Year 2009-10, 2010-11 and 2011-12) i.e. common issue involved all these three grounds is, whether the assessee and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 77 - is entitled for deduction under section 80IA on the value of the captive power generated by it. If yes, than at what rate such deduction is to be admissible.

109. In ground No.3 in the Asstt.Year 2009-10 (ITA No.2365/Ahd/2012) the issue agitated in this ground is, whether on sale of shares/ mutual fund capital is to be assessed as business income.

taken by the assessee in the Asstt.Year and 1380/Ahd/2009 and 13. Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 78 - 2007-08, 2008-09 and 2009-10. In the Asstt.Year 2007-08, 2008-09 and 2009-10, the assessee has moved an application for permission to raise additional ground of appeal. It has pleaded that “lower authorities treated income on account of sale of carbon-credit as revenue receipts exigible to tax, are erroneous and contrary to the provisions of the Act. The ld.AO/CIT(A) ought to have so held and excluded income on account of sale of carbon-credit as capital receipt and not leviable to tax. It be so held.”

“19.2 The Id. 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.

116. Apart from additional ground, the assessee has taken ground no.4 in the Asstt.Year 2011-12 challenging this very issue. On merit the issue is squarely covered by the order of the ITAT in the Asstt.Year 2012-13 and 2013-14. The discussion made by the Tribunal on this issue is worth to note, which reads as under:

“34. We now take ground no.5 in the assessment year 2012-13 and ground no.8 in the assessment year 2013-14:

“Claim of deduction in respect of income from Carbon Credit being Capital receipt -

During the year, the Company has received income from Carbon Credit of Rs. 441.69 crores. The said revenue is credited to Profit & Loss account and is included in Revenue from Operations. Please refer to Schedule 23 of the Annual accounts. and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 81 -

We are enclosing herewith a detail note on this Carbon Credit. In the said note we have explained as under:

GFL's Carbon Credit:

• GFL operates a HCFC-22 plant at Village Ranjitnagar, District Panchmahals, Gujarat, India. During the production of HCFC-22, waste gas called HFC-23 is generated.

• For each ton of HCFC-22 produced, approximately 2.9% of HFC-23 is generated. HFC-23 is a greenhouse gas (GHG) which has Global Warming Potential of 11,700 of CO2 per ton of HFC- 23.

• GFL's CDM project consists of incinerating HFC-23 instead of allowing it to be vented into the atmosphere, and thereby reducing GHG emissions

• CERs awarded = Tones of GHG reduced *GWP of GHG • In the year 2005-2006, Gujrat Fluorochemicals Limited (GFL) has implemented a project for greenhouse gas emission reduction by thermal oxidation of the waste gas HFC-23 in India under Clean Development Mechanism of Kyoto Protocol. • GFL has installed, and operates and maintains a HFC-23 collection and thermal oxidation system (TO Plant) to incinerate HFC-23. The thermal oxidation system enabled GFL to avoid HFC-23 emissions (GHG emissions), which, in the absence of the project activity, would have been vented into the atmosphere. • Upon voluntary incineration of HFC-23, emission reduction is achieved and CERs are issued to GFL after complying with the specified monitoring plan approved by the UNFCCC. CERs are issued in electronic form. Once the CERs are generated through the project undertaken, they are credited to GFL's account in the CD Registry. From there, they are transferred to buyers. The same is reported as Sales in the Financial Accounts under the Chemical Segment. Unsold CERs are shown as Inventory at Cost. • GFL has sold CERs mainly to multilateral institutions / international buyers and treated the same as business income since CERs are earned / generated from HCFC-22 plant which is the and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 82 - primary business of GFL and also offered the same for taxation at the normal rate of tax like any other sources of income. All the expenses incurred as stated above are claimed as deduction (including tax depreciation on TO plant).

In this note, we have given the background of the carbon credits and how the carbon credits are received in the case of our Company. We had also explained the procedure of generation of carbon credits and steps taken and involved in receipt of such carbon credits. Thus, the carbon credits are issued by the CDM Executive Board, which operates under the UNFCCC and those are sold to international buyers for cash. We have also explained that the CERs are not received or allocated by Government. It will also be observed that in our case carbon credits are not received for using alternative fuel like non-fossil fuel which may be specific to wind energy business or other fuel switch or energy efficiency projects.

The claim is made that the said revenue from Carbon Credit is not taxable as income but a capital receipt not liable to tax. Hence, while computing total income, the said receipt, net of expenses, may please be excluded as capital receipt. This claim is based on the ITAT order in the case of My Home Power Limited, Hyderabad Bench, which is now confirmed by the Hon'ble Andhra Pradesh High Court.

We may state that such claim, that Carbon Credit revenue is Capital receipt not liable to tax, and hence should be excluded from total income, was made during the course of assessment proceedings for A.Y. 2010-11 and 2011-12 also. In the Assessment order, the AO has not accepted the said claim. The Company, has filed appeals for both the years before CIT(A). One of the grounds of appeal is regarding such claim. During the course of appellate proceedings for A.Y. 2010- 11, the CIT(A) has called for the remand report from Assessing officer on the issue. A copy of the said remand report was provided to us and we were asked to make our submissions on the said remand report. We have made our detailed submission dated 02-01-2015 to the CIT(A). The copy of the said submission is enclosed for ready reference in which we have provided our replies to the AOs observations in the remand report and the entire issue is discussed in detail. We rely on the same. and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 83 -

Therefore, in view of the above it is requested that at the time of assessment, carbon credit revenue of Rs. 441.69 crores credited in the profit and loss account, net of expenses, may please by excluded, being a capital receipt and not liable to tax on the basis of various ITAT orders and High Court decision in the case of My Home Power Limited. Enclosures:

2. Copy of the remand report dated 25.11.2014 for A.Y. 2010-11 3. Copy of the reply dated 02.01.2015 submitted to CIT(A) in response to above remand report during appellate proceedings for A.Y. 2010-11.

24. Discussion and Direction of DRP; :

24.1 It is seen from draft order that issue is not discussed in the draft assessment order, since the claim was made by the assessee during the course of the proceedings itself, as per letter dated 28/01/2015. The DRP has noted that there is no variation of income on this issue in the draft assessment order, which is prejudicial to the interest of Revenue. Thus, in strictly legal terms, the said objection doesn't fall under the provisions of Section 144C of the I.T. Act 1961.

24.2 Also in the case of Goetze (India) Ltd. (284 ITR 323), the Hon'ble Supreme Court has held that the Assessing Officer cannot entertain any claim for allowing deduction resulting in a reduction in the total income returned, which is not claimed in the original return or a revised return.

24.3 On merits, the DRP has noted the CIT (A)'s order of earlier 2 years and concurs with the findings of the CIT (A), that such carbon credit receipts GFL are taxable. The relevant excerpts of the order of the CIT(A) for A.Y. 2011.12 A.Y. 2010-11 are reproduced hereunder:-

From CIT (A) order for AY 2011-12; /

"9. 1 This issue has .been decided in appellant 's own case for the A Y 2010-1 1 vide order dated 30-10.2015 in Appeal No. CAB- 11321201415. In this order the revenue earned from the sale of carbon credits, net of expenses has been held to be taxable in the hands of the and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 84 - appellant. Moreover, it is seen that in the current year such revenue also includes profit earned on account of trading of such carbon credits which are revenue in nature under all circumstances. Hence, following the decision of the earlier order and considering the fact that the appellant is also engaged in the trading of carbon credits, it is held that such revenue in the current year is also taxable in the hands of the appellant as income from business. Alternatively, this is also taxable as short term capital gain as has been held in the appellate order of AY 2010-11. Hence, this ground of appeal is dismissed"

From CIT(A)order for AY2010-11

"11.1 In the present case too, the appellant had profit motive in the establishment of the CDM project. Hence it is held that it is carrying on the business of generation of CERS through this CDM project and accordingly, the revenue on account of sale of such CER. is taxable as profits and gains of business being carried on by the appellant. 11.2 Without prejudice to the finding given above that revenue earned from sale of carbon credits is taxable as income from the business Hi the hands of the appellant, even if it is treated as a capital receipt then also it will be taxable in the hands of the appellant as income from capital gain on account of transfer ofCERs. This is due to the fact that in the case of the appellant, the cost of acquisition of CERS has already been determined. Thus, even if the appellant's contentions are accepted, it is to be held that these CERS are capital assets in the hands of the appellant and are having determined cost. Under such situation, the receipt received on account of transfer of such capital assets will be taxable in the hands of the appellant as short term or long term capital gain. Since, in the case of the appellant, all such CERS have been transferred within three years of date of acquisition of fire same, hence the entire sale consideration net of expenses is taxable as short term capital gain. Accordingly there will be no difference on the tax to be levied on the income of the appellant under such situation also. Thus in the alternate situation also, there shall be no change in the total income of the appellant.

11.3 On the basis of these discussions, it is held that the revenue earned by the appellant company on account of sale of CERs is its income taxable under the head income from business. Hence, this ground of appeal is dismissed." and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 85 -

24.4 In view of the above the claim Of the assessee that carbon credit receipt are not liable to tax is rejected and accordingly, no directions are issued to the AO on this ground of objection.”

(4) Whether on facts and in the circumstances of the case and in law, the ITAT erred in treating the income from realisation of carbon credits as capital in nature, despite the fact that the realization from carbon credits has been treated by the assessee itself as revenue income and offered to tax?"

“6. The last surviving question pertains to the treatment that the assessee’s income from trading of carbon credits should be given. The Tribunal held that receipts should in the nature of capital receipts and therefore would not invite tax. This issue has and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 86 - been examined by two High Courts. The Karnataka High Court in the case of CIT Vs. Subhas Kabini Corporation Ltd., reported in (2016) 385 ITR 592 (Karn) and Andhra Pradesh High Court in the case of Commissioner of Income-tax Vs. My Home Power Limited reported in (2014) 365 ITR 82(A) have held that receipts of carbon credit are in the nature of revenue receipts. Following the decisions of said two High courts, this question is also not considered.”

It is to be noted here that the Hon’ble Gujarat High Court has thereafter issued a corrigendum in the above order in OJMCA/1/2018 in Tax Appeal No.553 of 2017 wherein the applicant pointed out an advertent mistake in paragraph-6. The Hon’ble Court rectified the typographic/inadvertent mistake vide order dated 9.3.2018. It reads as under:

“Through this application, the assessee points out that in our judgment dated 28.08.2017, while dismissing Revenue’s Tax Appeals, we had inadvertently recorded in Paragraph-6 that several High Courts have held “that receipts of carbon credit are in the nature of revenue receipts”. This is clearly a typographical/ inadvertent error. The above quoted portion of paragraph-6 would, therefore, be corrected and read as under – “that receipts of carbon credit are in the nature of capital receipts”. The applicant stands disposed of accordingly.”

“Carbon credits is an incentive given to an industrial undertaking for reduction of the emission of GHGs (Green House gases), including carbon dioxide which is done through several ways such as by switching over to wind and solar energy, forest regeneration, installation of energy-efficient machinery, landfill methane capture, etc. The Kyoto Protocol commits certain developed countries to reduce their GHG emissions and for this, they will be given carbon credits. A reduction in emissions entitles the entity to and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT - 87 - a credit in the form of a Certified Emission Reduction (CER) certificate. The CER is tradable and its holder can transfer it to an entity which needs Carbon Credits to overcome an unfavorable position on carbon credits.

Income-tax Department has been treating the income on transfer of carbon credits as business income which is subject to tax at the rate of 30%. However, divergent decisions have been given by the courts on the issue as to whether the income received or receivable on transfer of carbon credit is a revenue receipt or capital receipt.

In order to bring clarity on the issue of taxation of income from transfer of carbon credits and to encourage measures to protect the environment, it is proposed to insert a new section 115BBG to provide that where the total income of the assessee includes any income from transfer of carbon credit, such income shall be taxable at the concessional rate often per cent (plus applicable surcharge and cess) on the gross amount of such income. No expenditure or allowance in respect of such income shall be allowed under the Act.

This amendment will take effect from 1st April, 2018 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent years.”

Benches as well as Hon’ble High Gujarat High Court in the case of Mitesh Impex (supra) and held that if a particular item is going to affect taxability of assessee, then a fresh claim can be entertained by the first appellate authority or by the DRP. Thus, we overrule this reasoning of the DRP and direct the AO to treat these receipts in both assessment years as capital receipt.”

One of us (i.e. Judicial Member) is author of the order in the Asstt.Year 2012-13, 2013-14, as also author of the order in the case of CIT Vs. Subhas Kabil Power Corporation Ltd., at Bangalore which has been upheld by the Hon’ble Karnataka High Court. This decision has been followed by the Hon’ble jurisdictional High Court in the case of Alembic Ltd. Therefore, respectfully following the decision of jurisdictional High Court in the case of Alembic Ltd., (supra) and the order of the ITAT in assessee’s own case for the Asstt.Year 2012-13 and 2013-14, this issue is decided in favour of the assessee. The ld.AO is directed to treat the sale proceeds from carbon credit as capital receipts in all these years.

"271. Failure to furnish returns, comply with notices, concealment of income, etc.

(1) The Assessing Officer or the Commissioner (Appeals) or the CIT in the course of any proceedings under this Act, is satisfied that any person (a) and (b)** ** ** (c) has concealed the particulars of his income or furnished inaccurate particulars of such income.He may direct that such person shall pay by way of penalty. (i)and (Income-tax Officer,)** ** ** (iii) in the cases referred to in Clause (c) or Clause (d), in addition to tax, if any, payable by him, a sum which shall not be less than, but which shall not exceed three times, the amount of tax sought to be evaded by reason of the concealment of particulars of his income or fringe benefit the furnishing of inaccurate particulars of such income or fringe benefits:

Explanation 1- Where in respect of any facts material to the computation of the total income of any person under this Act,

(A) Such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the Commissioner (Appeals) or the CIT to be false, or (B) such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, then, the amount added or disallowed in computing the total income or such person as a result thereof shall, for the purposes of Clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed.”

Pronounced in the Open Court on 28th June, 2019.