THE JOINT COMMISSIONER OF INCOME TAX(OSD),, GANDHINAGAR vs. KALPATARU POWER TRANSMISSION LTD.,, GANDHINAGAR

आदेश / O R D E R

PER PRADIP KUMAR KEDIA - AM: The captioned appeals have been filed at the instance of the Revenue against the common order of the Commissioner of Income Tax(Appeals)-12, Ahmedabad [CIT(A) in short] dated 21/02/2016 in the matter of assessment order under s.143(3) r.w.s. 153A(1)(b) of the

ITA Nos.1462 & 1463/Ahd/2016 Jt. CIT (OSD) vs. Kalpataru Power Transmission Ltd. Asst.Years – 2010-11 & 2011-12 - 2 - Income Tax Act, 1961 (hereinafter referred to as "the Act") dated 30/03/2013 & 30/03/2014 relevant to Assessment Years (AYs) 2010-11 & 2011-12 respectively. Since the grounds of appeal involved in both the appeals are common, these were heard together and are being disposed of by way of a common order.

ii) On the facts and circumstances of the case, the Ld. Commissioner of Income-Tax (Appeals) has erred in law and on facts in deleting the disallowance of Rs.63,03,835/- u/s.14A r.w.r. 8D made by A.O.

3.1. Ground No.1 of Revenue’s appeal concerns addition of Rs.4,42,72,610/- on account of carbon credit receipts as revenue receipt. The issue is no longer res integra. Identical issue came up in assessee’s own case for AY 2009-10 in ITA No.538/Ahd/2013 order dated 18/03/2016 wherein Coordinate Bench adjudicated the issue in the following terms:

ITA Nos.1462 & 1463/Ahd/2016 Jt. CIT (OSD) vs. Kalpataru Power Transmission Ltd. Asst.Years – 2010-11 & 2011-12 - 3 - "9. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 10. We are alive to learned counsel’s core contention that the issue about taxability of carbon credits is no longer res integra inasmuch as there are several decisions of this Tribunal, and one of which has been approved by Hon’ble Andhra Pradesh High Court, which have held that the carbon credit receipts are not taxable. However, for the reasons we will set out in a short while, we consider it appropriate to deal with the matter in a little detail and set out our understanding about certain basic aspects of this case, rather than disposing of appeal, without examining the facts of case, summarily as a covered matter.

ITA Nos.1462 & 1463/Ahd/2016 Jt. CIT (OSD) vs. Kalpataru Power Transmission Ltd. Asst.Years – 2010-11 & 2011-12 - 4 - otherwise occur”. The emission reduction units, which is what carbon credits or CERs (certified emission reductions) imply, can thus be acquired by the parties as well, as long as the project, in which these reductions are achieved, are approved by the parties to the protocol. Of course, this method of reduction of harmful gases is only supplemental method inasmuch as these countries cannot rely solely, or mainly, on so acquiring CERs from harmful emission reductions, but that is not really material in the present context because what we are dealing with is only acquiring the CERs from Indian entities. In effect, even if the emission for harmful gas is reduced in a developing country like India, as long as the project in which this reduction is achieved is approved by parties to the protocol and these emission reduction units are transferred by the Indian entity so reducing the emissions to the entities in the parties to the Kyoto protocol, such emission reductions can be taken into account in their committed reductions. The respective parties to the Kyoto protocol have in turn put the emission obligations on the business entities in their countries, and, to fulfil the emission obligations, these entities have obtained the emission reduction credits from entities in other parts of the world. There are entities which trade in and facilitate transfer of these credits from one entity to another. There are sponsorship arrangements, under the Clean Development Mechanism, will allow the CERs generated by Indian entities to transfer the CERs to the foreign entities. It is this peculiar feature of mechanism of fulfilling the commitments that lead to a unique business model in terms of the carbon credits. Of course, the carbon credits through work in developing countries can either be through buying the credits straight away, through joint implementations or by sponsoring a project in the developing world where cost of reducing the harmful gas emission is much lower. These three modes are termed as IET (International Emission Trading), JI (Joint Implementation) and CDM (Clean Development Mechanism) respectively. Whatever be the mode, the common thread is that for all this emission reduction work in the developing countries, developed countries get the credits and virtually a legitimacy to their higher emission to harmful gas emissions. The following diagram could perhaps throw some light on how carbon credits get converted into cash, or, to put it bluntly, how business entities in the developed countries wash their guilt for generating harmful gases by doling out monies to those who save emission of harmful gases:

ITA Nos.1462 & 1463/Ahd/2016 Jt. CIT (OSD) vs. Kalpataru Power Transmission Ltd. Asst.Years – 2010-11 & 2011-12 - 5 -

(http://www.dailytimesgazette.com/carbon-credit-scheme-blamed-for-the-increased- emission-of-greenhouse-gases-2/24240/)

ITA Nos.1462 & 1463/Ahd/2016 Jt. CIT (OSD) vs. Kalpataru Power Transmission Ltd. Asst.Years – 2010-11 & 2011-12 - 6 -

ITA Nos.1462 & 1463/Ahd/2016 Jt. CIT (OSD) vs. Kalpataru Power Transmission Ltd. Asst.Years – 2010-11 & 2011-12 - 7 - 17. It is in this light of factual scenario that we need to address ourselves to the taxability of sale consideration for carbon credits. 18. As we deal with this aspect of the matter, we may acknowledge the fact that there is a series of decisions of this Tribunal, starting with the decision in the case of My Home Power Ltd Vs DCIT [(2013) 63 SOT 227 (Hyd)], on this issue and all but one of these decisions are in favour of the assessee. The reasoning, which prevailed upon the bench to decide the matter in favour of the assessee, has been set out in the case of My Home Power Ltd (supra) as follows: …. Carbon credit is in the nature of "an entitlement" received to improve world atmosphere and environment reducing carbon, heat and gas emissions. The entitlement earned for carbon credits can, at best, be regarded as a capital receipt and cannot be taxed as a revenue receipt. It is not generated or created due to carrying on business but it is accrued due to "world concern". It has been made available assuming character of transferable right or entitlement only due to world concern. The source of carbon credit is world concern and environment. Due to that the assessee gets a privilege in the nature of transfer of carbon credits. Thus, the amount received for carbon credits has no element of profit or gain and it cannot be subjected to tax in any manner under any head of income. It is not liable for tax for the assessment year under consideration in terms of sections 2(24), 28, 45 and 56 of the Income-tax Act, 1961. Carbon credits are made available to the assessee on account of saving of energy consumption and not because of its business. Further, in our opinion, carbon credits cannot be considered as a bi-product. It is a credit given to the assessee under the Kyoto Protocol and because of international understanding. Thus, the assessees who have surplus carbon credits can sell them to other assessees to have capped emission commitment under the Kyoto Protocol. Transferable carbon credit is not a result or incidence of one's business and it is a credit for reducing emissions. The persons having carbon credits get benefit by selling the same to a person who needs carbon credits to overcome one's negative point carbon credit. The amount received is not received for producing and/or selling any product, bi- product or for rendering any service for carrying on the business. In our opinion, carbon credit is entitlement or accretion of capital and hence income earned on sale of these credits is capital receipt. For this proposition, we place reliance on the judgment of the Supreme Court in the case of CIT v. Maheshwari Devi Jute Mills Ltd. [1965] 57 ITR 36 wherein held that transfer of surplus loom hours to other mill out of those allotted to the assessee under an agreement for control of production was capital receipt and not income.

ITA Nos.1462 & 1463/Ahd/2016 Jt. CIT (OSD) vs. Kalpataru Power Transmission Ltd. Asst.Years – 2010-11 & 2011-12 - 8 - Being so, the consideration received by the assessee is similar to consideration received by transferring of loom hours. The Supreme Court considered this fact and observed that taxability of payment received for sale of loom hours by the assessee is on account of exploitation of capital asset and it is capital receipt and not an income. Similarly, in the present case the assessee transferred the carbon credits like loom hours to some other concerns for certain consideration. Therefore, the receipt of such consideration cannot be considered as business income and it is a capital receipt. Accordingly, we are of the opinion that the consideration received on account of carbon credits cannot be considered as income as taxable in the assessment year under consideration. Carbon credit is not an offshoot of business but an offshoot of environmental concerns. No asset is generated in the course of business but it is generated due to environmental concerns. Credit for reducing carbon emission or greenhouse effect can be transferred to another party in need of reduction of carbon emission. It does not increase profit in any manner and does not need any expenses. It is a nature of entitlement to reduce carbon emission, however, there is no cost of acquisition or cost of production to get this entitlement. Carbon credit is not in the nature of profit or in the nature of income. 19. In all other decisions on the same lines, as cited before us, there is a reference to the aforesaid observations of the Tribunal and there is hardly any independent analysis of the factual situation. The same reasoning has been adopted by the coordinate benches. . 20. With greatest respect to the coordinate benches, we have our serious reservations on this factual finding by the coordinate benches. As a matter of fact, the findings are given in only one decision, i.e. My Home Power (supra), and other decisions simply, and somewhat mechanically, follow the same. The factual findings in this case are not the same, as arrived by the coordinate bench in the case of My Home Power (supra), and we are, therefore, not inclined to be guided by this decision. However, for the reasons we will set out in a short while, it is not necessary to refer the matter to a special bench at this stage. Let us first set out our reasons of expressing this voice of dissent: i. As it was evident from the response to the questions posed by us during the course of hearing, the grant of CERs are inextricably linked to the actual functioning of the unit inasmuch as it was reduction of emission of harmful gases, as a result of the change in the manner in which unit functioned e.g. lesser or no use of fossil fuel, which entitles

ITA Nos.1462 & 1463/Ahd/2016 Jt. CIT (OSD) vs. Kalpataru Power Transmission Ltd. Asst.Years – 2010-11 & 2011-12 - 9 - the assessee to the CER. Take, for example, a situation in which the unit is closed and does not function at all. Learned counsel fairly accepts that there cannot be any CERs in such a situation. In such a situation, we donot subscribe to the view that the CER “is not generated or created due to carrying on business but it is accrued due to ‘world concern’”. We are of the view that the CER is generated due to carrying on business in a manner friendly to the cause of reduction of harmful gases and thus protect the environment. ii. As regards the finding that “Carbon credits are made available to the assessee on account of saving of energy consumption and not because of its business”, we are of the considered view that the CERs are made available to the assessee because of its carrying on the business in an environment friendly manner, and, as we have emphasized before, if there is no carrying on of the business, there are no carbon credits. The question of savings in energy consumption arises only in the course of the business. The CERs, in our opinion, are an offshoot of business being carried in environmentally responsible manner. Take, for example, lowering or eliminating the use of fossil fuel. When a business does so, and uses other fuels, e.g. renewable energy or solar energy, in the place of fossil fuels, e.g. oil, coal or natural gas, it is the activity of carrying on business in this manner which earns the business CERs. The activity of business and activity of earning carbon credits cannot, therefore, be divorced from each other. The core activity is business and being environmentally responsible is the manner in which this core activity is carried out. It is thus incorrect to say that carbon credits are made available to the assessee not because of its business. iii. The activity of obtaining CERs is a systematic activity which requires careful planning and a series of actions before the CERs are obtained. For example, a project is to be first approved by the appropriate authorities which grant the CERs. The functioning of the business and the reductions in emissions are to be monitored by the appropriate authorities. The carbon credits are not a windfall which appear out of the blue. A series of conscious decisions are thus required to be taken by the assessee in order to get the CERs and the considerations of CERs essentially therefore have a role to play on the manner in which business is carried out. For example, when renewal energy is substituted for the fossil fuels, the expected gains of carbon credits are

ITA Nos.1462 & 1463/Ahd/2016 Jt. CIT (OSD) vs. Kalpataru Power Transmission Ltd. Asst.Years – 2010-11 & 2011-12 - 10 - also factored. It is an integral part of the business activity, and an important consideration about the choice of courses available in carrying on the business, which results in CERs. The generation of CERs is thus on account of business activity. We, therefore, find ourselves in disagreement with the views of the coordinate bench to the effect that “Carbon credit is not an offshoot of business but an offshoot of environmental concerns. No asset is generated in the course of business but it is generated due to environmental concerns.” iv. This gain is not in terms of money, but it is a gain nevertheless. It is clearly a benefit in the sense it entitles the assessee to transfer a right to produce more emission- which is a valuable entitlement, and it arises from carrying on of business. This factual finding is important in the context of Section 28(iv) which provides for taxability of “the value of any benefit or perquisite, whether convertible into money or not, arising from business or exercise of profession” as a business income. Accordingly, we are unable to subscribe to the finding of the coordinate bench that “It is not liable for tax for the assessment year under consideration in terms of sections 2(24), 28, 45 and 56 of the Income-tax Act, 1961” v. As India does not have any commitments for reduction of emission of CO2 and CO2e, under the Kyoto Protocol, the concept of ‘surplus CERs” for a resident assessee is devoid of legally sustainable basis. Every CER that a resident assessee gets is available for transfer, as long as there is a willing buyer, who will have economic advantage or at least philanthropic satisfaction- assuming that he will buy it only to cancel it, for the same. The assessee does get any advantage in the capital field from the same. It is wholly unlike a case of someone with a surplus production capacity or entitlement which he transfers for a consideration. A capacity entitlement is in the field of capital inasmuch as it governs the production an assessee can have over a period. That is not the case here. It is in this background that we are unable to concur with the observations of the coordinate bench which state that “carbon credit is entitlement or accretion of capital and hence income earned on sale of these credits is capital receipt. For this proposition, we place reliance on the judgment of the Supreme Court in the case of CIT v. Maheshwari Devi Jute Mills Ltd. [1965] 57 ITR 36 wherein held that transfer of surplus loom hours to other mill out of those allotted to the assessee under an agreement for control of

ITA Nos.1462 & 1463/Ahd/2016 Jt. CIT (OSD) vs. Kalpataru Power Transmission Ltd. Asst.Years – 2010-11 & 2011-12 - 11 - production was capital receipt and not income. Being so, the consideration received by the assessee is similar to consideration received by transferring of loom hours. The Supreme Court considered this fact and observed that taxability of payment received for sale of loom hours by the assessee is on account of exploitation of capital asset and it is capital receipt and not an income”. These views do not appeal to us. Based on the material before us, we are unable to subscribe to the view that the CER receipts are capital receipts in nature. vi. As regards the judicial precedents in respect of taxability of subsidies received by the assessee, we are of the considered view that these judicial precedents are not relevant in the present context. The assessee has not received any monies, as a subsidy, from any government or public or multilateral forum. What he has received is an advantage incidental to carrying on business in an environmentally responsible manner. It is an offshoot of business. vii. As we have noted earlier in our order, sale of carbon credit does not do any good to the protection of environment or address global concerns about environment. Ironically, while these credits are generated by conducting business in an environmentally responsible manner, sale of these credits only result in higher emission of harmful gases in the countries signatory to the Kyoto Protocol. In a way, therefore, it is compensation for giving someone right to generate more harmful emissions than he is permitted to otherwise emit. It is inappropriate to glorify this income as offshoot of “environmental concerns”. viii. The question of binding judicial precedents arises only in the context of what is actually decided and on the legal questions. The factual aspects which have not been considered or decided in the judicial precedents cannot be treated as covered by these precedents. It is our bounden duty to examine the factual aspects in sufficient detail so as to come to a definite conclusion. As a final fact finding authority, we cannot wish away, or decline to deal with, the hard facts staring at our face, just because the coordinate benches had no occasions to take note of these facts or because these facts have not been brought to the notice of the bench.

ITA Nos.1462 & 1463/Ahd/2016 Jt. CIT (OSD) vs. Kalpataru Power Transmission Ltd. Asst.Years – 2010-11 & 2011-12 - 12 - ix. Since these crucial facts were not brought to the notice of the coordinate bench, the coordinate bench could not deal with the peculiarities of different types of carbon credits, identify the kind of carbon credit that is examined with respect to the taxability issues and was thus lead to proceed on certain assumptions which seem to be incorrect.

ITA Nos.1462 & 1463/Ahd/2016 Jt. CIT (OSD) vs. Kalpataru Power Transmission Ltd. Asst.Years – 2010-11 & 2011-12 - 13 - 24. As a co-ordinate bench of equal strength, and it is not open for us to disregard the views of the coordinate benches. While it is well settled in law that coordinate benches cannot disregard the view of another coordinate bench, it is, however, equally true that it is vital to the administration of justice that those exercising judicial power must have the necessary freedom to doubt the correctness of an earlier decision if and when subsequent proceedings bring to light what is perceived by them as an erroneous decision in the earlier case. In the case of Union of India Vs Paras Laminates Pvt Ltd [(1990) 186 ITR 722 (SC)], Hon’ble Supreme Court has, inter alia, observed as follows: It is true that a Bench of two members must not lightly disregard the decision of another bench of the same Tribunal on an identical question. …………..The rationale of this rule is the need for continuity, certainty and predictability in the administration of justice. Persons affected by decisions of Tribunals or Courts have a right to expect that those exercising judicial functions will follow the reason or ground of the judicial decision in the earlier case on identical matters.……….It is, however, equally true that it is vital to the administration of justice that those exercising judicial power must have the necessary freedom to doubt the correctness of an earlier decision if and when subsequent proceedings bring to light what is perceived by them as an erroneous decision in the earlier case…………

ITA Nos.1462 & 1463/Ahd/2016 Jt. CIT (OSD) vs. Kalpataru Power Transmission Ltd. Asst.Years – 2010-11 & 2011-12 - 14 - view that since “the receipt of the CERs was reasonably certain as the assessee- company has already completed the formalities for getting the UNFCC certification, as itself stated by it in its submission” and since “only residual -formalities were required to be completed”, the CER income, as shown in the profit and loss account, should be brought to tax. Learned CIT(A) has not dealt with this aspect of the matter as the addition was deleted on merits. 27. In our considered view, however, that is not the correct approach. 28. The event triggering the taxation in respect of carbon credits is the sale of carbon credits. It is only when the carbon credits are transferred, and transferred for a valuable consideration, that an income accrues. The grant of carbon credits is not the event triggering the taxation of income. These carbon credits are of no practical use, in Indian perspective, unless these are transferred by the assessee. The principles of conservatism, which is one of the most fundamental principle in determining of commercial profits, does not permit an anticipated income being accounted for, even though all anticipated losses, as soon as these can be quantified on a reasonable basis, are invariably taken into account in this process. Till the point of time these carbon credits are actually sold, the income embedded in these carbon credits, even when any, does not crystallize and continues to remain, at best, an anticipated income. Whether the CERs are generated under the CDM or for the IEM or even under JI, the taxability of the income from CERs will be taxable only when the right to receive consideration for transfer of these CERs is quantified and crystallized. We may add here that, while the ground of appeal raised by the Assessing Officer refers to “addition of Rs 5,78,28,058 made on account of sale of carbon credits”, it is not even the case of the Assessing Officer that the sale was made in the relevant previous year. This aspect of the matter is clear from the observations made by the Assessing Officer, which have been reproduced earlier in this order after our paragraph 4, and this is what has been emphatically stated at the bar, in the course of hearing before us, by the learned counsel. Once both the parties are unanimous on the factual aspect that the sale is not effected in the relevant previous year, there cannot be any good reasons to bring the CER value to tax in this assessment year. 29. In view of the above discussions, in our considered view, the gains on sale of CERs, though taxable in nature, could only have been taxed at the point of time when these CERs were actually transferred to the foreign entity. Accordingly, the value of CERs, even though quantifiable, cannot be brought to tax by the reason of accrual simplictor. That is precisely what has been done in this case. It is for this reason that we confirm the relief granted by the CIT(A) and decline to interfere in the matter.

ITA Nos.1462 & 1463/Ahd/2016 Jt. CIT (OSD) vs. Kalpataru Power Transmission Ltd. Asst.Years – 2010-11 & 2011-12 - 15 -

3.2. Noticeably, the aforesaid order of the Tribunal was approved by the Hon’ble Gujarat High Court in Tax Appeal No.73 of 2017 judgement dated 02/03/2017. This apart, we also take note of the insertion of section 115BBG of the Act inserted w.e.f. Assessment Year 2018-19

ITA Nos.1462 & 1463/Ahd/2016 Jt. CIT (OSD) vs. Kalpataru Power Transmission Ltd. Asst.Years – 2010-11 & 2011-12 - 16 - whereby the legislature has sought to tax income by way of transfer of carbon credits at a specified percentage. Clearly, the charge of tax of transfer of carbon credit is prospective w.e.f. AY 2018-19 onwards. As a corollary, the income arising on account of carbon credit receipts is not taxable in the AYs 2010-11 and 2011-12 in question. This aspect has been taken note of by the Coordinate Bench in Gujarat Fluorochemicals vs. DCIT in ITA No.805/Ahd/2017 and Others order dated 13/08/2018. The Coordinate Bench after taking judicial notice of various decisions operating in this regard and also prospective amendment in the law from AY 2018-19 has rendered a view that receipt on account of carbon credits are to be treated as capital receipt and not susceptible to taxation.

3.3. The relevant operative paras on chargeability of sale of carbon credits in the case of Gujarat Fluorochemicals(supra) is reproduced hereunder for ready reference.

“36. Facts in both the years are common. The assessee has filed a note explaining the alleged carbon credits and how it has received the receipts. The note has been reproduced by the DRP in both the assessment years in its order. The note and the discussion made by the DRP on this issue are as under: “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

ITA Nos.1462 & 1463/Ahd/2016 Jt. CIT (OSD) vs. Kalpataru Power Transmission Ltd. Asst.Years – 2010-11 & 2011-12 - 17 - account and is included in Revenue from Operations. Please refer to Schedule 23 of the Annual accounts. 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.

ITA Nos.1462 & 1463/Ahd/2016 Jt. CIT (OSD) vs. Kalpataru Power Transmission Ltd. Asst.Years – 2010-11 & 2011-12 - 18 - • 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 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

ITA Nos.1462 & 1463/Ahd/2016 Jt. CIT (OSD) vs. Kalpataru Power Transmission Ltd. Asst.Years – 2010-11 & 2011-12 - 19 - 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.

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:

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:-

ITA Nos.1462 & 1463/Ahd/2016 Jt. CIT (OSD) vs. Kalpataru Power Transmission Ltd. Asst.Years – 2010-11 & 2011-12 - 20 -

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 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

ITA Nos.1462 & 1463/Ahd/2016 Jt. CIT (OSD) vs. Kalpataru Power Transmission Ltd. Asst.Years – 2010-11 & 2011-12 - 21 - 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."

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.”

ITA Nos.1462 & 1463/Ahd/2016 Jt. CIT (OSD) vs. Kalpataru Power Transmission Ltd. Asst.Years – 2010-11 & 2011-12 - 22 - (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?"

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.”

ITA Nos.1462 & 1463/Ahd/2016 Jt. CIT (OSD) vs. Kalpataru Power Transmission Ltd. Asst.Years – 2010-11 & 2011-12 - 23 - has been affirmed by the Hon’ble Karnataka High Court (was also authorized by the Judicial Member while posted at Bangalore). Apart from the above, we would like to make reference to the explanatory statement of Finance Act, 2017. It reads as under:

“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 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.”

ITA Nos.1462 & 1463/Ahd/2016 Jt. CIT (OSD) vs. Kalpataru Power Transmission Ltd. Asst.Years – 2010-11 & 2011-12 - 24 - 41. Thus, taking into consideration resolution of litigation on this issue by the Legislature itself, which had made provision for taxation of such receipts at the rate of 10% from the assessment year 2018-19 as well as authoritative pronouncements of Hon’ble jurisdictional High Court, we are of the view that receipts received by the assessee on sale of carbon credit are to be treated as capital receipts and not liable to tax. The ld.DRP has assigned one more reasons for not entertaining claim of the assessee particularly in the assessment year 2012-13 is that such claim was not in the return of income, rather it was made during the course of assessment proceedings. On the strength of Hon’ble Supreme Court judgment in the case of Goetez India Ltd.(supra), we are of the view that the AO cannot entertain any claim for allowing deduction resulting in a reduction of total income returned, which is not claimed in the original return or a revised return. To this reasoning of the DRP, we are of the view that we have considered this aspect while dealing with the issue regarded enhancement claim made under section 80IA of the Act. We have made reference to the decision of the ITAT, Mumbai and Bangalore 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.”

3.4. The Co-ordinate Bench has decided the controversy in favour of the assessee and against the Revenue. In view of the aforesaid discussion, we do not see any reason to interfere with the order of the Ld.CIT(A) in this regard. Hence, the ground raised by the Revenue is dismissed.

ITA Nos.1462 & 1463/Ahd/2016 Jt. CIT (OSD) vs. Kalpataru Power Transmission Ltd. Asst.Years – 2010-11 & 2011-12 - 25 -

4.1. Identical issue arose in AY 2009-10 in assessee’s own case in ITA No.538/Ahd/2013(supra). The relevant operative paras concerning AY 2009-10 is reproduced hereunder:-

Issue II: Disallowance under section 14A 34. So far as this disallowance of Rs 68,15,142 is concerned, which stands deleted by the CIT(A), only a few material facts need to be taken note of. During the course of the assessment proceedings, the Assessing Officer noticed that the assessee has earned a dividend income of Rs 3,32,19,012. It was also noted that the assessee has offered a disallowance of Rs 30,000 under section 14A, but the assessee has not furnished any details in support of this amount. It was in this backdrop that the assessee was required to show cause as to why disallowance not be made under section 14A read with rule 8D. The assessee explained that the investments have been made out of interest free funds, the nexus of these investments with the interest free funds was demonstrated, It was also explained that similar disallowances have been accepted in the past as well. The Assessing Officer accepted the assessee’s explanation that no interest bearing funds are used in these investments, but proceeded with making a disallowance in respect of 0.5% of the average investments, which worked out to Rs 68,45,112, under rule 8D r.w.s. 14A. Aggrieved, assessee carried the matter in appeal before the CIT(A) who reversed the action of the Assessing Officer by observing as follows: 6.2 It was intimated by appellant during the course of assessment proceedings that investments were made in earlier years in shares of subsidy companies and other companies. None of these shares were liquidated in the past 3 years. In such a situation, AO is not justified to conclude that the directors of the appellant company were involved in investment decisions and part of their remuneration needs to be disallowed. Before invoking the provisions of Rule 8D, AO has to give a finding that claim made by the appellant in the return of income is not correct. In this case AO has not given any such finding. It is only presumption of AO that directors of the company might have been involved in decision making relating to liquidation of old investments and investment in new areas. No facts have been brought on record by AO which indicate that there were lot of movements in the investment activity requiring involvement of senior management personnel. I therefore, hold that there is

ITA Nos.1462 & 1463/Ahd/2016 Jt. CIT (OSD) vs. Kalpataru Power Transmission Ltd. Asst.Years – 2010-11 & 2011-12 - 26 - no justification for disallowance of Rs.68,15,142/- and the same is directed to be deleted. Ground No.2 of the appeal is allowed. 35. The Assessing Officer is aggrieved and is in appeal before us. 36. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 37. The basic thrust of learned counsel’s submission is that unless the assessee points out any specific expenditure for earning of tax exempt income, disallowance under rule 8D for 0.5% of average investments cannot be made. He also submits that the Assessing Officer has himself accepted that no direct expenses are incurred in earning the dividend income. It is also contended that the provisions of Section 14A(2) and 14A(3) are not satisfied on the facts of the present case, and, as such, rule 8D cannot be invoked. 38. Learned counsel’s submissions, as also the basis on which the learned CIT(A) has granted the relief, are factually incorrect. We have noted that the Assessing Officer has specifically rejected the assessee’s offer of disallowance of Rs 30,000 by observing as follows: 12.6 The contentions of the assessee have been perused. The only contention raised by the assessee is that it has surplus funds and the investments have been made out of dividend income accrued to the company and funds made available to the company on maturity of mutual funds in which the surplus funds raised from the Qualified Institutional Placements (QIPs) were invested. The assessee has demonstrated one to one nexus between the maturity of the mutual funds and the investments made during the relevant period. 12.7 However, the assessee has failed to provide the basis on which disallowance under section 14A of the Act has been worked out. As already discussed above that the assessee has huge investment portfolio, holding investments of more than 120 crores, has earned substantial exempt income of Rs.3.32 crores. Moreover, there has been significant activity in the investment portfolio where old investments are liquidated and new investments are made. Making, managing and disposing off the investments require decision making, its accounting, tracking of the changes etc. Moreover, as per the Annual report of the company the directors of the company are being paid salary, commission on profits and other perquisites aggregating to Rs.750 lacs

ITA Nos.1462 & 1463/Ahd/2016 Jt. CIT (OSD) vs. Kalpataru Power Transmission Ltd. Asst.Years – 2010-11 & 2011-12 - 27 - (aprox.). As the decisions with regard to investments made by the company are important decisions the same are taken by the directors of the company and a part of their remuneration is relatable to these investments and the income derived therefrom. 12.8 In view of the discussion held above it is clear certain administrative, salary and other general expenses have been incurred in relation to the investments that result in income that does not form part of total income. Moreover, the assessee has not made disallowance under section 14A on any rational, logical or actual basis, but, the same has been disallowed on adhoc basis. 39. We have noted that Section 14A(2) categorically provides that “The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.[Emphasis supplied by us]”. Here is a case in which the Assessing Officer has taken note of the huge expenditure, a part of which is also attributable to the tax exempt income, and finds that the small disallowance of Rs 30,000 made by the assessee is not on any rational, logical or actual basis, and, it is for this reason that the Assessing Officer has invoked disallowance under rule 8D. We see no infirmity in the stand so taken by the Assessing Officer. The conditions of Section 14A (2) are clearly fulfilled. The CIT(A) has granted the impugned relief on the basis that the AO has not given any finding about incorrectness of the disallowance offered by the assessee, but this is, as we can see from the extracts from the assessment order, factually incorrect. As regards learned counsel’s reliance on Priya Exhibitors Pvt Ltd vs DCIT [(2012) 54 SOT 356 (Del)], we find that the coordinate bench had specifically stated that “….. Their Lordships has held that the Assessing Officer must in the first instance determine whether the claim of the assessee is correct and determination must be made having regard to the accounts of the assessee. The legislature directs him to follow rule 8D only where the Assessing Officer is not satisfied with the claim of assessee. In the present case, the Assessing Officer has not fulfilled his onus of recording his findings”. The facts in the present case are diametrically opposed to the said factual position. It is a case, as evident from the reproductions set our earlier in this order, in which the Assessing Officer has recorded specific dissatisfaction with the claim of the assessee. As a matter of fact, this precedent supports the case of the revenue. We may now refer to the observations of the CIT(A) to the effect that “It is only presumption of AO that

ITA Nos.1462 & 1463/Ahd/2016 Jt. CIT (OSD) vs. Kalpataru Power Transmission Ltd. Asst.Years – 2010-11 & 2011-12 - 28 - directors of the company might have been involved in decision making relating to liquidation of old investments and investment in new areas. No facts have been brought on record by AO which indicate that there were lot of movements in the investment activity requiring involvement of senior management personnel”. We find that its not even in dispute that a part of expenses attributable to the work in connection with the investment are to be disallowed, as the assessee has on its own offered Rs 30,000 for disallowance in this regard. The dispute is confined to the quantum of disallowance and the basis on which it is to be quantified. In the absence of any reasonable basis of disallowance offered by the assessee, and in the absence of the assessee even disclosing the basis on which disallowance is made, the Assessing Officer had invoked the rule 8D. We see no infirmity in this action. In view of these discussions, as also bearing in mind entirety of the case, we vacate the relief granted by the CIT(A) and restore the disallowance of Rs 68,45,142 made by the Assessing Officer. 40. Ground no. 2 is thus allowed.”

4.3. The issue has thus been decided in favour of the Revenue and against the Assessee by the Co-ordinate Bench. In the light of the view taken by the Coordinate Bench, we set aside the order of the CIT(A) on this score and uphold the action of the Assessing Officer. Hence, this ground of Revenue’s appeal for AY 2010-11 is partly allowed.

4.4. In the result, Revenue’s appeal in ITA No.1462/Ahd/2016 for AY 2010-11 is partly allowed.

Revenue’s appeal in ITA No.1463/Ahd/2016 for AY 2011-12 5. The grounds of appeal raised by the Revenue in ITA No.1463/Ahd/2016 for AY 2011-12 as under:-

ITA Nos.1462 & 1463/Ahd/2016 Jt. CIT (OSD) vs. Kalpataru Power Transmission Ltd. Asst.Years – 2010-11 & 2011-12 - 29 - i) On the facts and circumstances of the case, the Ld.Commissioner of Income-Tax(appeals) has erred in law and on facts in deleting addition of Rs.4,26,95,758/- made by the AO on account of receipts from carbon credits treating it as revenue receipt. ii) On the facts and circumstances of the case, the Ld.Commissioner of Income-Tax (appeals) has erred in law and on facts in deleting the disallowance of Rs.1,16,12,352/- u/s.14A r.w.r.8D made by A.O. iii) On the facts and circumstances of the case, the ld.Commissoner of Income-Tax (appeals) has erred in law and on facts in deleting the disallowance of Rs.7,91,852/- on account of additional depreciation.

“7. Next set of grounds of appeal is regarding rejection of claim of additional depreciation of Rs. 7,91,852/- u/s 32(l)(iia). The Appellant had acquired and installed new plant & machinery in FY 2009-10. Since the plant

ITA Nos.1462 & 1463/Ahd/2016 Jt. CIT (OSD) vs. Kalpataru Power Transmission Ltd. Asst.Years – 2010-11 & 2011-12 - 30 - & machinery were used for less than 182 days, the claim of additional depreciation during AY 2010-11 was restricted to 50%. During the assessment proceedings for the current assessment year, the Appellant during the course of assessment made an additional claim before the AO for allowing the balance additional depreciation u/s. 32(l)(iia) vide letter No. 933 dated 17-3-2014. Detailed submissions were made before the AO during the course of assessment, however, the AO was not convinced with the submissions made by the Appellant and therefore did not entertain the claim of balance additional depreciation. The AO was of the view that additional depreciation can be allowed only in the year in which the assets are acquired and installed and not in the subsequent year. The AO has stated that the law does not contain any provision enabling the tax payer to claim the balance half entitlement in the subsequent years as there is no explicit provision entitling the assessee to claim the balance of the additional depreciation in subsequent year. The proviso to Section 32(1)(ii) has to be construed in a restrictive way and liberal interpretation of the same cannot be made.

7.2 Before me, the Appellant submitted that since no additional depreciation was claimed in the return of income, the AO could not have added the sum to the total income while passing the assessment order. In view of the same the very action of the AO in firstly making the addition without there being any claim in the return of income, and secondly, not allowing the legally valid claim made by way of a communication dated 17/3/2014 is erroneous. The appellant has made written submissions and challenged the addition/disallowance made on account of depreciation claimed by the Appellant during the assessment proceeding towards additional depreciation u/s 32(l)(iia) on the assets installed during the preceding assessment year used for a period less of than 182 days during the preceding assessment year. The Appellant has claimed the additional depreciation of Rs.7,91,852/- u/s 32(l)(iia) of the Income Tax Act, 1961 during the assessment proceeding of Asst. Tear 2011-12, on the assets which were put to use during the assessment year 2010-11 for a period less than 182 days and therefore additional depreciation was calculated at 50% of the applicable rate during the assessment year 2010-11. The balance amount of additional depreciation was not claimed by the Appellant at the time of filing the return of income and therefore such additional depreciation was claimed by submitting the letter No 933 dated 17.03.2014 clarifying the reason thereof. However, the Assessing

ITA Nos.1462 & 1463/Ahd/2016 Jt. CIT (OSD) vs. Kalpataru Power Transmission Ltd. Asst.Years – 2010-11 & 2011-12 - 31 - officer not only rejects the claim but addition of the same amount of Rs. 7,91,852/- was made while calculating the total income without considering the facts that the said amount of Rs. 7,91,852/- on account of additional depreciation was not claimed at the time of filing the return of income. Accordingly, the AO has erred in computation of total income by not allowing the deduction of additional depreciation but also erred while calculating the assessed taxable income u/s 143(3) of the Act by way of addition on account of additional depreciation which was not at all claimed originally at the time of calculation of taxable income at the time of filing return of income.

7.3 The Appellant further submitted that with regard to additional depreciation u/s 32(l)(iia), 50% of which has not been claimed in preceding assessment year 2010-11 (due to restriction of claiming only 50% depreciation on account of use of the same for less than 182 days), is clearly allowable during the current assessment year 2011-12. The Assessing Officer has erred in rejecting the legally valid claim of the Appellant made during the course of assessment proceedings. The Appellant relied on the following Authorities wherein half unclaimed portion of the additional depreciation has been held allowable in succeeding assessment year:

• Apollo Tyres Ltd. v. Asstt CIT 45 taxmann.com 337

"Provided further that where an asset referred to clause (i) or clause (ii) or clause (iia), as the case may be, is acquired by the assessee during the previous year and is put to use for the purpose of business or ; profession for a period of less than one hundred and eighty days in that previous year, the deduction under this sub-section in respect of such asset shall be restricted to fifty per cent of the amount calculated at the percentage prescribed for an asset under clause (i) or clause (iii) or clause (iia) as the case may be.”

ITA Nos.1462 & 1463/Ahd/2016 Jt. CIT (OSD) vs. Kalpataru Power Transmission Ltd. Asst.Years – 2010-11 & 2011-12 - 32 - 11. A bare reading of this section 32(l)(iia) clearly says that in case a new machinery or plant was acquired and installed after 31-03-2005 by an assessee, who is engaged in the business of manufacture or produce of article or thing, the, a sum equal to 20% of the actual cost of the machinery and plant shall be allowed as a deduction. It is not in dispute that the assessee has acquired and installed the machinery after 31-03-205. IT is also not in dispute that the assessee is engaged in the manufacture of article or thing. Therefore the assessee is eligible for additional depreciation which is equivalent to 20% of the actual cost of such machinery. The dispute is the year in which the depreciation has to be allowed. The assessee Has already claimed 10% of the depreciation in the earlier assessment year since the machinery was used for less than 180 days and claiming the balance 10% in the year under consideration. Section 32(l)(iia) does not say that the year in which the additional depreciation has to be allowed. It simply says that the assessee is eligible for additional depreciation equal to 20% of the cost of the machinery provided the machinery or plant is acquired by the machinery or plant is acquired and installed after 31-03-2005. Proviso to section 32(l)(iia) says hast if the machinery was acquired by the assessing during the previous year and has put to use for the purpose of business less than 180 days, the deduction shall be restricted to 50% of the amount calculated at the prescribed rate. Therefore, if the machinery is put to use in any particular year, the assessee is entitled for 50% of the prescribed rate of additional depreciation. The Income-tax Act is silent about the allowance of the balance 10% additional depreciation in the subsequent year. Taking advantage of this position, the assessee now claims that the year in which the machinery was put to use the assessee is entitled for 50% additional depreciation since the machinery was put to use for less than 180 days and the balance 50% shall be allowed in the next year since the eligibility of the assessee for claiming 20% of the additional depreciation cannot be denied by invoking Second Proviso to section 32(l)(ii)of the Act.

• DCIT v. Cosmo Films Ltd. 139 ITD 628 [2012 “….

o Thus, the intention was not to deny the benefit to the assessee who have acquired or installed new machinery or plant. The second proviso to section 32(l)(iia) restricts the allowances only to 50% where the assts have been

ITA Nos.1462 & 1463/Ahd/2016 Jt. CIT (OSD) vs. Kalpataru Power Transmission Ltd. Asst.Years – 2010-11 & 2011-12 - 33 - acquired and put to use for a period less than 180 days in the year of acquisition. This restriction is only on the basis of period of use. There is no restriction that balance of one rime incentive in the form of additional sum of depreciation shall not be available in the subsequent year. Section 32(2) provide for a carry forward set up of unabsorbed depreciation. This additional benefit in the form of additional allowance u/s. 32(l)(iia) is onetime benefit to encourage the industrialization and in view of the decision of Hon'ble Supreme Court in the case of Bajaj Temp Ltd. (supra), the provisions related to it have to be construed reasonably liberally and purposive to make the provision meaningful while granting the additional allowance. This additional benefit is to give impetus to industrialization and the basic intention and purpose of these provisions can be reasonably and liberally held that the assessee deserves to get the benefit in full when there is no restriction in the statute to deny the benefit of balance of 50% when the new machinery and plant were acquired and used for less than 1 80 i days. Onetime benefit extended to assessee has been earned in the year of acquisition of ne machinery and plant. It has been calculated @ 15% but restricted to 50% only on account of usage of these plant and machinery in the year of acquisition. In section 32(1)(iia), the expression used is "shall be allowed”. Thus, the assessee had earned the benefit as soon as he had purchased the new machinery and plant in full but it is restricted to 50% in that particular year on account of period usages. Such restrictions cannot divest the statutory right. Law does not prohibit that balance 50% will not be allowed in succeeding year. The extra depreciation allowable u/s. 32(l)(iia) in an extra incentive which has been earned and calculated in the year of acquisition but restricted for that year to 50% on account of usage. The so earned incentive must be made available in the subsequent year. The overall deduction of depreciation u/s 32 shall definitely not exceed the total cost of machinery and plant. In view of this matter, we set aside the orders of the authorities below and direct to extend the benefit. We allow ground no.2 of the assessee's appeal. Since we have decided ground no.2 in favour of assessee, there is no need to decide the alternative claim raised in ground no.3. The same is dismissed."

• Asstt. CIT v. SIL Investment Ltd. 26 taxmann.com 78 (Delhi) o 40. There is nothing on record to show that the directions given by Id. CIT(A) are not proper. The eligibility for deduction of additional depreciation stands admitted, since 50% thereof had already been allowed by the AO in the

ITA Nos.1462 & 1463/Ahd/2016 Jt. CIT (OSD) vs. Kalpataru Power Transmission Ltd. Asst.Years – 2010-11 & 2011-12 - 34 - assessment year 2005-06, i.e., the immediately preceding assessment year. Therefore, obviously, the balance 50% of the deduction is to be allowed in the current year, Le. assessment year 2006-07. The Id CFT(A) has merely directed the verification of the contentions of the assessee and to allow the balance additional depreciation after such factual verification. Accordingly, finding no merit therein, ground No. 3 raised by the Department is rejected.

• Birla Corporation Ltd. v. DCIT 55 taxmann.com 33

ITA Nos.1462 & 1463/Ahd/2016 Jt. CIT (OSD) vs. Kalpataru Power Transmission Ltd. Asst.Years – 2010-11 & 2011-12 - 35 - J. P. Khaitan, Senior Advocate that a bare reading of section 32(l)(ha) clearly shows that the assessee is eligible for additional depreciation in case the new machinery and plant was acquired and installed after 31-03-2005. There is no restrictive condition in the clause for the eligibility of the assessee to claim additional depreciation. When the assessee is eligible for depreciation @ 20%, in the absence of any specific provision, the AO cannot cut down the scope of deduction by referring to second proviso to section 32(l)(ii) of the Act. He also pointed out that even if there is any contradiction between sections 32(l)(iia) and second proviso to section 32(l)(ii), it has to be reconciled so as to give harmonious effect to the legislative intent. The benefits conferred on the assessee by way of incentive provision cannot be taken away by adopting an implied meaning to second I proviso to section 32(l)(ii) of the Act. Since the second proviso to section 32(l)(ii) does not expressly prohibit, the allowance of the balance 50% depreciation in the subsequent year, second proviso to section 32(l)(ii) shall not be interpreted to mean that it impliedly restrict the additional depreciation to be allowed in the subsequent assessment year. We are of the view that the assessee now is entitled for 50b/o additional depreciation, because in the year in which the machinery was first put to use the assessee claimed only 50% of additional depreciation for the reason that the same was put to use for less than 180 days, in this assessment year for the balance of depreciation. 7.4 I have considered the facts and circumstances of the case. I find that the controversy is indeed squarely covered by various decisions of the Tribunal and High Courts in favour of the Appellant. The Appellant has referred to various decisions in its written submissions. Further, the Jurisdictional ITAT, Ahmedabad deciding the similar issue in case of Income Tax Officer, Ward 2(2), Surat v. M/s. Aswani Industries, Surat in ITA No. 140/Ahd/2013 for AY 2008-09, has held in favour of the assessee as under:

"4. The Second issue relates to additional depreciation of Rs. 4,98,859/- . Assessing officer has disallowed the balance additional depreciation claimed by assessee on the machinery installed in the second half of the previous year relevant to the A.Y. 2007-08. The assessee's contention was that he was eligible for additional depreciation @ 20 % on the plant and machinery purchased in the second half of the financial year 2006-07 but being used less than 180 days, only 10 % depreciation was

ITA Nos.1462 & 1463/Ahd/2016 Jt. CIT (OSD) vs. Kalpataru Power Transmission Ltd. Asst.Years – 2010-11 & 2011-12 - 36 - allowed by A.O. The balance 10 % additional depreciation was carried forward in the year under appeal and claimed in the computation of income which was disallowed by A.O. on the ground that carried forward of such additional depreciation is inadmissible as per provisions of section 32(l)(iia). The Ld. CIT(A) has given relief to the assessee by following the decision of ITAT, Delhi in the case of DCIT vs. Cosmo Films Ltd (124 Taxman.com 189) wherein it has been held that the additional depreciation cannot be restricted to 50 % and it has to be allowed in succeeding years if it is not allowed full in the relevant year. For the sake of convenience the relevant portion of the order is as under:

"17. We have heard both the sides on this issue. Section 32(1)(iia) inserted by Finance (No. 2) with effect from 1.4.2003. In speech of Finance Minister this clause was inserted to provide incentive for fresh investment in industrial sector. This clause was intended to give impetus to new investment in setting up a new industrial unit or for expanding the installed capacity of existing units by at least 25 % thereafter these provisions were amended by the Finance (No.2) Act of 2004 w.e.f. 1.4.2005 and provided that in the case of any machinery or plant which has been acquired after the 31st day of march, 2005 by an assessee engaged in the business of manufacture of production of any article or thing a further sum equal 15 % of actual cost of such machinery or plant shall be allowed as deduction under clause (ii) of section 32(1). This additional allowance u/s 32(1) (iia) is made available as certain percentage of actual cost of new machinery and plant acquired and installed. This provision has been directed to the setting up new industrial undertaking making or for expansion of the industrial undertaking by way of making more investment in capital goods. Thus, these are incentives aimed to boost new investments in setting up and expanding the units. The proviso to section 32(l)(iia) restricts the benefits in respect of following- 'Provided that no deduction shall be allowed in respect of_ (A) Any machinery or plant which, before its installation by the assesses was used either within or outside India by any other person; or (B) Any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest-house or (C) Any office appliances or road

ITA Nos.1462 & 1463/Ahd/2016 Jt. CIT (OSD) vs. Kalpataru Power Transmission Ltd. Asst.Years – 2010-11 & 2011-12 - 37 - transport vehicle, or (D) Any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head "profit and gains of business or profession of any previous year."

Thus, this incentive in the form of additional sum of depreciation is not available to any plant or machinery which been used either within India or outside India by any other person or such machinery and plant are installed in any office premises or any residential accommodation, including accommodation in the nature of a guest house or any office appliances or road transport vehicles, or any machinery or plant the whole of actual cost of which is allowable as deduction (where by way of depreciation or otherwise) in computing the total income under the head "Profit and gains of business or profession" of any one prevision year. Thus, the intension was not to deny the benefit to the assets who have acquired or instated new machinery or plant. The second proviso to section 32(l)(ii) restricts the allowances only to 50% where the assets have been acquired and part to use for a period less than 160 days in the year of acquisition.

This restriction is only on the basis of period of use. There is no restriction, that balance of one time incentive in the form of additional sum of depreciation shall not be available in the subsequent year. Section 32(2) provides for a carry forward set up of unabsorbed depreciation. This additional benefit in the form of additional allowance u/s 32(l)(iia) is one time benefit to encourage the industrialization and in view of the decision of Hon'ble Supreme Court in the case of Bajaj Tempo vs. CIT,; cited supra, the provisions related to it have to be constructed reasonably, liberally and purposive to make the provision meaningful while granting the additional allowance. This additional benefit is to give impetus to industrialization and the basic intention and purpose of these provisions can be reasonably and liberally held that the assessee deserves to get the benefit in full when there is no restriction in the statute lo deny the benefit of balance of 50% when the new plant and machinery were acquired and use for less than 180 days. One time benefit extended to assessee has been earned in the year of

ITA Nos.1462 & 1463/Ahd/2016 Jt. CIT (OSD) vs. Kalpataru Power Transmission Ltd. Asst.Years – 2010-11 & 2011-12 - 38 - acquisition of new plant and machinery. It has been calculated @ 15% but restricted to 50% only on account of usage of these plant & machinery in the year of acquisition. In section 32(1 (iia) the expression used is "shall be allowed". Thus the assessee had earned the benefit as soon as he had purchased the new plant and machinery in full but it is restricted to 50% in that particular year on account of period !of usages. Such restrictions cannot divest the statutory right. Law does not prohibit that balance 50% will not be allowed in succeeding year. The extra depreciation allowable u/s 32(l)(iia) in an extra incentive which has been earned and calculated in the year of acquisition but restricted for that year to 50% on account of usage. The so earned incentive must be made available in the subsequent year. The overall deduction of depreciation u/s 32 shall definitely not exceed the total cost of plant machinery. In view of this matter, we set aside the orders of the authorities below and direct to extend the benefit." In view of the above, we feel no need to interfere with the order passed by Ld. CIT(A) in respect of deletion of disallowance on account of additional depreciation of Rs. 4,98,859/- also and the order passed by Ld. CIT(A) is hereby upheld."

6.5 Considering the series of Authorities relied upon by the appellant and as extracted above, it is imperative to hold that the provisions of Section 32(l)(iia) of the Act beneficial to assessee and therefore have to be interpreted liberally so as to benefit the Assessee. It is also found that the intention of the legislation is to allow additional benefit. The Karnataka High Court opined that the proviso would not restrain the assessee from claiming1 the balance of the benefit of additional depreciation in the subsequent assessment year. Similar view is held by the ITAT, Ahmedabad in the case of M/s. Aswani Industries (supra). In view of the above, the claim made by the Appellant of Rs. 7,91,852 being balance additional depreciation for new assets acquired and installed in AY 2010-11 is allowed in the current assessment year. It is also noted that as per Explanation 5 to section 32(1) it is compulsory for the AO to allow depreciation whether claimed or not in the computation of total income. In view of the statutory provisions the AO was not correct in not allowing the additional depreciation claim made during the course of assessment. I therefore delete the addition made, and additionally, allow the claim of

ITA Nos.1462 & 1463/Ahd/2016 Jt. CIT (OSD) vs. Kalpataru Power Transmission Ltd. Asst.Years – 2010-11 & 2011-12 - 39 - additional depreciation of Rs. 7,91,852/-. This ground of appeal is thus allowed.”

8.1. We find that the CIT(A) has appreciated the facts and loan in perspective and has rightfully came to a conclusion that assessee was entitled to remaining part of 50% of the claim of the additional depreciation eligible under s.32(1)(iia) of the Act in the subsequent assessment year adopting purposive approach to the issue. We thus find no infirmity in the view taken by the CIT(A) and therefore decline to interfere. Ground No.3 of Revenue’s appeal is accordingly dismissed.

8.2. In the result, Revenue’s appeal in ITA No.1463/Ahd/2016 for AY 2011-12 is partly allowed.

This Order pronounced in Open Court on 10/ 05/2019

(महावीर �साद) (�द�प कुमार के�डया) �या�यक सद�य लेखा सद�य ( PRADIP KUMAR KEDIA ) ( MAHAVIR PRASAD ) JUDICIAL MEMBER ACCOUNTANT MEMBER

Ahmedabad; Dated 10/ 05 /2019

ट�.सी.नायर, व.�न.स./T.C. NAIR, Sr. PS

ITA Nos.1462 & 1463/Ahd/2016 Jt. CIT (OSD) vs. Kalpataru Power Transmission Ltd. Asst.Years – 2010-11 & 2011-12 - 40 -

आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त(अपील) / The CIT(A)-12, Ahmedabad �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 5. 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy//

उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील�य अ�धकरण, अहमदाबाद / ITAT, Ahmedabad 1. Date of dictation ..10.5.19 (dictation-pad 13-pages attached at the end of this appeal-file) 2. Date on which the typed draft is placed before the Dictating Member …10.5.19 3. Other Member… 4. Date on which the approved draft comes to the Sr.P.S./P.S…………….. 5. Date on which the fair order is placed before the Dictating Member for pronouncement…… 6. Date on which the fair order comes back to the Sr.P.S./P.S……. 7. Date on which the file goes to the Bench Clerk………………… 8. Date on which the file goes to the Head Clerk…………………………………... 9. The date on which the file goes to the Assistant Registrar for signature on the order…………………….. 10. Date of Despatch of the Order………………