PR COMMISSIONER OF INCOME TAX-II vs. RAJASTHAN STATE MINES andMINERALS LTD

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 313 / 2017 Principal Commissioner of Income Tax-II, New Central Revenue Building, Statue Circle, Jaipur (Raj.) ----Appellant Versus Rajasthan State Mines & Minerals Ltd., C-89-90, Lal Kothi Scheme, Jaipur. ----Respondent _____________________________________________________ For Appellant(s) : Mr. Anuroop Singhi with Mr. N.S. Bhati For Respondent(s) : Mr. Sanjay Jhanwar with Ms. Archana _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYAS Judgment 28/11/2017 By way of this appeal, the appellant has assailed the judgment and order of the Tribunal whereby the Tribunal has partly allowed the appeal of the department for statistical purposes. Counsel for the appellant has framed the following substantial questions of law:- “i) Whether the Tribunal was justified in reversing the order of Assessing Officer and by holding the income from sale of Carbon Emission Reduction Certificates (CERs) of Rs. 3,50,00,162/- as capital income, ignoring that the same was specifically a revenue report and even the assessee has claim benefit u/s 80IA of the Act?”

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However, counsel for the appellant contended that the issue is now squarely covered by the decision of this Court in Tax Appeal No. 151/2016 decided on 13th October, 2017 wherein it has been held as under:- “4. For issue no.4 counsel for the respondent has relied on the decision of this court in ITA No.85/2014 wherein it has been held as under:- “28. The issue No.3 is with regard to sale proceeds received by the company from the sale of Certified Emission Reduction (CER) pertaining to Carbon Credit shown as capital receipt. 29. In view of the decision rendered by the Supreme Court in Vodafone International (supra), it has to be taken as capital account and it cannot be taxed under the Income Tax Act since it was taxable under direct tax and the Tribunal has given the finding which reads as under:- “We have heard the rival submissions and perused the evidence on record. We find that the Appellate Tribunal in My Home Power Ltd. Vs. DCIT (supra), have, after detailed examination, concluded that the receipts from Carbon credit are capital in nature. We are inclined to follow the said decision and the other two decisions of Chennai Tribunal in Sri Velayudhaswamy Spinning Mills (P.) Ltd. Vs. DCIT(Supra) and Ambika Cotton Mills Ltd. Vs.DCIT (supra) where also it has been held that receipt on account of Carbon Credit is capital in nature & neither chargeable to tax under the head Business Income nor liable to tax under the head Capital Gains. Our above view is also supported by the decision of Supreme Court in the case of Vodafone International Holdings Vs. UOI (supra) wherein Supreme Court has held that treatment of any particular item in different manner in the 1961 Act and DTC serves as an important guide in determining the taxability of said item. Since DTC by virtue of the deeming provisions specifically provides for taxability of carbon credit as business receipt and Income Tax Act does not do so, our view gets duly fortified by the principles stated in the above decision of Supreme Court. Accordingly, this ground of the assessee is allowed and the addition made by the AO is deleted.”

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“5.4 He contended that in view of the decision of the Supreme Court in Poonam Chand Trilok Chand vs. Commissioner of Income Tax (06.01.1982 – ALLHC), 136 ITR 0537 holding as under: 8. Now, coming to the merits of the claim, we find that the view taken by the AAC was absolutely correct while the one taken by the Appellate Tribunal is erroneous in law. As noted above, the assessee follows the mercantile system of accounting. It may be that the assessee was disputing its liability to pay the purchase tax to the State Govt. and had not made any debit entry in its books of account. It is on record that when the assessee lost its case finally, it debited the amounts to the accounts of the customers and made payments to the State Govt. Those payments ' were, of course, made in the subsequent years, but that will not make any difference because it is the accrual of the liability under the mercantile system of accounting which would decide the question of its deduction. Reference may be made to the decision o£ the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. v. CIT MANU/SC/0438/1971 : [1971]82ITR363(SC) . In that case, the assessee company followed the mercantile system of accounting and incurred a liability on account of sales tax, determined by the sales tax authorities to be payable, on the sales made by it during the calendar year 1954, being the previous year relevant to the assessment year 1955-56. The sales tax demand was raised pending the Income Tax assessment for that year. The ITO rejected the assessee's claim for a deduction of that amount on two grounds : firstly, that the assessee had contested the sales tax liability in appeals and, secondly, that it had made no provision in its books with regard to the payment of that amount. The appeals to higher authorities or courts taken by the assessee, contesting its liability to pay the sales tax, ultimately failed. On these facts, the view taken by the court was that the moment the dealer made either purchases or sales which were subject to sales tax, the obligation to pay the tax arose. Although that liability could not be enforced till quantification was effected in assessment proceedings, the liability for payment of tax was independent of the assessment. The assessee, which folio wed the mercantile system of accounting, was entitled to a deduction, from the profits and gains of its business, of the liability to pay the sales tax which arose on the sales made by it during the relevant previous

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year. It was further held that the fact that the assessee was contesting its liability to pay the sales tax or that it failed to debit the liability in its books of account did not debar it from claiming the same as a deduction either under Section 10(1) or under Section 10(2) (xv) of the Indian I.T. Act, 1922. Counsel for the respondent has relied upon the decision in case of Commissioner of Income Tax-III vs. Subhash Kabini Power Corporation Ltd [2016] 69 taxmann.com 394 (Karnataka) wherein it has been held as under:- “12. Considering the above, we find that when the carbon credit is generated out of environmental concerns, and it is not having the character of trading activity, the Tribunal has rightly held that it is capital receipt and it is not income out of business and hence, not liable to pay income tax.” He has further relied upon the decision of Godrej & Boyce Manufacuring Company Ltd. vs. Deputy Commissioner of Income Tax [2017] 81 taxmann.com 111 (SC) wherein it has been held as under:- “34. For the aforesaid reasons, the first question formulated in the appeal has to be answered against the Appellant-Assessee by holding that Section 14A of the Act would apply to dividend income on which tax is payable Under Section 115- O of the Act.” In view of the above, the issue is answered in favour of the assessee and against the department The appeal stands dismissed. (VIJAY KUMAR VYAS)J. (K.S. JHAVERI)J. A.Sharma/107