SRF LIMITED,NEW DELHI vs. ACIT, CIRCLE- 1, LTU, NEW DELHI

PER SUDHANSHU SRIVASTAVA, JM:

This appeal is preferred by the assessee against order dated

20.08.2018 passed by the Learned Commissioner of Income Tax

(Appeals)-22, New Delhi {CIT(A)} and pertains to Assessment Year 2006-

2 ITA No.6693/Del/2018 SRF Ltd. vs. ACIT

Income tax Act and chargeable to tax as profits and gains from business or profession.

That the Appellant craves leave to add, alter, amend or vary any of the ground either at or before the hearing of the appeal.

1.1 Further, the assessee has also raised the following two additional grounds of appeal before us: -

“4. That on the facts & circumstances of the case and in law, the capital receipts on account of Certified Emission Reduction (‘CER’s) / (‘Carbon Credits’) amounting to ` 93,85,40,499/- may held to be excluded from the computation of ‘book profits’ under section (‘u/s’) 115JB of the Income-tax Act, 1961 (‘the Act’).” “5. The Hon’ble ITAT may be pleased to grant the claim of ‘Education Cess’ (@ 3%) amounting to ` 83,55,777/- u/s 37 of the Act paid/payable by the assessee under normal provisions of the Act.”

3 ITA No.6693/Del/2018 SRF Ltd. vs. ACIT

2.0 The main issue involved is regarding the treatment of

Certified Emission Reductions (CER)/carbon credits which has been

claimed by the assessee as capital receipts and hence not liable to

income tax by relying on the order of this Tribunal (ITAT), Hyderabad

Bench in case of My Home Power Ltd. [ITA no.1114/Hyd/2009) approved

by Hon’ble High Court of Andhara Pradesh.

2.1 Briefly stated, the assessee was incorporated in the year 1973 and is a leading business conglomerate engaged in the manufacturing of refrigerants, engineering plastics and industrial yarns. The assessee is having one of its refrigerant manufacturing facility at Village, Jhiwana, in District Alwar, Rajasthan. The manufacturing facility was setup in the year 1989. In carrying on the fluoro-chemicals business, the assessee, at its refrigerant manufacturing facility at Jhiwana, produces HCFC-22. Production of HCFC-22 generates HFC-23, a Green House Gas (GHG). The assesseee was having an option to emit such Green House Gas HFC-23 in the air without impacting its business of production of HCFC-22 as there is no legal/statutory obligation on the assessee for reduction in emission of HFC 23 gas in the open air. However, the assessee

4 ITA No.6693/Del/2018 SRF Ltd. vs. ACIT

chose to reduce the emission of green-house gas namely HFC- 23, in the atmosphere by a adopting a process called ‘Thermal Oxidation’ a process(thermal oxidation) which had no relationship with the business activity. By such thermal oxidation, the assessee reduces emission of GHG in the atmosphere.

2.2 Consequent tosuch efforts of the assesseeresulting in reduction in emission of GHG, the assesseewas allotted certain entitlement called CER/Carbon credits by the UNFCCC, in terms of Kyoto Protocol. During the year under consideration, the assesseereceived a sum of Rs. 93,85,40,499/- on account of transfer of 14,00,000 units of such CERs which the assessee had claimed as capital receipts before the ITAT in original appeal.

2.3 The first time the assessee’sappeal came up for hearing before the ITAT in the year 2017, the co-ordinate Bench of the Tribunal, vide its

order dated 10.04.2017 (in ITA no. 2181/Del/2009), remitted the issue to the file of the Assessing Officer (AO) with following directions: -

“Para 16 - We have carefully considered the rival contentions. The issue involved is whether the income

5 ITA No.6693/Del/2018 SRF Ltd. vs. ACIT

shown by the assessee on sale of carbon credit certificates is “income‟ chargeable to tax or not. The issue is legal in nature and the income has been disclosed by the assessee in its profit and loss account and stated in the notes on accounts that sale of such certificate is recognized as income, therefore no fresh facts are to be investigated. In view of the decision of the Honble Supreme Court in case of NTPC Ltd versus CIT 229 ITR 383 wherein the purpose of any assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with the law. It is further held therein that if as a result of a judicial decision given while the appeal is pending before the tribunal if it is found that a non-taxable item is taxed or a permissible deduction is denied. The assessee cannot be prevented from raising that question before the tribunal. The assessee has demonstrated in view of the decision of the Hon’ble Andhra Pradesh High Court that such income cannot be taxed. Therefore, the case of the assessee squarely falls within the law laid down by the Hon’ble Supreme Court. In view of this we admit the additional ground of appeal and remit the issue back to the file of the Ld. assessing officer to decide the issue on merit whether the sale of carbon credit certificates of Rs. 95.83 crores are income chargeable to tax or not. In view of this, the application of the assessee for admission of the additional ground of appeal is allowed as well as the additional ground admitted is remitted back to the file of the Ld. assessing officer to decide it in accordance with the law, after granting reasonable opportunity of hearing to the assessee.”

2.4 After the issue was set aside to the assessing

6 ITA No.6693/Del/2018 SRF Ltd. vs. ACIT

officer, the assessee submitted various evidences and filed necessary information in support of its claim. The AO, however, did not accept the submission of the assessee and held that income on sale of carbon credits is a benefit arising out of the business of the assessee and would fall within the definition of income u/s 2(24)(vd) r.w.s.28(iv) of the Act by relying upon the order of the Ahmedabad Bench of the Tribunal in the case of Kalpataru Power Transmission Ltd. {[2016] 68 taxmann.com 237 (Ahm. Trib.)}andfurther on the order of the ITAT Cochin Bench in the case of Apollo Tyres Ltd. {[2014] 47 taxmann.com 416 (Cochin Trib.)}.

2.5 Thereafter, the Ld. Commissioner of Income Tax (Appeal-22)vide his order dated 20.08.2018also rejected the claim of the assessee by relying the orders of the ITAT Ahmedabad Bench and ITAT Cochin Bench as aforementioned and held that income on transfer of CERs should be considered as benefit or perquisites u/s 28(iv) of the Act chargeable to tax as profits and against of business and profession.

3.0 Before us, the Ld. AR began his arguments by

7 ITA No.6693/Del/2018 SRF Ltd. vs. ACIT

relying on the order of the coordinate bench of this Tribunal in assessee’s own case for Assessment Year (A.Y.) 2007-08 and A.Y. 2010-11. The findings of the ITAT for AY 2007-08 [ITA No. 2064/Del/2014] which have been strongly relied upon by the Ld. AR are reproduced hereunder for reference:

“Para 30 – “We have heard the rival contentions, perused the relevant findings and as well as material referred to before us at the time of hearing. We have noted that various Hon’ble high courts including My Home Power Limited(Supra) have held that carbon credits are not offshoot of business but offshoot of environmental concerns and hence not chargeable to tax. In case of judgment of Hon’ble Gujarat High Court in case of Gujarat Flourochemicals Limited [ITA no. 11 & 28 of 2019], cited above, the facts noted by the ITAT Ahmedabad in its order (ITA no.805 and 2744/Ahd/2017) are worth discussing. The appellant in said case was operating a HCFC-22 plant at village Ranjitnagar, District Panchmahals, Gujarat. During the production of HCFC-22, waste gas called HFC-23 was also generated. Appellant’s CDM project consisted of incinerating HFC-23 instead of allowing it to bevented into the atmosphere, and thereby reducing GHG emissions. Due to reduction in emission of HFC-23, CERs were awarded to the appellant. The appellant raised the issue of exclusion of CER from total income before the DRP for the first time, which refused to entertain the claim of the assessee primarily relying on the judgment of Hon’ble Supreme court in Goetze (India) Limited vs CIT 284 ITR 323. The tribunal taking note of the facts and judgments on the issue allowed the appeal of the assessee with following findings: - “41. Thus,

8 ITA No.6693/Del/2018 SRF Ltd. vs. ACIT

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 MiteshImpex (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.” Aggrieved, the revenue took the matter before Hon’ble High Court of Gujarat, which dismissed the appeal.” Para 31 – “We have observed that facts of the assessee are similar to the case of Gujarat Flourochemicals Ltd (Supra). Further, in other cases too, the Hon’ble High

9 ITA No.6693/Del/2018 SRF Ltd. vs. ACIT

Courts have held CER as the capital receipts not liable to tax. This tribunal in earlier years also has dealt with this issue in the case of assessee and remitted the matter to the file of AO. The observation of the tribunal in assessee’s own case for AY 2010-11 (ITA no.356/Del/2015) is reproduced herein below for reference: “60. On the aspect of claim of the assessee that receipt of CER is capital nature, we find force in the argument of the Ld. AR that cause of action had arisen in the case by virtue of the decision in My Home Power Ltd. (supra). The claim of assessee is bonafide and has been raised before AO as well as DRP. The assessee is not in the business of trading in CERs but in business of technical textile, chemicals, refrigerant gaseous etc. The assessee has been granted CERs on account of its efforts for reduction in harmful greenhouse gases in terms of Kyoto Protocol. Thus it cannot be said that CERs are benefits arising from the business of the assessee. Various Hon’ble High Court including My Home Power Ltd. (supra) have held that carbon credits are not offshoot of business but offshoot of environmental concerns and hence not taxable…..”

3.1 In particular, the Ld. ARemphasizedthe judgment of the

Hon’ble Gujarat High Court in the case of Gujarat Flourochemicals

Limited[ITA no. 11 & 28 of 2019], the facts of which case, as noted by

the Ahmedabad Bench of Tribunal in its order [ITA no. 805 &

2744/Ahd/2017], are similar to the facts of the assessee and where

it had been held that carbon credits are not offshoot of business but

10 ITA No.6693/Del/2018 SRF Ltd. vs. ACIT

offshoot of environmental concerns and hence not chargeable to tax.

3.2 Para no. 6 of the synopsis filed by the assessee gives a

comparative chart of the facts of the Gujarat Flourochemical Limited

(supra) and of the assessee which is being reproduced below: -

S. Particulars Gujarat SRF Ltd. No. Flourochemical (P. no. 286-293 Ltd. (P. no. 23-26 of P.B.) of Case Laws Compilation) 1. Business activity HCFC-22 plant at HFCF-22 facility producing the village at Jhiwan, emission: Ranjitnagar, Rajasthan Production site Gujarat 2. Main commercial HFC-22 HFC-22 product 3. Waste Gas HFC-23 HFC-23 (Emission) 4. Protocol Kyoto Protocol Kyoto Protocol 5. Regulatory UNFCCC UNFCCC Framework 6. Purpose Green House Gas Green House Gas Emission Emission reduction for reduction for Environment Environment Protection Protection 7. Process employed Thermal Oxidation Thermal Oxidation 8. CER’s Awarded CER’s awarded CER’s awarded by UNFCCC, by UNFCCC, transferred to transferred to international international agencies for value agencies for realization value realisation

11 ITA No.6693/Del/2018 SRF Ltd. vs. ACIT

3.3 The ld. AR submitted that since the facts of above case

and of the assessee’s case are identical, which has also been noted

by the coordinate bench in assesse’s own case for AY 2007-08, the

ratio laid by the Hon’ble Gujarat High Court in aforementioned case

should be followed.

3.4 The Ld. AR proceeded to heavily rely upon the orders of

jurisdictional ITAT on the issue under consideration wherein it has

been held that Carbon Credit is not anoffshoot of business but an

offshoot of environmental concerns and that the income/ profits

from the sale of carbon credits is essentially in the nature of capital

receipts, not chargeable to tax. The judgments relied upon by the Ld.

AR are as under:

i. Malana Power Co. Ltd. [ITA Nos. 2281/Del/2013, 1550/Del/2015 & 3957/Del/2015] ii. Triveni Engineering and Industries Ltd. [ITA Nos. 2030- 2033/Del/2015] iii. DLF Limited [ITA Nos. 4159/Del/2015 & 4794/Del/2015] iv. Malana Power Co. Ltd. [ITA Nos. 3713/Del/2017 & 2464/Del/2017] v. Dee Development Engineers Ltd. [ITA No. 4959/Del/2016]

3.5 The Ld. AR further stated that issue is now settled by

several Hon’ble High Courtsviz. Gujarat High Court, Allahabad High

12 ITA No.6693/Del/2018 SRF Ltd. vs. ACIT

Court, Madras High Court, Rajasthan High Court, Karnataka High

Court, Bombay High Court and Andhra Pradesh High Courtwhich

have held that receipts from transfer of the Carbon Credits are

capital in nature and not are chargeable to tax. Reliance was placed

on the following judicial precedents:

i. Alembic Limited [ITA Nos. 553/2017 & 554/2017] (Gujarat High Court 28.08.2017) ii. L.H. Sugar Factory Pvt. Ltd. [2016-TIOL-1942-HC-ALL-IT] iii. Ambika Cotton Mills Ltd. [TS-144-HC-2021(MAD)] iv. LancoTanjore Power Co. Ltd. [[2021] 434 ITR 671 (Madras)] v. Tamil Nadu Newsprint & Papers Ltd. [[2021] 130 taxmann.com 213 (Madras)] vi. Arun Textiles Pvt. Ltd. [2016-TIOL-2212-HC-MAD-IT] vii. Rajasthan State Mines and Minerals Ltd. [2017-TIOL-2297- HC-RAJ-IT] viii. Shree Cement Ltd. [ ITA No. 86/204 dated 22.08.2017] ix. SubhashKabini Power Corporation Ltd. {[2016] 69 taxmann.com 394 (Karnataka)} x. Dodson Lindblom Hydro Power Pvt. Ltd. [2019-TIOL-531- HC-MUM-IT] xi. My Home Power Ltd. {[2014] 46 taxmann.com 314 (Andhra Pradesh)}

3.6 As regards, the orders relied upon by the AO and the Ld. CIT(A)

in their respective orders,the Ld. AR submitted that the

13 ITA No.6693/Del/2018 SRF Ltd. vs. ACIT

order of the Cochin Bench of the Tribunal in the case of Apollo Tyres

Ltd.{[2014] 47 taxmann.com 416 (Cochin Trib.)}as relied by the

revenue, had already been analyzed by the Hon’ble Allahabad High

Court in the case of L.H. Sugar Factory Pvt. Ltd. (supra) which held

it ‘not to be good in law’. It was submitted that the Hon’ble High

Courtin L.H. Sugar Factory Pvt. Ltd. (supra) has referred to the order

of the Chennai Bench of the ITAT in case of India Dyeing Mills (P.)

Ltd.[2014] 36 ITR(T) 55 (Chennai - Trib.) which has considered the

judgment of Apollo Tyres Ltd. (supra) and My Home Power Ltd.

(supra) and then held the issue in favour of the assessee. It was

further submitted that the order of the ITAT Ahmedabad Bench in

the case of Kalpataru Power Transmission Ltd. {[2016] 68

taxmann.com 237 (Ahm. Trib.)}which has been relied upon by the

AO and the Ld. CIT(A) has already been examined and overruled by

the later judgment of the same bench of Ahmedabad Tribunal in the

same case of Kalpataru Power Transmission Ltd.[2019-TIOL-1424-

ITAT-AHM].

3.7 It was also the submission of the Ld. AR that CERs,

although,are not arising from the business of the assessee, they

cannot in any case be treated as benefits or perquisite arising from

14 ITA No.6693/Del/2018 SRF Ltd. vs. ACIT

business as CERs are received in cash and not in some non-

monetary form. Therefore, the contention of AO and consequently

Ld. CIT(A) of holding CERs as ‘benefits’ or ‘perquisites’ under the

provisions of section 28(iv) read with section 2(24)(vd) of the Act is

completely misplaced and untenable. He relied on the judgment of

Hon’ble Supreme Court in the case of CIT v. Mahindra and Mahindra

Ltd. [2018] 302 CTR 213 on this aspect of the issue.

4.0 The Ld. CIT-DR, on the other hand, relied upon the order

of AO and the Ld. CIT(A) on all the issues and submitted that

casemay be decided on the merits of the case.

5.0 We have carefully considered the rival contentions

and have perused the orders of the lower authorities and judgments relied upon by the revenue and the Ld. AR on the issue under consideration. As observed in various judgments, the

‘Carbon credits’ or CERs represent the‘privilege /entitlement’ given

to the businesses for its efforts resulting in reductionof emission of

greenhouse gases. Such CERs are tradable commodity and one party

to Kyoto protocol is benefited by selling such entitlement to other

parties to Kyoto protocol which are in deficit. During the year under

consideration, the assessee has also received certain sum on

15 ITA No.6693/Del/2018 SRF Ltd. vs. ACIT

account of sale of certain CERs entitlement to other parties. All such

parties are foreign parties and the amount has been received in

foreign currency. The question that we are really required to

adjudicate upon is whether such money received by the assessee on

sale of CERs/ carbon credits is taxable under Income-tax Act or not.

The Hyderabad bench of the Tribunal in case of My Home Power Ltd

(Supra) while dealing with the similar issue held as under:

“24. We have heard both the parties and perused the material on record. Carbon credit is in the nature of "an entitlement" received to improve world atmosphere and environment reducing carbon, heat and gas emissions. The entitlement earned for carbon credits can, at best, be regarded as a capital receipt and cannot be taxed as a revenue receipt. It is not generated or created due to carrying on business but it is accrued due to "world concern". It has been made available assuming character of transferable right or entitlement only due to world concern. The source of carbon credit is world concern and environment. Due to that the assessee gets a privilege in the nature of transfer of carbon credits. Thus, the amount received for carbon credits has no element of profit or gain and it cannot be subjected to tax in any manner under any head of income. It is not liable for tax for the assessment year under consideration in terms of sections 2(24), 28, 45 and 56 of the Income-tax Act, 1961. Carbon credits are made available to the assessee on account of saving of energy consumption and not because of its business. Further, in our opinion, carbon credits cannot be considered as a bi- product. It is a credit given to the assessee under the

16 ITA No.6693/Del/2018 SRF Ltd. vs. ACIT

Kyoto Protocol and because of international understanding. Thus, the assessees who have surplus carbon credits can sell them to other assessees to have capped emission commitment under the Kyoto Protocol. Transferable carbon credit is not a result or incidence of one's business and it is a credit for reducing emissions. The persons having carbon credits get benefit by selling the same to a person who needs carbon credits to overcome one's negative point carbon credit. The amount received is not received for producing and/or selling any product, bi-product or for rendering any service for carrying on the business. In our opinion, carbon credit is entitlement or accretion of capital and hence income earned on sale of these credits is capital receipt. For this proposition, we place reliance on the judgement of the Supreme Court in the case of CIT vs. Maheshwari Devi Jute Mills Ltd. (57 ITR 36) wherein held that transfer of surplus loom hours to other mill out of those allotted to the assessee under an agreement forcontrol of production was capital receipt and not income. Beingso, the consideration received by the assessee is similar to consideration received by transferring of loom hours. TheSupreme 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 assesse 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

17 ITA No.6693/Del/2018 SRF Ltd. vs. ACIT

generated in the course of business but it is generated due to environmental concerns. Credit for reducing carbon emission or greenhouse effect can be transferred to another party in need of reduction of carbon emission. It does not increase profit in any manner and does not need any expenses. It is a nature of entitlement to reduce carbon emission, however, there is no cost of acquisition or cost of production to get this entitlement. Carbon credit is not in the nature of profit or in the nature of income.” “25. Further, as per guidance note on accounting for Self- generated Certified Emission Reductions (CERs) issued by the Institute of Chartered Accountants of India (ICAI) in June, 2009 states that CERs should be recognised in books when those are created by UNFCCC and/or unconditionally available to the generating entity. CERs are inventories of the generating entities as they are generated and held for the purpose of sale in ordinary course. Even though CERs are intangible assets those should be accounted as per AS-2 (Valuation of inventories) at a cost or market price, whichever is lower. Since CERs are recognised as inventories, the generating assessee should apply AS-9 to recognise revenue in respect of sale of CERs.” 26. Thus, sale of carbon credits is to be considered as capitalreceipt. This ground is allowed.”

5.1 The above order of the Hyderabad Bench has been

confirmed by the Hon’ble High Court of Andhara Pradesh. Next, the

judgment of Hon’ble High Court of Gujarat in case of Gujarat

Flourochemicals Ltd. [ITA Nos. 11/2019 & 28/2019], wherein the

facts as noted by the Tribunal are similar with the facts of the

18 ITA No.6693/Del/2018 SRF Ltd. vs. ACIT

assessee, has held the issue in favour of assessee. Undoubtedly, the

facts of said case are similar to the case of the assessee which goes a

long way to support the claim of the assessee.

5.2 The coordinate bench in case of Malana Power Co. Ltd.

[ITA Nos. 2281/Del/2013, 1550/Del/2015 & 3957/Del/2015] while

adjudicating the additional ground of carbon credits held as under:

“5. We have heard the rival submissions in respect of theassessee’s plea for admission of additional grounds and it is ourconsidered opinion that the additional grounds raise a purelylegal issue, the facts of which are already available on record. It iswell settled that legal ground can be raised any time as per theratio laid down by the Hon'ble Supreme Court in the case of NTPCLtd. Vs CIT reported in 229 ITR 383 (SC), therefore, these areadmitted.” “6. Coming to the merits of the additional grounds of appeal raised by the assessee, we find that this issue is covered in favour of the assessee by the judgment of the Hon’ble Allahabad HighCourt in the case of Pr. Commissioner of Income Tax vs. L.H. Sugar Factory Pvt. Ltd. reported in 392 ITR 568 (All.) wherein the Hon’ble Allahabad High Court had held that income from sale of carbon credits/profits from sale of carbon credits is capital in nature. We also find that ITAT Bangalore Bench in the case of SubhashKabini Power Corpn. Ltd. vs. CIT reported in (2015) 37 ITR (T)106 (Bang .Trib.) had held that once the Assessing Officer had allowed the assessee’sclaim of deduction u/s 80-IA in respect of income derived from sale of carbon credits, such order was not amendable u/s 263 of the Act. This order of

19 ITA No.6693/Del/2018 SRF Ltd. vs. ACIT

ITAT, Bangalore Bench was also upheld by the Hon’ble Karnataka High Court.” “6.1 Further, ITAT Hyderabad Bench in the case of CIT Vs. My Home Power Ltd. Hyderabad in ITA No. 1114/Hyd/2009 held that carbon credit receipts are capital in nature. This order of ITAT Hyderabad Bench was subsequently upheld by the Hon'ble Andhra Pradesh High Court in 365 ITR 82.” “6.2 Accordingly, respectfully following the ratio of the settled judicial precedent as aforementioned, we allow the additional grounds raised by the assessee and hold that the income from sale of carbon credits is capital in nature.”

5.3 Coming to the judgments relied upon by the AO and

the Ld. CIT(A) and which have been further relied by the Ld. DR, we

are of opinion that such cases do not support the case of revenue.

As pointed out by the Ld. AR,the orderof the Cochin Bench of the

Tribunal in the case of Apollo Tyres Ltd.{[2014] 47 taxmann.com 416

(Cochin Trib.)}had already been analyzed by the Hon’ble Allahabad

High Court in the case of L.H. Sugar Factory Pvt. Ltd. (supra) which

held it ‘not to be good in law’. The other order of the ITAT

Ahmedabad Bench in the case of Kalpataru Power Transmission

Ltd.{[2016] 68 taxmann.com 237 (Ahm. Trib.)}has been overruled by

the later judgment of same bench of Ahmedabad Bench of the

20 ITA No.6693/Del/2018 SRF Ltd. vs. ACIT

Tribunal in the same case of Kalpataru Power Transmission

Ltd.[2019-TIOL-1424-ITAT-AHM].In view of the fact that case laws

relied upon by the revenue have already been overruled by higher

court or by the same court in later judgment, we are not inclined to

consider those judgments while adjudicating the issue under

consideration.

5.4 We also borrow some reasoning from the fact that

Ministry of Finance has inserted a specific provision in form of

section 115BBG in the Act which is effective from 1st April, 2018 and

will accordingly apply from assessment year 2018-19 and

subsequent years. The rate of taxation provided in said section is

10% (in addition toapplicable surcharge and education cess). This

also corroborates the case of the assessee that CERs are not regular

business receipts arising from business of the assessee and this fact

has also been recognized by the Government and, therefore, need

arose to bring a special provision under the Act and that too at

concessional rate of tax. Further, in any case, in view of amendment

being applicable from assessment year 2018-19, the taxability in

year concerned, which is AY 2006-07, is not governed by said

provisions and hence the taxability of carbon credits need to be

21 ITA No.6693/Del/2018 SRF Ltd. vs. ACIT

decided in light of extant judicial position.

5.5 We are in complete agreement with the Ld. AR that the

issue in no longer resintegra in view of several judgments of Hon’ble

High Courts. In the following cases, the Hon’ble High Courts have

decided the issue in favour of assessee by holding carbon credits as

capital receipts not liable to tax:

i. Alembic Limited [ITA Nos. 553/2017 & 554/2017] (Gujarat High Court 28.08.2017) ii. L.H. Sugar Factory Pvt. Ltd. [2016-TIOL-1942-HC-ALL-IT] iii. Ambika Cotton Mills Ltd. [TS-144-HC-2021(MAD)] iv. LancoTanjore Power Co. Ltd. [[2021] 434 ITR 671 (Madras)] v. Tamil Nadu Newsprint & Papers Ltd. [[2021] 130 taxmann.com 213 (Madras)] vi. Arun Textiles Pvt. Ltd. [2016-TIOL-2212-HC-MAD-IT] vii. Rajasthan State Mines and Minerals Ltd. [2017-TIOL-2297- HC-RAJ-IT] viii. Shree Cement Ltd. [ ITA No. 86/204 dated 22.08.2017] ix. SubhashKabini Power Corporation Ltd. {[2016] 69 taxmann.com 394 (Karnataka)} x. Dodson Lindblom Hydro Power Pvt. Ltd. [2019-TIOL-531- HC-MUM-IT] xi. My Home Power Ltd. {[2014] 46 taxmann.com 314 (Andhra Pradesh)}

5.6 Further, we are not aware of any contrary judgment of

22 ITA No.6693/Del/2018 SRF Ltd. vs. ACIT

any High Court on the issue nor the Ld. DR could point out any

contrary judgment on the issue. Therefore, respectfully following the

ratio of the Hon’ble High Courts as discussed above as well the

orders of the ITAT including the jurisdictional bench of the Tribunal,

we are of the view that carbon credits/CERs are in nature

entitlement accrued to the assessee on account of its efforts to

reduce the emission of harmful greenhouse gases. They have arisen

due to environmental concerns and therefore cannot be said to be

‘connected with’or ‘incidental to’ the business activities of assessee.

The assessee is engaged in the business of refrigerants, engineering

plastics and industrial yarns etc. and is not into the business of

trading of carbon credits. All these findings of facts have been given

by the coordinate bench in assessee’s own case in subsequent years

in AY 2007-08 and AY 2010-11 which have been placed before us.

We, therefore,hold that carbon credits are not offshoot of business

but offshoot of environmental concerns and hence not chargeable to

tax.The receipts arising from transfer of carbon credits are in the

nature of capital receipts not subjected to tax in terms of section

28(iv) read with section 2(24)(vd) of the Act. The claim of the assessee

raised in grounds of appeal from 1 to 3 is hereby allowed.

23 ITA No.6693/Del/2018 SRF Ltd. vs. ACIT

6.0 Connected with the above, another issue raised by the

assessee, by way of additional ground of appeal no.4, is the

exclusion of carbon credits from the book profits computed under section 115JB of the Act. It was submitted that the above additional ground is legal ground, all the facts are available on record. The learned authorised representative relied upon the several judicial precedents on this issue.

6.1 Although, the Ld. Sr. DR has opposed the assessee’s

prayer for admitting the additional ground, the issue raised by way

of additional ground is a legal issue and has been adjudicated by

various courts and, hence, we allow the additional ground no.4 to be

raised before us.

6.2 The Ld. AR has relied upon the various orders of the

Tribunal in support of this ground as under:

• Malana Power Co. Ltd. [ITA Nos. 2281/Del/2013, 1550/Del/2015 & 3957/Del/2015] • Malana Power Co. Ltd. [ITA Nos. 3713/Del/2017 & 2464/Del/2017] • Sicpa India Private Ltd. [TS-154-ITAT-2020(DEL)] • L.H. Sugar Factory Pvt. Ltd. (Lucknow ITAT 09.02.2016) • Ramgad Minerals & Mining Ltd. [TS-579-ITAT-2020(Bang)]

24 ITA No.6693/Del/2018 SRF Ltd. vs. ACIT

6.3 Further reliance was placed on the following judgments in which it was held that the capital receipts which are not liable to tax under normal provisions of Act are also not liable to tax under MAT provisions of the Act:

• Ankit Metal & Power Ltd. [TS-410-HC-2019(CAL)] • Ultimate Flexipack Ltd. [ITA Nos. 3373/Del/2011 & Others (22.01.2020)] • Reliance Industries Limited [ITA Nos. 1547/Mum/2016 & 2733/5842/Mum/2017] • Alok Industries Ltd. [TS-313-ITAT-2018(Mum)] • Nilgiri Tea Estate Ltd. [[2014] 47 taxmann.com 329 (Cochin - Trib.)] • Harrisons Malayalam Ltd. [[2009] 32 SOT 497 (Cochin)] • Ankit Metal & Power Ltd. [TS-410-HC-2019(CAL)] • Harinagar Sugar Mills Ltd. [2019-TIOL-1242-HC-MUM-IT]

6.4 It is a settled law that a capital receipt is not liable to tax under the Act unless it is specifically included in the definition of income u/s 2(24) of the Act and chargeable under any of the charging provisions of the Act. Once a particular receipt is treated as capital receipt, the same cannot be brought to tax in garb of ‘minimum alternative tax’applicable on book profits computed u/s 115JB of the Act. The ratio of judgment delivered by the Hon’ble

25 ITA No.6693/Del/2018 SRF Ltd. vs. ACIT

High Court of Calcutta in case of Ankit Metal & Power Ltd. [2019]

109 taxmann 93 (Cal) is worth mentioning. In Para no. 27, the

Hon’ble Court held that:

“27. In this case since we have already held that in relevant assessment year 2010-11 the incentives 'Interest subsidy' and 'Power subsidy' is a 'capital receipt' and does not fall within the definition of 'Income' under Section 2(24) of Income Tax Act, 1961 and when a receipt is not on in the character of income it cannot form part of the book profit under Section 115JB of the Act, 1961. In the case of AppolloTyres Ltd. (supra) the income in question was taxable but was exempt under a specific provision of the Act as such it was to be included as a part of the book profit. But where a receipt is not in the nature of income at all it cannot be included in book profit for the purpose of computation under Section 115JB of the Income Tax Act, 1961. For the aforesaid reason, we hold that the interest and power subsidy under the schemes in question would have to be excluded while computing book profit under Section 115 JB of the Income Tax Act, 1961.”

6.5 Further ITAT, Lucknow Bench, in case of L.H. Sugar

Factory Ltd. (ITA No. 717 & 418/LKW/2013 and others), held as

under: -

“4. We have considered the rival submissions. We find that the issue indispute as per Ground No. 1 of appeal is regarding nature of receipt onaccount of sale of carbon credit and in the case of CIT Vs. My Home PowerLtd. (Supra) also, the dispute before Hon’ble Andhra Pradesh High Courtwas this as to whether the amount received by the assessee on

26 ITA No.6693/Del/2018 SRF Ltd. vs. ACIT

transfer ofcarbon credit is capital receipt or Revenue receipt. It was held by Hon’bleAndhra Pradesh High Court in that case that carbon credit is not anoffshoot of business but an offshoot of environmental concerns and noassets is generated in the course of business but it is generated due toenvironmental concerns and therefore, it was held that the Tribunal hascorrectly held that this is a capital receipt and it cannot be business receiptof income and in this manner, Hon’ble Andhra Pradesh High Court hasupheld the Tribunal’s order in that case. The dispute in the present case isalso regarding nature of receipt on account of transfer of carbon credit.Ld. DR of the Revenue could not point out any difference in facts in thepresent case and in the case of CIT Vs. My Home Power Ltd. (Supra) andtherefore, respectfully following this judgment of Hon'ble Andhra PradeshHigh Court, we decline to interfere in the order of Ld. CIT(A) on this issue.Accordingly, Ground No.1 of the Revenue is rejected.”

6.6 We, therefore, respectfully following the aforesaid ratio

of Hon’ble High Court hold that Carbon credits being the capital

receipts cannot be brought to tax as book profits and are, thus,

liable to be excluded from the computation of book profits u/s

115JB. The additional ground of appeal no.4 of the assessee is thus

allowed.

7.0 The assesseehas raised anotheradditional ground

of appeal (ground no. 5) on the allowability of education cess as deductible expenditure u/s 37 (1) of the Act.It was submitted that the above additional ground is legal

27 ITA No.6693/Del/2018 SRF Ltd. vs. ACIT

ground, all thefacts are available on record. The learnedauthorised representative relied upon the several judicial precedents onthis issue.

7.1 The Ld. Sr. DR has opposed the assessee’s prayer for admitting

the additional ground.

7.2 We have noted that ground raised contains a purely legal issue as the relevant facts are already on record before revenue authorities. We, therefore, admit the additional ground of appeal raised before us.

7.3 The learned AR arguing on the legal groundsubmitted that an amount of Rs. 83,55,777/- may be please allowed u/s 37 of the Act as paid/payable on the basis of the following judgments of theHon’ble High Courts and ITAT:

i. the Hon’ble Rajasthan High Court (Jaipur Bench) in the case of Chambal FertilisersAnd Chemicals Ltd.[TS-489-HC- 2018(RAJ)] ii. the Hon’ble Bombay High Court (Goa Bench) in the case of Sesa Goa Limited [TS-163-HC-2020(BOM)]

iii. the Delhi ITAT in the case of Sicpa India Private Ltd. [TS- 154-ITAT-2020(DEL)]

iv. the Kolkata ITAT in the case of Philips India Limited [TS- 326-ITAT-2020(KOL)]

28 ITA No.6693/Del/2018 SRF Ltd. vs. ACIT

v. the Kolkata ITAT in the case of Reckitt Benckiser (India) Private Limited [TS-614-ITAT-2020(KOL)]

7.4 Further, the learned AR had also relied upon the recent order of the coordinate bench in the case of DCM Shriram

Ltd. [TS-554-ITAT-2021(DEL)-TP], dated 28th October, 2021, wherein

the coordinate bench has allowed the deduction of education cess

u/s 37(1) of the Act by following the above judgments of the Hon’ble

Bombay and Rajasthan High Court in the case of Sesa Goa Limited

and Chambal FertilisersAnd Chemicals Ltd.

It is noted that provisions of section 40(a)(ii) of the 7.5 Act prohibits the allowance of any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at proportion of, or otherwise on the basis of, any such profits or gains. There is no dispute that tax payable under the Act is not an allowable expense due to express provisions of section 40(a)(ii). The core issue, however, is that whether the education cess is part of tax or not. In the judgments referred to by the Ld. AR, it has been held that ‘cess’ is not part of tax. Reference is also made to the CBDT Circular No. F. NO. 91/58/66-ITJ(19) dated May 18th, 1967

29 ITA No.6693/Del/2018 SRF Ltd. vs. ACIT

which clarifies that since the word 'cess' had been omitted from Sec. 40(a)(ii), only taxes paid are to be disallowed for AY 1962-63 and onwards.

7.6 The coordinate bench of this Tribunal in case of Sicpa India Private Ltd. [TS-154-ITAT-2020(DEL)] has already dealt with the issue holding as under: “33. This issue has been decided by Hon’ble High Court of Rajasthan in case of Chambal Fertilizers and Chemicals Ltd. (supra) in the light of the interpretation of Circular dated 19.05.1967 (supra) in favour of the assessee by returning following findings:- “13. On the third issue in appeal no.52/2018, in view of the circular of CBDT where word “Cess” is deleted, in our considered opinion, the Tribunal has committed an error in not accepting the contention of the assessee. Apart from the Supreme Court decision referred that assessment year is independent and word Cess has been rightly interpreted by the Supreme Court that the Cess is not tax in that view of the matter, we are of the considered opinion that the view taken by the tribunal on issue no.3 is required to be reversed and the said issue is answered in favour of the assessee.” 34. So, in these circumstances, education cess is not a disallowable expenditure u/s 40(a)(ii) of the Act having been expressly excluded from section 40(a)(ii) of the Act. Moreover, cess is not in the nature of tax as has been held by Hon’ble Supreme Court in case of Smith Kline Amp; French (India) Ltd. and Ors. vs.

30 ITA No.6693/Del/2018 SRF Ltd. vs. ACIT

CIT (1996) 219 ITR 581 (SC). So, we are of the considered view that AO/CIT(A) have erred in disallowing the deduction for education cess on income-tax, dividend distribution tax and fringe benefit tax for AYs 2009-10, 2010-11 & 2011-12 in computing the total income under normal provisions of the Act, consequently ordered to be deleted. Hence, Ground No.4 of AY 2009-10, Ground No.3 of AY 2010-11 & Ground No.4 of AY 2010-11 in assessee’s appeals are allowed.”

7.7 The coordinate bench of this Tribunal in case of DCM Shriram Ltd.[TS-554-ITAT-2021(DEL)-TP]has already dealt with the issue holding as under:

“63. We have carefully considered the rival contentions and pursued the various judicial precedents cited before us. We have appreciated the arguments of the ld DR. However the judicial precedents cited before us of Honourable Bombay and Rajasthan High court bind us. We find that this issue is squarely covered in favour of the assessee by the decision of Honourable Bombay high court in case of SesaGoa Limited [2020] 117 taxmann.com 96 (Bombay)/[2020] 423 ITR 426 (Bombay) and Honourable Rajasthan High court in case of Chambal fertilizers Limited [2019] 107 taxmann.com 484 (Rajasthan). Therefore respectfully following the same, we direct the ld AO to allow assessee the deduction of cess u/s 37 (1) of the act. Accordingly, additional ground of appeal is allowed.”

7.8 We have carefully considered the rival contentions and pursued the various judicial precedents cited before us and

31 ITA No.6693/Del/2018 SRF Ltd. vs. ACIT

respectfully following the legal precedent, as it stands today (as the proposed amendment by Finance Bill, 2022 is yet to take effect) hold that education cess is not a disallowable expenditure u/s 40(a)(ii) of the Act having been expressly excluded from section 40(a)(ii) of the Act by following the judgment of the Hon’ble Rajasthan High Court in the case of Chambal FertilisersAnd Chemicals Ltd. (supra) and the Hon’ble

Bombay High Court in the case of Sesa Goa Limited (supra). We,

therefore, allow the deduction of education cess amounting to Rs. 83,55,777/- u/s 37 of the Act.

8.0 In the final result the appeal of the assessee stands allowed.

Order pronounced on 07.02.2022.

Sd/- Sd/- (ANIL CHATURVEDI) (SUDHANSHU SRIVASTAVA) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated:07.02.2022 PK/rkk Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI

32 ITA No.6693/Del/2018 SRF Ltd. vs. ACIT

Date of dictation Date on which the typed draft is placed before the dictating Member Date on which the typed draft is placed before the Other member Date on which the approved draft comes to the Sr.PS/PS Date on which the fair order is placed before the Dictating Member for Pronouncement Date on which the fair order comes back to the Sr. PS/ PS 07.02.2022 Date on which the final order is uploaded on the website of ITAT Date on which the file goes to the Bench Clerk Date on which file goes to the Head Clerk. The date on which file goes to the Assistant Registrar for signature on the order Date of dispatch of the Order