THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-1, , ELURU vs. THE ANDHRA SUGARS LIMITED, TANUKU

On being aggrieved by the additions made by the Ld. AO, the assessee filed an appeal before the Ld. CIT(A). Before the Ld. CIT(A), the assessee made similar submissions regarding each of the addition made by the Ld. AO. The Ld. CIT(A) considering the submissions and after examining the documents provided by the assessee, partly allowed the appeal of the assessee. On being aggrieved by the order of the Ld. CIT(A), the Revenue is in appeal before us by raising the following grounds of appeal: “1. The order of the Ld. CIT(A) is erroneous in law and on facts.

The Ld. CIT(A) erred in restricting the addition on account of disallowance of capital expenditure to Rs. 1.74 Crs treating the balance amount as revenue expenditure.

Grounds No. 1, 13 and 14 are general in nature and need not adjudication.

Grounds No. 2 & 3 relates to disallowance of interest expenditure in relation to exempt dividend income U/s. 14A r.w.r 8D of the IT Rules amounting to Rs. 1,10,52,654/-. On this issue, the Learned Departmental Representative (“Ld. DR”) submitted that the Ld. AO has disallowed the proportionate expenditure including interest amounting to Rs. 1,10,52,654/- out of which administrative expenditure is Rs. 17,88,000/- and interest expenditure is Rs. 92,64,000/-. The Ld. DR therefore submitted that the Ld. AO has rightly disallowed the expenditure in accordance with Rule 8D r.w.s 14A of the Act. He therefore pleaded that the deletion of interest expenditure of Rs. 92,64,000/- by the Ld. CIT(A) is bad in law.

Per contra, the Learned Authrorized Representative (“Ld. AR”) submitted that in earlier assessment years in the assessee’s own case the Tribunal has deleted the proportionate addition of interest expenditure as it was established by the assessee that it has not utilized the borrowed funds for investment. He also submitted that no fresh investments are made in the impugned assessment year. The Ld. AR further submitted that these investments are made 15 to 20 years earlier and hence, proportionate disallowance of interest during the impugned assessment year cannot be made. He therefore pleaded that the order of the Ld. CIT(A) on this issue be upheld.

Per contra, the Ld. AR submitted that the generation of electricity is akin to manufacture of a product and is considered as a good under the Sale of Goods Act, 1930. He further submitted that as per section 32(1)(iia) of the Act what required isto install the new machinery or plant after 31/03/2002 for the purpose of claiming additional depreciation. He argued that it is not necessary to have any operational connectivity to the articles / things manufactured or produced by the assessee company. He therefore pleaded that the Ld. CIT(A) has rightly appreciated these facts and has allowed the same. The LD AR relied on various judicial pronouncements as detailed in the Paper Book.

We have heard both the sides and perused the material available on record. From the submissions of the Ld. AR, it is observed that various judicial pronouncements have held that electricity is a ‘good’ covered by the definition of ‘goods’ under the Sale of Goods Act, 1930. Since it is considered as an article or good which is tradable electricity is covered under the definition of good under the Sale of Goods Act, 1930.It was the submission of the Ld. AR that power generation unit used for captive consumption. Prior to the amendment brought in the Finance Act, 2012, additional depreciation is also allowable in the case of power generating unit used for captive consumption by the assessee who manufacture or produce articles / things. In the instant case the assessee uses electricity in the manufacturing activity. “8. Similarly, it is clear that electricity has been held to be "goods" for the purposes of sales tax in the Constitution Bench judgment of the Supreme Court in State of Andhra Pradesh vs. NTPC Ltd. AIR 2002 SC 1895. The Supreme Court, in that judgment held as follows: “20. Before we deal with the constitutional aspects let us first state what electricity is, as understood in law, and what are its relevant characteristics. It is settled with the pronouncement of this Court in Commissioner of Sales Tax, Madhya Pradesh, Indore v. Madhya Pradesh Electricity Board, Jabalpur – 1969(2) SCR 939 that electricity is goods. The definition of goods as given in Article 366 (12) of the Constitution was considered by this Court and it was held that the definition in terms is very wide according to which “goods” means all kinds of moveable property. The term “moveable property” when considered with reference to “goods” as defined for the purpose of sales-tax cannot be taken in a narrow sense and merely because electrical energy is not tangible or cannot be moved or touched like, for instance, a piece of wood or a book it cannot cease to be moveable property when it has all the attributes of such property. It is capable of abstraction, consumption and use which if done dishonestly is punishable under Section 39 of the Indian Electricity Act, 1910. If there can be sale and purchase of electrical energy like any other moveable object, this Court held that there was no difficulty in holding that electric energy was intended to be covered by the definition of “goods”. However, A.N. Grover, J., speaking for three-Judge Bench of this Court went on to observe that electric energy “can be transmitted, transferred, delivered, stored, possessed etc. in the same way as any other moveable property”. In this observation we agree with Grover. J., on all other characteristics of electric energy except that it can be „stored‟ and to the extent that electric energy can be „stored‟, the observation must be held to be erroneous or by oversight. The science and technology till this day have not been able to evolve any methodology by which electric energy can be preserved or stored.”

The Tribunal's judgment in NTPC vs. DCIT [relied upon in the orders of the CIT(A) as well as the Tribunal in the present case] followed this judgment of the Supreme Court to hold that electricity has all the necessary trappings of “articles” or “things” and the benefit of additional depreciation cannot be denied.

Ground No.7 is with respect to the deletion of disallowance of loss claimed by the assessee under the head ‘stores written off’. On this issue, the Ld. DR argued that the event of sale of stores happened during the subsequent Financial Year whereas the assessee has claimed it as expenditure in the earlier Financial Year. He therefore pleaded that the addition made by the Ld. AO be upheld as this transaction does not pertain to the year under consideration.

Per contra, the Ld. AR submitted that as per the Accounting Standards issued by the Ministry of Corporate Affairs and Institute of Chartered Accountants of India (“ICAI”) any event occurring after the balance sheet date may require adjustment of reported values of assets, liabilities, expense, income and equity for the accounting period shall be considered during the accounting period. The Ld. AR further submitted that the stores written off is based on the anticipated sales realization of Rs. 4 Crs which was already been reduced from the block of assets while claiming depreciation on the balance WDV for the AY 2011- 12. The Ld. AR further pleaded that since the plant (stores written off) was sold to M/s. Rayalaseema Alkali Chemicals Ltd., Kurnool for Rs. 1,26,00,000/- during the AY 2012-13 before the finalization of audit of accounts, the balance of Rs. 2,74,00,000/- was written off in the books of account and claimed as expenditure. He therefore submitted that it is revenue neutral as the same has to be allowed during the subsequent assessment year. Further, the Accounting Standards mandate it to be considered in the accounting period wherein if it materialized before the finalization of accounts for the impugned assessment year and the loss has been quantified. He therefore pleaded that the order of the Ld. CIT(A) be upheld.

We have heard both the sides and perused the material available on record. It is a fact that the listed entities have a mandate to follow the Accounting Standard-4 “Contingencies and Events Occurring after the balance sheet date” issued by the Ministry of Corporate Affairs and ICAI. Accordingly, the company has followed recognizing the loss arising out of the writing off of stores which materialized during the subsequent Financial Year but pertaining the accounting period. The assessee has also considered on provisional basis an amount of Rs 4 Crs and has reduced it from WDV of assets while claiming depreciation during the FY. We therefore find no infirmity in the order of the Ld. CIT(A) on this issue and hence the Ground No.7 raised by the Revenue is dismissed.

Grounds No. 8 & 9 relate to confirming the disallowance of capital expenditure amounting to Rs. 1.74 Crs and treating the balance as revenue expenditure by the Ld.CIT(A). The Ld. DR submitted that the Ld. AO has analyzed the expenditure in detail the expenditure incurred by the assessee under the head ‘repairs and maintenance’ items wise and has disallowed a sum of Rs. 8,05,92,163/- considering it as capital expenditure and not allowable as revenue expenditure. He therefore pleaded that since the Ld. AO has analyzed the expenditure item by item, there is no ambiguity in considering the expenditure as capital expenditure and hence pleaded that the order of the Ld. AO be upheld.

Per contra, the Ld. AR submitted that in the assessee’s own case for the AY 2007-08 and 2008-09, this Tribunal has considered that the assessee has incurred expenditure in connection with replacement of certain parts of machineries such of Membrane Sheets etc., as detailed in the Ld. AO’s order. He further argued that these Membrane Sheets are nothing but spare parts / consumables for the existing machinery and did not constitute any new machinery to be considered as capital expenditure. He therefore pleaded that the Ld. CIT(A) has rightly considered the Membrance sheets and other items as detailed in his order in para 9.2 as revenue expenditure and hence pleaded that it may be upheld.

We heard both the sides and perused the material available on record. On a perusal of the items of expenditure disallowed by the Ld. AO, we find that some of the items are independent machineries like Motors, Pumps, Compressors, transformers, UPS Systems etc., having distinct characteristics of machines and also capable of independent function whether or not fixed to continuous process plant. These machinery being part of the continuous process that does not lose their identity or function. Each machine in a plant should be treated independently as such and not as a mere part of the composite machinery of the plant. Considering these facts and circumstances, the Ld. CIT(A) has examined the items of disallowance and had given relief to the items which are to be treated as revenue in nature while upholding the action of the Ld. AO in the case of expenditure which are capital in nature. The Ld. CIT(A) by relying on the decision in the assessee’s own case for the earlier assessment year has given his findings regarding the items constituting capital or revenue in nature. We therefore find no reason to interfere in the decision of the Ld. CIT(A) and therefore we find no infirmity in the order of the Ld. CIT(A) on this issue. Thus, Ground No. 8 raised by the Revenue is dismissed.

Grounds No. 10, 11 and 12 relate to the treatment of sale of carbon credit as revenue or capital receipt. The Ld. DR submitted that Special Leave Petition (“SLP”) has been filed before the Hon’ble Supreme Court which is admitted against the order of the Hon’ble High Court of Madras in CIT vs. Wascare (India) Ltd [2022] 138 taxmann.com 185 (SC). He further submitted that notice has been issued in SLP filed against the High Court. He therefore pleaded that since the matter is pending before the Hon’ble Supreme Court, the decision of the Hon’ble High Court in the case of CIT vs. Wascare (India) Ltd (supra) shall not be applicable.

Per contra, the Ld. AR submitted that the carbon credit accrued to the assessee and the sale of the same which was earned on clean development mechanism in its wind energy operations is a capital receipt and cannot be considered as a revenue receipt. He further submitted that carbon credits are made available to the assessee on account of saving of energy consumption and not because of the assessee’s business and it is not a byproduct of the assessee. The Ld. AR relied on the order of the coordinate Bench in in the case of ACIT vs. M/s. Sree Kalyani Agro Industries Pvt Ltd, dated 25/01/2018. He therefore pleaded that the carbon credits cannot be considered as a revenue receipt as it is not directly linked with the power generation. He prayed that the order of the Ld. CIT(A) be upheld.

We have heard both the sides and perused the material available on record and gone through the case law submitted by the Ld. AR in the case of ACIT vs. M/s. Sree Kalyani Agro Industries Pvt Ltd (supra) by the coordinate Bench of the Tribunal. We find that the Tribunal has relied on the decision of the Hon’ble jurisdictional High Court in the case of CIT vs. My Home Power Ltd [2014] 365 ITR 0082 (AP) wherein it was held that carbon credit is a capital receipt. Relevant portion of the order is extracted below: “7. We have heard the rival submissions and perused the materials placed on record. The Ld.CIT(A) allowed the appeal of the assessee and held that the carbon credits are capital receipts following the decision of jurisdictional High Court in the case of My Home Power Ltd. cited supra. The Hon'ble ITAT, Hyderabad in the case of My Home Power Ltd. has held that the sale of carbon credits is not taxable and they are capital receipts. The relevant portion of the discussion is extracted 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/s 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 b/-product it is a credit given to the assessee under the Kyoto Protocol and because of international understanding Thus, the assessee's who have surplus carbon credits can sell them to other assesses 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 ones negative point carbon credit The amount received isnot received for producing and/or selling any product, b/- 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 vs. Maheswari Devi Jute Mills Ltd (57 17W 36) wherein held that transfer of surplus loom hours to other mill out of those allotted to the assessee under an agreement for control of production was capital receipt and not income. Being so, the consideration received by the assessee is similar to consideration received by transferring of loom hours. The Supreme Court considered this fact and observed 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 in 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 green house 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 product 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 (CER5) issued by the institute of Chartered -Accountants of India (ICAI) in June, 2009 states that CERs should be recognized in books when those are created by (J/VFCCC 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 recognized as inventories, thegenerating assessee should apply AS-9 to recognize revenue in respect of sale of CERs." 7.1 The Hon'ble Jurisdictional High Court in the case of My Home Power Ltd., upheld the view taken by Hon'ble ITAT, Hyderabad and the relevant part of the order is extracted as under: "We have considered the aforesaid submission and we are unable to accept the same, as the learned Tribunal has factually found that "Carbon Credit is not an offshoot of business but an offshoot of environmental concerns. No asset is generated in the course business but it is generated due to environmental concerns." We agree with this factual analysis as the assessee is carrying on the business of power generation. The Carbon Credit is not even directly linked with power generation. On the sale of excess Carbon Credits the income was received and hence as correctly held by the Tribunal it is capital receipt and it cannot be business receipt or income. In the circumstances, we do not find any element of law in this appeal." Facts of the case are similar and the order of the jurisdictional High Court is binding on the lower courts, thus respectfully following the judgment of the Hon'ble Jurisdictional High Court we hold that the carbon credits are capital receipts and cannot' be considered as business income. Accordingly, we uphold the order of the CIT(A) and dismiss the appeal of the revenue.”

Further, the argument of the Ld. DR cannot be accepted that notice has been issued in SLP filed by the Revenue wherein the case is pending before the Hon’ble Supreme Court. We therefore find that the Ld. CIT(A) has rightly followed the decision of the Hon’ble jurisdictional High Court in the case of CIT vs. Myhomes Power Limited (supra) and has deleted the addition made by the Ld. AO. In the absence of any finality on this issue by the Hon’ble Apex Court, the ratio laid down by Hon’ble Jurisdictional High Court and Hon’ble Madras High Court shall be considered final. Thus, we are of the considered view that no interference is required in the order of the Ld. CIT(A) thereby dismissing the Grounds No. 10, 11 and 12 raised by the Revenue.

In the result, appeal of the Revenue is dismissed.

With respect to the assessee’s Cross Objection in C.O.No.140/Viz/2019 (AY 2012-13), since the Revenue appeal is dismissed, the grounds raised by the assessee in its Cross Objection supporting the order of Ld CIT(A) are considered infructuous and hence dismissed.