M/S. SATIA INDUSTRIES LIMITED,MUKTSAR vs. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-1, BATHINDA

ORDER Per:Anikesh Banerjee, JM: The instant appeal of the assesseewas filed against the order of the ld. Commissioner of Income Tax (Appeals), NFAC, Assessment Unit, Delhi,[in brevity the ‘CIT (A)’], order passed u/s 250of the Income Tax Act 1961, [in brevity ‘the Act’] for A.Y. 2018-19. The assessment order is framed u/s 143(3)r.w.s. 144B of the Act.

1. That in the facts fit circumstances of the case, the Ld. AO NFAC has erred on facts & law in assessing the income at Rs.27,39,13,236/- assessment vide order u/s 143(3) r.w.s. 144C dated 26.07.2022, in pursuance of directions of Dispute Resolution Panel dated 29.06.2022, and the amount of Rs. 4,57,32,318/- paid to ZYLO international has been wrongly treated as bogus expenditure u/s 69C and further the amount of Rs. 17,77,26,000/- received on account of sale/ transfer of Recs/ESCs has been wrongly treated as business income.

2. That in the facts fit circumstances of the case, the Ld. AO NFAC has erred on facts fit law in making the addition of Rs. 17,77,26,000/- received on account of sale/transfer of RECs/ESCs, in pursuance of directions of Dispute Resolution Panel dated 29.06.2022, while recording the finding that the claim of the assessee u/s 115BBG is being rejected despite the fact that the claim made in the return of income was modified during the course of assessment proceedings and in the objections filed before the DRP that the receipts from sale/transfer of RECs/ESCs are capital receipts which are not liable to tax.

2.1. That in the facts & circumstances of the case, the Ld. AO NFAC has erred on facts fit law in making the addition of Rs.17,77,26,000/-, in pursuance of directions of Dispute Resolution Panel dated 29.06.2022, by treating the receipts from sale/transfer of RECs/ESCs as business income, and charging the tax on the same as against the claim of the assessee, based on the assessment order for A.Y 2017-18 in the case of the assessee, that the receipts from sale/transfer of RECs/ESCs are capital receipts which are not liable to tax.

2.2. The claim of the assessee before the AO NFAC & in the objection filed before the DRP that the amount received from sale/transferof RECs/ESCs is capital receipt for which judgement of various benches of ITAT (including the order of the jurisdictional benches) has been rejected by the AO NFAC and DRP without rebutting the case law relied upon by the assessee. 3. That the SCN dated 27.06.2022 issued by the DRP for enhancement of income of Rs. 4,57,32,318/-, on the basis of information forwarded by the Principle CIT Amritsar-1 vide letter dated 21.04.2022, to submit the reply on 28.06.2022 proves that there was violation of principle of natural justice as only one day time has been allowed to submit reply to the SCN and, in view, of the judgment of Apex Court in the case of Sona Builders the directions issued by the Dispute resolution panel for enhancement of income of Rs 4,57,32,318/- deserves to be set aside/quashed.

3.1. That the Dispute Resolution Panel has erred on law in rejecting legal objection of the assessee raised during the course of the proceedings before the panel, without providing any opportunity of hearing to the assessee, that theprovisions of Section 144C(8) does not allow the DRP to issue directions to enhance the income of the assessee to the extent of Rs. 4,57,32,318/- which was not part of the subject matter of the variations suggested by the AO and the AO had not proposed any addition on this issue in the draft assessment order

3.2. That the Dispute Resolution Panel erred on law to issue directions dated 29.06.2022 regarding enhancement of Rs.4,57,32,318/- by treating the transaction of payment of commission to Zylo International as bogus u/s69C, while relying on the judgments of High Courts of Madras and Delhi for rejecting the legal objection raised by the assessee, without confronting the above said case laws to the assessee because both the case laws are distinguishable on facts.

5.1. That the Ld. AO NFAC has erred on facts & law invoking the provisions ofsection 115BBE of the Act and charging the special rate of tax, which is highly unjustified.

6. That the appellant craves leave to add or amend the grounds of appeal before the appeal is finally heard or disposed of.”

3.1 During the impugned financial year, the Ministry of New and Renewable Energy (MNRE) issued transferable and saleable credit certificates under the Electricity Act 2003, which are generally referred to as Renewable Energy Certificates (“RECs”). Such RECs are issued, under the Central Electricity Regulatory Commission Regulations, 2010 (“CERC”) issued pursuance to section 178(1) and section 66 r.w. clause (y) of section 178(2) of the Electricity Act, 2003. 3.2 During the impugned year, the assessee earned by sale/transfer of REC/ESCs amounting to Rs.17,77,26000/-. The assessee claimed this amount u/s 115BBG of the Act and paid the tax @ 10% during filing of return U/s 139 of the Act. During the assessment proceeding the assessee amended its claim related to income earned from the sale/transfer of RECs/ESCs as capital receipt and recomputed the tax by claiming exemption of tax on said income. The ld. AO issued a draft assessment order by rejecting the same. The assessee filed a petition before the Dispute Resolution Panel (DRP). As per the direction of DRP the said amount was taken as business income of assessee. 3.3 During proceeding in DRP, the ld. DRP recommended for addition of commission amount of Rs.4,57,32,318/- u/s 69C of the Act. Being aggrieved assessee filed an appeal before us. 3.4 During the appeal proceeding, the assessee basically agitated three grievances; - i) RECs/ESCs is income in capital in nature not in revenue in nature. And also, it is not attracted the provision u/s 115BBG as it is not come under the carbon credit. ii) The said claim can be amended during the time of assessment by changing the revenue income into capital. iii) The grievance related to addition of commission u/s 69C which was paid by the assessee during the year amount to Rs.4,57,332,318/-. The matter was taken for adjudication accordingly. Ground No. 1 4. Ground No. 1 is general in nature. Ground No. 2 5. The ld. AR for the assessee, Mr Sudhir Sehgal, filed a written submission which are kept in the record. Mr Sehgal first placed that the assessee earned Rs.17,77,26,000/- by transferring of the RECs and ESCs credit during the impugned year which is capital in nature. Though in the return the assessee claimed it u/s 115BBG and paid the tax in special rate. 5.1 Mr Sehgal, ld. AR invited our attention in APB pages 7 to 15, the copy of the letter dated 26.09.2021 submitted before the revenue related to claim made in which income earned from RECs/ESCs. The relevant part of the assessee’s submission is extracted as below:

5.2 Mr Sehgal, ld. AR further explained the details about the sale of renewable energy certificate (REC and ESCarts), the relevant part is extracted as below: “2. Receipts on sale of Renewable Energy Certificates[REC] & ESCERTS [Addition made as per directions of the DRP]:

Before we specifically, deal with the above said ground of appeal, it is important to give the ‘brief profile’ of the company and the business carried on by it which is as under: a. The assessee is a public company engaged in the manufacturing of ‘writing & printing paper’, having factory premises in Village Rupana, situated in District Muktsar Sahib, which is Agro based area. The company has a co- generation captive power division also, in which, electricity is generated from renewable energy sources i.e. Bio-fuels which includes ‘Rice Husk’, unlike other companies which utilize fossil fuels i.e. coal & Diesel and the same is consumed by the paper division. b. The generation of power from renewable energy resources helps in reduction of emission of carbon/heat and gases. c. The assessee is maintaining complete record viz a viz cashbook and ledger, which are audited and no defects have been pointed by the DRP/Ld. AO in day to day of maintenance of books of accounts. d. It is also an undisputed fact that the electricity so generated by use of the Bio-fuels is not being sold to any other concern, but it is wholly consumed in the manufacturing activity of the appellant and this use of Bio-fuels saves the environment being an environment friendly as it reduces the carbon/heat & gas emission like carbon credits. e. It is submitted that in order to encourage the use of renewable sources of energy, such as wind energy, solar energy, steam energy, etc., Ministry of New and Renewable Energy (‘MNRE’) issues transferable and saleable credit certificates under the Electricity Act, 2003, which are generally referred to as “Renewable Energy Certificates (‘RECs’)”. Such RECs are issued, under Central Electricity Regulatory Commission Regulations, 2010 (‘CERC Regulations’) issued pursuance to section 178(1) and section 66 read with clause (y) of section 178(2) of the Electricity Act, 2003. f. Further, the Energy Conservation Act, 2001 (‘the EC Act’) provides for various provisions relating to the conservation of energy. The energy conservation/reduction targets are set by the ‘Government of India’ in consultation with BEE under section 14(a) of the Energy Conservation Act, 2001. The Central Government in exercise of the power conferred upon it under clause (1) of section 14A of the EC Act and Rule 11 of the PAT Rules, 2012 issuesthe ‘energy savings certificates’ to these Designated Consumers, whose energy consumption is less than the prescribed norms and standards. g. Further, the objective of REC mechanism is to promote ‘renewable energy’ and facilitate compliance of Renewable Purchase Obligations (‘RPO’) through a market-based instrument aimed at addressing the mismatch, between availability of renewable energy resources in state and the requirement of the obligated entities to meet the RPO. h. Under the REC mechanism, the units/undertakings/entities, which are not using ‘renewable energy resources’ are required to purchase, at a cost, RECs, to compensate its RPO. This mechanism helps in promoting use of ‘renewable energy resources’ and in sustaining the non-renewable energy resources. i. The company engaged in generation of electricity from use of ‘renewable energy sources’ is required to apply for registration for issuance of certificates and thereafter, transferable certificates are issued by Central Agency of MNRE. j. The CERC Regulations also provide that the certificates issued to an eligible entity can also be placed for dealing in any of the ‘Power Exchanges’ as the certificate holder may consider appropriate, and such certificate shall be available for dealing in accordance with the Rules and Byelaws of such Power Exchange at a value pre-determined by the Power Exchange. Similarly, ESCERTS are also issued for the conservation of energy and the same can be sold on the Power Exchange regulated by the Government. k. Regarding Energy Saving Certificates (ESCerts), it is issued to those plants who had over achieved the targets to reduce specific energy consumption in energy intensive industries & those plants who are under achievers of that targets are entitled to purchase ESCerts. l. The energy saving certificates (ESCerts) are also issued as the energy saving also reduces the emission of carbon heat & gases. m. It is submitted that the receipts generated from the sale proceeds of RECs/ESCerts are not liable to tax for the assessment year under consideration in terms of sections 2(24), 28, 45 and 56 of the Act.

RECs/ESCerts are made available to the assessee on account of reduction in emission of carbon/heat & gases & saving of energy consumption also reduces emission of carbon/heat & gases and not because of its business. Further, RECs/ESCerts cannot be considered as a by-product. Transferable RECs/ESCerts are not a result or incidence of one’s business, but it is a credit for reducing emissions. The persons having RECs get benefit by selling the same to a person who needs credits to fulfill one’s RPO. The amount received is not received for producing and/or selling any product, by-product or for rendering any service for carrying on the business, REC/ESCerts is entitlement & an off shoot of environmental concern & not an off shoot of business. n. In the case of carbon credits, the courts have repeatedly held that they are not directly linked with power generation as there are not an off shoot of business & it is a capital receipt and cannot be business receipt or income.”

Section 115BBG deals with Income from sale of Carbon Credit does not take within its ambit the income from sale of RECs/ESCs:

'115BBG, Tax on income from transfer of carbon credits. ~{i) Where the toad income of an assessee includes any income by way of transfer of carbon credits, the income-tax payable shall be the aggregate of- (a) the amount of income-tax calculated mi die income by way of transfer of carbon credits, at the rate of ten per cent; and (b) the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the amount of income referred to in clause (a). (2) Notwithstanding anything contained in this Act mi deduction In respect of any expenditure or allowance stud! be allowed to the assessee under any provision of this Act in computing his income referred to in clause (a) of sub-section (1). Explanation, -For the purposes of this section ’carbon credit" in respect of one unit shall mean reduction of one tonne of carbon dioxide emissions or emissions of its equivalent gases which is validated by die United Nations Framework on Climate Change and which can be traded In market at its prevailing market price. Thus, the Panel is of the view that the assessee has wrongly claimed the Income from Sale of RECs/ESCs u/s 115BBG of Income Tax Act,

1961. Income from sale of REC/ESCs is normal business income few the assessee and needs to be included in the business income and taxed at normal tale rather than at concessional rate.

3.5.3. The AO has rightly noted that the assessee has shown the income from sale of RECs/ESCs in P&L account in the item no.

of business. It is hereby established that the REC/ESCs are a sresult of the assessee’s business. The Panel, therefore, finds no infirmity in the order of the AO.

9.2 Thus following the directions of the Hon. DRP, the addition of Rs. 17,77,26,000/- is made to the total income as business income and the assessee s claim under section 115BBG is rejected.”

6.1 The ld. DR further argued and placed the order of the High Court of Orissa in the case of Orissa Rural Housing Development Corpn. Ltd. v.Assistant Commissioner of Income-tax, Circle - 1(1), 2012] 17 taxmann.com 186 (Orissa)- Held“Section 139 of the Income-tax Act, 1961 - Return of income - Revised return - Assessment year 2006-07 - Whether an assessee can revise his return of income by way of filing a revised statement of income after filing original return other than by way of filing revised return as contemplated under section 139(5) - Held, no"

Comments of the DRP Our Submissions It has been stated by the DRP that It is a settled fact that the amount received is not for assessee is generating Captive producing or selling any products, byproducts or for Power through Renewable Energy rendering any service. The RECs/ESCs are made available Source i.e. Biofuel and, for which, to the assessee on account of saving of energy the raw material is Rice Husk consumption and not because of its business. Thus, they which is used for paper production are accretion to capital. Nothing has been generated or and, hence, it is effectively the created but it is accrued on account of ‘World concern’ byproducts of paper production and it is in the nature of “An Entitlement” and the process and, thus, cannot be source of this is World Concern and Environment that considered as an offshoot of the assessee gets a privilege in the nature of RECs/ESCs. environmental concern. Transferable RECs/ESCs is not a result of incidence of one business, it is a credit for reducing emission, the person having RECs/ESCs gets benefit by selling the same to a person who needs RECs/ESCs to overcomes once negative point of RECs/ESCs thus the amount is received is not received for producing/or selling any product, byproduct or for rendering any service for carrying on of business. RECs/ESCs contain the right to It is a settled law that a receipt, which is not in the transfer and these credits have no character of income as defined in Section 2(24) of the other value and the question of Act and not chargeable to tax u/s 4 r.w.s. 5 cannot be savings in emission arises only in brought in the ambit of tax and, thus, it is a capital the course of the business and receipt only. This view has been taken into consideration thus, they are taxable. by the ‘Jaipur Bench’ of the ITAT in &404/ JP/2019 in which, the decision of the Andhra Pradesh High Court as cited supra in the case of CIT vs. My Home Power Ltd. as cited above and also of the Hon’ble Rajasthan High Court in the case of CIT vs. Shree Cement Ltd. dated 22.08.2017 and the finding has been reproduced that since the source of the Carbon Credit is the World Concern and Environment and due to this, the assessee gets a privilege in the nature of transfer of Carbon Credit and cannot be liable for tax in terms of Section 2(24), (28) (45) & (56). It has further been held that the Carbon Credits are on the account of savings of energy consumption and not on business. Even while rendering this judgment, the Jaipur Tribunal has discussed the provisions of 115BBG and, thus, since as on the day also, RECs/ESCs are not part of Section 2(24) and, hence, it is a capital receipt. It has been stated that activity of RECs/ESCs do not bear the character of income u/s 2(24) obtaining RECs/ESCs is a and are not covered u/s 115BBG of the Act as there is a systematic activity which requires mention of only Carbon Credits and, even, the latest series of action and they are not judgment of the Jaipur Bench of the Tribunal in the case windfall and, therefore, they have of Ginni Global Pvt. Ltd. in clarifies an essential role to play in the the issues along with the other judgments which are manner the business is carried being relied upon in the judgment set. out. It has been stated by the DRP that This finding of the Ld. DRP is against the numerous the benefit or perquisite or credit judgments as being relied upon in the judgment set and is generated from business and also in the amended Section 115BBG only Carbon Credit the same would be business have been covered and not the RECs/ESCs. income and is taxable.

15. We rely on the above judgments as cited above and also even after the amendment u/s 115BBG, the RECs/ESCs have not been included either in this section or in Section 2(24) of the Act and this issue has been elaborately discussed in the judgment of the Rajasthan High Court and of Hyderabad Bench of ITAT as cited above. Thus, the DRP has erred in not considering the bonafide submissions of the assessee and even it may be stated that for the AY 2017-18, the assessment of the company was made u/s 143(3) vide order dated 29.03.2022,as per the copy of the order attached in the paper book page 228 to 259 wherein, the receipts on account of the RECs/ESCs etc. were held to be capital receipt and similar submissions were made before the AO NFAC and point wise rebuttal was given in a page 249 to 253 and the returned income of the assessee was accepted. [Judgments on the issue that carbon credits are capital receipts upto AY 2017-18 are attached in the Indexed Judgment Set] 16. It is also submitted herewith that consistency has to be maintained in the Income Tax Proceedings also as per the following judgments: a. CIT Vs/ DalmiaDadri Cement Ltd. (1970) 77 ITR 410 (P&H) “Held also, that though as a general rule the principle of res judicata is not applicable to decisions of income tax authorities and an assessment for a particular year is final and conclusive between the parties only in relation to the assessment for that year and the decisions given in an assessment for an earlier year are not binding either on the assessee or the department in a subsequent year, this rule is subject to limitations, for there should be finality and certainty in all litigations including litigation arising out of the Income Tax Act and an earlier decision on the same question cannot be reopened.”

8.1.1. Ambika Cotton Mills Ltd.v.Deputy Commissioner of Income-tax, [2013] 40 taxmann.com 171 (Chennai - Trib.)

“15. This leaves us with the issue regarding addition of Rs. 15,51,913. Undisputedly, the only strife between the parties is that per assessee it is liable to be taxed in the assessment year 2010-11 which is opposed by the Revenue who states that since it is a case of mercantile system of accounting, the amount has to be taxed in the impugned assessment year. We notice and even the Assessing Officer holds that necessary intimation of credit in question was received on October 3, 2009, i.e., in the previous year relevant to the succeeding assessment year 2010-11. The assessee also submits that it had included the amount as income for the purpose of assessment in the next assessment year instead of impugned assessment year. Faced with this situation and without going into merits of legality of the claim in hand, we deem it appropriate to observe that in case the Assessing Officer has already treated the amount as income in the assessment year 2010-11, the addition in question would stand deleted in favour of the assessee.

8.1.2. Commissioner of Income-tax – IV v. My Home Power Ltd, [2014] 46 taxmann.com 314 (AndhraPradesh): - “3. 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 of 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.”

8.1.3. Assistant Commissioner of Income Taxv.Ginni Global (P.) Ltd. [2019] 109 taxmann.com 333 (Jaipur - Trib.) “Thus, the income by way of transfer of carbon credit has been given a special treatment as chargeable to tax @ 10% and not as part of the normal business income of the assessee. The said amendment is prospective in nature and therefore, cannot be applied to the assessment years under consideration. In view of the above discussion as well as fact and circumstances of the case, we do not find any error or illegality in the impugned order of the ld. CIT(A) qua this issue” 8.1.4. Commissioner of Income-taxv.Maheshwari Devi Jute Mills Ltd, [1965] 57ITR36 (SC) :Our attention was invited to a judgment of the Allahabad High Court in Maheshwari Devi Jute Mills v. Commissioner of Income-tax IT Miscellaneous Case No. 177of 1960, decided on September 13, 1962, in which a Division Bench of the Allahabad High Court answered a similar question relating to taxability of payments received for sale of "loom-hours" by the respondent in an assessment year with which we are not concerned in these appeals. The court in that case ignoring the view in the judgments under appeal held that "loom-hours" did not form the fixed profit-making structure of the respondent and it was not correct to say that the capital structure of the business was 220 looms multiplied by the number of hours per week for which the machinery was entitled to work. The "loom-hours" had in the view of the court nothing to do with the capital structure of the business and there was nothing to show that the defect in the preparatory section which rendered the "loom-hours" un-utilisable was permanent. It was always open to the respondent to acquire the necessary yarn from outside and thereby utilise the remaining quota of "loom-hours" in manufacturing jute, and if the respondent preferred not to procure yarn and chose to sell the surplus "loom-hours" and thus ensure profit for itself without incurring any risk, the receipt by disposal of a commercial asset was profit of the business irrespective of the manner in which that asset was exploited by the owner of the business. In the view of the High Court the respondent was entitled to exploit the asset to its best advantage: it may do so either by utilising it personally or by letting it out to somebody else, and the sale of a part of its quota of "loom-hours" amounted to exploitation of its capital asset and the receipt obtained therefrom was income. We are unable to agree with this view. The surplus "loom-hours" were disposed of and no interest remained therein with the respondent: there was no exploitation of the "loom-hours" by permitting user while retaining ownership. Receipt by sale of "loom-hours" must therefore be regarded in this case as a capital receipt and not income. In our judgment the High Court was right in holding that the receipts from sale of "loom-hours" were in the nature of capital receipts and were not taxable. The appeals fail and are dismissed with costs.”(Emphasis supplied)

8.2. Relinace is placed on judgments related amendment of claim of deduction during assessment proceeding: - 8.2.1. Goetze (India) Ltd. v. Commissioner of Income-tax, [2006] 157Taxman1 (SC).

4. The decision in question is that the power of the Tribunal under section 254 of the Income-tax Act, 1961, is to entertain for the first time a point of law provided the fact on the basis of which the issue of law can be raised before the Tribunal. The decision does not in any way relate to the power of the Assessing Officer to entertain a claim for deduction otherwise than by filing a revised return. In the circumstances of the case, we dismiss the civil appeal. However, we make it clear that the issue in this case is limited to the power of the assessing authority and does not impinge on the power of the Income-tax Appellate Tribunal under section 254 of the Income-tax Act, 1961. There shall be no order as to costs.

8.2.2. JSW Steel Ltd.v.Assistant Commissioner of Income-tax, Circle 11(5), Bangalore, [2017] 82 taxmann.com 210 (Mumbai - Trib.) “23. From the perusal of aforesaid decisions, at the outset, it may appear that on similar nature of issues there are divergent views of various benches of the Tribunal, however, one common point/ratio permeating through all the decisions, which can be deduced by us is that, if an assessee company is in receipt of a 'capital receipt' which is not chargeable to tax at all, that is, it does not fall within any of the charging section or can be classified under any heads of income under the Income Tax Act, then same cannot be treated as part of net profit as per Profit & Loss account or reckoned as 'working result' of the company of the relevant previous year and consequently, cannot be held to be taxable as 'book profit' under MAT in terms of section 115JB. Accordingly, our conclusion remains the same that, the capital surplus on account of waiver of dues neither is nether taxable nor can be included in computation of book profit u/s 115JB.”

8.2.3. Principal Commissioner of Income-tax, Central-2, Kolkatav.Ankit Metal & Power Ltd, [2019] 109 taxmann.com 93 (Calcutta) “28. The third issue involve in the instant appeal which requires adjudication is whether the action of Tribunal entertaining / allowing the claim which was made by the assessee before the Assessing Officer by filing a revised computation instead of filing a revised return since the time to file the revised return was lapsed, for claiming to treat the incentive subsidies in question as capital receipts instead of revenue receipts as claimed in original return. The Assessing Officer had denied this claim. Revenue has attacked the order of the tribunal by relying on the decision in the case of Goetze (India) Ltd. (supra).

Ground No. 3 9. Ground No. 3, not pressed. Ground Nos. 4 & 5

“18. Addition of Rs. 4,57,32,318/- on account of alleged bogus and ingenuine expenditure Facts • As stated above the assessee is a public company engaged in the manufacturing of writing and printing paper having its factory premises in village Rupana, situated in District of Sri. Muktsar Sahib [Punjab] which is a rural area.

• The turn over of the assessee company is in the range of 622 Crores in FY 2017-18 relevant to AY 2018-19 and for the purpose of arranging orders for sale of writing and printing paper, the assessee has engaged the services of agents to procure the orders for which the commission is paid.[P&L Account/ balance sheet on PB-6A-6D]

• This is a permanent trade practice of the assessee company and commission is being paid from year to year and all the cases of assessee company has been assessed u/s 143(3) of the Act and no adverse inference has been drawn by the department in any of the assessment years prior to AY 2018- 19.

• It is matter of record that no query had been raised by the AO NFAC, relating to the payment of commission by the assessee, during the course of faceless assessment proceedings which culminated in Draft Assessment Order dated 28.09.2021.[Draft Assessment Order on PB-17-22]

• It is also a matter of record that the first notice u/s 148A(b) of the Act was issued by the Jurisdictional AO [DCIT Circle-1, Bathinda] on 24.03.2022, on the basis of information flagged on the insight portal of the Income Tax Department,& in continuation of the same notices u/s 148A(b) were also issued on 01.04.2022/05.04.2022 &07.04.2022 and the last reply was filed before the Jurisdictional AO [DCIT Circle-1, Bathinda] on 7-4- 2022.[Notice u/s 148A(b) & replies are on PB-167-227]

Crux of the matter raised by the AO in notice u/s 148A(b) of the Act

• That as per information flagged on the insight portal of the Income Tax department as per report uploaded by ITO (Inv.) (OSD-1), Unit-8, New Delhi. The assessee had credited an amount of Rs.4,57,32,318/- in the account of Rolmex International Prop. Jaswant Singh & he is a non-filer.

• According to the department since M/s Rolmex International is a bogus entity the transactions entered there in were bogus and in-genuine.

• The information was confronted to the assessee vide notice u/s 148A(b) dated 24.03.2022 & in response to the same the assessee submitted the reply that no payment had been made to Rolmex International.

• Further enquiries by the Income Tax Department were made & the amount credited in the account of Rolmex International with Union Bank of India & transferred from the account of the assessee was brought to the notice of the assessee.

• The assessee further explained before the AO during the course of proceedings u/s 148A that the payments were made by the assessee to M/s

Zylo International against the payment of commission & the invoices raised by the entity/bank vouchers for payment/bank statement of PNB/ledger account of the entity in the books of the assesseealongwith Form 16A issued to the above stated entity along with confirmation of Zylo International & ledger account were placed on record during the course of proceedings u/s 148.

• The Jurisdictional AO, without making any independent inquiry, shared the information with the DRP vide letter dated 12.04.2022 but the DRP issued the SCN for enhancement, through e-mail, for the first time on 27th June, 2022 and the assessee was allowed time up to 28.06.2022 to respond to the sameand The order making enhancement was passed by the DRP on 29.06.2022.”

In a recent judgement, it was held that the powers of DRP is restricted only to the issues raised in the draft assessment order and therefore it cannot enhance the variation proposed in the order as a result of any new issue which comes to the notice of the panel during the course of proceedings before it. This is not in accordance with the legislative intent. It is accordingly proposed to insert an Explanation in the provisions of section 144C to clarify that the power of the DRP to enhance the variation shall include and shall always be deemed to have included the power to consider any matter arising out of the assessment proceedings relating to the draft assessment order. This power to consider any issue would be irrespective of the fact whether such matter was raised by the eligible assessee or not. This amendment will be effective retrospectively from the 1st day of April, 2009 and will accordingly apply to assessment year 2009-10 and subsequent assessment years.”

“Section 251(1) In disposing of an appeal [Commissions (Appeals)] shall have the following powers- (a) in an appeal against an order of assessment, he may confirm, reduce, enhance or annul the assessment”

12.1. The ld. AR respectfully relied on the caseSh. Jagdish Narayan Sharma vs. ITO in [Jaipur Bench] “48. The principle emerging from various pronouncements of the Supreme Court, Union Tyres observes, is that the first Appellate Authority is invested with very wide powers under Section 251(1)(a) of the Act and once an assessment order is brought before the authority, his competence is not restricted to examining only those aspects of the assessment about which the assessee makes a grievance and ranges over the whole assessment to correct the Assessing Officer not only regarding a matter raised by the assessee in appeal but also regarding any other matter considered by the Assessing Officer and determined in assessment.

12.3. The ld AR argued that the ld. AO should not take any decision under surmises and conjectures. Mr. Sehgal, ld. AR relied on the orders which are reproduced as below. 12.3.1. Mobile Communication (India) (P.) Ltd.v.Deputy Commissioner of Income-tax, Circle 5(1), New Delhi, [2010] 125ITD309 (DELHI) “10.2 The learned Commissioner of Income-tax (Appeals) has also placed reliance on the judgment in the case of Lachminarayan Madan Lal v. CIT [1972] 86 ITR 439 (SC). As regards the former judgment, it will be seen that the Hon’ble Apex Court held that claim of expenditure had to be tested on the facts of the case. There is no dispute to the above proposition and since on the facts of the case, it will be seen that expenditure is duly supported by necessary evidence, the same is eligible claim of deduction. So far as the case of Lachminarayan Madan Lal (supra), it is seen that, it was noted that mere existence of an agreement would not be sufficient for allowability of claim of commission. This proposition is undisputed and in any case, however, cannot be applied to the facts of the instant case. In the instant case, claim of the appellant is not based on the solely agreement but based on the fact that payees have duly confirmed the rendering of services. Also other facts such as details of the parties for whom services have been rendered, payment of service tax and payment by account payee cheques and declaration for such sum as income by payees supports the claim of the appellant that services have been duly rendered by payees, the same is duly eligible for deduction. As regards the judgment in the case of Modi Industries Ltd. v. CIT [1993] 200 ITR 3291 (Delhi), the same is wholly inapplicable as that was a case where the assessee has claimed deduction in respect of commission paid to S.E. Corporation on account of their services. In that case, it was found that Corporation had not employed any person who was shown to possess the necessary experience and qualification that it had no godown of its own and it used to draw the goods from the sales office of the assessee and that the Corporation did not have the physical resources necessary to have carried out its duties. In the instant case, there is neither any evidence to that effect and, nor any material to support such a hypothesis. On the contrary, it is a case where summons were not issued to such parties and in such circumstances considering the evidence on record, it is incorrect to suggest that, services have not been rendered. Hence, such judgment too has no application to the facts of the present case.”

12.3.2. Umacharan Shaw & Bros.v.Commissioner of Income-tax, [1959] 37ITR271 (SC) “The Department contends that one of the unusual features was that though the balances of the partners were fluctuating as their drawings were made, the profits continued to be divided equally. This is no doubt an unusual feature, but it depends upon how the drawings were considered by others. There was an arrangement in the deed itself for such drawings, and looking at the circumstances of the family the drawings during a year could not be said to be too extensive as others had withdrawn large sums also in their turn. Taking into consideration the entire circumstances of the case, we are satisfied that there was no material on which the Income-tax Officer could come to the conclusion that the firm was not genuine. There are many surmises and conjectures, and the conclusion is the result of suspicion which cannot take the place of proof in these matters.”

Circle-1, Bhatinda with Hon’ble DRP that as per report uploaded by the ITO (Inv.) (OSD-1), Unit-8, New Delhi on Insight Portal under high Risk/VRU cases assessee has credited an amount of Rs. 4,57,32,318/- in the account Rolmex International (Prop. Shri Jaswant Singh - PAN- HZMPS8162P). As per the said report Rolmex International is a Bogus entity and transactions entered therein are bogus and non-genuine in nature. Assessee has objected before the DRP on the issue of power of DRP for enhancement by the DRP. Hon'bie DRP has dealt with this objection as well as issue of Rs 4,57,32,318/- credited to the account of M/s. Rolmex International in detail in Para 3.8 and 3.9 of the Hon’ble DRP’s order dated 29.06.2022. After considering all the facts and materials available on record, Hon’ble DRP in Para 3.9.7 of the order dated 29.06.2022 has directed the AO to make an addition of Rs. 4 ,57,32,318/- treating the entire transaction as bogus. The direction of the Hon. DRP is reproduced as under:

3.9.7 The assessee, inter alia contended that the above stated payments have been made to M/s Zylo International, whose ledger account in the books of the assessee was filed to evidence the transaction. Since the proceeding for AY 2018-19 was pending before this Panel, the AO forwarded this information to this Panel which was confronted to the assessee. The assessee has merely reiterated the submission made before the AO. However, it is noticed from the copies of bank account wo, 171911100004049 is not in the name of Zylo International but in the name of Rolmex International. Thus, unilateral copies, of ledger account do not negate ar dilute the- evidentiary value of the bank statement and the information received. It is clear that thesetransactions are made to Rolmex International from the account of the assessee through RTGS. Therefore, there remains no doubt that the payment has been made to Rolmex international whose alleged prop, Sh. Jaswant Singh Is a labourer and man of no means. In that view of the matter, the Panel concurs with the view of the AO that the aforesaid transactions are entered by the assessee company are Rolmex International, and not with Zylo International The®, the invoices filed by the assessee in the name of Zylo International and crediting the payments in die name of Rolmex international buttress the contention of the AO that these transactions entered by the assessee company are bogus and that bills have been issued in the name of one concern and the amount has been audaciously credited into the bank accounts of another concern through RTGS. The Panel accordingly directs the AO to make an addition of Rs, 4,57,32,31.8/-, treating the entire transaction as bogus.”

15..1. CARBON CREDITS vs. RENEWABLE ENERGY SOURCESVs. ESCERTS

That in the present era global warming and environmental concerns are on the mind of everybody and all the developed/underdeveloped countries are having their meetings regularly to devise new modes to reduce the emission of greenhouse gases i.e. Carbon dioxide/Methane etc. to impede global warming because the emission of excessive greenhouse gases primary polluter of environment.

15.2. Common Feature [Credit for reducing carbon emission or greenhouse effect]

The common features of Carbon Credits/ RECs/ ESCERTS is that these are the incentives given to reduce the Carbon footprints i.e. emission of Greenhouse gasses such as carbon dioxide/ methane etc. and the basics of all three of them and the difference are as under: -

(a) Basics of Carbon Credits

As stated above, the emission of greenhouse gases/Carbon which primarily comprises of Carbon dioxide, Methane, Nitrous Oxide and Fluorinated gases, are a primary polluter of the environment.

(i) The carbon credits are of two types. The first type of carbon credits is validated by united nation Framework on Climate Change under Kyoto Protocol and are taxable u/s 115BBG of the Act at special rate.

(ii) That under the Kyoto Protocol to the United Nations framework convention on climate change, it was mutually agreed by the participant counties to reduce emission of Green House Gases/ Carbon foot print the credit is given to the assessee reducing such emissions under the Kyoto Protocol and because of international understanding.

(iii) The second type of carbon credits are of voluntary nature & are regulated by independent body Verra which was founded in 2007 by environmental and business leaders who saw the need for greater quality assurance in voluntary carbon markets.

(iv) The assessee company is dealing in a second type of carbon credits which are of voluntary nature and are not regulated by United Nations

Framework Convention on climate change.

15.3. Basics of Renewable Energy Certificates

Another way to help to reduce carbon footprints has been devised by giving credit to units generating electricity from biofuels [agriculture residue i.e. rice husk and wheat straw] as compared to fossil fuel [Diesel/ Coal] and it is a mechanism in giving incentive to the producers of electricity from Renewable Energy Sources.

(i) The regulation has been put in place by the Central Electricity Commission [CERC] and the Renewable Energy Certificates are issued under the rules and regulation framed by a regulatory authority. The REC will be exchanged only in the Power Exchanges approved by CERC within the bank of a floor price and forbearance (Ceiling) price to be determined by CERC from time to time.

15.4. Basics of ESCERTs

The Perform Achieve and Trade (PAT) is a market-based mechanism to reduce the specific energy consumption in energy intensive industries. This is facilitated through the trading of ESCERTs which are issued to those plants who have overachieved their targets. Those plants who were under achievers of their targets are entitled to purchase ESCERTsfor the trading of ESCERTs, Central Electricity Regulatory Commission (CERC) is the Market Regulator and Bureau of Energy Efficiency is the Administrator.

15.5. Common Features: For treating them as capital receipts not liable to tax a) That all the above stated three modes of incentives are in the nature of an entitlement received to improve word atmosphere reducing Carbon/ Heat and gases emissions and entitlement earned can, at best, be recorded as ‘capital receipt’ and cannot be taxed as the ‘revenue receipt’. b) The credits in all the three modes of reduction of ‘carbon footprint’ are not generated or created due to carrying on business to this accrued due to concern of the word to improve emission of ‘greenhouse gases’ which are primary polluters of environment. Thus, the amount received for ‘Carbon Credits’ has no element for profit and gain and it is not subjected to tax under any head of income and it is not liable for tax in terms of section 2(24),28,45 & 56 of the Income Tax Act, 1961. [The taxability of Carbon Credits stands changed w.e.f. AY 2018-19] c) Further the credits under all the above stated modes of reduction of carbon footprints cannot be considered as by-products because credit is given to the assessee to help the reduction in emission of greenhouse gases and the assessee, who has surplus under any of the three schemes can sell them to another assessee. d) Moreover, transferable credits of all the three modes of incentive does not result into and are not incidence of one’s business and these are credit for reducing emission.The person having credits under any of the above stated schemes get benefited by selling the same to persons who needs to offset carbon footprint because of one’s negative points under any of the modes of incentives. e) The amount is not received, in any of the modes of incentive, by producing or selling any product, by-product or rendering any services for carrying on the business and the credit under any of the three modes is entitlement or accretion of capital and hence income earned on sales of these is a capital receipt. f) That credit under any above said modes of incentive is not an off shoot of business, but it is generated due to environmental concerns and no asset is generated in the course ofbusiness, but it is generated due to environmental concern and the credit for reducing carbon emission or greenhouse effect can be transferred to any other party to reduce carbon emission.

16. The assessee claimed the transfer value of REC/ESCs amounting to Rs.17,77,26000/-in return under section 1115BBG and paid tax. During the time of assessment, the assessee amended the claim and treated the income as capital receipt. We relied on the orders My Home Power Ltd,(supra)andMaheshwari Devi Jute Mills Ltd, (supra)the income is offshoot from environmental concern not from offshoot of business concern. The nature is fully related to environmental health. We find that said income is capital in nature and not liable to tax under business income. 16.1. The next grievance is related the amendment of claim in assessment stage. The transfer value of REC/ESCs amounting to Rs.17,77,26000/- was duly claimed as capital receipt in assessment stage. We respectfully relied on the order of Hon’ble Apex Court in the case of Goetze (India) Ltd&the order of the Hon’ble Calcutta High Court in the case of Ankit Metal & Power Ltd. Both theorders have not impinged the power of ITAT u/s 254 to allow the claim duly amended by assessee after filing the return. Accordingly, the revised claim made by the assessee during the time of assessment is duly accepted. We set aside the order of ld. CIT(A) and restore the claim of assessee. 16.2. The commission paid by the assessee amount to Rs.4,57,332,318/- was treated as bogus and added back U/s 69C. The addition was cropped up by the recommendation of the ld. DRP.The ld. DRP issued the SCN for enhancement, through e-mail, for the first time on 27th June, 2022 and the assessee was allowed time up to 28.06.2022 to respond to the same and the order making enhancement was passed by the DRP on 29.06.2022. The grievance of the assessee is that the ld. DRP has acted beyond jurisdiction U/s 144C(8) of the Act. The ld. AR placed the explanatory note of the Finance Bill 2021.After submission of requisite documents as evidence of transaction, the ld. DRP had not considered the same. Considering the submission of assessee the Tax Invoice, transaction through bank account and the TDS certificate are duly placed before the bench as proof of transaction with M/s Zylo International. The ld. DR has not made any objection about the assessee’s submission and not able to submit any contrary judgment against the assessee. It is pertinent to mention the revenue was not able to submit any transaction with M/s Rolmex International Prop. Jaswant Singhwith the assessee. The addition cannot be on basis of surmises and conjectures. We respectfully relied on the order of Hon’ble Apex Court Umacharan Shaw & Bros(supra). In our considered view the addition amount to Rs. 4,57,332,318/- is quashed.