Fly Ash Sales Funds Restricted by Environmental Law: Delhi HC Rules Proceeds not Taxable as Profit [Read Order]

In a recent ruling, the Delhi High Court ruled that proceeds from the sale of fly ash by NTPC Vidyut Vyapar Nigam Ltd. (NVVNL), a wholly owned subsidiary of NTPC, were not taxable as income under the Income Tax Act. The court held that the funds were subject to statutory restrictions imposed by environmental regulations so they could not be treated as profit earned by the assessee.

The dispute arose when the Income Tax Department sought to tax Rs. 42.16 crore received from the sale of fly ash and cenosphere during the assessment year 2015-16. The Principal Commissioner of Income Tax had invoked Section 263 of the Income Tax Act to revise the original assessment order, claiming that NVVNL had understated its taxable income. NVVNL appealed the revision before the Income Tax Appellate Tribunal (ITAT), which ruled in its favour. The Revenue then challenged this decision in the Delhi High Court.

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The fly ash in question was provided to NVVNL by its parent company, NTPC, in compliance with the Ministry of Environment and Forests’ notification dated 03.11.2009, issued under the Environment (Protection) Act, 1986. The notification mandated that any proceeds from the sale of fly ash be maintained in a separate account and used exclusively for developing infrastructure or promoting fly ash utilization until 100% utilization targets were achieved.

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The company's counsel argued that it had deposited the entire proceeds in a designated “fly ash utilization fund” and used the amount strictly for the purposes mandated by the environmental notification. They further showed that all remaining funds were returned to NTPC and that none of the proceeds were credited to its profit and loss account or claimed as business income. The expenses debited from the fund such as employee costs and administrative expenses were not simultaneously claimed as deductions, so preventing double accounting.

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A division bench comprising Justice Vibhu Bakhru and Justice Tejas Karia observed that the company had adjusted its books to ensure that no such expenses were claimed as deductions elsewhere in its tax filings. The court also observed that the infrastructure created from the fund did not benefit the company directly and did not result in the acquisition of any assets by the company.

The court ruled that the company had not earned any assessable income from the sale of fly ash. The fly ash belonged to NTPC, and NVVNL had merely acted in a facilitative role in furtherance of government-mandated environmental policy. Citing parallels with a previous decision by the Madras High Court in New Horizon Sugar Mills Pvt. Ltd., where similar statutory reserve funds were excluded from income tax, the court upheld the ITAT’s order.

The appeal filed by the Revenue was dismissed, and the court held that no substantial question of law arose in the matter.

To Read the full text of the Order CLICK HERE

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