2018 (4) TMI 1776 - AT - Income Tax

Tribunal rules in favor of assessee on tax treatment of carbon credits

Malana Power Co. Ltd. Versus DCIT, Circle 16 (1), New Delhi And Vice-Versa., JCIT (OSD), ACIT

Malana Power Co. Ltd. Versus DCIT, Circle 16 (1), New Delhi And Vice-Versa., JCIT (OSD), ACIT - TMI Issues Involved:1. Nature of income from the sale of carbon credits.2. Applicability of Section 14A disallowance.3. Disallowance of common expenses.4. Exclusion of carbon credits from book profits under Section 115JB.Detailed Analysis:1. Nature of Income from the Sale of Carbon Credits:The primary issue was whether the income from the sale of carbon credits should be considered a capital receipt or business income. The assessee argued that the income from the sale of carbon credits should be treated as a capital receipt not liable to tax. The Tribunal noted that the issue was covered in favor of the assessee by the judgment of the Hon'ble Allahabad High Court in the case of Pr. Commissioner of Income Tax vs. L.H. Sugar Factory Pvt. Ltd., wherein it was held that income from the sale of carbon credits is capital in nature. The Tribunal also referenced ITAT Bangalore and Hyderabad Bench decisions which supported the view that carbon credit receipts are capital receipts. Consequently, the Tribunal held that the income from the sale of carbon credits is capital in nature and allowed the additional grounds raised by the assessee.2. Applicability of Section 14A Disallowance:The Tribunal examined the disallowance made under Section 14A of the Income Tax Act. The Ld. Commissioner of Income Tax (A) had deleted the disallowance on the grounds that the assessee had made investments in its subsidiary concerns using funds raised by issuing share capital and self-generated funds, not borrowed funds. The Tribunal upheld this finding, noting that no factual or legal infirmity was pointed out by the department. Therefore, the Tribunal dismissed the department's appeal on this issue for all assessment years involved.3. Disallowance of Common Expenses:The assessee challenged the partial upholding of the disallowance of common expenses by the Ld. Commissioner of Income Tax (A). The Tribunal noted that the Assessing Officer had disallowed 100% of the common expenses due to a lack of substantiation by the assessee. The Ld. Commissioner of Income Tax (A) had granted partial relief based on the previous year's order. The Tribunal found that the issue required a fresh examination as the lower authorities had made the disallowance on an estimate without a factual basis. Thus, the Tribunal restored the issue to the file of the Assessing Officer for a de novo adjudication.4. Exclusion of Carbon Credits from Book Profits Under Section 115JB:The assessee contended that the income from the sale of carbon credits should be excluded from the computation of book profits under Section 115JB. The Tribunal referred to the ITAT Jaipur Bench's decision in the case of Shree Cements Ltd., which held that capital receipts should not be included in the book profits for MAT purposes. The Tribunal concluded that since the income from the sale of carbon credits is a capital receipt, it should not be included in the book profits under Section 115JB. Accordingly, the Tribunal allowed the assessee's appeals for the assessment years 2010-11 and 2011-12 on this ground.Conclusion:The Tribunal's consolidated order allowed the assessee's appeals regarding the nature of income from the sale of carbon credits and the exclusion of such income from book profits under Section 115JB. The Tribunal dismissed the department's appeals concerning the disallowance under Section 14A and the partial relief granted for common expenses, except for the issue of common expenses, which was remanded for fresh examination.