2021 (10) TMI 416 - AT - Income Tax

Tribunal Rules Carbon Credit Sales Not Taxable, Allows Additional Depreciation

M/s. Damodar Jagannath Malpani Versus The Deputy Commissioner of Income Tax, Circle-3, Pune.

The Tribunal ruled in favor of the assessee, determining that income from the sale of Certified Emission Reduction (CER)/Carbon Credit should be treated ... Characterization of income - income on such sale of carbon credit - revenue or capital receipt - HELD THAT:- As decided in M/s. Dodson Lindblom Hydro Power Pvt. Ltd. [2019 (4) TMI 1034 - BOMBAY HIGH COURT] the said carbon credits is outside the scope of the chargeability of tax as the same constitutes “capital receipts'. Additional depreciation u/s 32 - Addition of 50% of the claim of additional depreciation made by the assessee firm in respect of the plant and machinery acquired and installed by it after 30th September, 2012 - Department‟s view was that this additional depreciation could be claimed only in the year of purchase and the same was not available in the subsequent year - HELD THAT:- Hon‟ble Karnataka High Court in the case of Rittal India Pvt. Ltd. [2016 (1) TMI 81 - KARNATAKA HIGH COURT] had given the right to the assessee to claim the remaining unclaimed 50% depreciation in the subsequent assessment year and at that time the proviso to section 32 was also not there but right now with the insertion of such proviso, this right has been statutorily recognized. That as regards, whether such proviso would apply to past periods or not, the judgment of the Hon‟ble Madras High Court (supra.) which is still operational and it has been held that the said proviso was only clarificatory in nature and would thus apply to pending cases covering past periods also. Thus, Grounds raised in appeal by the assessee are allowed. Issues Involved:1. Taxability of income from the sale of Certified Emission Reduction (CER)/Carbon Credit.2. Disallowance of additional depreciation on plant and machinery.Issue-wise Detailed Analysis:1. Taxability of Income from the Sale of Certified Emission Reduction (CER)/Carbon Credit:The primary issue in Grounds No. 1 to 4 was whether the income on the sale of CER/Carbon Credit should be treated as a capital receipt or a revenue receipt. The assessee argued that the income from the sale of CER/Carbon Credit was a capital receipt and thus not taxable. However, the Assessing Officer (AO) treated it as a business receipt and added it to the total income of the assessee.The CIT(A) upheld the AO's view, stating that the CERs were obtained in the course of the business activity and had a market value. Therefore, the income from the sale of CERs was considered a revenue receipt.During the hearing, the assessee's counsel referred to the judgment of the Hon'ble Jurisdictional High Court in the case of Pr. CIT Vs. M/s. Dodson Lindblom Hydro Power Pvt. Ltd., which held that the sale of carbon credit is a capital receipt and not liable for tax. This view was supported by several High Courts, including the Andhra Pradesh High Court in Commissioner of Income Tax v/s. My Home Power Ltd., the Karnataka High Court in Commissioner of Income Tax v/s. Subhash Kabini Power Corporation Ltd., and others.The Tribunal, following the consistent view of different High Courts and the decision of the Hon'ble Jurisdictional High Court, concluded that the income from the sale of CER/Carbon Credit should be treated as a capital receipt and thus not taxable. Therefore, Grounds No. 1 to 4 were allowed in favor of the assessee.2. Disallowance of Additional Depreciation on Plant and Machinery:Grounds No. 6 and 7 pertained to the disallowance of additional depreciation of Rs. 10,98,27,376/-, being 50% of the claim made by the assessee for plant and machinery acquired and installed after 30th September 2012. The AO disallowed the claim, stating that additional depreciation could only be claimed in the year of purchase and not in subsequent years.The CIT(A) upheld the AO's decision, citing that the proviso to Section 32 of the Income Tax Act, which allows for claiming the remaining 50% of additional depreciation in the subsequent year, was effective from 01.04.2016 and thus not applicable for the assessment year 2014-15.However, the assessee's counsel referred to the Hon'ble Jurisdictional High Court's decision in Pr. CIT Vs. M/s. Godrej Industries Ltd., which allowed the claim of additional depreciation in subsequent years for assets acquired and used for less than 180 days in the previous year. This view was supported by the Karnataka High Court in Commissioner of Income Tax v. Rittal India Pvt. Ltd., and the Madras High Court in Commissioner of Income Tax v. Shri T.P. Textiles Pvt. Ltd., which held that the amendment to Section 32 was clarificatory and thus applicable to pending cases covering past periods as well.The Tribunal, following the binding judgment of the Hon'ble Jurisdictional High Court and other High Courts, concluded that the assessee was entitled to claim the remaining 50% of additional depreciation in the subsequent year. Therefore, Grounds No. 6 and 7 were allowed in favor of the assessee.Conclusion:In summary, the Tribunal allowed Grounds No. 1 to 4 and Grounds No. 6 and 7 in favor of the assessee, treating the income from the sale of CER/Carbon Credit as a capital receipt and allowing the claim for additional depreciation in the subsequent year. The appeal of the assessee was partly allowed.