2022 (3) TMI 653 - AT - Income Tax

Tribunal Rules in Favor of Assessee on Carbon Credit Tax Deduction

Sri Saravana Mills Private Limited, (Formerly known as Sri Saravana Spinning Mills Private Limited) Versus The Deputy Commissioner of Income Tax, Circle – 1, Dindigul, Tamil Nadu

The Tribunal allowed the appeal of the assessee concerning the deduction claimed on account of carbon credit receipts under Section 80IA of the Income Tax ... Deduction of carbon credit receipt u/s.80IA - Nature of receipt - revenue or capital receipt - HELD THAT:- We noted that the issue of carbon credits is fully covered by the decision of the Hon’ble Madras High Court in the case of S.P. Spinning Mills Private Limited Vs. Assistant Commissioner of Income Tax [2021 (1) TMI 1081 - MADRAS HIGH COURT]. Also see Commissioner of Income Tax Vs. Ambika Cotton Mills Limited [2021 (3) TMI 442 - MADRAS HIGH COURT] Thus we hold that the receipt on carbon credit is in the nature of capital receipt and no disallowance can be made. Thus, we reverse the orders of the lower authorities and allow the appeal of the Assessee on this issue. Issues Involved:1. Reopening of assessment beyond four years.2. Deduction claimed on account of carbon credit receipts under Section 80IA of the Income Tax Act, 1961.Detailed Analysis:1. Reopening of Assessment Beyond Four Years:The first issue raised by the assessee was against the order of the Commissioner of Income Tax (Appeals) confirming the action of the Assessing Officer in reopening the assessment. The reopening was beyond four years, and the original assessment was completed under Section 143(3) of the Income Tax Act, 1961. The assessee contended that there was no failure on their part to make a full and true disclosure for the relevant assessment year, which is a necessary condition for reopening the assessment beyond four years.2. Deduction on Account of Carbon Credit Receipts Under Section 80IA:The second issue pertained to the deduction claimed by the assessee on account of carbon credit receipts under Section 80IA of the Act. The Assessing Officer had treated the carbon credit receipts as revenue in nature and made an addition of Rs. 1,83,35,339/-. The Commissioner of Income Tax (Appeals) upheld this view, stating that the receipts from carbon credits are revenue receipts and not eligible for deduction under Section 80IA. The assessee appealed to the Tribunal against this decision.Tribunal's Findings:On Carbon Credit Receipts:The Tribunal noted that the issue of carbon credits is covered by the decision of the Hon’ble Madras High Court in the case of S.P. Spinning Mills Private Limited Vs. Assistant Commissioner of Income Tax. The Madras High Court, in paragraphs 28 and 29 of its judgment, had held that the receipt from the sale of carbon credits should be treated as a capital receipt and not taxable. The High Court referred to several decisions, including those of the Karnataka High Court and the Andhra Pradesh High Court, which upheld the view that carbon credit receipts are capital receipts.The Tribunal highlighted that the Andhra Pradesh High Court, in the case of CIT vs. My Home Power Ltd., had concluded that carbon credit is an offshoot of environmental concerns, not directly linked to the business activity, and thus should be treated as a capital receipt. This view was further supported by the Hon’ble Supreme Court in the case of Commissioner of Income Tax v. Maheshwari Devi Jute Mills Ltd., where it was held that the sale of loom-hours resulted in a capital receipt.The Tribunal also referred to the decision of the Hon’ble Division Bench of the Madras High Court in the case of PCIT vs. Arun Textiles Pvt. Ltd., which confirmed that the sale of carbon credits should be considered as a capital receipt and not taxable.Conclusion:Based on these precedents, the Tribunal held that the receipt from carbon credits is in the nature of a capital receipt and no disallowance can be made. Consequently, the orders of the lower authorities were reversed, and the appeal of the assessee on this issue was allowed.On Reopening of Assessment:Since the Tribunal decided the issue of carbon credits in favor of the assessee on merits, it refrained from adjudicating the jurisdictional issue of reopening the assessment. The issue was kept open and dismissed as academic.Final Order:The appeal of the assessee was allowed, and the order was pronounced in the court on 4th March 2022 at Chennai.