2022 (7) TMI 620 - AT - Income Tax

Appellant wins appeal on Carbon Credit Income treatment as capital receipt, expenses remanded for re-examination

Essel Mining & Industries Limited Versus Dy. CIT, Central Circle-1 (4), Mumbai

The tribunal partially allowed the appellant's appeal, ruling that Carbon Credit Income should be treated as a capital receipt, not revenue income. The ... Disallowance of Common Expenses against deduction claimed under section 80IA - As per assessee Director’s remuneration and Auditor’s remuneration should be allocated proportionately as calculated by AO and Legal & Professional Expenses and Travelling Expenses are found to be acceptable as done by assessee - HELD THAT:- We have considered the order of AO, order of CIT (A) and submissions of assessee. We found force in the contention of assessee that earlier precedents settled in assessee’s own case needs to be examined and followed. Hence, on this issue, we restore the matter back to the file of the AO and the ground of appeal is partly allowed. Taxability of Carbon Credit received by assessee - Revenue or capital receipt - HELD THAT:- Following the order passed in case of My Home Power Ltd. [2014 (6) TMI 82 - ANDHRA PRADESH HIGH COURT] we are of the considered view that sale of Renewable Energy Certificate (Carbon Credit) of income received by the assessee is a capital receipt and could not be business receipt or income nor it is directly linked with the business of the assessee nor any asset is generated in the course of business but it is generated due to environmental concern. So the addition by the AO from the sale of Carbon Credit and confirmed by the ld. CIT(A) is not sustainable, hence, ordered to be deleted. Issues Involved:1. Disallowance of the claim of Carbon Credit Income as Capital Receipt.2. Disallowance of common expenses under Section 80IA.Issue-Wise Detailed Analysis:1. Disallowance of the claim of Carbon Credit Income as Capital Receipt:The appellant challenged the CIT(A)'s decision to treat Carbon Credit Income as revenue income under Section 28, amounting to Rs. 10,20,587/-. The tribunal considered the legislative resolution on this issue, noting that the Finance Act, 2017, introduced Section 115BBG effective from 01.04.2018, which taxes income from the transfer of carbon credits at a rate of 10%. However, this amendment is prospective and not applicable to the assessment year under consideration.The tribunal referred to the decision of the Co-ordinate Bench in the case of M/s Dawarkesh Sugar Industry Ltd., which followed the Andhra Pradesh High Court's ruling in My Home Power Ltd. The High Court held that Carbon Credit is not an offshoot of business but of environmental concerns, and no asset is generated in the course of business. Therefore, the income from the sale of Carbon Credits is a capital receipt, not a business receipt.The tribunal concluded that the sale of Renewable Energy Certificates (Carbon Credit) is a capital receipt and not directly linked with the business of the assessee. The addition of Rs. 10,20,587/- by the AO was not sustainable and was ordered to be deleted.2. Disallowance of common expenses under Section 80IA:The appellant contested the CIT(A)'s decision to uphold the disallowance of common expenses amounting to Rs. 59,27,000/-. The CIT(A) noted that the AO allocated additional traveling expenses to the 80IA units based on their turnover ratio, reducing the deduction under Section 80IA by Rs. 59,27,000/-.During the appellate proceedings, the assessee relied on previous decisions, including those of CIT(A)-6, Kolkata, and ITAT, which had accepted the allocation made by the assessee for legal, professional, and traveling expenses. However, the CIT(A) found that the merit of the issue was not examined in those decisions and upheld the AO's allocation.The tribunal considered the order of the AO, the CIT(A), and the submissions of the assessee. It found merit in the assessee's contention that earlier precedents in the assessee's own case should be examined and followed. Consequently, the tribunal restored the matter back to the AO for re-examination, allowing the ground of appeal partly.Conclusion:The tribunal allowed the appeal of the assessee partly for statistical purposes. The disallowance of Carbon Credit Income as revenue income was deleted, and the issue of disallowance of common expenses under Section 80IA was remanded back to the AO for re-examination. The order was pronounced in the open court on 27th June 2022.