TaxTMI 
TaxTMI 
2019 (5) TMI 1540
X X X X Extracts X X X X
X X X X Extracts X X X X
.... under:- i) On the facts and circumstances of the case, the Ld. Commissioner of Income-Tax (Appeals) has erred in law and on facts in deleting addition of Rs. 4,42,72,610/- made by the Assessing Officer on account of receipts from carbon credits treating it as revenue receipt. ii) On the facts and circumstances of the case, the Ld. Commissioner of Income-Tax (Appeals) has erred in law and on facts in deleting the disallowance of Rs. 63,03,835/- u/s.14A r.w.r. 8D made by A.O. 3.1. Ground No.1 of Revenue's appeal concerns addition of Rs. 4,42,72,610/- on account of carbon credit receipts as revenue receipt. The issue is no longer res integra. Identical issue came up in assessee's own case for AY 2009-10 in ITA No.538/Ahd/2013 order dated 18/03/2016 wherein Coordinate Bench adjudicated the issue in the following terms: "9. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 10. We are alive to learned counsel's core contention that the issue about taxability of carbon credits is no longer res integra inasmuch as there are several decisions of this....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... by sinks of greenhouse gases in any sector of the economy" provided, inter alia, "any such project has the approval of the parties involved" and "any such project provides a reduction in emissions by sources, or an enhancement of removals by sinks, that is additional to any that would otherwise occur". The emission reduction units, which is what carbon credits or CERs (certified emission reductions) imply, can thus be acquired by the parties as well, as long as the project, in which these reductions are achieved, are approved by the parties to the protocol. Of course, this method of reduction of harmful gases is only supplemental method inasmuch as these countries cannot rely solely, or mainly, on so acquiring CERs from harmful emission reductions, but that is not really material in the present context because what we are dealing with is only acquiring the CERs from Indian entities. In effect, even if the emission for harmful gas is reduced in a developing country like India, as long as the project in which this reduction is achieved is approved by parties to the protocol and these emission reduction units are transferred by the Indian entity so reducing the emissions to the entit....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... permitted to generate, under the Kyoto protocol, and instead of reducing the harmful gas emission on his own or to supplement his efforts in reduction of these harmful emissions, he is buying credits for the reduction in harmful gases achieved by someone else in this developing country. 15. What does a person get by buying these carbon credits or CERs. For each carbon credit that a person in the developed world buys, he gets right to emit one more ton of CO2 (carbon dioxide) or CO2e (carbon dioxide equivalent gases). Nobody would normally buy these credits as a token of appreciation of the work done in the developing world. The purchase of these credits is driven by the business compulsions. The business compulsion is to meet the emission norms. These emission norms are met by reduction in emission on its own and also paying money to someone in the developing world to buy credit for what environmental friendly work has been done by that entity. All this is in no way reducing the emissions but merely redistributing the right to emit greenhouse gases. That is an act too unkind to the global concerns, and it ends up supporting the global warming rather than controlling it. T....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Power Ltd Vs DCIT [(2013) 63 SOT 227 (Hyd)], on this issue and all but one of these decisions are in favour of the assessee. The reasoning, which prevailed upon the bench to decide the matter in favour of the assessee, has been set out in the case of My Home Power Ltd (supra) as follows: .... Carbon credit is in the nature of "an entitlement" received to improve world atmosphere and environment reducing carbon, heat and gas emissions. The entitlement earned for carbon credits can, at best, be regarded as a capital receipt and cannot be taxed as a revenue receipt. It is not generated or created due to carrying on business but it is accrued due to "world concern". It has been made available assuming character of transferable right or entitlement only due to world concern. The source of carbon credit is world concern and environment. Due to that the assessee gets a privilege in the nature of transfer of carbon credits. Thus, the amount received for carbon credits has no element of profit or gain and it cannot be subjected to tax in any manner under any head of income. It is not liable for tax for the assessment year under consideration in terms of sections 2(24), 28, 45 and 5....
X X X X Extracts X X X X
X X X X Extracts X X X X
....an be transferred to another party in need of reduction of carbon emission. It does not increase profit in any manner and does not need any expenses. It is a nature of entitlement to reduce carbon emission, however, there is no cost of acquisition or cost of production to get this entitlement. Carbon credit is not in the nature of profit or in the nature of income. 19. In all other decisions on the same lines, as cited before us, there is a reference to the aforesaid observations of the Tribunal and there is hardly any independent analysis of the factual situation. The same reasoning has been adopted by the coordinate benches. . 20. With greatest respect to the coordinate benches, we have our serious reservations on this factual finding by the coordinate benches. As a matter of fact, the findings are given in only one decision, i.e. My Home Power (supra), and other decisions simply, and somewhat mechanically, follow the same. The factual findings in this case are not the same, as arrived by the coordinate bench in the case of My Home Power (supra), and we are, therefore, not inclined to be guided by this decision. However, for the reasons we will set out in a shor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hich requires careful planning and a series of actions before the CERs are obtained. For example, a project is to be first approved by the appropriate authorities which grant the CERs. The functioning of the business and the reductions in emissions are to be monitored by the appropriate authorities. The carbon credits are not a windfall which appear out of the blue. A series of conscious decisions are thus required to be taken by the assessee in order to get the CERs and the considerations of CERs essentially therefore have a role to play on the manner in which business is carried out. For example, when renewal energy is substituted for the fossil fuels, the expected gains of carbon credits are also factored. It is an integral part of the business activity, and an important consideration about the choice of courses available in carrying on the business, which results in CERs. The generation of CERs is thus on account of business activity. We, therefore, find ourselves in disagreement with the views of the coordinate bench to the effect that "Carbon credit is not an offshoot of business but an offshoot of environmental concerns. No asset is generated in the course of business but it....
X X X X Extracts X X X X
X X X X Extracts X X X X
....assessee is on account of exploitation of capital asset and it is capital receipt and not an income". These views do not appeal to us. Based on the material before us, we are unable to subscribe to the view that the CER receipts are capital receipts in nature. vi. As regards the judicial precedents in respect of taxability of subsidies received by the assessee, we are of the considered view that these judicial precedents are not relevant in the present context. The assessee has not received any monies, as a subsidy, from any government or public or multilateral forum. What he has received is an advantage incidental to carrying on business in an environmentally responsible manner. It is an offshoot of business. vii. As we have noted earlier in our order, sale of carbon credit does not do any good to the protection of environment or address global concerns about environment. Ironically, while these credits are generated by conducting business in an environmentally responsible manner, sale of these credits only result in higher emission of harmful gases in the countries signatory to the Kyoto Protocol. In a way, therefore, it is compensation for giving someone right ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re for the project being set up is generation of CERs, it cannot be said that CERs are not offshoot of business. 22. Clearly, therefore, the My Home Power decision will not hold good in the case of CERs under the CDM. 23. One of the glaring peculiarity of the carbon credits under the CDM is the sponsorship arrangement by the foreign entity and the fact that very setting up of the project is predominantly for the purpose of transferring resultant CERs to the foreign entity. The impact of this peculiarity on the nature of receipt is not at all examined. The coordinate benches have also proceeded on the basis that all carbon credits are to be given uniform treatment by treating them capital receipts which are not incidental to carrying on the business. This assumption cannot, in any case, hold good for carbon credits under the CDM since in these cases the unit generating these credits are set up for the predominant purpose of generating emission reductions through making modifications in the working mechanism. 24. As a co-ordinate bench of equal strength, and it is not open for us to disregard the views of the coordinate benches. While it is well settled in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e related period which was duly certified, that the assessee had entered into the contracts with sponsors, that the assessee itself had recognized the income, that the assessee was following mercantile system of accounting, that there was a reasonable certainty about its ultimate realization. The Assessing Officer was of the view that since "the receipt of the CERs was reasonably certain as the assessee-company has already completed the formalities for getting the UNFCC certification, as itself stated by it in its submission" and since "only residual -formalities were required to be completed", the CER income, as shown in the profit and loss account, should be brought to tax. Learned CIT(A) has not dealt with this aspect of the matter as the addition was deleted on merits. 27. In our considered view, however, that is not the correct approach. 28. The event triggering the taxation in respect of carbon credits is the sale of carbon credits. It is only when the carbon credits are transferred, and transferred for a valuable consideration, that an income accrues. The grant of carbon credits is not the event triggering the taxation of income. These carbon credits are of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ment years in which the CERs are actually sold. That would, according to the learned Departmental Representative, meet the ends of justice. We are, however, not persuaded by this plea. We do not think any such directions are at all needed. In addition to other course open to the Assessing Officer, Explanation 2 to Section 153(3) reasonably safeguard the legitimate interests of the revenue. We need not supplement the same. 31. It is in this backdrop and being aware of the fact that our views on whether or not the carbon credits, particularly under the CDM, are taxable will have limited and somewhat academic significance at this stage since the question of taxability will need to be finally adjudicated by us only in the year in which sale proceeds of the carbon credit are received by the assessee, we have not referred the matter for constitution of a special bench at this stage. That occasion will arise only in the year and in the case in which sale proceeds are received by the assessee. We are sure that as a final fact finding body, in an appropriate case, all these aspects of the nature and taxability of carbon credits, as have been briefly touched upon in this order, will....
X X X X Extracts X X X X
X X X X Extracts X X X X
....- During the year, the Company has received income from Carbon Credit of Rs. 441.69 crores. The said revenue is credited to Profit & Loss account and is included in Revenue from Operations. Please refer to Schedule 23 of the Annual accounts. We are enclosing herewith a detail note on this Carbon Credit. In the said note we have explained as under: GFL's Carbon Credit: • GFL operates a HCFC-22 plant at Village Ranjitnagar, District Panchmahals, Gujarat, India. During the production of HCFC-22, waste gas called HFC-23 is generated. • For each ton of HCFC-22 produced, approximately 2.9% of HFC- 23 is generated. HFC-23 is a greenhouse gas (GHG) which has Global Warming Potential of 11,700 of CO2 per ton of HFC-23. • GFL's CDM project consists of incinerating HFC-23 instead of allowing it to be vented into the atmosphere, and thereby reducing GHG emissions • CERs awarded = Tones of GHG reduced *GWP of GHG • In the year 2005-2006, Gujrat Fluorochemicals Limited (GFL) has implemented a project for greenhouse gas emission reduction by thermal oxidation of the waste gas HFC-23 in India under Clean Dev....
X X X X Extracts X X X X
X X X X Extracts X X X X
....'ble Andhra Pradesh High Court. We may state that such claim, that Carbon Credit revenue is Capital receipt not liable to tax, and hence should be excluded from total income, was made during the course of assessment proceedings for A.Y. 2010-11 and 2011-12 also. In the Assessment order, the AO has not accepted the said claim. The Company, has filed appeals for both the years before CIT(A). One of the grounds of appeal is regarding such claim. During the course of appellate proceedings for A.Y. 2010-11, the CIT(A) has called for the remand report from Assessing officer on the issue. A copy of the said remand report was provided to us and we were asked to make our submissions on the said remand report. We have made our detailed submission dated 02-01-2015 to the CIT(A). The copy of the said submission is enclosed for ready reference in which we have provided our replies to the AOs observations in the remand report and the entire issue is discussed in detail. We rely on the same. Therefore, in view of the above it is requested that at the time of assessment, carbon credit revenue of Rs. 441.69 crores credited in the profit and loss account, net of expenses, may p....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... as short term capital gain as has been held in the appellate order of AY 2010-11. Hence, this ground of appeal is dismissed" From CIT(A)order for AY2010-11 "11.1 In the present case too, the appellant had profit motive in the establishment of the CDM project. Hence it is held that it is carrying on the business of generation of CERS through this CDM project and accordingly, the revenue on account of sale of such CER. is taxable as profits and gains of business being carried on by the appellant. 11.2 Without prejudice to the finding given above that revenue earned from sale of carbon credits is taxable as income from the business Hi the hands of the appellant, even if it is treated as a capital receipt then also it will be taxable in the hands of the appellant as income from capital gain on account of transfer of CERs. This is due to the fact that in the case of the appellant, the cost of acquisition of CERS has already been determined. Thus, even if the appellant's contentions are accepted, it is to be held that these CERS are capital assets in the hands of the appellant and are having determined cost. Under such situation, the receipt received on ac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on'ble Gujarat High Court in the case of CIT Vs. Alembic Ltd. (supra). The question framed is as under: (4) Whether on facts and in the circumstances of the case and in law, the ITAT erred in treating the income from realisation of carbon credits as capital in nature, despite the fact that the realization from carbon credits has been treated by the assessee itself as revenue income and offered to tax?" 39. The question has been replied by the Hon'ble High Court is as under: "6. The last surviving question pertains to the treatment that the assessee's income from trading of carbon credits should be given. The Tribunal held that receipts should in the nature of capital receipts and therefore would not invite tax. This issue has been examined by two High Courts. The Karnataka High Court in the case of CIT Vs. Subhas Kabini Corporation Ltd., reported in (2016) 385 ITR 592 (Karn) and Andhra Pradesh High Court in the case of Commissioner of Income-tax Vs. My Home Power Limited reported in (2014) 365 ITR 82(A) have held that receipts of carbon credit are in the nature of revenue receipts. Following the decisions of said two High courts, this question is also not....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ital receipt. In order to bring clarity on the issue of taxation of income from transfer of carbon credits and to encourage measures to protect the environment, it is proposed to insert a new section 115BBG to provide that where the total income of the assessee includes any income from transfer of carbon credit, such income shall be taxable at the concessional rate often per cent (plus applicable surcharge and cess) on the gross amount of such income. No expenditure or allowance in respect of such income shall be allowed under the Act. This amendment will take effect from 1st April, 2018 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent years." 41. Thus, taking into consideration resolution of litigation on this issue by the Legislature itself, which had made provision for taxation of such receipts at the rate of 10% from the assessment year 2018-19 as well as authoritative pronouncements of Hon'ble jurisdictional High Court, we are of the view that receipts received by the assessee on sale of carbon credit are to be treated as capital receipts and not liable to tax. The ld.DRP has assigned one more reasons for not ent....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... have been made out of interest free funds, the nexus of these investments with the interest free funds was demonstrated, It was also explained that similar disallowances have been accepted in the past as well. The Assessing Officer accepted the assessee's explanation that no interest bearing funds are used in these investments, but proceeded with making a disallowance in respect of 0.5% of the average investments, which worked out to Rs. 68,45,112, under rule 8D r.w.s. 14A. Aggrieved, assessee carried the matter in appeal before the CIT(A) who reversed the action of the Assessing Officer by observing as follows: 6.2 It was intimated by appellant during the course of assessment proceedings that investments were made in earlier years in shares of subsidy companies and other companies. None of these shares were liquidated in the past 3 years. In such a situation, AO is not justified to conclude that the directors of the appellant company were involved in investment decisions and part of their remuneration needs to be disallowed. Before invoking the provisions of Rule 8D, AO has to give a finding that claim made by the appellant in the return of income is not correct. In this....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rned substantial exempt income of Rs. 3.32 crores. Moreover, there has been significant activity in the investment portfolio where old investments are liquidated and new investments are made. Making, managing and disposing off the investments require decision making, its accounting, tracking of the changes etc. Moreover, as per the Annual report of the company the directors of the company are being paid salary, commission on profits and other perquisites aggregating to Rs. 750 lacs (aprox.). As the decisions with regard to investments made by the company are important decisions the same are taken by the directors of the company and a part of their remuneration is relatable to these investments and the income derived therefrom. 12.8 In view of the discussion held above it is clear certain administrative, salary and other general expenses have been incurred in relation to the investments that result in income that does not form part of total income. Moreover, the assessee has not made disallowance under section 14A on any rational, logical or actual basis, but, the same has been disallowed on adhoc basis. 39. We have noted that Section 14A(2) categorically provides ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....and investment in new areas. No facts have been brought on record by AO which indicate that there were lot of movements in the investment activity requiring involvement of senior management personnel". We find that its not even in dispute that a part of expenses attributable to the work in connection with the investment are to be disallowed, as the assessee has on its own offered Rs. 30,000 for disallowance in this regard. The dispute is confined to the quantum of disallowance and the basis on which it is to be quantified. In the absence of any reasonable basis of disallowance offered by the assessee, and in the absence of the assessee even disclosing the basis on which disallowance is made, the Assessing Officer had invoked the rule 8D. We see no infirmity in this action. In view of these discussions, as also bearing in mind entirety of the case, we vacate the relief granted by the CIT(A) and restore the disallowance of Rs. 68,45,142 made by the Assessing Officer. 40. Ground no. 2 is thus allowed." 4.3. The issue has thus been decided in favour of the Revenue and against the Assessee by the Co-ordinate Bench. In the light of the view taken by the Coordinate Bench, we s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tain the claim of balance additional depreciation. The AO was of the view that additional depreciation can be allowed only in the year in which the assets are acquired and installed and not in the subsequent year. The AO has stated that the law does not contain any provision enabling the tax payer to claim the balance half entitlement in the subsequent years as there is no explicit provision entitling the assessee to claim the balance of the additional depreciation in subsequent year. The proviso to Section 32(1)(ii) has to be construed in a restrictive way and liberal interpretation of the same cannot be made. 7.2 Before me, the Appellant submitted that since no additional depreciation was claimed in the return of income, the AO could not have added the sum to the total income while passing the assessment order. In view of the same the very action of the AO in firstly making the addition without there being any claim in the return of income, and secondly, not allowing the legally valid claim made by way of a communication dated 17/3/2014 is erroneous. The appellant has made written submissions and challenged the addition/disallowance made on account of depreciation claime....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the Act, which reads as follows: "Provided further that where an asset referred to clause (i) or clause (ii) or clause (iia), as the case may be, is acquired by the assessee during the previous year and is put to use for the purpose of business or ; profession for a period of less than one hundred and eighty days in that previous year, the deduction under this sub-section in respect of such asset shall be restricted to fifty per cent of the amount calculated at the percentage prescribed for an asset under clause (i) or clause (iii) or clause (iia) as the case may be." 11. A bare reading of this section 32(l)(iia) clearly says that in case a new machinery or plant was acquired and installed after 31-03-2005 by an assessee, who is engaged in the business of manufacture or produce of article or thing, the, a sum equal to 20% of the actual cost of the machinery and plant shall be allowed as a deduction. It is not in dispute that the assessee has acquired and installed the machinery after 31-03-205. IT is also not in dispute that the assessee is engaged in the manufacture of article or thing. Therefore the assessee is eligible for additional depreciation which is equiv....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ncourage the industrialization and in view of the decision of Hon'ble Supreme Court in the case of Bajaj Temp Ltd. (supra), the provisions related to it have to be construed reasonably liberally and purposive to make the provision meaningful while granting the additional allowance. This additional benefit is to give impetus to industrialization and the basic intention and purpose of these provisions can be reasonably and liberally held that the assessee deserves to get the benefit in full when there is no restriction in the statute to deny the benefit of balance of 50% when the new machinery and plant were acquired and used for less than 1 80 i days. Onetime benefit extended to assessee has been earned in the year of acquisition of ne machinery and plant. It has been calculated @ 15% but restricted to 50% only on account of usage of these plant and machinery in the year of acquisition. In section 32(1)(iia), the expression used is "shall be allowed". Thus, the assessee had earned the benefit as soon as he had purchased the new machinery and plant in full but it is restricted to 50% in that particular year on account of period usages. Such restrictions cannot divest the statutor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....view of the second proviso to section 32(l)(ii) of the Act. Further, the balance 50% of additional depreciation on such plant and machinery has been claimed by the assessee company during the year under consideration i.e. the FY 2006-07 relevant to this assessment year 2007-08. A bare reading of clause (iia) of section 32(1) of the Act w.e.f. the AY 2006-07, provides for allowance of additional depreciation equal to 20% of actual cost of new plant and machinery acquired and installed after March, 31st 2005 by an assessee engaged in the business of manufacture or production of any article or thing. Such additional depreciation is to be allowed as deduction u/s. 32(l)(iia) of the Act but second proviso to section 32(l)(ii) restricts the allowance of depreciation at 50%, if the plant and machinery is acquired during the previous year is put to use for a period of less than 180 days in that previous year. The second proviso specifically makes a reference to an asset referred to in clause (iia) of the said section 32(1) of the Act. And it is because of the second proviso assessee claimed only 50%; additional depreciation for AY 2006-07 and accordingly, claimed the balance amount of addi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... depreciation claimed by assessee on the machinery installed in the second half of the previous year relevant to the A.Y. 2007-08. The assessee's contention was that he was eligible for additional depreciation @ 20 % on the plant and machinery purchased in the second half of the financial year 2006-07 but being used less than 180 days, only 10 % depreciation was allowed by A.O. The balance 10 % additional depreciation was carried forward in the year under appeal and claimed in the computation of income which was disallowed by A.O. on the ground that carried forward of such additional depreciation is inadmissible as per provisions of section 32(l)(iia). The Ld. CIT(A) has given relief to the assessee by following the decision of ITAT, Delhi in the case of DCIT vs. Cosmo Films Ltd (124 Taxman.com 189) wherein it has been held that the additional depreciation cannot be restricted to 50 % and it has to be allowed in succeeding years if it is not allowed full in the relevant year. For the sake of convenience the relevant portion of the order is as under: "17. We have heard both the sides on this issue. Section 32(1)(iia) inserted by Finance (No. 2) with effect from 1.4.2003....
X X X X Extracts X X X X
X X X X Extracts X X X X
....preciation or otherwise) in computing the total income under the head "Profit and gains of business or profession" of any one prevision year. Thus, the intension was not to deny the benefit to the assets who have acquired or instated new machinery or plant. The second proviso to section 32(l)(ii) restricts the allowances only to 50% where the assets have been acquired and part to use for a period less than 160 days in the year of acquisition. This restriction is only on the basis of period of use. There is no restriction, that balance of one time incentive in the form of additional sum of depreciation shall not be available in the subsequent year. Section 32(2) provides for a carry forward set up of unabsorbed depreciation. This additional benefit in the form of additional allowance u/s 32(l)(iia) is one time benefit to encourage the industrialization and in view of the decision of Hon'ble Supreme Court in the case of Bajaj Tempo vs. CIT,; cited supra, the provisions related to it have to be constructed reasonably, liberally and purposive to make the provision meaningful while granting the additional allowance. This additional benefit is to give impetus to industrializ....