2014 (3) TMI 428 - AT - Income Tax

Nature of receipt - Whether capital or revenue - Clean development mechanism by realizing carbon credit Held that - The decision in My Home Power Ltd. Versus Deputy Commissioner of Income-tax, Central Circle - 7 2012 (11) TMI 288 - ITAT HYDERABAD followed - the consideration received on account of carbon credits cannot be considered as income as taxable in the assessment year under consideration - 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 is generated due to environmental concerns - Credit for reducing carbon emission or greenhouse effect can 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. Self- generated Certified Emission Reductions (CERs) - CERs are inventories of the generating entities as they are generated and held for the purpose of sale in ordinary course - Since CERs are recognised as inventories, the generating assessee should apply AS-9 to recognise revenue in respect of sale of CERs thus, the sale of carbon credits is to be considered as capital receipt the CIT(A) has erred in confirming addition made by the Assessing Officer holding that the realization of carbon credit in question by the assessee gives rise to a revenue receipt Decided in favour of Assessee. Delayed payment of TDS Interest on TDS Held that - The sole reason given by the authorities below is that before making the addition, the party at whose instance the assessee had stated to have paid the amount did not support its plea and the amount had been written off as sundry expenses thus, there is no reason to delete the addition made Decided against Assessee. TNEB interest for security deposit Held that - The AO holds that necessary intimation of credit in question was received on 03.10.2009, i.e. in the previous year relevant to the succeeding assessment year 2010-11 - The assessee also submits that it had included the amount as income for the purpose of assessment in the next assessment year instead of impugned assessment year it would be appropriate to observe that in case the Assessing Officer has already treated the amount as income in the assessment year 2010-11, the addition in question would stand deleted in favour of the assessee.

Summary

Issues:
1. Nature of receipt - capital or revenue
2. Addition of Rs. 89,690
3. Addition of Rs. 15,51,913

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Nature of receipt - capital or revenue:
The appeal was against the order of the Commissioner of Income Tax confirming additions made in the assessment order for various amounts claimed as capital receipt re Clean Development Mechanism (CDM) by realizing carbon credit, delayed payment of TDS, interest on TDS, and TNEB interest for security deposit. The assessee argued that the CIT(A) erred in confirming the additions and relied on a case law for support. The Revenue opposed the appeal and supported the CIT(A)'s order. The Assessing Officer considered the receipts as revenue in nature, rejecting the assessee's explanations. However, the ITAT Chennai referred to a judgment by ITAT Hyderabad, which held that carbon credits are a capital receipt and not taxable as revenue. Consequently, the addition related to carbon credits was deleted.

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Addition of Rs. 89,690:
The addition of Rs. 89,690 was contested by the assessee, but the authorities upheld it due to lack of supporting evidence from the party at whose instance the amount was paid. The amount was written off as sundry expenses, leading to the conclusion that the addition should not be deleted. Therefore, the ITAT Chennai decided not to delete this addition.

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Addition of Rs. 15,51,913:
The dispute regarding the addition of Rs. 15,51,913 was centered on the assessment year for taxation. The assessee argued that it should be taxed in the subsequent assessment year, while the Revenue insisted on taxing it in the impugned assessment year due to the mercantile system of accounting. The Assessing Officer received intimation of the credit in the relevant previous year for the subsequent assessment year. The assessee included the amount as income for the next assessment year. The ITAT Chennai observed that if the Assessing Officer had already treated the amount as income in the subsequent assessment year, the addition in question would be deleted in favor of the assessee. Consequently, the appeal was partly allowed.

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