2018 (4) TMI 1776 - AT - Income Tax

Claim of deduction u/s 80-IA in respect of income derived from sale of carbon credits - HELD THAT - We allow the additional grounds raised by the assessee and hold that the income from sale of carbon credits is capital in nature. Addition of 100% of the common expenses u/s 40A(2)(b) - HELD THAT - Assessing Officer, allowed relief to the assessee by following the order of his predecessor in the immediately preceding year wherein common expenses to the extent of ₹ 16,51,000/- had been allowed. Ld. Commissioner of Income Tax (A) also noted that the justification for increase in expenses could not be given by the assessee. Thus, it is seen that on the one hand, the assessee was not been able to substantiate the apportionment of common expenses and justify the increase in expenses and on the other hand, the lower authorities have also made the disallowance on an estimate without recording any finding of fact. Under the circumstances, it is our considered opinion that this issue should be examined afresh by the Assessing Officer. Addition u/s 14A - HELD THAT - As noted by CIT (A) that ₹ 26.31 cores have been invested out of self generated funds and further that all related documents, bank accounts were submitted and the trail of funds was established. Thereafter, the Ld. Commissioner of Income Tax (A) has followed the decision of his predecessor in the immediately preceding assessment year wherein it had been held that since no borrowed funds were utilized by the assessee for investment in its subsidiary concern, there was no question of incurring any expenditure on the same. Although the department has contested this action of the Ld. Commissioner of Income Tax (A), no factual or legal infirmity in this adjudication could be specifically pinpointed even during the course of proceedings before us. Therefore, on the facts of the case and in view of the factual findings recorded by the Ld. Commissioner of Income Tax (A), we find no reason to interfere with the adjudication on this issue. Accordingly, we dismiss ground no. 2 of department's appeal. MAT - Sale of carbon credits is to be excluded while computing book profits u/s 115JB - HELD THAT - It is settled law that the purpose and legislative intent behind introduction of provisions of section 115J/115JA/115JB was to take care of the phenomenon of prosperous zero tax companies which had continued but were paying no income tax even though they had profits and were declaring dividends. It was further sought that minimum corporate tax should be paid by these companies and accordingly MAT was introduced. However, it was never the intention of the legislature that any receipts which is not taxable per se within the tax provision or not reckoned as part of net profit as per the profit and loss account as Companies Act can be brought to tax as a book profit. Since income/profits from the sale of carbon credits is essentially in the nature of capital receipts, by no stretch of imagination can it be brought to tax under the provisions of minimum alternate tax u/s 115JB of the Act. Accordingly, we allow the grounds raised by the assessee in this regard in assessment years 2010-11 and 2011-12 Disallowance u/s 14A - HELD THAT - As per provisions of sub- section (1) of section 14A, it is clear that for the said section to apply, the precondition is that there should be an income which does not form part of the total income under the Income Tax Act. Since the assessee company did not have any exempt income under the Act, section 14A will not get attracted. Since exempt income is nil, section 14A will not apply and once section 14A does not apply, the question of application of Rule 8D also will not arise. The Ld. Sr. DR could not point out any factual or legal infirmity in the order of the Ld. Commissioner of Income Tax (A) on this issue although he has vehemently argued against the deletion of disallowance. Therefore, on facts, we find no reason to interfere with the findings of the Ld. Commissioner of Income Tax (A) with respect to ground raised by the department in its appeal for assessment year 2010-11 and the same are dismissed.

Issues Involved:
1. Nature of income from the sale of carbon credits.
2. Applicability of Section 14A disallowance.
3. Disallowance of common expenses.
4. Exclusion of carbon credits from book profits under Section 115JB.

Detailed Analysis:

1. Nature of Income from the Sale of Carbon Credits:
The primary issue was whether the income from the sale of carbon credits should be considered a capital receipt or business income. The assessee argued that the income from the sale of carbon credits should be treated as a capital receipt not liable to tax. The Tribunal noted that the issue was covered in favor of the assessee by the judgment of the Hon'ble Allahabad High Court in the case of Pr. Commissioner of Income Tax vs. L.H. Sugar Factory Pvt. Ltd., wherein it was held that income from the sale of carbon credits is capital in nature. The Tribunal also referenced ITAT Bangalore and Hyderabad Bench decisions which supported the view that carbon credit receipts are capital receipts. Consequently, the Tribunal held that the income from the sale of carbon credits is capital in nature and allowed the additional grounds raised by the assessee.

2. Applicability of Section 14A Disallowance:
The Tribunal examined the disallowance made under Section 14A of the Income Tax Act. The Ld. Commissioner of Income Tax (A) had deleted the disallowance on the grounds that the assessee had made investments in its subsidiary concerns using funds raised by issuing share capital and self-generated funds, not borrowed funds. The Tribunal upheld this finding, noting that no factual or legal infirmity was pointed out by the department. Therefore, the Tribunal dismissed the department's appeal on this issue for all assessment years involved.

3. Disallowance of Common Expenses:
The assessee challenged the partial upholding of the disallowance of common expenses by the Ld. Commissioner of Income Tax (A). The Tribunal noted that the Assessing Officer had disallowed 100% of the common expenses due to a lack of substantiation by the assessee. The Ld. Commissioner of Income Tax (A) had granted partial relief based on the previous year's order. The Tribunal found that the issue required a fresh examination as the lower authorities had made the disallowance on an estimate without a factual basis. Thus, the Tribunal restored the issue to the file of the Assessing Officer for a de novo adjudication.

4. Exclusion of Carbon Credits from Book Profits Under Section 115JB:
The assessee contended that the income from the sale of carbon credits should be excluded from the computation of book profits under Section 115JB. The Tribunal referred to the ITAT Jaipur Bench's decision in the case of Shree Cements Ltd., which held that capital receipts should not be included in the book profits for MAT purposes. The Tribunal concluded that since the income from the sale of carbon credits is a capital receipt, it should not be included in the book profits under Section 115JB. Accordingly, the Tribunal allowed the assessee's appeals for the assessment years 2010-11 and 2011-12 on this ground.

Conclusion:
The Tribunal's consolidated order allowed the assessee's appeals regarding the nature of income from the sale of carbon credits and the exclusion of such income from book profits under Section 115JB. The Tribunal dismissed the department's appeals concerning the disallowance under Section 14A and the partial relief granted for common expenses, except for the issue of common expenses, which was remanded for fresh examination.

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