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2018 (6) TMI 1735 - AT - Income TaxAddition made on account of interest expenditure - advancement of loans - HELD THAT - We find that the assessee had advanced loan to AHPL for its business that the financial institutions had advanced loans for a specific purpose that the borrowed funds were utilised for those purposes only. It appears that the AO had not understood the real character of the loans availed by the assessee. He had not also considered overall availability of the loans sanctioned by the financial institutions. FAA had given a finding of fact that borrowed funds were not utilised for the specific purposes and that the assessee had used its own funds for making investments. The available funds with it were in excess of the investments. Considering these facts we are of the opinion that there is no need to interfere with the order of the FAA. So confirming his order we decide the first effective ground of appeal against the AO. Sale of Carbon Credits - capital receipts or business receipts - HELD 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 is generated due to environmental concern. ITAT agree with this factual analysis as the assessee is carrying on the business of power generation. The carbon credit is not even directly linked with power generation. On the sale of excess carbon credits the income was received and hence as correctly held by the Tribunal it is capital receipt and it cannot be business receipt or income. See M/S. MY HOME POWER LTD. 2014 (6) TMI 82 - ANDHRA PRADESH HIGH COURT . - Decided against revenue.
Issues:
1. Disallowance of interest expenditure. 2. Sale of Carbon Credits. Issue 1: Disallowance of interest expenditure: The Assessing Officer (AO) challenged an order of the CIT(A) regarding the disallowance of interest expenditure amounting to &8377; 6.09 crores. The AO observed an increase in interest expenditure corresponding to an increase in borrowings and directed the assessee to explain the reason for not disallowing the interest expenses. The AO disallowed a proportionate interest amount of &8377; 2,00,32,397. The First Appellate Authority (FAA) considered the fund flow chart and loan details, concluding that no borrowed funds were diverted for investments. The FAA relied on the judgment of the Hon'ble Bombay High Court in a similar case and deleted the addition made by the AO. During the hearing, the Departmental Representative argued that borrowed funds were used for investments, while the Authorized Representative contended that no borrowed funds were utilized for investments. The tribunal found that the assessee used its own funds for investments, and since the borrowed funds were not diverted, the FAA's decision was upheld, and the appeal against the AO was dismissed. Issue 2: Sale of Carbon Credits: The second effective ground of appeal involved the sale of Carbon Credits. The Tribunal referred to a previous decision related to the allowability of deduction under section 80IA of the Income Tax Act for receipts earned from the sale of carbon credits. The Tribunal reproduced relevant paragraphs from the previous order, highlighting the contention between the assessee and the Revenue regarding the nature of income derived from carbon credits. The Tribunal considered various judgments and held that receipts from the sale of carbon credits are capital in nature and not taxable as business income. Citing judgments and findings from different Tribunals and High Courts, the Tribunal concluded that carbon credits are not a business receipt but a capital receipt. Therefore, the Tribunal dismissed the appeal filed by the AO, following the settled proposition in law regarding the treatment of receipts from the sale of carbon credits as capital items not to be included in the Profit & Loss Account. In conclusion, the ITAT Mumbai upheld the decisions of the FAA regarding the disallowance of interest expenditure and the treatment of receipts from the sale of carbon credits, dismissing the appeal filed by the AO in both instances.
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