2016 (8) TMI 1574 - AT - Income Tax

Sale of carbon credits - whether sale of carbon credits is not derived from eligible business of generation of power? - whether carbon credits has direct nexus between activity of assessee and income generated for it? - HELD THAT - As in case of DCIT vs. Kalpataru Power Transmission Ltd. 2016 (4) TMI 916 - ITAT AHMEDABAD wherein assessee was engaged in business of power generation through biomass power generation unit. It received Carbon Emission Reduction Certificates (CERs) popularly known as Carbon Credits for activity of using agricultural waste as fuel. Assessee received certain amount from transfer of carbon credit which was shown as capital receipt. Assessing Officer treated said receipt as business income and brought it to tax. CIT(A) following the decision in case of My Home Power Ltd. 2012 (11) TMI 288 - ITAT HYDERABAD held that the receipt on sale of carbon credits was a capital receipt and deleted the addition. On appeal, Tribunal observed that assessee was engaged in the business of power generation through biomass power generation unit. It received Carbon Emission Reduction Certificates (CERs) popularly known as Carbon Credits for activity of using agricultural waste as fuel. Assessee received certain amount from transfer of carbon credit which was shown as capital receipt. AO treated said receipt as business income and brought it to tax. Whether since carbon credit was not an offshoot of business but an offshoot of environmental concerns, amount received on transfer of carbon credit had no element of profit or gain and, thus, it could not be brought to tax. Ld. Authorized Representative fairly agree to restore the matter to be decided in its facts and circumstances. So, issue is restored to Assessing Officer with a direction to decide the same as per fact and law after providing due opportunity of being heard to assessee. Additional depreciation for wind mills u/s. 32(1)(iia) - HELD THAT - As in case of CIT vs. VTM Ltd. 2009 (9) TMI 35 - MADRAS HIGH COURT examined the same issue and dismissed the revenue appeal seeking to disallow additional depreciation u/s.32(1)(iia) of the Act with respect of setting up a windmill by a manufacturer of textile goods. Thus, following the ratio of VMT Ltd.(supra) issue has been decided in favour of assessee with regard to addition depreciation u/s.32(1)(iia) of the Act. Hon ble Supreme Court in case of CST vs. M.P. Electricity Board ( 1968 (11) TMI 85 - SUPREME COURT held that the electricity generated by an assessee is an article or goods. The explanation to amendments (memorandum) as inserted by Finance Act, 2012 as relied upon by CIT(A) cannot be said to overrule and earlier decision of Hon ble High Court. An amendment that has prospective application cannot be said to retrospectively take away the rights of an assessee qua it s explanatory notes. Where there is no ambiguity in the Section, there is no warrant for resort to external aids of interpretation namely the notes on clauses and the memorandum explaining its provisions. In the light of decision of VTM Ltd.(supra) with regard to claim of additional depreciation u/s.32(1)(iia) for setting up a windmill, wherein material being sole decision by Hon ble High Court on the matter, we hold that additional depreciation should be allowed.

Summary

Issues:
1. Sale of carbon credits - Eligibility for deduction under sec. 80-IA and taxability of the amount received.
2. Additional depreciation claim on windmills under sec. 32(1)(iia) - Disallowance and relevant case laws.

Issue 1: Sale of Carbon Credits
The appellant, engaged in trading in cotton bales and power generation, contested the disallowance of deduction on income from power generation, including the sale of carbon credits. The Assessing Officer disallowed the deduction, emphasizing the necessity of a direct nexus between the appellant's activity and the income generated. The Commissioner of Income-Tax (Appeals) held that income from carbon credits did not qualify as derived from the eligible business. The appellant argued that carbon credits result directly from clean energy production, serving as a subsidy linked to energy production costs reduction. The appellant relied on the Karnataka High Court's decision in CIT vs. Subhash Kabini Power Corporation Ltd., where carbon credit receipts were deemed capital receipts. The Tribunal referred to a similar case involving biomass power generation, where carbon credit receipts were treated as capital and not business income. The Tribunal agreed to restore the matter to the Assessing Officer for a factual and legal assessment, considering the direct nexus between the appellant's activity and the income from carbon credits.

Issue 2: Additional Depreciation Claim
The appellant claimed additional depreciation on two windmills installed during the year under sec. 32(1)(iia). The Assessing Officer disallowed the claim, citing a precedent related to a different section of the Income Tax Act. The Commissioner of Income-Tax (Appeals) upheld the disallowance based on explanatory notes to amendments by the Finance Act, 2012. The appellant argued that the precedent cited was not relevant to the current scenario under sec. 32(1)(iia). The appellant referred to decisions by the Delhi Tribunal and the Madras High Court supporting the allowance of additional depreciation for power generation activities. The Tribunal considered the Supreme Court's ruling that electricity generated by an assessee qualifies as goods. The Tribunal concluded that the additional depreciation claim should be allowed, following the precedent set by the Madras High Court. The Tribunal emphasized that the explanatory notes to amendments could not override established legal decisions. Consequently, the appeal was partly allowed in favor of the appellant.

This detailed summary provides a comprehensive analysis of the legal judgment, addressing the issues related to the sale of carbon credits and the additional depreciation claim on windmills.