2017 (3) TMI 1902 - HC - Income Tax

Characterization of receipts - income from sale of Certified Emission Reductions (CERs) - capital receipts or Revenue receipts - Whether Tribunal has erred in law and in facts treating the income from sale of Certified Emission Reductions (CERs) as revenue receipt excisable to taxation instead of treating them as capital receipt? - as alleged taxing event had not taken place during the current year the Tribunal ought not to have proceeded further to examine the taxability in a future year - HELD THAT - We are of the opinion that as such the Tribunal has materially erred in proceeding further to examine the taxability of the income from sale of CERs in future year. It is not in dispute that so far as the year under consideration for which the appeal was before the learned Tribunal has confirmed the order passed by the learned CIT(A) deleting the addition by observing that no such income has been received by the assessee in the year under consideration as there was neither any sale nor transfer of the carbon receipts in favour of any foreign companies during the year under consideration. Therefore as such the issue before the learned Tribunal was as such academic. Therefore keeping the said question open to be considered in accordance with law in the year in which the income is derived from sale of CERs Tribunal ought to have disposed of the appeal. At this stage it is required to be noted that even the learned Tribunal has in the impugned order has specifically observed that the learned Tribunal is making observations on the aforesaid issue to show their understanding on the issue and that they have briefly touched the issue. In any case the learned Tribunal ought not to have decided the issue which as such was academic before it. While quashing and setting aside the observations made by the learned Tribunal with respect to the income derived from carbon receipts and/or on sale of CERs we hold the question in favour of the assessee and against the Revenue by keeping the said question open to be considered in accordance with law in the year in which the income from sale of CERs is received. Under the circumstances we hereby set aside the observations made by the learned Tribunal with respect to the income from sale of CERs made in the impugned judgment and order however keeping the said question open to be considered in accordance with law and in the year in which the income from sale of CERs is accrued / received. Disallowance u/s 14A - Appeal ADMITTED to consider the following substantial question of law. Whether ITAT has erred in reversing the order of CIT(A) and confirming the order of the AO to the extent of confirming disallowance under Rule 8D r.w.s. 14A?

Summary

Issues:
1. Treatment of income from sale of Certified Emission Reductions (CERs) as revenue or capital receipt.
2. Examination of taxability of income in a future year when not before the Tribunal.
3. Taxability of income from sale of CERs as business gain under section 28(iv) of the Income Tax Act.
4. Determination of income from sale of CERs as capital or revenue receipt.
5. Consideration of previous judgments on similar matters.
6. Disallowance under Rule 8D r.w.s. 14A.

Analysis:

Issue 1: Treatment of CERs income
The appellant challenged the Tribunal's decision treating income from the sale of CERs as revenue receipt instead of a capital receipt. The Tribunal erred in examining the taxability of future year income when not relevant to the current year. The Tribunal's decision was contrary to earlier rulings and the Andhra Pradesh High Court judgment. The High Court kept the question open for future consideration when the income is actually received.

Issue 2: Examination of taxability in a future year
The Tribunal's decision to examine the taxability of future year income, which was not before it, was deemed unjustified. The Tribunal confirmed that no income was received in the current year, making the issue academic. The High Court held in favor of the appellant, setting aside the Tribunal's observations and keeping the question open for consideration in the relevant year.

Issue 3: Taxability of CERs income as business gain
The Tribunal erred in holding the income from the sale of CERs as a business gain under section 28(iv) of the Income Tax Act. The High Court did not delve into the question of whether such income is a revenue receipt for taxation purposes, keeping it open for future consideration.

Issue 4: Determination of income as capital or revenue receipt
The Tribunal's decision regarding the nature of income from the sale of CERs was challenged. The High Court did not make a definitive ruling on whether such income should be treated as capital or revenue receipt, leaving it open for future assessment.

Issue 5: Consideration of previous judgments
The Tribunal's disregard for previous judgments, including the Andhra Pradesh High Court ruling, was highlighted. The High Court emphasized the importance of considering past decisions on similar matters, but did not delve into the specifics of those judgments in this case.

Issue 6: Disallowance under Rule 8D r.w.s. 14A
The High Court admitted the appeal to consider whether the Tribunal erred in reversing the CIT(A)'s order and confirming the AO's disallowance under Rule 8D r.w.s. 14A. This issue was left for further examination and determination in the subsequent proceedings.