2022 (12) TMI 1484 - AT - Income Tax

Disallowance of expenses u/s 14A - addition to the book profits of the assessee u/s115JB of the Act the amount of total disallowance computed u/s 14A - HELD THAT - We hold that the disallowance u/s 14A of the Act of expenses incurred for the purposes of earning exempt income be restricted to the extent of exempt income earned by the assessee during the year in accordance with the decision of the Hon ble jurisdictional High Court in the case of the assessee itself as cited before us. 2019 (7) TMI 541 - GUJARAT HIGH COURT Further we direct that no adjustment be made to the book profits of the assessee under Section 115JB of the Act of the expenses disallowed under Section 14A of the Act again following the decision of the jurisdictional High Court in the case of the assessee itself and the Special Bench of the ITAT in the case of Vireet Investment Private Limited 2017 (6) TMI 1124 - ITAT DELHI Deduction u/s 80IA - Captive Power Generation Plants - Hon ble jurisdictional High Court in own case in Tax Appeal Nos. 11 28 of 2019 vide order dated 17.06.2019. 2019 (7) TMI 541 - GUJARAT HIGH COURT held that it was the selling price of electricity which was to be considered for determining the Revenue generated from sale to CPP for the purposes of computing profits eligible to deduction u/s 80-IA(4) of the Act applying the ratio laid down by it in the case of Gujarat Alkalies 2016 (10) TMI 1111 - GUJARAT HIGH COURT DR was unable to point out any distinguishing facts nor was any contrary decision of the Hon ble jurisdictional High Court or the Hon ble Apex Court brought to our notice. Thus since the issue already stands decided in favour of the assessee in its own case by the Hon ble jurisdictional High Court the disallowance made by the Assessing Officer and confirmed by the learned CIT(A) of deduction claimed under Section 80IA of the Act. Characterization of receipt - revenue from Carbon credit - revenue or capital receipt - HELD THAT - The issue being covered by the decision of the Hon ble jurisdictional High Court in favour of the assessee in its own case we hold that the profit earned by the assessee for Carbon Credits is capital in nature; and the addition made by the Revenue by treating them as revenue in nature is directed to be deleted.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Deduction under Section 80IA(4) of the Income Tax Act.
3. Taxability of revenue from Carbon Credits.

Detailed Analysis:

Issue 1: Disallowance under Section 14A of the Income Tax Act

The assessee contested the disallowance of expenses related to exempt income under Section 14A read with Rule 8D of the Income Tax Rules. The Assessing Officer (AO) had disallowed Rs. 7,92,83,524, which was later adjusted to Rs. 3,45,82,170 by the CIT(A) after considering calculation errors. The AO also added the total disallowance to the book profits under Section 115JB for Minimum Alternate Tax (MAT) purposes.

The Tribunal held that the disallowance under Section 14A cannot exceed the exempt income, as affirmed by the jurisdictional High Court in the assessee's own case. The Tribunal restricted the disallowance to Rs. 51,40,000, the amount of exempt income earned. Additionally, it was directed that no adjustment be made to the book profits under Section 115JB for the expenses disallowed under Section 14A, in line with the Special Bench decision in the case of Vireet Investment Private Limited and the jurisdictional High Court's ruling.

Issue 2: Deduction under Section 80IA(4) of the Income Tax Act

The assessee claimed a deduction of Rs. 33,28,49,068 under Section 80IA for Captive Power Generation Plants. The AO recalculated the revenue from captive power units using the average purchase price of GUVNL, reducing the deduction to Rs. 1,30,00,897. The CIT(A) upheld this disallowance.

The Tribunal found that the jurisdictional High Court had ruled in favor of the assessee in a similar matter, stating that the selling price of electricity should be considered for revenue calculation. Consequently, the Tribunal directed the deletion of the disallowance of Rs. 31,98,48,171, allowing the deduction claimed by the assessee.

Issue 3: Taxability of Revenue from Carbon Credits

The assessee treated revenue from the sale of Carbon Credits as capital receipts not subject to tax. The AO, supported by the CIT(A), taxed these receipts as business income or short-term capital gains.

The Tribunal noted that the jurisdictional High Court had ruled in favor of the assessee, deeming such receipts as capital in nature and not taxable. Citing decisions from other High Courts, the Tribunal directed the deletion of the addition made by the Revenue, treating the Carbon Credits' revenue as capital receipts.

Conclusion

The appeal was partly allowed, with the Tribunal ruling in favor of the assessee on all three Issues:
1. Disallowance under Section 14A was restricted to the amount of exempt income, with no adjustments to book profits under Section 115JB.
2. Full deduction under Section 80IA(4) was allowed based on the selling price of electricity.
3. Revenue from Carbon Credits was treated as capital receipts, not subject to tax.