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2016 (4) TMI 916 - AT - Income TaxTaxability of carbon credit - CIT(A) deleted the addition - Held that - These carbon credits are of no practical use, in Indian perspective, unless these are transferred by the assessee. The principles of conservatism, which is one of the most fundamental principle in determining of commercial profits, does not permit an anticipated income being accounted for, even though all anticipated losses, as soon as these can be quantified on a reasonable basis, are invariably taken into account in this process. Till the point of time these carbon credits are actually sold, the income embedded in these carbon credits, even when any, does not crystallize and continues to remain, at best, an anticipated income. Whether the CERs are generated under the CDM or for the IEM or even under JI, the taxability of the income from CERs will be taxable only when the right to receive consideration for transfer of these CERs is quantified and crystallized. We may add here that, while the ground of appeal raised by the Assessing Officer refers to addition of ₹ 5,78,28,058 made on account of sale of carbon credits , it is not even the case of the Assessing Officer that the sale was made in the relevant previous year. This aspect of the matter is clear from the observations made by the Assessing Officer, which have been reproduced earlier in this order after our paragraph 4, and this is what has been emphatically stated at the bar, in the course of hearing before us, by the learned counsel. Once both the parties are unanimous on the factual aspect that the sale is not effected in the relevant previous year, there cannot be any good reasons to bring the CER value to tax in this assessment year. In view of the above discussions, in our considered view, the gains on sale of CERs, though taxable in nature, could only have been taxed at the point of time when these CERs were actually transferred to the foreign entity. Accordingly, the value of CERs, even though quantifiable, cannot be brought to tax by the reason of accrual simplictor. That is precisely what has been done in this case. It is for this reason that we confirm the relief granted by the CIT(A) and decline to interfere in the matter. - Decided in favour of assessee. Disallowance under section 14A - CIT(A) deleted the addition - Held that - It is a case, as evident from the reproductions set our in which the Assessing Officer has recorded specific dissatisfaction with the claim of the assessee. As a matter of fact, this precedent supports the case of the revenue. We may now refer to the observations of the CIT(A) to the effect that It is only presumption of AO that directors of the company might have been involved in decision making relating to liquidation of old investments and investment in new areas. No facts have been brought on record by AO which indicate that there were lot of movements in the investment activity requiring involvement of senior management personnel . We find that its not even in dispute that a part of expenses attributable to the work in connection with the investment are to be disallowed, as the assessee has on its own offered ₹ 30,000 for disallowance in this regard. The dispute is confined to the quantum of disallowance and the basis on which it is to be quantified. In the absence of any reasonable basis of disallowance offered by the assessee, and in the absence of the assessee even disclosing the basis on which disallowance is made, the Assessing Officer had invoked the rule 8D. We see no infirmity in this action. In view of these discussions, as also bearing in mind entirety of the case, we vacate the relief granted by the CIT(A) and restore the disallowance made by the Assessing Officer. - Decided against assessee.
Issues Involved:
1. Taxability of carbon credits. 2. Disallowance under section 14A of the Income Tax Act, 1961. Issue I: Taxability of Carbon Credits 1. Material Facts and Developments: - The assessee is engaged in manufacturing transmission line towers and steel structures. - During the assessment, the Assessing Officer (AO) noticed that the assessee earned income from carbon credits amounting to ?5,78,28,058 but did not offer it to tax, claiming it as capital receipts. - The AO required the assessee to justify why this income should not be taxed as revenue receipts. 2. Assessee's Defense: - Carbon credits are non-taxable capital receipts, similar to grants and subsidies. - They are not realizations of sales and have not accrued under the Income Tax Act. - If considered business income, the assessee claimed a deduction under section 80IA. 3. Assessing Officer's View: - The AO rejected the comparison of carbon credits with government subsidies as they are received from business entities, not public bodies. - Carbon credits fall under the wide connotation of 'income' under section 2(24) of the Act. - The AO concluded that the net receipts from the sale of carbon credits are taxable revenue receipts. 4. CIT(A) Decision: - The CIT(A) held that the amount received from the sale of carbon credits is a capital receipt, not connected with the process of production or sale of power. - Citing the ITAT Hyderabad decision in M/s. My Home Power Ltd. vs. DCIT, the CIT(A) concluded that carbon credits are entitlements received to improve the environment and are capital receipts. 5. ITAT Analysis: - The ITAT examined the nature of carbon credits, noting that they are financial instruments representing reduced CO2 emissions. - The Tribunal discussed the Kyoto Protocol and the mechanism of carbon credits, emphasizing that the credits are a result of environmentally responsible business practices. - The ITAT disagreed with the earlier decisions, stating that carbon credits are generated due to business activities and should be considered revenue receipts. 6. Conclusion: - The ITAT held that gains from the sale of carbon credits are taxable but should be taxed in the year of sale, not on an accrual basis. - The relief granted by the CIT(A) was confirmed, and the addition of ?5,78,28,058 was deleted. Issue II: Disallowance under Section 14A 1. Material Facts: - The assessee earned a dividend income of ?3,32,19,012 and offered a disallowance of ?30,000 under section 14A. - The AO noted that the assessee did not provide details supporting this amount and made a disallowance of ?68,45,112 under rule 8D. 2. CIT(A) Decision: - The CIT(A) deleted the disallowance, stating that the AO did not give a finding that the claim made by the assessee was incorrect. - The CIT(A) held that there was no justification for the disallowance as there was no evidence of significant investment activity requiring involvement of senior management. 3. ITAT Analysis: - The ITAT noted that the AO had specifically rejected the assessee's disallowance offer, observing that the assessee had a substantial investment portfolio and incurred significant expenses related to investments. - The AO's dissatisfaction with the assessee's claim was justified, and the conditions of Section 14A(2) were fulfilled. 4. Conclusion: - The ITAT vacated the relief granted by the CIT(A) and restored the disallowance of ?68,45,142 made by the AO. Final Judgment: - The appeal was partly allowed, with the ITAT confirming the deletion of the addition related to carbon credits and restoring the disallowance under section 14A.
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