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2017 (12) TMI 119 - AT - Income TaxCarbon credits - capital receipts OR business income - Held that - Carbon credits are capital receipts and cannot be considered as business income. Accordingly, we uphold the order of the CIT(A) and dismiss the appeal of the revenue. See CIT. vs My Home Power Ltd. 2014 (6) TMI 82 - ANDHRA PRADESH HIGH COURT . Eligible for deduction u/s 80IA - generation of ash - Held that - The ash is generated in process of generation of power from the manufacturing unit and it is not distinct and different from the activity of the manufacturing of power. The Ld.DR did not place any evidence to show that the assessee is not generating ash out of the manufacturing unit. Therefore, the sale proceeds of ash are directly derived from the generation of power and as such the same are eligible for deduction u/s 80IA. Accordingly, we set aside the orders of the lower authorities and direct the assessing officer to allow the deduction u/s 80IA on sale of ash. Accordingly, the appeal of the assessee on this ground is allowed. Exclusion of sale proceeds of carbon credits from the computation of book profit u/s 115JB - Held that - The carbon credit is credited to the Profit & Loss account held to be capital receipts and not exigible to tax as held by Hon ble jurisdictional High Court in My Home Power Ltd. supra . Hence respectfully following the view taken by the Coordinate Bench, we direct the AO to exclude the sale of carbon credits for the purpose of computation of book profits u/s 115JB of IT Act. Appeal of the assessee on this ground is allowed.
Issues Involved:
1. Reopening of assessment. 2. Eligibility of deduction under Section 80IA for income from sale of carbon credits and sale of ash. 3. Taxability of carbon credits under Section 115JB. Detailed Analysis: 1. Reopening of Assessment: The assessee challenged the reopening of the assessment on the grounds that it was a mere change of opinion. However, the reopening was upheld as valid by the CIT(A) and the Tribunal, applying the ratio laid down by the Kerala High Court in the case of Innovative Foods Ltd. Vs. UOI [356 ITR 319]. The assessment year involved was 2008-09, and the reopening was within four years from the end of the relevant assessment year. No additional case law was brought by the assessee to counter this observation, leading to the dismissal of the assessee’s appeal on this ground. 2. Eligibility of Deduction under Section 80IA: Carbon Credits: The assessee claimed that the income from carbon credits should be eligible for deduction under Section 80IA. The CIT(A) allowed the appeal of the assessee, following the judgment of the Andhra Pradesh High Court in the case of CIT vs. My Home Power Ltd., which held that carbon credits are capital receipts and not taxable as revenue receipts. The Tribunal upheld this decision, noting that carbon credits are an entitlement received to improve the world atmosphere and environment by reducing carbon emissions, and thus cannot be taxed as revenue receipts. The Tribunal cited the decision of the ITAT, Hyderabad in My Home Power Ltd., which stated that carbon credits are not generated due to carrying on business but due to environmental concerns, and hence, they are capital receipts. Sale of Ash: The AO disallowed the deduction claimed under Section 80IA for the sale of ash, arguing that the income from the sale of ash is not derived from the business of power generation. The CIT(A) upheld this disallowance. However, the Tribunal found that the sale proceeds of ash are directly derived from the generation of power and are not distinct from the activity of power generation. The Tribunal noted that the AO’s reliance on the cases of CIT Vs. Liberty India and CIT Vs. Pandian Chemicals was misplaced as those cases dealt with different issues (DEPB entitlements and interest payments, respectively). Consequently, the Tribunal directed the AO to allow the deduction under Section 80IA for the sale of ash, setting aside the orders of the lower authorities. 3. Taxability of Carbon Credits under Section 115JB: The assessee included the income from carbon credits in the Profit & Loss account and paid taxes under Section 115JB. However, following the Andhra Pradesh High Court’s decision that carbon credits are capital receipts, the assessee argued that these should be excluded from the computation of book profits under Section 115JB. The Tribunal admitted this additional ground, referencing the decision of the Supreme Court in CIT Vs. NTPC Ltd. [229 ITR 383], which allows for the consideration of new grounds if they arise from the order of the CIT(A). During the hearing, the Tribunal agreed that carbon credits, being capital receipts, should not be included in the Profit & Loss account for the purpose of computing book profits under Section 115JB. The Tribunal cited the decision of the ITAT Kolkata in DCIT Vs. Binani Industries [137 DTR 185], which held that capital receipts not chargeable to tax should be excluded from the computation of book profits under Section 115JB. The Tribunal thus directed the AO to exclude the sale of carbon credits from the computation of book profits under Section 115JB. Conclusion: The Tribunal partly allowed the appeal of the assessee and dismissed the appeal of the revenue. The cross objections filed by the assessee were also partly allowed. The Tribunal upheld the validity of the reopening of the assessment, allowed the deduction under Section 80IA for the sale of ash, and directed the exclusion of carbon credits from the computation of book profits under Section 115JB.
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