2020 (8) TMI 176 - AT - Income Tax

Sale of carbon credits - capital receipt OR revenue receipt - assessee is a company engaged in the business of generation of hydro and wind power. The assessee was entitled to claim deduction u/s. 80IA of the Income-tax Act, 1961 the Act in respect of business of generation of power - HELD THAT - As decided in M/S. SHREE CEMENT LTD. 2015 (3) TMI 759 - ITAT JAIPUR entitlement earned for carbon credits is a capital receipt and cannot be taxed as a revenue receipt. It is not generated or created due to carrying on business but it is accrued due to 'world concern'. It has been made available assuming character of transferable right or entitlement only due to world concern. The source of carbon credit is world concern and environment. Due to that the assessee gets a privilege in the nature of transfer of carbon credits. Thus, the amount received for carbon credits has no element of profit or gain and it cannot be subjected to tax in any manner under any head of income. In CIT Vs. Subhash Kabini Power Corporation Ltd. 2016 (5) TMI 793 - KARNATAKA HIGH COURT upheld the view taken by the Tribunal that receipts on account of carbon credit are capital receipts not chargeable to tax. Disallowance u/s. 14A r.w. Rule 8D - Assessee submitted that since the issue of disallowance u/s. 14A of the Act has not been examined either by the AO or the CIT(A) on the basis of availability of own funds of the assessee which have been utilized for making investments which are likely to yield tax free income and other relevant considerations, the issue should be remanded to the AO - HELD THAT - Prayer for remanding the issue to the AO as put forth by the ld. counsel for the assessee has to be accepted as neither the AO or the CIT(Appeals) has examined this issue. In this regard, the ld. counsel for the assessee submitted that a perusal of balance sheet would show availability of own funds. We are of the view that this aspect can be looked into by the AO in the set aside proceedings. We hold and direct accordingly.

Summary

Issues involved:
1. Taxability of carbon credits as revenue or capital receipt.
2. Disallowance under section 14A read with Rule 8D of the Income Tax Act.

Detailed Analysis:

Issue 1: Taxability of carbon credits as revenue or capital receipt
The appeal by the revenue challenged the CIT(Appeals) order regarding the taxability of carbon credits received from the sale. The AO denied the benefit under section 80IA of the Income Tax Act to the extent of the receipt from the sale of carbon credits, considering it as a revenue receipt. However, the assessee claimed it to be a capital receipt not chargeable to tax. The CIT(Appeals) allowed the alternative claim of the assessee, citing the decision of the Hon'ble Andhra Pradesh High Court in CIT v. My Home Power Ltd., which held that income from the sale of carbon credits should be considered a capital receipt and not taxable under any head of income. The ITAT also referred to other judgments supporting the capital nature of carbon credits. Consequently, the ITAT dismissed the revenue's grounds related to the taxability of carbon credits as revenue, upholding them as capital receipts.

Issue 2: Disallowance under section 14A read with Rule 8D
The AO disallowed a sum under section 14A read with Rule 8D of the Income Tax Act, attributing it to expenses related to earning exempt income. The assessee contended that investments were made from own funds and no disallowance should apply. The CIT(Appeals) deleted the addition made by the AO, considering the investments in subsidiary companies as business expediency. However, the ITAT, post the decision of the Hon'ble Supreme Court in Maxopp Investments Ltd., held that the purpose of making the investment is irrelevant. The ITAT directed a remand to the AO for a de novo consideration of the disallowance under section 14A of the Act, as neither the AO nor the CIT(Appeals) examined the issue based on the availability of own funds of the assessee. The ITAT partially allowed the appeal by the revenue for statistical purposes, emphasizing a reevaluation of the disallowance under section 14A.

In conclusion, the ITAT upheld the capital nature of carbon credits and directed a reevaluation of the disallowance under section 14A read with Rule 8D, emphasizing the consideration of own funds used for investments.