2016 (2) TMI 512 - AT - Income Tax

Disallowance of claim u/s 80IA made in respect of the sale of Carbon Credit - Held that - It is now settled proposition in law that in principle the receipts on sale of carbon credits should not brought into the Profit & Loss Account and it relates to the balance sheet‟ item. Consequently, the question of making a claim u/s 80IA(4) of the Act, allowability of the same or otherwise becomes an academic exercise. In view of the above, the questions raised by the Revenue in its appeal and the cross objections raised by the assessee are required to be dismissed as academic.

Summary

Issues Involved:
1. Allowability of claim of deduction under section 80IA of the Income Tax Act, 1961 in respect of receipts earned from the sale of carbon credits.
2. Nature of income from the sale of carbon credits - whether it is a capital receipt or business income.
3. Treatment of expenditure incurred for earning carbon credits if income from the sale of carbon credits does not qualify for deduction under section 80IA(4).

Detailed Analysis:

Appeals for the AY 2007-2008

ITA No.5932/M/2010 (By Revenue)

The primary issue in this appeal is the allowability of the claim of deduction under section 80IA of the Income Tax Act, 1961 concerning the receipts earned from the sale of carbon credits. The CIT (A) had granted the deduction based on the judgment of the Hon'ble Supreme Court in Liberty India vs. CIT (317 ITR 218), stating that carbon credit is a byproduct of hydroelectric power generation and is eligible for deduction under section 80IA(4). However, the Revenue contested this, citing the judgment of the Hon'ble High Court of Andhra Pradesh in CIT vs. My Home Power Ltd [2014] 365 ITR 82 (AP), which considered income from the sale of carbon credits as a "capital receipt" and not a "business receipt," thus not liable for tax under the Act. The Tribunal agreed with the Andhra Pradesh High Court's judgment, stating that carbon credits are an offshoot of environmental concerns and not directly linked to power generation, thus classifying the income as a capital receipt.

C.O. No.128/M/2011 (By assessee)

The assessee filed a cross-objection arguing that if the income from the sale of carbon credits does not qualify for deduction under section 80IA(4), then the expenditure incurred for earning the carbon credits should be reduced in computing the profit of the eligible undertaking. Additionally, the assessee raised an additional ground, asserting that the income from the sale of carbon credits is a capital receipt and should be excluded from the total income. The Tribunal admitted the additional ground and directed the AO to exclude the relevant receipts from the computation of total income, aligning with the judgment of the Andhra Pradesh High Court in My Home Power Ltd.

ITA No.7716/M/2011 (AY 2008-2009) (By assessee)

In this appeal, the issue again revolves around the allowability of the claim of deduction under section 80IA(4) for receipts earned from the sale of carbon credits. The CIT (A) had directed the AO to exclude these receipts, denying the benefit of deduction under section 80IA(4). The Tribunal, consistent with its earlier decision for AY 2007-2008, held that the receipts from the sale of carbon credits are capital receipts and outside the scope of chargeability to tax. The Tribunal admitted and allowed the additional ground raised by the assessee, similar to the AY 2007-2008.

ITA No.5933/M/2012 (AY 2009-2010) (By assessee)

The issue in this appeal is identical to the previous years regarding the allowability of the claim of deduction under section 80IA(4) for receipts from the sale of carbon credits. The CIT (A) had denied the benefit, directing the AO to exclude these receipts. The Tribunal upheld its previous decisions, determining that the receipts from the sale of carbon credits are capital receipts and not chargeable to tax. The additional ground raised by the assessee, identical to the earlier years, was admitted and allowed.

Conclusion:

The Tribunal concluded that the receipts from the sale of carbon credits are capital receipts and not chargeable to tax. Consequently, the question of making a claim under section 80IA(4) becomes an academic exercise. The appeals of the Revenue were dismissed, and the appeals and cross-objections of the assessee were partly allowed. The Tribunal directed the AO to exclude the receipts from the sale of carbon credits from the computation of total income.