2017 (9) TMI 650 - AT - Income Tax

Deduction u/s 80IA(4)(iv) - initial assessment year - Business of manufacture of transformer oils, lubricating oils and other petroleum products besides generation of electricity from wind mills - Profits from 6 Wind Mill Units not correctly worked out as per AO, losses in the years prior to the initial year had been otherwise set-off against the other incomes of the assessee in those respective years - Interpretation of Sec. 80IA(5) - AO assessed loss in 4 units out of six - Held that - as per the assessee, it is only the losses starting from the initial year, i.e. the first year of claim of deduction and thereafter, which are required to be taken into consideration for arriving at profits eligible for deduction. Factually speaking, there is no dispute that so far as losses considered by the Assessing Officer are concerned, they have otherwise been absorbed against other incomes of the assessee in the respective years. CBDT clarified initial assessment year used in Sec. 80IA(5) of the Act is to be understood to mean the first year opted by the assessee for claiming deduction u/s 80IA of the Act. Considered in this light also, we find no error on the part of the CIT(A) in allowing the claim of the assessee. - Revenue appeal is dismissed Nature and taxability of Income earned on account of transfer of Carbon Credit - Revenue Income or capital receipts - Held That - the receipt on account of Carbon Credit was a capital receipt not chargeable to tax.Therefore Tribunal affirm the order of CIT (A) - Appeal of revenue is dismissed. Disallowance interest expenditure u/s 14A -Held That - Own funds comprising of Share Capital and Reserves & Surplus were much more than the investments in the exempt instruments and, therefore, CIT(A) made no mistake in deleting the disallowance of interest expenditure made u/s 14A of the Act. - Decided against Revenue

Summary

Issues Involved:
1. Deduction under Section 80IA(4)(iv) for windmill units.
2. Taxability of income from Carbon Credit.
3. Disallowance under Section 14A read with Rule 8D.

Issue-wise Detailed Analysis:

1. Deduction under Section 80IA(4)(iv) for Windmill Units:
The first issue pertains to the assessee's claim for a deduction of ?6,71,25,876 under Section 80IA(4)(iv) of the Income Tax Act, 1961. The Assessing Officer (AO) observed that the profits of the windmill units were not correctly worked out as the losses from prior years were not considered, which he believed was required under Section 80IA(5). Consequently, the AO denied the deduction to the extent of ?5,25,99,585, later rectified to ?4,02,23,291. The CIT(A) sided with the assessee, referencing the Madras High Court's decision in Velayudhaswamy Spinning Mills Pvt. Ltd., which stated that only losses from the 'initial year' and subsequent years should be considered. The Tribunal upheld this view, noting that the CBDT Circular No. 1/2016 also supported the interpretation that the 'initial assessment year' is the year the assessee chooses to start claiming the deduction. Thus, the Revenue's appeal on this ground was dismissed.

2. Taxability of Income from Carbon Credit:
The second issue involves the nature and taxability of income from Carbon Credit, amounting to ?2,01,68,049. The AO treated this as revenue income, but the CIT(A) determined it to be a capital receipt, not chargeable to tax, based on the Andhra Pradesh High Court's ruling in My Home Power Limited. The Tribunal affirmed the CIT(A)'s decision, as no contrary High Court ruling was presented by the Revenue. Therefore, the income from Carbon Credit was considered a capital receipt and not taxable.

3. Disallowance under Section 14A read with Rule 8D:
The third issue concerns the disallowance under Section 14A read with Rule 8D. The AO computed a disallowance of ?9,81,130, while the assessee had already disallowed ?6,32,214 in its return. The CIT(A) found that the assessee had sufficient interest-free funds to cover the investments in exempt instruments, referencing the Bombay High Court's decisions in HDFC Bank Ltd. and Reliance Utilities & Power Ltd. Consequently, the CIT(A) deleted the disallowance of interest expenditure but upheld the disallowance of administrative expenses. The Tribunal found no error in the CIT(A)'s decision, affirming that the assessee's own funds were sufficient, and thus upheld the CIT(A)'s order. The Revenue's appeal on this ground was also dismissed.

Conclusion:
The Tribunal dismissed the Revenue's appeal on all grounds, affirming the CIT(A)'s decisions regarding the deduction under Section 80IA(4)(iv), the taxability of Carbon Credit income, and the disallowance under Section 14A read with Rule 8D.