2019 (12) TMI 434 - AT - Income Tax

Reopening of assessment u/s 147 - assessee has claimed deduction u/s 80IA of the Act in respect of Carbon Emission Reduction Certificates (CERs) sales which is not eligible for the deduction u/s 80IA - HELD THAT - Income by way of transfer of carbon credit has been given a special treatment as chargeable to tax @ 10% and not as part of the normal business income of the assessee. The said amendment is prospective in nature and therefore, cannot be applied to the assessment years under consideration. In view of the above discussion as well as fact and circumstances of the case, we do not find any error or illegality in the impugned order of the ld. CIT(A) qua this issue. The only addition made by the AO in the reassessment proceedings has been deleted by the ld. CIT(A) which we have upheld in our findings on the merits of the issue in the Revenue-s appeals.

Summary

Issues Involved:
1. Whether the income from the sale of Carbon Emission Reduction Certificates (CERs) should be treated as a capital receipt or revenue receipt.
2. Validity of the reassessment proceedings initiated by the Assessing Officer.

Issue-wise Detailed Analysis:

1. Treatment of Income from Sale of Carbon Emission Reduction Certificates (CERs):

The primary issue in this case was whether the income from the sale of Carbon Emission Reduction Certificates (CERs) should be classified as a capital receipt or a revenue receipt. The assessee, a company engaged in generating electricity through a hydroelectric power plant, had claimed the income from the sale of CERs as a capital receipt. The Assessing Officer (AO), however, disallowed this claim, treating it as a revenue receipt and not eligible for deduction under Section 80IA of the Income Tax Act.

The CIT(A) allowed the assessee's claim, holding that the income from the sale of CERs is a capital receipt. This decision was based on precedents set by the Hon'ble Rajasthan High Court in cases such as Pr. CIT v. Rajasthan State Mines & Minerals Ltd. and CIT v. Shree Cement Ltd., which had established that receipts from the sale of carbon credits are capital in nature.

The Tribunal upheld the CIT(A)'s decision, noting that the treatment of CERs as capital receipts is consistent with several judicial precedents, including the Supreme Court's decision in Vodafone International Holdings v. UOI. The Tribunal emphasized that carbon credits are not generated due to business activities but are accrued due to global environmental concerns, making them capital receipts. It also referenced the ITAT Hyderabad Bench's decision in CIT v. My Home Power Ltd., which supported the view that carbon credits are capital receipts.

Furthermore, the Tribunal noted that the Finance Act, 2017, introduced Section 115BBG, which taxes income from the transfer of carbon credits at a special rate of 10%. However, this amendment is prospective and applicable from the assessment year 2018-19 onwards, and thus not relevant to the assessment years under consideration (2010-11 and 2011-12).

2. Validity of Reassessment Proceedings:

The assessee challenged the validity of the reassessment proceedings initiated by the AO under Section 148 of the Income Tax Act. The reassessment was based on the AO's belief that the assessee had wrongly claimed deduction under Section 80IA for income from the sale of CERs, leading to escaped income.

The CIT(A) and the Tribunal both upheld the reassessment proceedings' validity, noting that the AO had grounds to believe that income had escaped assessment. However, since the only addition made by the AO in the reassessment proceedings (regarding the treatment of CERs) was deleted by the CIT(A) and upheld by the Tribunal, the issue of the validity of reassessment became academic and was dismissed as infructuous.

Conclusion:

The Tribunal dismissed the Revenue's appeals and the assessee's cross-objections, upholding the CIT(A)'s decision that the income from the sale of CERs is a capital receipt and not liable to tax as a revenue receipt. The reassessment proceedings' validity was upheld, but since the primary issue was decided in favor of the assessee, the cross-objections became academic and were dismissed.