2022 (1) TMI 992 - AT - Income Tax

Amount receivable on account of CER s (Carbon Emission Reduction) - Revenue or capital receipt - Disallowance of amount claimed as provision relating to CDM (Clean Development Mechanism) income in earlier year written back - assessee credited CDM revenue account and debited CDM revenue receivable account and booked income in that year - assessee has earned Carbon Credits in earlier years on the basis of wind-mill power generated during FYs 2007-08, 2008-09 2009-10 - HELD THAT - CDM revenue receivable account was shown on asset side as amount receivable which would have liquidated upon sale of Carbon Credits by the assessee - unfortunately CER market crashed in 2012 and as a result, these credits could not be realized and the assessee had to forgo the credits ultimately. Accordingly, the income after adjusting exchange difference was reversed by reducing the opening balance of Accumulated Profit Loss Account and the claim was made in the computation of income. The said accounting treatment was in accordance with the applicable accounting standards. Logically also, when the provision was created in earlier years, the same was by way of credit to Profit Loss account. Accordingly, when the same has been reversed, the same has been adjusted from the accumulated balance of Profit Loss Account. Thus, it was a case when a provision of income was made in the books of account which was offered to tax The income could ultimately be not realized and accordingly, the same has been claimed as deduction. On the given facts, we concur with the submissions of Ld. AR that the provisions of Sec.36(1)(vii) r.w.s. 36(2) were not applicable since it was not the case of bad debts. The Ld. CIT(A) has denied the claim of the assessee by observing that the CER receipts would be capital receipts and therefore, any loss arising therefrom would be capital loss only and hence not allowable. The said observation over-look the fact that despite being capital receipts, the assessee has offered the same to tax in earlier years. The assessee s action of offering the income to tax, in our opinion, would entitle him to claim the expenditure if ultimately the receipts could not be realized by the assessee. The same is based on the principal of equity and natural justice. Therefore, on the given facts and circumstances, we would hold that the claim made by the assessee was an allowable deduction. The Ld. AO is directed to grant the deduction as claimed by the assessee. Resultantly, the appeal stand allowed. Interest disallowance u/s 36(1)(iii) - CIT-A deleted the addition - HELD THAT - It is admitted position that the tax effect of quantum addition under dispute by revenue is less than the prescribed monetary limit of ₹ 50 Lacs and therefore, the appeal is not maintainable in terms of low tax effect circular issued by CBDT vide Circular No. 17/2019 dated 08/08/2019 F.No.279/Misc. 142/2007-TTJ(Pt.). This recent circular further enhances the monetary limit fixed in earlier Circular No.3 of 2018 dated 11/07/2018 issued by CBDT as amended on 20/08/2018. Hence, the appeal stand dismissed with a liberty to revenue to seek recall of the appeal, if at a later stage, it is found that the matter is covered by any exceptions provided in any of the circular or in case the tax effect in any of the appeals exceeds the prescribed monetary limit. The appeal stands dismissed.

Summary

Issues:
1. Disallowance of provision for CDM income
2. Nature of CERs and claim for deduction
3. Interest disallowance under section 36(1)(iii)

Issue 1: Disallowance of provision for CDM income
The case involved cross-appeals for Assessment Year 2013-14 regarding the disallowance of a provision for Clean Development Mechanism (CDM) income. The Assessing Officer added back the provision to the income as the receivables were not written off in the books. The assessee argued that the provision write-back was in line with accounting guidance on Certified Emission Reductions (CERs). The assessee's contention was that the CER income booked in earlier years was reversed during the year and claimed as a deduction. The CIT(A) held that CERs were capital in nature and the subsequent write-back did not qualify as an allowable deduction. The tribunal disagreed, stating that the provision was offered to tax in earlier years, and the assessee should be allowed the deduction as the income could not be realized. The tribunal directed the Assessing Officer to grant the deduction as claimed by the assessee.

Issue 2: Nature of CERs and claim for deduction
The tribunal analyzed the nature of CERs earned by the assessee in previous years and the claim for deduction related to the reversal of CER income. The tribunal noted that despite CERs being capital receipts, the assessee had offered the income to tax in earlier years. Therefore, the tribunal held that the assessee was entitled to claim the deduction as the receipts could not be realized, based on principles of equity and natural justice. The tribunal directed the Assessing Officer to allow the deduction claimed by the assessee.

Issue 3: Interest disallowance under section 36(1)(iii)
The Revenue's appeal involved the computation of interest disallowance under section 36(1)(iii). The CIT(A) deleted the disallowance, and the Revenue appealed further. However, the tribunal dismissed the Revenue's appeal due to the tax effect being below the prescribed monetary limit set by CBDT circulars. The tribunal stated that the appeal was not maintainable under the low tax effect circular and dismissed it, granting the Revenue the liberty to seek a recall if exceptions applied or if the tax effect exceeded the monetary limit.

In conclusion, the tribunal allowed the assessee's appeal regarding the provision for CDM income and dismissed the Revenue's appeal on interest disallowance due to the low tax effect. The judgment provided detailed analysis on the nature of CERs, the claim for deduction, and the application of relevant tax provisions in the case.