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TMI Blog2019 (5) TMI 1540X X X X Extracts X X X X X X X X Extracts X X X X ..... nces of the case, the Ld. Commissioner of Income-Tax (Appeals) has erred in law and on facts in deleting addition of Rs. 4,42,72,610/- made by the Assessing Officer on account of receipts from carbon credits treating it as revenue receipt. ii) On the facts and circumstances of the case, the Ld. Commissioner of Income-Tax (Appeals) has erred in law and on facts in deleting the disallowance of Rs. 63,03,835/- u/s.14A r.w.r. 8D made by A.O. 3.1. Ground No.1 of Revenue's appeal concerns addition of Rs. 4,42,72,610/- on account of carbon credit receipts as revenue receipt. The issue is no longer res integra. Identical issue came up in assessee's own case for AY 2009-10 in ITA No.538/Ahd/2013 order dated 18/03/2016 wherein Coordinate Bench adjudicated the issue in the following terms: "9. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 10. We are alive to learned counsel's core contention that the issue about taxability of carbon credits is no longer res integra inasmuch as there are several decisions of this Tribunal, and one of which has been approved by Hon'ble Andhra Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter alia, "any such project has the approval of the parties involved" and "any such project provides a reduction in emissions by sources, or an enhancement of removals by sinks, that is additional to any that would otherwise occur". The emission reduction units, which is what carbon credits or CERs (certified emission reductions) imply, can thus be acquired by the parties as well, as long as the project, in which these reductions are achieved, are approved by the parties to the protocol. Of course, this method of reduction of harmful gases is only supplemental method inasmuch as these countries cannot rely solely, or mainly, on so acquiring CERs from harmful emission reductions, but that is not really material in the present context because what we are dealing with is only acquiring the CERs from Indian entities. In effect, even if the emission for harmful gas is reduced in a developing country like India, as long as the project in which this reduction is achieved is approved by parties to the protocol and these emission reduction units are transferred by the Indian entity so reducing the emissions to the entities in the parties to the Kyoto protocol, such emission reductions can b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on on his own or to supplement his efforts in reduction of these harmful emissions, he is buying credits for the reduction in harmful gases achieved by someone else in this developing country. 15. What does a person get by buying these carbon credits or CERs. For each carbon credit that a person in the developed world buys, he gets right to emit one more ton of CO2 (carbon dioxide) or CO2e (carbon dioxide equivalent gases). Nobody would normally buy these credits as a token of appreciation of the work done in the developing world. The purchase of these credits is driven by the business compulsions. The business compulsion is to meet the emission norms. These emission norms are met by reduction in emission on its own and also paying money to someone in the developing world to buy credit for what environmental friendly work has been done by that entity. All this is in no way reducing the emissions but merely redistributing the right to emit greenhouse gases. That is an act too unkind to the global concerns, and it ends up supporting the global warming rather than controlling it. There is no point in glorifying these transactions of carbon credits as an act of benevolence or by put ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see. The reasoning, which prevailed upon the bench to decide the matter in favour of the assessee, has been set out in the case of My Home Power Ltd (supra) as follows: .... Carbon credit is in the nature of "an entitlement" received to improve world atmosphere and environment reducing carbon, heat and gas emissions. The entitlement earned for carbon credits can, at best, be regarded as 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. It is not liable for tax for the assessment year under consideration in terms of sections 2(24), 28, 45 and 56 of the Income-tax Act, 1961. Carbon credits are made available to the assessee on account of saving of energy consumption an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not need any expenses. It is a nature of entitlement to reduce carbon emission, however, there is no cost of acquisition or cost of production to get this entitlement. Carbon credit is not in the nature of profit or in the nature of income. 19. In all other decisions on the same lines, as cited before us, there is a reference to the aforesaid observations of the Tribunal and there is hardly any independent analysis of the factual situation. The same reasoning has been adopted by the coordinate benches. . 20. With greatest respect to the coordinate benches, we have our serious reservations on this factual finding by the coordinate benches. As a matter of fact, the findings are given in only one decision, i.e. My Home Power (supra), and other decisions simply, and somewhat mechanically, follow the same. The factual findings in this case are not the same, as arrived by the coordinate bench in the case of My Home Power (supra), and we are, therefore, not inclined to be guided by this decision. However, for the reasons we will set out in a short while, it is not necessary to refer the matter to a special bench at this stage. Let us first set out our reasons of expressing this voi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rities which grant the CERs. The functioning of the business and the reductions in emissions are to be monitored by the appropriate authorities. The carbon credits are not a windfall which appear out of the blue. A series of conscious decisions are thus required to be taken by the assessee in order to get the CERs and the considerations of CERs essentially therefore have a role to play on the manner in which business is carried out. For example, when renewal energy is substituted for the fossil fuels, the expected gains of carbon credits are also factored. It is an integral part of the business activity, and an important consideration about the choice of courses available in carrying on the business, which results in CERs. The generation of CERs is thus on account of business activity. We, therefore, find ourselves in disagreement with the views of the coordinate bench to the effect that "Carbon credit is not an offshoot of business but an offshoot of environmental concerns. No asset is generated in the course of business but it is generated due to environmental concerns." iv. This gain is not in terms of money, but it is a gain nevertheless. It is clearly a benefit in the sense ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we are unable to subscribe to the view that the CER receipts are capital receipts in nature. vi. As regards the judicial precedents in respect of taxability of subsidies received by the assessee, we are of the considered view that these judicial precedents are not relevant in the present context. The assessee has not received any monies, as a subsidy, from any government or public or multilateral forum. What he has received is an advantage incidental to carrying on business in an environmentally responsible manner. It is an offshoot of business. vii. As we have noted earlier in our order, sale of carbon credit does not do any good to the protection of environment or address global concerns about environment. Ironically, while these credits are generated by conducting business in an environmentally responsible manner, sale of these credits only result in higher emission of harmful gases in the countries signatory to the Kyoto Protocol. In a way, therefore, it is compensation for giving someone right to generate more harmful emissions than he is permitted to otherwise emit. It is inappropriate to glorify this income as offshoot of "environmental concerns". viii. The question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of CERs under the CDM. 23. One of the glaring peculiarity of the carbon credits under the CDM is the sponsorship arrangement by the foreign entity and the fact that very setting up of the project is predominantly for the purpose of transferring resultant CERs to the foreign entity. The impact of this peculiarity on the nature of receipt is not at all examined. The coordinate benches have also proceeded on the basis that all carbon credits are to be given uniform treatment by treating them capital receipts which are not incidental to carrying on the business. This assumption cannot, in any case, hold good for carbon credits under the CDM since in these cases the unit generating these credits are set up for the predominant purpose of generating emission reductions through making modifications in the working mechanism. 24. As a co-ordinate bench of equal strength, and it is not open for us to disregard the views of the coordinate benches. While it is well settled in law that coordinate benches cannot disregard the view of another coordinate bench, it is, however, equally true that it is vital to the administration of justice that those exercising judicial power must have the nec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was a reasonable certainty about its ultimate realization. The Assessing Officer was of the view that since "the receipt of the CERs was reasonably certain as the assessee-company has already completed the formalities for getting the UNFCC certification, as itself stated by it in its submission" and since "only residual -formalities were required to be completed", the CER income, as shown in the profit and loss account, should be brought to tax. Learned CIT(A) has not dealt with this aspect of the matter as the addition was deleted on merits. 27. In our considered view, however, that is not the correct approach. 28. The event triggering the taxation in respect of carbon credits is the sale of carbon credits. It is only when the carbon credits are transferred, and transferred for a valuable consideration, that an income accrues. The grant of carbon credits is not the event triggering the taxation of income. These carbon credits are of no practical use, in Indian perspective, unless these are transferred by the assessee. The principles of conservatism, which is one of the most fundamental principle in determining of commercial profits, does not permit an anticipated income bei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er course open to the Assessing Officer, Explanation 2 to Section 153(3) reasonably safeguard the legitimate interests of the revenue. We need not supplement the same. 31. It is in this backdrop and being aware of the fact that our views on whether or not the carbon credits, particularly under the CDM, are taxable will have limited and somewhat academic significance at this stage since the question of taxability will need to be finally adjudicated by us only in the year in which sale proceeds of the carbon credit are received by the assessee, we have not referred the matter for constitution of a special bench at this stage. That occasion will arise only in the year and in the case in which sale proceeds are received by the assessee. We are sure that as a final fact finding body, in an appropriate case, all these aspects of the nature and taxability of carbon credits, as have been briefly touched upon in this order, will be examined in a befitting manner by a special bench of this Tribunal in due course. In any case, the case before us, as we have noted above, is with respect to carbon credits under CDM mechanism, which has its own peculiarities and on which there are no judicial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this Carbon Credit. In the said note we have explained as under: GFL's Carbon Credit: * GFL operates a HCFC-22 plant at Village Ranjitnagar, District Panchmahals, Gujarat, India. During the production of HCFC-22, waste gas called HFC-23 is generated. * For each ton of HCFC-22 produced, approximately 2.9% of HFC- 23 is generated. HFC-23 is a greenhouse gas (GHG) which has Global Warming Potential of 11,700 of CO2 per ton of HFC-23. * GFL's CDM project consists of incinerating HFC-23 instead of allowing it to be vented into the atmosphere, and thereby reducing GHG emissions * CERs awarded = Tones of GHG reduced *GWP of GHG * In the year 2005-2006, Gujrat Fluorochemicals Limited (GFL) has implemented a project for greenhouse gas emission reduction by thermal oxidation of the waste gas HFC-23 in India under Clean Development Mechanism of Kyoto Protocol. * GFL has installed, and operates and maintains a HFC-23 collection and thermal oxidation system (TO Plant) to incinerate HFC-23. The thermal oxidation system enabled GFL to avoid HFC-23 emissions (GHG emissions), which, in the absence of the project activity, would have been vented into the atmosphere. * U ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T(A). One of the grounds of appeal is regarding such claim. During the course of appellate proceedings for A.Y. 2010-11, the CIT(A) has called for the remand report from Assessing officer on the issue. A copy of the said remand report was provided to us and we were asked to make our submissions on the said remand report. We have made our detailed submission dated 02-01-2015 to the CIT(A). The copy of the said submission is enclosed for ready reference in which we have provided our replies to the AOs observations in the remand report and the entire issue is discussed in detail. We rely on the same. Therefore, in view of the above it is requested that at the time of assessment, carbon credit revenue of Rs. 441.69 crores credited in the profit and loss account, net of expenses, may please by excluded, being a capital receipt and not liable to tax on the basis of various ITAT orders and High Court decision in the case of My Home Power Limited. Enclosures: 1. Note on Carbon Credit. 2. Copy of the remand report dated 25.11.2014 for A.Y. 2010-11 3. Copy of the reply dated 02.01.2015 submitted to CIT(A) in response to above remand report during appellate proceedings for A.Y. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness being carried on by the appellant. 11.2 Without prejudice to the finding given above that revenue earned from sale of carbon credits is taxable as income from the business Hi the hands of the appellant, even if it is treated as a capital receipt then also it will be taxable in the hands of the appellant as income from capital gain on account of transfer of CERs. This is due to the fact that in the case of the appellant, the cost of acquisition of CERS has already been determined. Thus, even if the appellant's contentions are accepted, it is to be held that these CERS are capital assets in the hands of the appellant and are having determined cost. Under such situation, the receipt received on account of transfer of such capital assets will be taxable in the hands of the appellant as short term or long term capital gain. Since, in the case of the appellant, all such CERS have been transferred within three years of date of acquisition of fire same, hence the entire sale consideration net of expenses is taxable as short term capital gain. Accordingly there will be no difference on the tax to be levied on the income of the appellant under such situation also. Thus in the al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng question pertains to the treatment that the assessee's income from trading of carbon credits should be given. The Tribunal held that receipts should in the nature of capital receipts and therefore would not invite tax. This issue has been examined by two High Courts. The Karnataka High Court in the case of CIT Vs. Subhas Kabini Corporation Ltd., reported in (2016) 385 ITR 592 (Karn) and Andhra Pradesh High Court in the case of Commissioner of Income-tax Vs. My Home Power Limited reported in (2014) 365 ITR 82(A) have held that receipts of carbon credit are in the nature of revenue receipts. Following the decisions of said two High courts, this question is also not considered." It is to be noted here that the Hon'ble Gujarat High Court has thereafter issued a corrigendum in the above order in OJMCA/1/2018 in Tax Appeal No.553 of 2017 wherein the applicant pointed out an advertent mistake in paragraph-6. The Hon'ble Court rectified the typographic/inadvertent mistake vide order dated 9.3.2018. It reads as under: "Through this application, the assessee points out that in our judgment dated 28.08.2017, while dismissing Revenue's Tax Appeals, we had inadvertently recorded in Par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndment will take effect from 1st April, 2018 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent years." 41. Thus, taking into consideration resolution of litigation on this issue by the Legislature itself, which had made provision for taxation of such receipts at the rate of 10% from the assessment year 2018-19 as well as authoritative pronouncements of Hon'ble jurisdictional High Court, we are of the view that receipts received by the assessee on sale of carbon credit are to be treated as capital receipts and not liable to tax. The ld.DRP has assigned one more reasons for not entertaining claim of the assessee particularly in the assessment year 2012-13 is that such claim was not in the return of income, rather it was made during the course of assessment proceedings. On the strength of Hon'ble Supreme Court judgment in the case of Goetez India Ltd.(supra), we are of the view that the AO cannot entertain any claim for allowing deduction resulting in a reduction of total income returned, which is not claimed in the original return or a revised return. To this reasoning of the DRP, we are of the view that we have considered this aspect while dea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer by observing as follows: 6.2 It was intimated by appellant during the course of assessment proceedings that investments were made in earlier years in shares of subsidy companies and other companies. None of these shares were liquidated in the past 3 years. In such a situation, AO is not justified to conclude that the directors of the appellant company were involved in investment decisions and part of their remuneration needs to be disallowed. Before invoking the provisions of Rule 8D, AO has to give a finding that claim made by the appellant in the return of income is not correct. In this case AO has not given any such finding. It is only presumption of AO that directors of the company might have been involved in decision making relating to liquidation of old investments and investment in new areas. No facts have been brought on record by AO which indicate that there were lot of movements in the investment activity requiring involvement of senior management personnel. I therefore, hold that there is no justification for disallowance of Rs. 68,15,142/- and the same is directed to be deleted. Ground No.2 of the appeal is allowed. 35. The Assessing Officer is aggrieved an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany and a part of their remuneration is relatable to these investments and the income derived therefrom. 12.8 In view of the discussion held above it is clear certain administrative, salary and other general expenses have been incurred in relation to the investments that result in income that does not form part of total income. Moreover, the assessee has not made disallowance under section 14A on any rational, logical or actual basis, but, the same has been disallowed on adhoc basis. 39. We have noted that Section 14A(2) categorically provides that "The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.[Emphasis supplied by us]". Here is a case in which the Assessing Officer has taken note of the huge expenditure, a part of which is also attributable to the tax exempt in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... even disclosing the basis on which disallowance is made, the Assessing Officer had invoked the rule 8D. We see no infirmity in this action. In view of these discussions, as also bearing in mind entirety of the case, we vacate the relief granted by the CIT(A) and restore the disallowance of Rs. 68,45,142 made by the Assessing Officer. 40. Ground no. 2 is thus allowed." 4.3. The issue has thus been decided in favour of the Revenue and against the Assessee by the Co-ordinate Bench. In the light of the view taken by the Coordinate Bench, we set aside the order of the CIT(A) on this score and uphold the action of the Assessing Officer. Hence, this ground of Revenue's appeal for AY 2010-11 is partly allowed. 4.4. In the result, Revenue's appeal in ITA No.1462/Ahd/2016 for AY 2010-11 is partly allowed. Revenue's appeal in ITA No.1463/Ahd/2016 for AY 2011-12 5. The grounds of appeal raised by the Revenue in ITA No.1463/Ahd/2016 for AY 2011-12 as under:- i) On the facts and circumstances of the case, the Ld.Commissioner of Income-Tax(appeals) has erred in law and on facts in deleting addition of Rs. 4,26,95,758/- made by the AO on account of receipts from carbon credits treat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional depreciation was claimed in the return of income, the AO could not have added the sum to the total income while passing the assessment order. In view of the same the very action of the AO in firstly making the addition without there being any claim in the return of income, and secondly, not allowing the legally valid claim made by way of a communication dated 17/3/2014 is erroneous. The appellant has made written submissions and challenged the addition/disallowance made on account of depreciation claimed by the Appellant during the assessment proceeding towards additional depreciation u/s 32(l)(iia) on the assets installed during the preceding assessment year used for a period less of than 182 days during the preceding assessment year. The Appellant has claimed the additional depreciation of Rs. 7,91,852/- u/s 32(l)(iia) of the Income Tax Act, 1961 during the assessment proceeding of Asst. Tear 2011-12, on the assets which were put to use during the assessment year 2010-11 for a period less than 182 days and therefore additional depreciation was calculated at 50% of the applicable rate during the assessment year 2010-11. The balance amount of additional depreciation was not c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 31-03-2005 by an assessee, who is engaged in the business of manufacture or produce of article or thing, the, a sum equal to 20% of the actual cost of the machinery and plant shall be allowed as a deduction. It is not in dispute that the assessee has acquired and installed the machinery after 31-03-205. IT is also not in dispute that the assessee is engaged in the manufacture of article or thing. Therefore the assessee is eligible for additional depreciation which is equivalent to 20% of the actual cost of such machinery. The dispute is the year in which the depreciation has to be allowed. The assessee Has already claimed 10% of the depreciation in the earlier assessment year since the machinery was used for less than 180 days and claiming the balance 10% in the year under consideration. Section 32(l)(iia) does not say that the year in which the additional depreciation has to be allowed. It simply says that the assessee is eligible for additional depreciation equal to 20% of the cost of the machinery provided the machinery or plant is acquired by the machinery or plant is acquired and installed after 31-03-2005. Proviso to section 32(l)(iia) says hast if the machinery was acquir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of ne machinery and plant. It has been calculated @ 15% but restricted to 50% only on account of usage of these plant and machinery in the year of acquisition. In section 32(1)(iia), the expression used is "shall be allowed". Thus, the assessee had earned the benefit as soon as he had purchased the new machinery and plant in full but it is restricted to 50% in that particular year on account of period usages. Such restrictions cannot divest the statutory right. Law does not prohibit that balance 50% will not be allowed in succeeding year. The extra depreciation allowable u/s. 32(l)(iia) in an extra incentive which has been earned and calculated in the year of acquisition but restricted for that year to 50% on account of usage. The so earned incentive must be made available in the subsequent year. The overall deduction of depreciation u/s 32 shall definitely not exceed the total cost of machinery and plant. In view of this matter, we set aside the orders of the authorities below and direct to extend the benefit. We allow ground no.2 of the assessee's appeal. Since we have decided ground no.2 in favour of assessee, there is no need to decide the alternative claim raised in gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... %, if the plant and machinery is acquired during the previous year is put to use for a period of less than 180 days in that previous year. The second proviso specifically makes a reference to an asset referred to in clause (iia) of the said section 32(1) of the Act. And it is because of the second proviso assessee claimed only 50%; additional depreciation for AY 2006-07 and accordingly, claimed the balance amount of additional depreciation in the immediately subsequent year i.e. the year under consideration AY 2007-08. We are in full agreement with the argument of Shri J. P. Khaitan, Senior Advocate that a bare reading of section 32(l)(ha) clearly shows that the assessee is eligible for additional depreciation in case the new machinery and plant was acquired and installed after 31-03-2005. There is no restrictive condition in the clause for the eligibility of the assessee to claim additional depreciation. When the assessee is eligible for depreciation @ 20%, in the absence of any specific provision, the AO cannot cut down the scope of deduction by referring to second proviso to section 32(l)(ii) of the Act. He also pointed out that even if there is any contradiction between section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Ltd (124 Taxman.com 189) wherein it has been held that the additional depreciation cannot be restricted to 50 % and it has to be allowed in succeeding years if it is not allowed full in the relevant year. For the sake of convenience the relevant portion of the order is as under: "17. We have heard both the sides on this issue. Section 32(1)(iia) inserted by Finance (No. 2) with effect from 1.4.2003. In speech of Finance Minister this clause was inserted to provide incentive for fresh investment in industrial sector. This clause was intended to give impetus to new investment in setting up a new industrial unit or for expanding the installed capacity of existing units by at least 25 % thereafter these provisions were amended by the Finance (No.2) Act of 2004 w.e.f. 1.4.2005 and provided that in the case of any machinery or plant which has been acquired after the 31st day of march, 2005 by an assessee engaged in the business of manufacture of production of any article or thing a further sum equal 15 % of actual cost of such machinery or plant shall be allowed as deduction under clause (ii) of section 32(1). This additional allowance u/s 32(1) (iia) is made available as certain pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 32(l)(iia) is one time benefit to encourage the industrialization and in view of the decision of Hon'ble Supreme Court in the case of Bajaj Tempo vs. CIT,; cited supra, the provisions related to it have to be constructed reasonably, liberally and purposive to make the provision meaningful while granting the additional allowance. This additional benefit is to give impetus to industrialization and the basic intention and purpose of these provisions can be reasonably and liberally held that the assessee deserves to get the benefit in full when there is no restriction in the statute lo deny the benefit of balance of 50% when the new plant and machinery were acquired and use for less than 180 days. One time benefit extended to assessee has been earned in the year of acquisition of new plant and machinery. It has been calculated @ 15% but restricted to 50% only on account of usage of these plant & machinery in the year of acquisition. In section 32(1 (iia) the expression used is "shall be allowed". Thus the assessee had earned the benefit as soon as he had purchased the new plant and machinery in full but it is restricted to 50% in that particular year on account of period !of usage ..... X X X X Extracts X X X X X X X X Extracts X X X X
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