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2016 (4) TMI 916 - ITAT AHMEDABAD

2016 (4) TMI 916 - ITAT AHMEDABAD - TMI - Taxability of carbon credit - CIT(A) deleted the addition - Held that:- 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 being accounted for, even though all anticipated losses, as soon as these can be quantified on a reasonable basis, a .....

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ere that, while the ground of appeal raised by the Assessing Officer refers to “addition of ₹ 5,78,28,058 made on account of sale of carbon credits”, it is not even the case of the Assessing Officer that the sale was made in the relevant previous year. This aspect of the matter is clear from the observations made by the Assessing Officer, which have been reproduced earlier in this order after our paragraph 4, and this is what has been emphatically stated at the bar, in the course of hearin .....

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e of CERs, even though quantifiable, cannot be brought to tax by the reason of accrual simplictor. That is precisely what has been done in this case. It is for this reason that we confirm the relief granted by the CIT(A) and decline to interfere in the matter. - Decided in favour of assessee.

Disallowance under section 14A - CIT(A) deleted the addition - Held that:- It is a case, as evident from the reproductions set our in which the Assessing Officer has recorded specific dissatisfac .....

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or management personnel”. We find that its not even in dispute that a part of expenses attributable to the work in connection with the investment are to be disallowed, as the assessee has on its own offered ₹ 30,000 for disallowance in this regard. The dispute is confined to the quantum of disallowance and the basis on which it is to be quantified. In the absence of any reasonable basis of disallowance offered by the assessee, and in the absence of the assessee even disclosing the basis on .....

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This appeal, filed by the Assessing Officer, is directed against the order dated 10th December 2012 passed by the Commissioner (Appeals), in the matter of assessment under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the Act ), for the assessment year 2009-10. 2. There are only two issues requiring our adjudication in this appeal i.e.whether or not the CIT(A) was justified, to use the words employed in the grounds of appeal before us, in deleting (a) the addition of  .....

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ers and steel structures, commissioning of transmission line tower and supply of transmission and distribution line material. During the course of the scrutiny assessment proceedings, the Assessing Officer noticed that while the assessee has shown, in its profit and loss account, income from carbon credits (also referred to as CERs i.e. certified emission reductions) amounting to ₹ 5,78,28,058, it has not offered the same to tax on the ground of carbon credits being in the nature of capita .....

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not be brought to tax in the hands of the assessee. The defence of the assessee was two fold- first, that the carbon credits are not taxable, as the carbon credit receipts are in the capital field; and - second, that in any event, even if carbon credit receipts are taxable in nature, the assessee is entitled to corresponding deduction under section 80IA as these receipts are derived from the undertaking entitled to deduction under that section. The elaborate written submissions submitted by the .....

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h have binding commitment under Kyoto Protocol to reduce Green House gases (GHGs). B. The assessee has further contended that CERs is not realization of sales. C. The CERs have not accrued to the assessee-company as: - The assessee-company got UNFCC approval for Padampur Plant on 20.06.2011 and for Tonk Plant through AtmosfairgGmbh on 14.01.2011 and through Carbon One on 19.10.2009. - The assessee company has also contended that the Padampur unit was registered on 25.03.2005 and Tonk Plant on 07 .....

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ssee to compare the carbon credits with the Government subsidies, inasmuch as the receipts are not from the Government or any regulatory body. What the assessee has received is the sale consideration of the carbon credits from another business entity, in need of these credits, and not from an independent body to promote the public good. He was of the view that the contention that since the underlying purpose is advancing public interest and has a benevolent objective, the receipt is not chargeab .....

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ld any monetary returns coming in unless specifically exempt . As regards the question whether carbon credits accrued during the relevant previous year or not, the findings of the Assessing Officer were as follows: 5.1 The contention of the assessee is that the CERs have not accrued as per the Income tax Act as the Padampur and Tonk Plants got UNFCC certificates and the registration for the said plants with regard to the CER credits in the years following the relevant previous year. Despite the .....

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he assessee with certainty and as per the prescribed procedure. - The assessee-company has entered into contracts with the Sponsors during the relevant period as is clear from the dates of registration. - The assessee has itself recognized the receipts on account of CERs in books of accounts and credited the same to the profit and loss account. Moreover, the assessee is following mercantile system of accounting wherein income and expenditures that have accrued are only credited or debited to the .....

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f stated by it in its submission. Only residual - formalities were required to be completed. Thus, the contention of the assessee on this count is rejected. 5. As regards the alternative contention of the assessee, i.e. availability of deduction under section 80IA of the Act, the Assessing Officer accepted the same with respect to Padampur plant (i.e. ₹ 1,05,27,285) as the assessee had claimed deduction under section 80IA, for the relevant previous year, in respect of this unit only. 6. It .....

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holding it to be capital receipt. His line of reasoning was as follows: 5. Facts of the case and arguments of the appellant have been carefully considered. At the outset it will be worthwhile to understand the nature of receipt in the case of appellant. The main business activity of appellant company is generation of power. Appellant has two Biomass based Power Generation Plant using agricultural waste as fuel at Padampur and Tonk in Rajasthan State. The CER (Carbon Emission Reduction) certifica .....

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dustry or for purchase of capital or raw material. Moreover, CBDT in Circular No.142 dated 1/8/1974 (95 ITR 131) observed that subsidy received for helping the growth of industries which is not meant for supplementing the profit is not considered as taxable. So, even if the amount is treated in the nature of subsidy, the same is not taxable. 5.1 It is settled law that any subsidy which compensates revenue expenditure is revenue in nature and which compensates capital expenditure is capital in na .....

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on'ble Court that the items treated by company are in the nature of goods or stock-in-trade. However, in the case of the appellant company, the CERs are not in the nature of stock-in-trade. They are not even a bye product in this case. Thus facts of the case of the appellant are different. 5.3 Identical issue has been considered by Hon ble ITAT B Bench in the case of M/s. My Home Power Ltd. vs. DCIT in ITA No. 1114/Hyd/2009. In this case the Hon'ble ITAT held as follows : "We have h .....

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able 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 .....

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nce of one's business and it is a credit for reducing emissions. The persons having carbon credits get benefit by selling the same to a person who needs carbon credits to overcome one's negative point carbon credit. The amount received is not received for producing and/or selling any product, bi-product or for rendering any service for carrying on the business. In our opinion, carbon credit is entitlement or accretion of capital and hence income earned on sale of these credits is capital .....

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t and observed that taxability of payment received for sale of loom hours by the assessee is on account of exploitation of capital asset and it is capital receipt and not an income. Similarly, in the present case the assessee transferred the carbon credits like loom hours to some other concerns for certain consideration. Therefore, the receipt of such consideration cannot be considered as business income and it is a capital receipt. Accordingly, we are of the opinion that the consideration recei .....

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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. 25. Further, as per guidance note on accounting for Self-generated Certified Emission Reductions (CERs) issued by the Institute of Chartered Accountants of India (ICAI) in June, 2009 states that CERs should be recognized in books when those are created by UNFCCC and/o .....

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be considered as capital receipt. This ground is allowed." 5.3. In view of above mentioned facts and decision of Hon'ble ITAT Hyderabad as mentioned above, I hold that amount received by appellant on sale of carbon credits are in the nature of capital receipts. AO is therefore not justified in making addition of ₹ 5,78,28,058/-. The addition is directed to be deleted. This ground of appeal is thus allowed 8. The Assessing Officer is aggrieved of the relief so granted by the CIT(A) .....

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taxable. However, for the reasons we will set out in a short while, we consider it appropriate to deal with the matter in a little detail and set out our understanding about certain basic aspects of this case, rather than disposing of appeal, without examining the facts of case, summarily as a covered matter. 11. A carbon credit is a financial instrument that represents a ton of CO2 (carbon dioxide) or CO2e (carbon dioxide equivalent gases) removed or reduced from the atmosphere from an emissio .....

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onally binding emission reduction targets. This agreement is signed in the backdrop of recognition that developed countries are principally responsible for the current high levels of harmful gas emissions in the atmosphere, as a result of more than one and a half century of industrial activity. What it seeks to achieve, in measurable terms and as set out in Article 3, is to ensure that their aggregate anthropogenic carbon dioxide equivalent emissions of greenhouse gases listed Annexure 1 (to the .....

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. Kyoto Protocol, provides that for achieving these reduction norms, the parties may acquire from, any other such party emission reduction units resulting from projects aimed at reducing anthropogenic emissions by sources or enhancing anthropogenic removals by sinks of greenhouse gases in any sector of the economy provided, inter 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 sink .....

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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 .....

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e Clean Development Mechanism, will allow the CERs generated by Indian entities to transfer the CERs to the foreign entities. It is this peculiar feature of mechanism of fulfilling the commitments that lead to a unique business model in terms of the carbon credits. Of course, the carbon credits through work in developing countries can either be through buying the credits straight away, through joint implementations or by sponsoring a project in the developing world where cost of reducing the har .....

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to cash, or, to put it bluntly, how business entities in the developed countries wash their guilt for generating harmful gases by doling out monies to those who save emission of harmful gases: (http://www.dailytimesgazette.com/carbon-credit-scheme-blamed-for-the-increased-emission-of-greenhousegases- 2/24240/) 12. The question that we are really required to adjudicate upon is whether the monies received by a person, on transfer of carbon credits, is taxable under the Indian Income Tax Act,1961. .....

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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 bus .....

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ng it. There is no point in glorifying these transactions of carbon credits as an act of benevolence or by putting those buying and selling these carbon credits on a higher moral pedestal. As Prof Adam Smith said three centuries ago, It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest . Nothing exemplifies it better than the situation before us. 16. Undoubtedly, generation of carbon credit does certainly m .....

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y measures in the course of normal business activity. The emission reduction is an integral party of the core activity carried out by the business. It is not some philanthropic act which gets the assessee before us these carbon credits, it is the manner in which the business activities are carried out, when found to be environment friendly and resulting in lesser emission of harmful gases, result in these carbon credits. All that one gains from these carbon credits in India is the right to trans .....

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ns, may perhaps be too exaggerated but not wholly unjustified. 17. It is in this light of factual scenario that we need to address ourselves to the taxability of sale consideration for carbon credits. 18. As we deal with this aspect of the matter, we may acknowledge the fact that there is a series of decisions of this Tribunal, starting with the decision in the case of My Home Power Ltd Vs DCIT [(2013) 63 SOT 227 (Hyd)], on this issue and all but one of these decisions are in favour of the asses .....

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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 lia .....

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m to other assessees to have capped emission commitment under the Kyoto Protocol. Transferable carbon credit is not a result or incidence of one's business and it is a credit for reducing emissions. The persons having carbon credits get benefit by selling the same to a person who needs carbon credits to overcome one's negative point carbon credit. The amount received is not received for producing and/or selling any product, bi-product or for rendering any service for carrying on the busi .....

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n received by the assessee is similar to consideration received by transferring of loom hours. The Supreme Court considered this fact and observed that taxability of payment received for sale of loom hours by the assessee is on account of exploitation of capital asset and it is capital receipt and not an income. Similarly, in the present case the assessee transferred the carbon credits like loom hours to some other concerns for certain consideration. Therefore, the receipt of such consideration .....

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e transferred to another party in need of reduction of carbon emission. It does not increase profit in any manner and does 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 .....

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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 voice of dissent: i. As it was evident from the response to the questions posed by us during the course of hearing, the grant of CERs are inextricably linked to the actual functioning of th .....

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but it is accrued due to world concern . We are of the view that the CER is generated due to carrying on business in a manner friendly to the cause of reduction of harmful gases and thus protect the environment. ii. As regards the finding that Carbon credits are made available to the assessee on account of saving of energy consumption and not because of its business , we are of the considered view that the CERs are made available to the assessee because of its carrying on the business in an env .....

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ossil fuels, e.g. oil, coal or natural gas, it is the activity of carrying on business in this manner which earns the business CERs. The activity of business and activity of earning carbon credits cannot, therefore, be divorced from each other. The core activity is business and being environmentally responsible is the manner in which this core activity is carried out. It is thus incorrect to say that carbon credits are made available to the assessee not because of its business. iii. The activity .....

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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 .....

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and it arises from carrying on of business. This factual finding is important in the context of Section 28(iv) which provides for taxability of the value of any benefit or perquisite, whether convertible into money or not, arising from business or exercise of profession as a business income. Accordingly, we are unable to subscribe to the finding of the coordinate bench that It is not liable for tax for the assessment year under consideration in terms of sections 2(24), 28, 45 and 56 of the Inco .....

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e capital field from the same. It is wholly unlike a case of someone with a surplus production capacity or entitlement which he transfers for a consideration. A capacity entitlement is in the field of capital inasmuch as it governs the production an assessee can have over a period. That is not the case here. It is in this background that we are unable to concur with the observations of the coordinate bench which state that carbon credit is entitlement or accretion of capital and hence income ear .....

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The Supreme Court considered this fact and observed that taxability of payment received for sale of loom hours by the assessee is on account of exploitation of capital asset and it is capital receipt and not an income . These views do not appeal to us. Based on the material before us, 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 cons .....

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nt. 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 of binding judicial pre .....

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d no occasions to take note of these facts or because these facts have not been brought to the notice of the bench. ix. Since these crucial facts were not brought to the notice of the coordinate bench, the coordinate bench could not deal with the peculiarities of different types of carbon credits, identify the kind of carbon credit that is examined with respect to the taxability issues and was thus lead to proceed on certain assumptions which seem to be incorrect. 21. On our perusal of the mater .....

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oordinate bench in the case of My Home Power Ltd (supra), has not examined the nature of these carbon credits and whether these carbon credits, if found to be under the CDM, will be at par with the carbon credits under the IET as was apparently the case in that judicial precedent. In any case, there is no categorical finding about the nature of CERs in the case of My Home Power (supra) though it has proceeded that generation of CERs was not the offshoot of business which cannot be the case when .....

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oreign 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 un .....

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ustice that those exercising judicial power must have the necessary freedom to doubt the correctness of an earlier decision if and when subsequent proceedings bring to light what is perceived by them as an erroneous decision in the earlier case. In the case of Union of India Vs Paras Laminates Pvt Ltd [(1990) 186 ITR 722 (SC)], Hon ble Supreme Court has, inter alia, observed as follows: It is true that a Bench of two members must not lightly disregard the decision of another bench of the same Tr .....

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tice that those exercising judicial power must have the necessary freedom to doubt the correctness of an earlier decision if and when subsequent proceedings bring to light what is perceived by them as an erroneous decision in the earlier case………… 25. While we are alive to the fact that the remedy to a such a situation normally lies, as is well settled in law, referring the matter to a larger bench, we do not think, for the reasons we will set out in a short while- in .....

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low paragraph 4 at page 4 and 5 of this order. The foundation of taxability on the accrual basis thus rests on the factors, as set out by the Assessing officer above, that the related plants were functional in the relevant period, that these was an emission reduction in the related period which was duly certified, that the assessee had entered into the contracts with sponsors, that the assessee itself had recognized the income, that the assessee was following mercantile system of accounting, tha .....

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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 .....

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lize and continues to remain, at best, an anticipated income. Whether the CERs are generated under the CDM or for the IEM or even under JI, the taxability of the income from CERs will be taxable only when the right to receive consideration for transfer of these CERs is quantified and crystallized. We may add here that, while the ground of appeal raised by the Assessing Officer refers to addition of ₹ 5,78,28,058 made on account of sale of carbon credits , it is not even the case of the Ass .....

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o bring the CER value to tax in this assessment year. 29. In view of the above discussions, in our considered view, the gains on sale of CERs, though taxable in nature, could only have been taxed at the point of time when these CERs were actually transferred to the foreign entity. Accordingly, the value of CERs, even though quantifiable, cannot be brought to tax by the reason of accrual simplictor. That is precisely what has been done in this case. It is for this reason that we confirm the relie .....

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rsuaded by this plea. We do not think any such directions are at all needed. In addition to other 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 .....

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hed 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 precedents as yet. The call on whether or not this is a case to be referred to special bench will have to be taken by the bench which is in seisin of the matter regarding taxability in the year of receipt. 3 .....

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assessment proceedings, the Assessing Officer noticed that the assessee has earned a dividend income of ₹ 3,32,19,012. It was also noted that the assessee has offered a disallowance of ₹ 30,000 under section 14A, but the assessee has not furnished any details in support of this amount. It was in this backdrop that the assessee was required to show cause as to why disallowance not be made under section 14A read with rule 8D. The assessee explained that the investments have been made .....

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matter in appeal before the CIT(A) who reversed the action of the Assessing Officer 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 remune .....

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ent activity requiring involvement of senior management personnel. I therefore, hold that there is no justification for disallowance of ₹ 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 and is in appeal before us. 36. 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. 37. The basic thrust of learned counsel s .....

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s submissions, as also the basis on which the learned CIT(A) has granted the relief, are factually incorrect. We have noted that the Assessing Officer has specifically rejected the assessee s offer of disallowance of ₹ 30,000 by observing as follows: 12.6 The contentions of the assessee have been perused. The only contention raised by the assessee is that it has surplus funds and the investments have been made out of dividend income accrued to the company and funds made available to the co .....

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s of more than 120 crores, has earned substantial exempt income of ₹ 3.32 crores. Moreover, there has been significant activity in the investment portfolio where old investments are liquidated and new investments are made. Making, managing and disposing off the investments require decision making, its accounting, tracking of the changes etc. Moreover, as per the Annual report of the company the directors of the company are being paid salary, commission on profits and other perquisites aggr .....

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e. 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 .....

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, it is for this reason that the Assessing Officer has invoked disallowance under rule 8D. We see no infirmity in the stand so taken by the Assessing Officer. The conditions of Section 14A (2) are clearly fulfilled. The CIT(A) has granted the impugned relief on the basis that the AO has not given any finding about incorrectness of the disallowance offered by the assessee, but this is, as we can see from the extracts from the assessment order, factually incorrect. As regards learned counsel s rel .....

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