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TMI Blog2018 (4) TMI 1776X X X X Extracts X X X X X X X X Extracts X X X X ..... Delhi for assessment year 2011-12 whereas ITA 2319/Del/2015 is the department's cross appeal. All these appeals have identical issues; these were heard together and are being disposed of through this consolidated order for the sake of convenience. 2. Brief facts of the case for assessment year 2009-10 are that the assessee company was engaged in the business of generation of hydroelectric power and development of hydroelectric power. The original return of income was filed declaring total income of Rs. 6,51,23,948/- after considering the income from sale of carbon credits as exempt income and claiming deduction of Rs. 142,02,88,285/- u/s 80-IA of the Income Tax Act, 1961 (hereinafter called 'the Act'). Subsequently, the assessee revised its return of income after offering income of Rs. 5,65,49,255/- being income from sale of carbon credit as its business income and, subsequently, increased the claim of deduction u/s 80IA to Rs. 1,47,68,37,540/-. The assessment was completed u/s 143(3) of the Act after making a disallowance of Rs. 2,11,70,140/- u/s 14A of the Income Tax Act, 1961, disallowance of claim u/s 80IA amounting to Rs. 6,65,27,663/- and disallowance of common e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder section 115JB of the Income Tax Act, 1961. " 3.1 The Ld. AR submitted that the assessee had installed hydro power plants for power generation to adopt Clean Development Mechanism and had resultantly earned carbon credits which were measured in units of Carbon Emission Reductions (CERs) or Verified Emission Reductions (VERs). It was submitted that there was a net income of Rs. 5,65,49,255/- from the sale of such CERs in AY 2009-10 which the assessee, in its original return of income, had claimed as exempt. It was further submitted that subsequently, the assessee had revised its return after taking into account this amount as business income and had claimed increased deduction u/s 80IA by the same amount which had been denied to the assessee in appeal. It was further submitted that the assessee had, however, paid tax on this amount by including the same in the book profit u/s 115JB of the Act. The Ld. AR further submitted that the assessee had been recently advised that CERs being in the nature of entitlement received to improve the world atmosphere by reducing carbon, heat and gas emissions, are in the nature of capital receipts not liable to tax. It was further submitted by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITA No. 1114/Hyd/2009 held that carbon credit receipts are capital in nature. This order of ITAT Hyderabad Bench was subsequently upheld by the Hon'ble Andhra Pradesh High Court in 365 ITR 82. The relevant portions of the order of ITAT Hyderabad Bench are as under- "24. We have heard both the parties and perused the material on record. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... generated due to environmental concerns. Credit for reducing carbon emission or greenhouse effect can be 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. 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 recognised in books when those are created by UNFCCC and/or unconditionally available to the generating entity. CERs are inventories of the generating entities as they are generated and held for the purpose of sale in ordinary course. Even though CERs are intangible assets those should be accounted as per AS-2 (Valuation of inventories) at a cost or market price, whichever is lower. Since CERs are recognised as inventories, the generating assessee should apply AS-9 to recognise revenue in respect of sale of CERs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r assessment years 2010-11 and 2011-12 submitted that the assessee's appeal in ITA No. 3957/Del/2015 for assessment year 2010-11 and ITA No. 1550/Del/2015 for assessment year 2011- 12 had identical grounds relating to the question as to whether the sale of carbon credits should be held to be excluded from the computation of book profits u/s 115JB of the Act or not. 10.1 Ld. AR also submitted that under the instructions of the assessee, ground no.2 relating to disallowance of claim of deduction u/s 80-IA on miscellaneous income and foreign exchange fluctuation income in ITA 1550/Del/2015 was not being pressed. 11. In response, the Ld. Sr. DR placed reliance on the findings of the Ld. Commissioner of Income Tax (A) as well as the Assessing Officer and vehemently argued that the adjustment u/s 115JB with respect of sale of carbon credits had been correctly made. 12. Coming to the department's appeal for assessment year 2010-11 in ITA 4685/Del/2015, the Ld. Sr. DR submitted that the Ld. Commissioner of Income Tax (A) had erred in deleting the disallowance u/s 14A of the Act. Ld. Sr. DR submitted that identical ground in assessment year 2011-12 was also being contested by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground no. 2 of the assessee stands allowed for statistical purposes. 13.2 Since Ground no.1 of the department's appeal also challenges the partial relief given by the Ld. Commissioner of Income Tax (A) to the assessee on apportionment of common expenses, in view of our restoring this issue to the file of the AO for being adjudicated afresh, ground no. 1 of the department's appeal is also allowed for statistical purposes. 13.3 In ground no. 2 of the department's appeal for assessment year 2009-10, the department has challenged the deletion of Rs. 2,11,70,140/- made u/s 14A. It is seen that the Ld. Commissioner of Income Tax (A) has recorded a finding that the assessee had made investment in its subsidiary concerns and the funds had been raised by the issuing share capital of Rs. 112.80 crore to its holding companies M/s S.N. Power and M/s Bhilwara Energy Limited. It has also been noted by the Ld. Commissioner of Income Tax (A) that Rs. 26.31 cores have been invested out of self generated funds and further that all related documents, bank accounts were submitted and the trail of funds was established. Thereafter, the Ld. Commissioner of Income Tax (A) has followed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he result of the working of the company during the period covered by the accounts and since, subsidy can never be income, it should be excluded from the book profits. 15.1 It has been held in other cases that while any assessment u/s 115JB would be concluded exclusively on the basis of book profits as adjusted by the items set out in the explanation there under, in an assessment in terms of section 115JA or 115JB, adjusted book profits would be further subjected to the effect of other provisions of the Act that are specifically brought into play by virtue of sub-section (4) of section 115JA and (5) of section 115JB. It is settled law that the purpose and legislative intent behind introduction of provisions of section 115J/115JA/115JB was to take care of the phenomenon of prosperous zero tax companies which had continued but were paying no income tax even though they had profits and were declaring dividends. It was further sought that minimum corporate tax should be paid by these companies and accordingly MAT was introduced. However, it was never the intention of the legislature that any receipts which is not taxable per se within the tax provision or not reckoned as part of net p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ently argued against the deletion of disallowance. Therefore, on facts, we find no reason to interfere with the findings of the Ld. Commissioner of Income Tax (A) with respect to ground nos. 1, 2 and 3 raised by the department in its appeal for assessment year 2010-11 and the same are dismissed. 15.4 Coming to department's appeal for 2011-12, the only ground remaining for adjudication is ground no.1 which challenges the action of the Ld. Commissioner of Income Tax (A) in deleting the disallowance u/s 14A of the Act. It is seen that in this year also, the Ld. Commissioner of Income Tax (A) has recorded a categorical finding that there was no exempt income earned by the assessee during the year under consideration. Therefore, for the reasons mentioned in our adjudication of identical grounds in department's appeal for assessment year 2010-11, we find no reason to interfere with the finding of the Ld. Commissioner of Income Tax (A) in this year as well and we dismiss the grounds raised by the department. 16. In the result, ITA No. 4685/D/2015 and 2319/D/2015 are dismissed. 17. In the final result, ITA 2281/Del/2013, ITA 3957/Del/2015 and ITA 1550/D/2015 are allowed whereas ..... X X X X Extracts X X X X X X X X Extracts X X X X
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