The Ahmedabad bench of the Income Tax Appellate Tribunal ( ITAT ) observed that profit from the sale of Carbon Credit is “Capital Receipt” and held as not taxable.
Gujarat Fluorochemicals Ltd, the assessee had shown Rs.51.40 lakhs as Dividend Income exempt from tax under the Act, earned during the impugned year. The Assessing Officer noted that the assessee had interest-bearing borrowed funds on which the interest was paid during the year and the business funds were mixed funds.
Further noted that the assessee did not maintain a separate account for the source of funds utilized for the investment activities and held that where tax-free activities and taxable income earning activities were carried out using a common kitty of funds, interest burden needed to be apportioned between the two activities since the case fell under Section 14A(2) of the Income Tax Act, 1961.
The Assessing Officer made an addition to the book profits of the assessee under Section 115JB of the Act the amount of total disallowance computed under Section 14A of the Act, of Rs.8,73,56,957/-. The CIT(A) directed disallowance to be reworked as allowed in A.Y 2011-12 after reducing the suo-moto disallowance made by the assessee amounting to Rs.80,73,433/-.
The assessee pointed out that in the case of the assessee itself had held that “the disallowance under Section 14A of the Act, in any case, cannot exceed the exempt income.”Further substantiated their contention by relying on various precedents.
A Coram Mrs Annapurna Gupta, A M and Shri T R Senthil Kumar, JM held that the disallowance under Section 14A of the Act of expenses incurred to earnan exempt income is restricted to the extent of exempt income earned by the assessee during the year amounting to Rs.51,40,000/-.
Concerningthe claim of revenue from Carbon credit as capital receipts, the assessee contended that the revenue earned from the sale of carbon credits (net of expenses) as a Capital Receipt, was not subject to tax.
It was pointed out that the revenue earned by the assessee from the sale of Carbon Credits, net of expenses was held by the Assessing Officer to be taxable in the hands of the assessee as opposed to the assessee returning the same as capital receipts not subject to tax. The CIT(A) upheld the order of the Assessing Officer following his order in the case of the assessee itself for AY 2010-11.
The Tribunal held that the profit earned by the assessee for Carbon Credits is capital in nature; and, the addition made by the Revenue by treating them as revenue in nature is directed to be deleted.
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