Carbon Credits wrongly offered to tax in earlier year can be claimed as deduction on non-realisation

Bharath Wind Farm Ltd Vs DCIT (ITAT Chennai)

Upon careful consideration of factual matrix, it could be seen that the assessee has earned Carbon Credits in earlier years on the basis of wind-mill power generated during FYs 2007-08, 2008-09 & 2009-10. Recognizing the same in its books of accounts, the assessee booked income of Rs.305.59 Lacs in AY 2010-11. This is an undisputed fact that this income has been offered to tax in earlier years. The credits earned by the assessee could be sold at prevailing market prices. In AY 2010­11, the assessee credited CDM revenue account and debited CDM revenue receivable account and booked income in that year. The CDM revenue receivable account was shown on asset side as amount receivable which would have liquidated upon sale of Carbon Credits by the assessee. However, 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 to the extent of Rs.296.62 Lacs (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. However, 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. However, 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.

FULL TEXT OF THE ORDER OF ITAT CHENNAI

1. Aforesaid cross-appeals for Assessment Year (AY) 2013-14 arises out of the order of learned Commissioner of Income Tax (Appeals)-1, Chennai [CIT(A)] dated 29-06-2018 in the matter of assessment framed by Ld. Assessing Officer (AO) u/s.143(3) of the Act on 10.03.2016. The ground raised by the assessee read as under: –

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