diff --git a/compose/config/environment.py b/compose/config/environment.py
index 8066c50fc5..17eacf1f5a 100644
--- a/compose/config/environment.py
+++ b/compose/config/environment.py
@@ -49,7 +49,7 @@ class Environment(dict):
             return result
         env_file_path = os.path.join(base_dir, '.env')
         try:
-            result.update(env_vars_from_file(env_file_path))
+            return cls(env_vars_from_file(env_file_path))
         except ConfigurationError:
             pass
         return result
diff --git a/tests/unit/cli_test.py b/tests/unit/cli_test.py
index d8e0b33fb6..bd35dc06f8 100644
--- a/tests/unit/cli_test.py
+++ b/tests/unit/cli_test.py
@@ -3,6 +3,8 @@ from __future__ import absolute_import
 from __future__ import unicode_literals
 
 import os
+import shutil
+import tempfile
 
 import docker
 import py
@@ -57,6 +59,22 @@ class CLITestCase(unittest.TestCase):
             project_name = get_project_name(base_dir)
         self.assertEquals('simplecomposefile', project_name)
 
+    @mock.patch.dict(os.environ)
+    def test_project_name_with_environment_file(self):
+        base_dir = tempfile.mkdtemp()
+        try:
+            name = 'namefromenvfile'
+            with open(os.path.join(base_dir, '.env'), 'w') as f:
+                f.write('COMPOSE_PROJECT_NAME={}'.format(name))
+            project_name = get_project_name(base_dir)
+            assert project_name == name
+
+            # Environment has priority over .env file
+            os.environ['COMPOSE_PROJECT_NAME'] = 'namefromenv'
+            assert get_project_name(base_dir) == os.environ['COMPOSE_PROJECT_NAME']
+        finally:
+            shutil.rmtree(base_dir)
+
     def test_get_project(self):
         base_dir = 'tests/fixtures/longer-filename-composefile'
         project = get_project(base_dir)