2012 (11) TMI 288 - AT - Income Tax

Carbon Credits Are Capital Receipts, Not Taxable Business Income Under Sections 2(24), 28, 45, and 56

My Home Power Ltd. Versus Deputy Commissioner of Income-tax, Central Circle - 7

ITAT Hyderabad held that carbon credits received by the assessee are capital receipts and not taxable as business income under sections 2(24), 28, 45, and ... Carbon Credits (Certified Emission Reductions) - deduction u/s. 80IA disallowed - Held that:- 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'. 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 credits cannot be considered as a bi-product. It is a credit given to the assessee under the Kyoto Protocol and because of international understanding. Thus, the assessees who have surplus carbon credits can sell them to other assessees to have capped emission commitment not as a result or incidence of one's business, as 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. Relying CIT v. Maheshwari Devi Jute Mills Ltd. [1965 (4) TMI 10 - SUPREME COURT] 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. 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 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 - thus sale of carbon credits is to be considered as capital receipt - in favour of assessee. Issues Involved:1. Whether the amount realized from the sale of Carbon Credits (CERs) is a capital receipt or a revenue receipt.2. Whether the amount from CERs is eligible for deduction under Section 80IA of the Income Tax Act.3. Whether the assessment of the total income and tax demand by the Assessing Officer was correct.Issue-Wise Detailed Analysis:1. Nature of Receipt from Sale of Carbon Credits (CERs):The primary issue is whether the amount realized from the sale of Carbon Credits (CERs) should be treated as a capital receipt or a revenue receipt. The assessee argued that the receipt from CERs is capital in nature, not connected to the business production process, and should not be considered income as per Section 2(24) of the Income Tax Act. The assessee emphasized that CERs are issued as recognition for reducing carbon emissions and are not related to the production or sale of power.The assessee cited various judicial precedents and CBDT circulars to support their claim that such receipts are capital in nature. The AR argued that the CERs are akin to a gift for achieving lower emissions and should not be taxed as income. The DR, however, contended that CERs have intrinsic value, are tradable, and should be treated as revenue receipts. The DR relied on Supreme Court judgments that defined 'goods' to include intangible properties like CERs.The Tribunal concluded that carbon credits are an entitlement received to improve the global atmosphere and environment by reducing emissions. They are not generated from business activities but are accrued due to international environmental concerns. The Tribunal held that the amount received for carbon credits is a capital receipt and not taxable as revenue under Sections 2(24), 28, 45, and 56 of the Income Tax Act. The Tribunal relied on the Supreme Court judgment in CIT v. Maheshwari Devi Jute Mills Ltd., where the transfer of surplus loom hours was considered a capital receipt.2. Eligibility for Deduction under Section 80IA:The assessee argued that if the receipt from CERs is considered revenue, it should be eligible for deduction under Section 80IA, as the CERs are directly linked to the power generation business. The AR cited various judicial decisions supporting the claim that income from activities directly linked to the business should be eligible for deduction under Section 80IA.The DR countered that the income from CERs is not directly related to the business of power generation but is incidental. The DR cited judicial precedents where income from independent sources was not eligible for deduction under Section 80IA. The Tribunal, having decided that the receipt from CERs is a capital receipt, did not delve deeper into this issue. Consequently, the alternate ground regarding Section 80IA became infructuous and was dismissed.3. Assessment of Total Income and Tax Demand:The Assessing Officer had treated the amount from CERs as revenue receipt, adding Rs. 11.75 crores to the returned income and determining the total income at Rs. 8,99,61,870, raising a tax demand of Rs. 3,60,80,529. The CIT(A) confirmed this order. The assessee appealed against this, arguing that the amount from CERs should not be taxed as it is a capital receipt.The Tribunal, after considering all arguments and evidence, concluded that the amount received from CERs is a capital receipt and not taxable as income. Consequently, the Tribunal allowed the assessee's appeal, overturning the Assessing Officer's and CIT(A)'s orders.Conclusion:The Tribunal held that the amount realized from the sale of Carbon Credits (CERs) is a capital receipt and not taxable as revenue. The alternate ground regarding the eligibility for deduction under Section 80IA was dismissed as infructuous. The assessee's appeal was allowed, and the assessment of total income and tax demand by the Assessing Officer was overturned.