2021 (7) TMI 1162 - HC - Income Tax

Court rules carbon credit sales as capital receipts, not taxable income. Tax Case Appeal dismissed.

The court affirmed that proceeds from the sale of carbon credits are capital receipts, not taxable income, in alignment with previous judicial decisions. ... Characterization of income - Proceeds realized on sale of Certified Emission Reduction Credit - assessee had earned on the Clean Development Mechanism in its wing energy operations - Whether a capital receipt and not taxable? - HELD THAT:- More or less, in a similar case, the Apex Court had an occasion to consider such an issue in the case of Commissioner of Income Tax v. Maheshwari Devi Jute Mills Ltd.[1965 (4) TMI 10 - SUPREME COURT] wherein the question came up for consideration before the Apex Court as to whether by sale of loom-hours, the amount received could be termed as capital receipt or the income out of business. In the said decision, the Apex Court held that the amount received out of sale of loom-hours can be termed as capital receipt and not income out of business. Also see M/S. AMBIKA COTTON MILLS LTD. [2021 (3) TMI 442 - MADRAS HIGH COURT] - Decided in favour of the assessee. Issues Involved:1. Denial of deduction under Section 80 IA on the profit from the sale of carbon credits.2. Determination of whether proceeds from the sale of Certified Emission Reduction Credit are capital receipts or taxable income.Detailed Analysis:Issue 1: Denial of Deduction under Section 80 IAThe assessee, a domestic company engaged in manufacturing newsprint, writing paper, and generating electricity, filed its return for the Assessment Year 2010-11, declaring an income of Rs. 1,26,83,88,996/- and claimed a deduction under Section 80 IA. The Assessing Officer denied this deduction on the profit from the sale of carbon credits, amounting to Rs. 75,90,644/-, arguing that such income could not be construed as income derived from manufacturing activity. The assessee appealed this decision, and the Commissioner of Income Tax (Appeals) allowed the appeal. Subsequently, the Revenue appealed to the Income Tax Appellate Tribunal, which dismissed the appeal, prompting the Revenue to file the present appeal.Issue 2: Nature of Proceeds from the Sale of Certified Emission Reduction CreditThe core question of law was whether the proceeds from the sale of Certified Emission Reduction Credit, earned through the Clean Development Mechanism in wind energy operations, should be considered a capital receipt and thus not taxable. The Tribunal had previously held that such proceeds are a capital receipt, not taxable under business income, which was upheld by various High Courts.Judgment Analysis:1. Previous Rulings and Legal Precedents:- The court noted that the question of law had already been decided against the Revenue and in favor of the assessee in previous judgments, specifically citing the judgment in [2021] 279 Taxman 405 (Madras) [Commissioner of Income Tax, Chennai Vs. M/s. Ambika Cotton Mills Ltd.].- The court referenced the decision in T.C.A.No.451 of 2018 [S.P. Spinning Mills Pvt. Ltd. Vs. Assistant Commissioner of Income Tax], where it was held that carbon credit receipts are capital receipts and not business income.2. Legal Reasoning:- The court reiterated that carbon credits are an offshoot of environmental concerns, not directly linked to the business operations, and thus, the proceeds from their sale should be treated as capital receipts.- It cited the Karnataka High Court's decision in CIT vs. Subhash Kabini Power Corporation Ltd., which approved the view that sale of carbon credits results in capital receipts, not taxable income.- The court also referenced the Andhra Pradesh High Court's decision in CIT vs. My Home Power Ltd., supporting the view that carbon credit proceeds are capital receipts.3. Final Decision:- The court concluded that the question of law involved in the present appeal was covered by the cited judgments, deciding against the Revenue and in favor of the assessee.- The Tax Case Appeal was dismissed with no costs, affirming that the proceeds from the sale of Certified Emission Reduction Credit are capital receipts and not taxable.In summary, the court upheld the principle that proceeds from the sale of carbon credits are capital receipts, aligning with previous judicial decisions and dismissing the Revenue's appeal.