2022 (4) TMI 94 - AT - Income Tax

Income from Sale of Carbon Credits Not Taxable as Capital Receipt under Income-tax Act

The court held that income from the sale of carbon credits is a capital receipt and not taxable under the Income-tax Act, 1961. The carbon credits were ... Carbon Credit Receipts - capital or revenue receipts - HELD THAT:- CIT(A) deleted the additions made by the AO by following the decision of Subhash Kabini Power Corporation [2016 (5) TMI 793 - KARNATAKA HIGH COURT] wherein it was held that income from sale of carbon credits is a capital receipt, not chargeable to tax - Decided against revenue. Carbon credits should be excluded for the purpose of computing books profits u/s 115JB - Whether long term capital gain which was exempted under section 47(i)(v) of the Act under the normal provisions can be excluded while computing book profits under section 115JB - Tribunal held that it is only those items of income which are included in the P & L A/c and those that are excluded by the explanation to section 115JB of the Act than can be reduced for the purpose of computing book profits - HELD THAT:- Tribunal in holding as above referred to decision of ITAT, Lucknow Bench, in the case of ACIT Vs. L H Sugar Factory Ltd.[2016 (3) TMI 367 - ITAT LUCKNOW] and CIT Vs. Benami Industries Ltd [2016 (3) TMI 873 - ITAT KOLKATA] wherein similar propositions as canvassed by the assessee was accepted after considering decision of Special Bench in the case of Raintree Commodities [2010 (7) TMI 794 - ITAT HYDERABAD] - Decided against revenue. Issues Involved:1. Whether the Carbon Credit Receipts are Capital Receipts.2. Whether Carbon Credit receipts should be excluded for the purpose of section 115JB.Issue-wise Detailed Analysis:1. Whether the Carbon Credit Receipts are Capital Receipts:The assessee, engaged in the business of power generation, declared income for the assessment year 2011-12. The total sales from operations included revenue from the sale of electricity and carbon credits. During the assessment proceedings, the assessee contended that the carbon credit receipts were capital in nature and not taxable, despite initially treating them as revenue receipts due to a bona fide mistake. The assessee explained that the Carbon Emission Reduction Certificate (CER), commonly known as 'carbon credit', was received for switching from fossil fuels to biomass, and had no relationship with production, sale of power, or raw materials. The CERs were issued to acknowledge the reduction of carbon emissions, representing an 'entitlement' to improve the environment, not a by-product of business operations.The Assessing Officer (AO) rejected this contention and taxed the income from the sale of carbon credits. However, the CIT(A) deleted the additions made by the AO, following the ITAT, Bengaluru Bench's decision in the assessee's own case for Assessment Year 2009-10, where it was held that income from the sale of carbon credits is a capital receipt and not chargeable to tax. This decision was affirmed by the Karnataka High Court, which followed the ITAT, Hyderabad Bench's ruling in My Home Power Ltd., asserting that carbon credits are an entitlement received to improve the world atmosphere and environment, not generated from business operations.The Tribunal reiterated that carbon credits are not an offshoot of business but of environmental concerns, and the income from their sale is a capital receipt, not taxable under sections 2(24), 28, 45, and 56 of the Income-tax Act, 1961. The Tribunal referred to the Andhra Pradesh High Court's decision in CIT v. My Home Power Ltd., which confirmed that carbon credits are generated due to environmental concerns, not business activities, and the income from their sale is a capital receipt.2. Whether Carbon Credit receipts should be excluded for the purpose of section 115JB:The CIT(A) agreed with the assessee's contention that if an item of income is not chargeable to tax, it should not be included for computing book profits under section 115JB of the Act. The assessee relied on the ITAT, Delhi Bench's decision in Malana Power Company and Others, which supported this view. The Revenue challenged this decision, citing the ITAT, Hyderabad Bench's ruling in Rain Commodities Ltd., which held that only items included in the Profit & Loss Account and excluded by the explanation to section 115JB can be reduced for computing book profits.However, the Tribunal referred to the ITAT, Mumbai Bench's decision in JSW Steel Ltd., which concluded that if a capital receipt is not chargeable to tax, it cannot be included in the net profit for computing book profits under section 115JB. The Tribunal also cited decisions from the ITAT, Lucknow Bench, and ITAT, Kolkata Bench, which supported this proposition. Consequently, the Tribunal found no merit in the Revenue's ground and upheld the CIT(A)'s decision to exclude carbon credit receipts from the computation of book profits under section 115JB.Conclusion:The appeal filed by the Revenue was dismissed, affirming that carbon credit receipts are capital receipts and should be excluded from the computation of book profits under section 115JB. The judgment was pronounced in the open court.