2015 (2) TMI 1419 - AT - Income Tax

Proceeds from sale of carbon credits are capital receipts, not business income; no deduction under s.80IA allowed; s.250(5) grounds sustained

Income Tax Officer, Ward 16 (2), Hyderabad Versus M/s. Perpetual Energy Systems Limited.

ITAT held that proceeds from sale of carbon credits are capital receipts and not includible in the assessee's business income, so no positive income arose ... Deduction u/s 80IA - receipts from sale of carbon credits - income from sale of carbon credits as capital receipt, while the assessee itself has treated as revenue receipts and credited to the P&L A/c. - HELD THAT:- The issue involved in this appeal of the Revenue thus is squarely covered in favour of the assessee on merits by the decision of My Home Power Ltd [2014 (6) TMI 82 - ANDHRA PRADESH HIGH COURT] we hold that the amount of sale proceeds from carbon credits received by the assessee cannot be included in its income, being in the nature of a capital receipt. Consequently, there would be no positive income from the business of generation of power in the hands of the assessee for the year under consideration and therefore, the question of claiming any deduction u/s 80IA or making disallowance on account of such deduction does not arise. No infirmity in the impugned order of CIT(A) deleting the disallowance made by the AO u/s 80IA and upholding his impugned order on this issue, we dismiss ground No. 1 of the Revenue’s appeal. Receipts from sale of carbon credits as of capital nature and hence not liable to tax - It is observed that the issue raised by the assessee in the additional grounds before CIT(A) was directly linked with the issue of disallowance made by the AO u/s 80IA as raised in the original ground and as rightly submitted by the assessee before the learned CIT(A), the same was going to the root of the matter involved in the appeal of the assessee. Adjudication of the issue raised by the assessee in the additional grounds did not require investigation of any new facts, as submitted by the assessee before the learned CIT(A) and all the relevant facts necessary for adjudicating the same having been already available on record, we are of the view that the learned CIT(A) was fully justified in admitting the additional grounds raised by the assessee, relying on the principles laid down in the case of National Thermal Power Corporation [1996 (12) TMI 7 - SUPREME COURT (LB)] The issue raised by the assessee in the additional ground filed before the learned CIT(A), thus, was very much relevant for the purpose of disposing of the appeal of the assessee on the issue of deduction under S.80IA and the learned CIT(A), in our opinion, was well within his powers to admit the additional grounds raised by the assessee in accordance with the provisions of S.250(5) and adjudicate upon the same. In that view of the matter, we find no merit in ground No. 2 of the Revenue’s appeal and accordingly dismiss the same. ISSUES PRESENTED AND CONSIDERED 1. Whether proceeds from sale of carbon credits are revenue receipts forming part of business income or capital receipts outside the taxable heads of income for the assessment year in question. 2. Whether receipts from sale of carbon credits, if treated as not includible in total income, negate the question of eligibility for deduction under section 80IA of the Income-tax Act. 3. Whether the appellate authority was justified in admitting and deciding additional grounds raised by the assessee (that the carbon-credit receipts are capital in nature) at the first appellate stage under the applicable principles and section 250(5). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Nature of receipts from sale of carbon credits (capital v. revenue) Legal framework: Taxability of receipts depends on their character (capital or revenue) and on charging provisions under sections including 2(24), 28, 45 and 56. Accounting guidance (ICAI guidance note on Self-generated Certified Emission Reductions (CERs), June 2009) and applicable accounting standards (AS-2, AS-9) inform treatment for recognition and classification. Precedent treatment: The Tribunal's decision in a co-ordinate bench (My Home Power Ltd.) and subsequent decision of the jurisdictional High Court upheld that proceeds from sale of surplus carbon credits are capital receipts. The Assessing Officer relied on precedents reaching opposite conclusions (including certain Supreme Court decisions addressing similar but distinct factual matrices) to treat such receipts as revenue. Interpretation and reasoning: The Tribunal reasoned that carbon credits are entitlements generated by global/environmental regulatory regimes (Kyoto Protocol/UNFCCC), accruing not from business operations but from a global environmental concern; they do not arise as a by-product of the production process, nor as profit generated by ordinary business activities, and there is no cost of acquisition or production attributable to them. The entitlement character makes the proceeds akin to transfer of an incorporeal capital asset (analogous to transfer of allocated loom hours held to be capital in the cited Maheshwari Devi Jute Mills principle). The guidance note recognizes CERs as self-generated items accounted as inventories for sale, but that accounting character does not compel taxability as business income where the intrinsic nature of the asset is a capital entitlement. On balance, proceeds are accretion of capital rather than revenue arising from carrying on business. Ratio vs. Obiter: Ratio - The conclusion that sale proceeds of surplus carbon credits constitute capital receipts not taxable under the ordinary heads (and thus not includible in total income) is the operative ratio applied to dispose of the appeal. Observations on accounting standards and guidance note are supportive and largely obiterish in that they inform treatment but the legal ratio rests on the nature of the entitlement and established analogies. Conclusion: Proceeds from sale of carbon credits are capital receipts and cannot be included in total income for the year under consideration; therefore they are not taxable under sections relied upon by the Assessing Officer. Issue 2 - Consequence for deduction under section 80IA Legal framework: Section 80IA provides deduction of profits of industrial undertakings. Deduction is available only if there is positive business income/profits eligible under the section; if receipts are not part of business income, the deduction claim based on such receipts is inapplicable. Precedent treatment: The Assessing Officer disallowed the claimed deduction under section 80IA by treating carbon-credit proceeds as business income; the first appellate authority disallowed entitlement to the statutory deduction on that ground but deleted the disallowance on the separate basis that the receipts were not taxable income at all. Interpretation and reasoning: If carbon-credit proceeds are capital and excluded from total income, there is effectively no positive business profit attributable to those receipts for the purpose of computing eligible profits under section 80IA. Consequently, the factual premise for the Assessing Officer's disallowance (that such receipts formed part of eligible profits) falls away. The deletion of the disallowance thus follows from the prior conclusion on character of receipts. Ratio vs. Obiter: Ratio - The legal consequence that no deduction under section 80IA arises in respect of non-taxable capital receipts is central to the decision. Obiter - discussion of the Assessing Officer's reliance on authorities treating similar receipts as revenue is explanatory and distinguishes those cases on facts. Conclusion: Having held the proceeds to be capital receipts not includible in income, there is no question of allowance or disallowance of deduction under section 80IA in respect of those proceeds; the disallowance is rightly deleted. Issue 3 - Admission of additional grounds at first appeal Legal framework: Principles governing admission of additional grounds before the first appellate authority permit amendment/raising of grounds where they are relevant to resolution of the appeal, do not require investigation of new facts, and fall within the appellate power under section 250(5) and settled Supreme Court principles. Precedent treatment: The Tribunal applied the principle in National Thermal Power Corporation and analogous authorities that additional grounds may be admitted if they go to the root of controversy and can be decided on the existing record without fresh evidence. Interpretation and reasoning: The additional ground (that carbon-credit receipts are capital) was directly linked to the original ground challenging disallowance under section 80IA and addressed the substantive controversy. All material facts necessary were on record and no new investigation was necessary. Admission therefore comported with the scope of appellate powers and procedural fairness. Ratio vs. Obiter: Ratio - The admission of the additional ground was proper as it was germane to the appeal and decidable on the record; this procedural holding is applied to sustain the appellate decision. Obiter - ancillary remarks on the motives for raising additional grounds are explanatory. Conclusion: The appellate authority acted within power in admitting and deciding the additional ground; the objection to admission is without merit.