TaxTMI 
TaxTMI 
2022 (2) TMI 758
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....the Act. 3. That on the facts and circumstances of the case and in law, the CIT(A) erred in disregarding the judgment of jurisdictional ITAT in the case of the appellant, while upholding the receipts from transfer of CER as revenue receipt. That the Appellant craves leave to add, alter, amend or vary any of the ground either at or before the hearing of the appeal. 1.1. Further, the assessee has also raised the following two additional grounds of appeal before us:- "4. That on the facts & circumstances of the case and in law, the capital receipts on account of Certified Emission Reduction ('CER's)/('Carbon Credits') amounting to Rs. 93,85,40,499/- may held to be excluded from the computation of 'book profits' under section ('u/s') 115JB of the Income-tax Act, 1961 ('the Act')." "5. The Hon'ble ITAT may be pleased to grant the claim of 'Education Cess' (@ 3%) amounting toRs. 83,55,777/- u/s. 37 of the Act paid/payable by the assessee under normal provisions of the Act." 2.0. The main issue involved is regarding the treatment of Certified Emission Reductions (CER)/carbon credits which has been claimed by the assessee as cap....
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....ss account and stated in the notes on accounts that sale of such certificate is recognized as income, therefore no fresh facts are to be investigated. In view of the decision of the Hon'ble Supreme Court in case of NTPC Ltd. versus CIT 229 ITR 383 wherein the purpose of any assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with the law. It is further held therein that if as a result of a judicial decision given while the appeal is pending before the tribunal if it is found that a non-taxable item is taxed or a permissible deduction is denied. The assessee cannot be prevented from raising that question before the tribunal. The assessee has demonstrated in view of the decision of the Hon'ble Andhra Pradesh High Court that such income cannot be taxed. Therefore, the case of the assessee squarely falls within the law laid down by the Hon'ble Supreme Court. In view of this we admit the additional ground of appeal and remit the issue back to the file of the Ld. assessing officer to decide the issue on merit whether the sale of carbon credit certificates of Rs. 95.83 crores are income chargeable to tax or....
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....t in said case was operating a HCFC-22 plant at village Ranjitnagar, District Panchmahals, Gujarat. During the production of HCFC-22, waste gas called HFC-23 was also generated. Appellant's CDM project consisted of incinerating HFC-23 instead of allowing it to be vented into the atmosphere, and thereby reducing GHG emissions. Due to reduction in emission of HFC-23, CERs were awarded to the appellant. The appellant raised the issue of exclusion of CER from total income before the DRP for the first time, which refused to entertain the claim of the assessee primarily relying on the judgment of Hon'ble Supreme court in Goetze (India) Limited vs CIT 284 ITR 323. The tribunal taking note of the facts and judgments on the issue allowed the appeal of the assessee with following findings:- "41. Thus, taking into consideration resolution of litigation on this issue by the Legislature itself, which had made provision for taxation of such receipts at the rate of 10% from the assessment year 2018-19 as well as authoritative pronouncements of Hon'ble jurisdictional High Court, we are of the view that receipts received by the assessee on sale of carbon credit are to be treated as capi....
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....t cannot be said that CERs are benefits arising from the business of the assessee. Various Hon'ble High Court including My Home Power Ltd. (supra) have held that carbon credits are not offshoot of business but offshoot of environmental concerns and hence not taxable....." 3.1. In particular, the Ld. AR emphasized the judgment of the Hon'ble Gujarat High Court in the case of Gujarat Flourochemicals Limited[ITA no. 11 & 28 of 2019], the facts of which case, as noted by the Ahmedabad Bench of Tribunal in its order [ITA no. 805 & 2744/Ahd/2017], are similar to the facts of the assessee and where it had been held that carbon credits are not offshoot of business but offshoot of environmental concerns and hence not chargeable to tax. 3.2. Para no. 6 of the synopsis filed by the assessee gives a comparative chart of the facts of the Gujarat Flourochemical Limited (supra) and of the assessee which is being reproduced below:- S. No. Particulars Gujarat Flourochemical Ltd. (P. no. 23-26 of Case Laws Compilation) SRF Ltd. (P. no. 286-293 of P.B.) 1. Business activity producing the emission: Production site HCFC-22 plant at village Ranjitnagar, Gujarat HFCF-22 facility at Jhiw....
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....m 213 (Madras)] vi. Arun Textiles Pvt. Ltd. [2016-TIOL-2212-HC-MAD-IT] vii. Rajasthan State Mines and Minerals Ltd. [2017-TIOL-2297-HC-RAJ-IT] viii. Shree Cement Ltd. [ITA No. 86/204 dated 22.08.2017] ix. Subhash Kabini Power Corporation Ltd. { [2016] 69 taxmann.com 394 (Karnataka)} x. Dodson Lindblom Hydro Power Pvt. Ltd. [2019-TIOL-531-HC-MUM-IT] xi. My Home Power Ltd. { [2014] 46 taxmann.com 314 (Andhra Pradesh)} 3.6. As regards, the orders relied upon by the AO and the Ld. CIT(A) in their respective orders, the Ld. AR submitted that the order of the Cochin Bench of the Tribunal in the case of Apollo Tyres Ltd. {[2014] 47 taxmann.com 416 (Cochin Trib.)}as relied by the revenue, had already been analyzed by the Hon'ble Allahabad High Court in the case of L.H. Sugar Factory Pvt. Ltd. (supra) which held it 'not to be good in law'. It was submitted that the Hon'ble High Court in L.H. Sugar Factory Pvt. Ltd. (supra) has referred to the order of the Chennai Bench of the ITAT in case of India Dyeing Mills (P.) Ltd. [2014] 36 ITR(T) 55 (Chennai - Trib.) which has considered the judgment of Apollo Tyres Ltd. (supra) and My Home Power Ltd. (supra) and then hel....
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.... both the parties and perused the material on record. 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". It has been made available assuming character of transferable right or entitlement only 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 are made available to the assessee on account of saving of energy consumption and not because of its business. Further, in our opinion, carbon credits cannot be considered as a bi-product. It is a credit....
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....cost of production to get this entitlement. Carbon credit is not in the nature of profit or in the nature of income." "25. Further, 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 states that CERs should be recognised in books when those are created by UNFCCC and/or unconditionally available to the generating entity. CERs are inventories of the generating entities as they are generated and held for the purpose of sale in ordinary course. Even though 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. " 26. Thus, sale of carbon credits is to be considered as capital receipt. This ground is allowed." 5.1. The above order of the Hyderabad Bench has been confirmed by the Hon'ble High Court of Andhara Pradesh. Next, the judgment of Hon'ble High Court of Gujarat in case of Gujarat Flourochemicals Ltd. [ITA Nos. 11/2019 & 28/2019], wherein....
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....y the AO and the Ld. CIT(A) and which have been further relied by the Ld. DR, we are of opinion that such cases do not support the case of revenue. As pointed out by the Ld. AR, the order of the Cochin Bench of the Tribunal in the case of Apollo Tyres Ltd. {[2014] 47 taxmann.com 416 (Cochin Trib.)}had already been analyzed by the Hon'ble Allahabad High Court in the case of L.H. Sugar Factory Pvt. Ltd. (supra) which held it 'not to be good in law'. The other order of the ITAT Ahmedabad Bench in the case of Kalpataru Power Transmission Ltd. {[2016] 68 taxmann.com 237 (Ahm. Trib.)}has been overruled by the later judgment of same bench of Ahmedabad Bench of the Tribunal in the same case of Kalpataru Power Transmission Ltd.[2019-TIOL-1424-ITAT-AHM].In view of the fact that case laws relied upon by the revenue have already been overruled by higher court or by the same court in later judgment, we are not inclined to consider those judgments while adjudicating the issue under consideration. 5.4. We also borrow some reasoning from the fact that Ministry of Finance has inserted a specific provision in form of section 115BBG in the Act which is effective from 1st April, 2018 and ....
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....cannot be said to be 'connected with' or 'incidental to' the business activities of assessee. The assessee is engaged in the business of refrigerants, engineering plastics and industrial yarns etc. and is not into the business of trading of carbon credits. All these findings of facts have been given by the coordinate bench in assessee's own case in subsequent years in AY 2007-08 and AY 2010-11 which have been placed before us. We, therefore, hold that carbon credits are not offshoot of business but offshoot of environmental concerns and hence not chargeable to tax. The receipts arising from transfer of carbon credits are in the nature of capital receipts not subjected to tax in terms of section 28(iv) read with section 2(24)(vd) of the Act. The claim of the assessee raised in grounds of appeal from 1 to 3 is hereby allowed. 6.0. Connected with the above, another issue raised by the assessee, by way of additional ground of appeal no. 4, is the exclusion of carbon credits from the book profits computed under section 115JB of the Act. It was submitted that the above additional ground is legal ground, all the facts are available on record. The learned authorised re....
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.... 2(24) of Income Tax Act, 1961 and when a receipt is not on in the character of income it cannot form part of the book profit under Section 115JB of the Act, 1961. In the case of Apollo Tyres Ltd. (supra) the income in question was taxable but was exempt under a specific provision of the Act as such it was to be included as a part of the book profit. But where a receipt is not in the nature of income at all it cannot be included in book profit for the purpose of computation under Section 115JB of the Income Tax Act, 1961. For the aforesaid reason, we hold that the interest and power subsidy under the schemes in question would have to be excluded while computing book profit under Section 115JB of the Income Tax Act, 1961." 6.5. Further ITAT, Lucknow Bench, in case of L.H. Sugar Factory Ltd. (ITA No. 717 & 418/LKW/2013 and others), held as under:- "4. We have considered the rival submissions. We find that the issue in dispute as per Ground No. 1 of appeal is regarding nature of receipt on account of sale of carbon credit and in the case of CIT Vs. My Home Power Ltd. (Supra) also, the dispute before Hon'ble Andhra Pradesh High Court was this as to whether the amount received by....
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....nd Chemicals Ltd. [TS-489-HC-2018(RAJ)] ii. the Hon'ble Bombay High Court (Goa Bench) in the case of Sesa Goa Limited [TS-163-HC-2020(BOM)] iii. the Delhi ITAT in the case of Sicpa India Private Ltd. [TS-154-ITAT-2020(DEL)] iv. the Kolkata ITAT in the case of Philips India Limited [TS-326-ITAT-2020(KOL)] v. the Kolkata ITAT in the case of Reckitt Benckiser (India) Private Limited [TS-614-ITAT-2020(KOL)] 7.4. Further, the learned AR had also relied upon the recent order of the coordinate bench in the case of DCM Shriram Ltd. [TS-554-ITAT-2021(DEL)-TP], dated 28th October, 2021, wherein the coordinate bench has allowed the deduction of education cess u/s. 37(1) of the Act by following the above judgments of the Hon'ble Bombay and Rajasthan High Court in the case of Sesa Goa Limited and Chambal Fertilisers And Chemicals Ltd. 7.5. It is noted that provisions of section 40(a)(ii) of the Act prohibits the allowance of any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at proportion of, or otherwise on the basis of, any such profits or gains. There is no dispute that tax payable under the Act is not an allo....