Issue – In the assessment order, the Assessing Officer has held that (a) Carbon Credit is not a capital receipt, (b) cost of acquisition of Carbon Credit is NIL & (c) entire receipt is taxable as capital gain. However, in the computation, it has been added as Business income. Learned CIT(Appeals) has held that receipt from CER’s is in the nature of benefit arising from the business of the assessee and is taxable as ‘Business Income’ u/s Sec 28(iv) of the Act.
Contention of the Department –Receipt on account of carbon credit is related to the business of the assessee and the assessee has undertaken activities which has resulted in the receipt on account of carbon credits. Hence, the amount so received has to be considered as related to the business of the assessee and should either be considered as revenue receipts chargeable to tax as business income, or the net amount after deduction of expenditure if any, incurred for the same should be considered as chargeable to tax under the head capital gains.
Contention of the Assessee :-
(a) Issue squarely covered in Assessee ’s favour by the decisions of Hon ’ble Tribunal:
The issue under consideration is squarely covered by the decision of Hon’ble Hyderabad Tribunal in favor of assessee in the case of My Home Power Ltd. –vs.- DCIT (2013) 151 TTJ 616 (Hyd) wherein it has been held that receipt on account of carbon credit is not in the nature of profit or in the nature of income and hence has to be considered as capital receipt. After examining the matter in detail the Hon’ble Tribunal in the said case have held as under –
“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 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 under the Kyoto Protocol. Transferable carbon credit is not a result or incidence of one’s business and it is a credit for reducing emissions. The persons having carbon credits get benefit by selling the same to a person who needs carbon credits to overcome one’s negative point carbon credit. The amount received is not received for producing and/or selling any product, byproduct or for rendering any service for carrying on the business. In our opinion, carbon credit is entitlement or accretion of capital and hence income earned on sale of these credits is capital receipt. For this proposition, we place reliance on the judgment of the Supreme Court in the case of CIT v. Maheshwari Devi Jute Mills Ltd. (57 ITR 36) wherein it is held that transfer of surplus loom hours to other mill out of those allotted to the assessee under an agreement for control of production was capital receipt and not income. Being so, the consideration received by the assessee is similar to consideration received by transferring of loom hours. The Supreme Court considered this fact and observed that taxability of payment received for sale of loom hours by the assessee is on account of exploitation of capital asset and it is capital receipt and not an income. Similarly, 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. Accordingly, we are of the opinion that the consideration received on account of carbon credits cannot be considered as income as taxable in the assessment year under consideration. Carbon credit is not an offshoot of business but an offshoot of environmental concerns. No asset is generated in the course of business but it is generated due to environmental concerns. Credit for reducing carbon emission or greenhouse effect can be transferred to another party in need of reduction of carbon emission. It does not increase profit in any manner and does not need any expense. It is a nature of entitlement to reduce carbon emission, however, 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.”
The principles stated above have been accepted and followed by the Chennai Bench of the Hon’ble Tribunal in the case of Sri Velayudhaswamy Spinning Mills (P.) Ltd. – vs.- DCIT (2013) 40 taxmann.com 141 (Chennai) and Ambika Cotton Mills Ltd. -vs.- DCIT (2013) I.T.A. No. 1836/Mds/2012(Chennai)
(b) No Provision under the Income Tax Act to tax Carbon Credit
Proposed Direct Tax Code (DTC) vide clause 33(2)(xi) specifically provides for taxability of Carbon Credit as Business receipts & chargeable to tax. Similar provision is not present under the current Income Tax Act ’1961.
Apex Court in Vodafone International Holdings –vs.- UOI 341 ITR 1 (2012) SC while deciding an issue on international taxation made a comparative analysis of the provisions of Direct Taxes Code (DTC) Bill, 2010 and Income Tax Act, 1961 and have held that treatment of any particular item in different manner in the 1961 Act and DTC serves as an important guide in determining tax ability of the said item. Since similar provision for tax ability is not present in the current statute, clear inference can be drawn that the above income is not chargeable to tax under the Income Tax Act, 1961.
We find that the Appellate Tribunal in My Home Power Ltd Vs. DCIT [supra], have, after detailed examination, concluded that the receipts from Carbon credit are capital in nature. We are inclined to follow the said decision and the other two decisions of Chennai Tribunal in Sri Velayudhaswamy Spinning Mills (P.) Ltd. Vs. DCIT [supra] and Ambika Cotton Mills Ltd. Vs. DCIT (supra) where also it has been held that receipt on account of Carbon Credit is capital in nature & neither chargeable to tax under the head Business Income nor liable to tax under the head Capital Gains. Our above view is also supported by the decision of Supreme Court in the case of Vodafone International Holdings Vs. UOI [supra] wherein Supreme Court has held that treatment of any particular item in different manner in the 1961 Act and DTC serves as an important guide in determining the taxability of said item. Since DTC by virtue of the deeming provisions specifically provides for taxability of carbon credit as business receipt and Income Tax Act does not do so, our view gets duly fortified by the principles stated in the above decision of Supreme Court. Accordingly this ground of the assessee is allowed and the addition made by the AO is deleted.