Receipt from the sale of carbon credit certificates:- Whether Capital receipt or revenue receipt?

Lokesh Mahnot

Commissioner of Income-tax – IV VS My Home Power Ltd. (Andhra Pradesh High Court), ITAT APPEAL NO. 60 OF 2014, Date of Pronouncement- 19.02.2014  

Controversy–  Receipt from the sale of carbon credit certificates:- Whether Capital receipt or revenue receipt?

Facts of the case

• The assessee company was engaged in business of power generation through biomass power generation unit;
• It received carbon credits, namely carbon Emission Reduction Certificate for its project activity of switching off fossil fuel from naptha and diesel to biomass.
• It transferred said carbon credits and offered receipt from said transfer as capital receipt.
• However, AO treated said receipts as business income and brought same to tax;
• Revenue submits that the consideration received on account of sale of Carbon Credits should be treated to be business income as the sale has been made in connection with the business,
• The argument that whether above said receipt can be considered as Capital receipt or Revenue receipt expediency is not acceptable because this was not a case of an ordinary business receipt. Carbon credit is not directly linked with power generation.+

Held- “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.” We agree with this factual analysis as the assessee is carrying on the business of power generation. The Carbon Credit is not even directly linked with power generation. On the sale of excess Carbon Credits the income was received and hence as correctly held by the Tribunal it is capital receipt and it cannot be business receipt or income.

Our Comments

There are various other judgements for and against the capital receipt. For e.g the case of Apollo Tyres Ltd. V. Asstt. CIT (2014) 47 taxmann.com 416 (Cochin- Trib.), it was held in the favour of Revenue. The Tribunal held that the Certified Emission Reduction/ Carbon credit was obtained by the assessee in the course of its business activity. The carbon credits also has a market in carbon trade exchange. Tribunal held that in the view of specific provisions in the Act, viz. section 28(iv) read with section 2(24)(vd), it is obvious that the value of any benefit or perquisite arising from business or profession forms part of the profits an gains of the business. Therefore, the income on sale of certificates is admittedly a benefit arising out of the business of the assessee and would fall within the definition of “income” under section 2(24)(vd).

Further the assessee was not entitled for deduction under section 80IA. The Tribunal adjudicated that the income on sale of credits was attributable to the business but it is not direct source of income from the industrial undertaking.

Therefore, the income on sale of credits would form part of income from PGBP however, can’t be treated as profit “derived from” the industrial undertaking.

However, recent judgement of Andhra High court Carbon Credit is not an offshoot of business but an offshoot of environmental concerns. And Tribunal adjudicated that it is capital receipt and it can’t be business receipt or income.

(Author can be reached at lokesh.mahnot@gmail.com)