CA Manish Soni
A. What is meant by Carbon Credits?
The alarming rate of ever increasing pollution is a matter of concern for each of us especially those living in the territory of Delhi NCR. Recently, the Hon’ble Supreme Court termed that living in Delhi is like living in a gas chamber. In past, several measures have been taken to curb the pollution and make life of dilliwallahs comfortable. However, as we say, ‘Destruction is a man’s will, Nevertheless Prevention is also a man’s will and therefore, it’s a man’s choice to choose between Destruction and Prevention.’ Even the recently concluded second phase of Odd-Even rule in Delhi has not demotivated the increasing pollution level! Now, let us look on the other side of the coin.
The carbon credit system came into existence when people became more aware that human industrial activities, particularly burning of CO2-emitting fuels like coal, petroleum and natural gas – is responsible for global warming and environmental degradation. The premise of the system is that a government or another regulating body will be able to regulate the total tons of carbon dioxide which are emitted but will leave some flexibility as to how that is accomplished. A carbon credit is a permit that allows the holder to emit one ton of carbon dioxide. Credits are awarded to countries or groups or corporates that have reduced their greenhouse gases below their emission quota. Carbon credits can be traded in the international market at their current market price.
For example, if an industrial undertaking plants enough trees to reduce emissions by one ton, the undertaking will be awarded one credit. If a steel producer has an emissions quota of 10 tons but is expected to produce 11 tons, it could purchase this carbon credit from the environmental group. The carbon credit system looks to reduce emissions by having countries honor their emission quotas and offer incentives for being below them.
In 2011, The Delhi Metro Rail Corporation has been certified by the United Nations(UN) as the First Metro Rail and Rail based system in the world which will get carbon Credits for reducing Green House Gas Emissions as it has helped to reduce pollution levels in the city by 6.3 lakh tons every year thus helping in reducing global warming. Today about 18 lakh people travel in the city’s Metro Rail system which is completely non-polluting and environment friendly and, but for the Metro these people would have traveled by cars, busses, two/three wheelers etc which would have resulted in emission of green House Gases such as CO2, CO, HC, NOx, PM and SO2. Thus, DMRC has helped in reduction in emission of harmful gases into the city’s atmosphere and the United Nations Body administering the clean Development Mechanism (CDM) under the Kyoto Protocol has certified that DMRC has reduced Emissions and thus earned carbon credits worth about Rs.47 crore annually for the next seven years and with the increase in number of passengers, this figure shall increase.(Source: DMRC Website)
B. Facts of the case
SubhashKabini Power Corporation Limited(‘the assessee’) was engaged in the business power generation. During the subject assessment year, it earned carbon credits which were sold for a consideration of INR 48.9 million to a Japanese Company for a consideration. CIT(A) while exercising his revisionary power has held that receipts on account of sale of carbon credits were revenue and not capital in nature and accordingly taxable under the Indian Tax Laws (‘ITL’).
[TS-236-HC-2016(KAR)]
C. Contentions of assessee
Receipts from the sale of carbon credit is capital in nature and thus neither in the nature of the income chargeable to tax nor in the nature of business profit/ income arising from business
D. Contentions of Revenue
- Any benefit or perquisite or credit is generated from business, the same would be a profit from business and isthus taxable u/s 28.
- Carbon credits were earnedfrom power generation business and therefore the same was taxable as business income
E. The Hon’ble Karnataka HC, while upholding the view of assessee, held that:
- Earlier, the ITAT correctly concluded that carbon credit was in the nature of ‘an entitlement’ received to improve world atmosphere and environment reducing carbon, heat and gas emissions. Further, since the source of credits was for world concern, the amount received had no element of profit and thus could not be subjected to tax
- AP HC had correctly held in the case of My Home Power Ltd.[2014] 46 taxmann.com 314 (Andhra Pradesh) that 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 toenvironmental concerns. Further, Carbon credit was not even directly linked with power generation and thus income received on sale of excess carbon credits was held to be a capital receipt
- Carbon credit is not the business of the assessee nor the same is generated as a by product on account of business activity of power generation, but is earned on account of concern for environment. Carbon credit is generated on account of employment of good and viable practices by assessee
F. Author’s note
The matter relating to taxability of carbon credits has been litigated in many cases. It can be stated that income by selling carbon credits may have been earned in the course of normal business, however, the same is earned due to concerns for environment. Therefore, it can be said that since there is no direct nexus between normal business and earning of carbon credits, the same should be treated as capital in nature.Further, in the following cases, it has been held that proceeds arising on account of sale of carbon credits is a capital receipt and therefore, not taxable:
- My Home Power Ltd. [2014] 46 taxmann.com 314 (Andhra Pradesh)
Note: In April 2016, the Hon’ble SC has admitted SLP against this order of Andhra Pradesh HC
- SreeRayalaseema Green Energy Ltd. [2015] 58 taxmann.com 62 (Hyderabad – Trib.)
- Intex [2015] 58 taxmann.com 337 (Chennai – Trib.)
- Arun Textiles [2015] 58 taxmann.com 223 (Chennai – Trib.)
- Adisankara Spinning Mills (P.) Ltd. [2015] 53 taxmann.com 79 (Chennai – Trib.)
- Sri Velayudhaswamy Spinning Mills (P.) Ltd. [2013] 40 taxmann.com 141 (Chennai – Trib.)
Interestingly, in the following case, it has been held that sale of carbon credit is revenue in nature and thus taxable under the ITL
- Kalpataru Power Transmission Ltd. [2016] 68 taxmann.com 237 (Ahmedabad Trib.)
Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of any law firm or professional firm or any other entity.
