2014 (8) TMI 947 - AT - Income Tax

Capital receipt or Revenue Receipt - whether the amount received by the assessee on account of clean development mechanism (CDM) is capital or revenue receipt - Held that - Following decision of My Home Power Ltd. v. Dy. CIT 2012 (11) TMI 288 - ITAT HYDERABAD - This decision was upheld by High Court CIT v. My Home Power Ltd. 2014 (6) TMI 82 - ANDHRA PRADESH HIGH COURT - amount received by the assessee on account of CDM (carbon credits) is capital in nature - Decided in favour of assessee.

Summary

Issues involved: Determination of whether the amount received on account of clean development mechanism (CDM) is a capital or revenue receipt.

Detailed Analysis:

1. Background: The appeal was filed against the order of the Commissioner of Income-tax (Appeals) concerning the assessment year 2009-10. The primary issue was the classification of the amount received by the assessee on account of CDM as either capital or revenue receipt.

2. Assessee's Claim: The assessee, engaged in yarn manufacture and electricity generation through wind electrical generators, initially claimed CDM receipts as capital receipts in the return of income for the relevant assessment year.

3. Assessment and Appeal: The Assessing Officer categorized the CDM receipts as revenue receipts under "income from business and profession." Subsequently, the assessee appealed the decision before the Commissioner of Income-tax (Appeals), who upheld the Assessing Officer's findings.

4. Tribunal Hearing: The appeal was brought before the Tribunal, where the Chartered Accountant representing the assessee cited a precedent from the Hyderabad Bench of the Tribunal regarding the treatment of CDM receipts as capital receipts. Conversely, the Joint Commissioner of Income-tax from the Department supported the lower authorities' decision, referring to a judgment from the Cochin Bench of the Tribunal.

5. Judicial Precedents: The Tribunal analyzed the decisions cited by both parties, particularly focusing on the Hyderabad Bench's ruling in the case of My Home Power Ltd. v. Dy. CIT. The Tribunal emphasized that carbon credits, including CDM receipts, are akin to entitlements aimed at environmental preservation and are not generated through regular business operations.

6. Legal Interpretation: Referring to the Supreme Court's judgment in CIT v. Maheshwari Devi Jute Mills Ltd., the Tribunal concluded that CDM receipts are capital receipts, not business income. The Tribunal highlighted that carbon credits are a result of environmental concerns, not business activities, and do not contribute to profits or require additional expenses.

7. Judgment: Citing the consistent view taken by the Hyderabad Bench and the Andhra Pradesh High Court, the Tribunal ruled that the amount received on account of CDM is capital in nature. Consequently, the impugned order was set aside, and the appeal was allowed.

This comprehensive analysis of the judgment showcases the detailed legal reasoning and precedents considered by the Tribunal in determining the nature of the receipts under the clean development mechanism.