2016 (4) TMI 1156 - AT - Income Tax

Carbon credit receipts - treated as capital in nature - eligibility for deduction u/s 80IA - Held that - Income from sale of carbon credits is capital in nature and the said income is not eligible for deduction u/s 80IA of the Act.

Summary

Issues involved: Determination of whether income received from the sale of carbon credit is revenue or capital in nature.

Analysis:
1. Nature of Income: The primary issue in this appeal is to ascertain whether the income generated from the sale of carbon credits should be classified as revenue or capital in nature. The Tribunal referred to a previous decision in the assessee's case for the assessment year 2010-11, where it was established that carbon credit receipts are to be treated as 'capital' in nature. The Tribunal highlighted that the receipts from trading carbon credits are not directly linked to power generation but rather stem from environmental concerns, leading to the conclusion that they are capital receipts. The Tribunal also noted that the assessee had initially declared the sale receipts as income to claim a deduction under section 80IA, but later sought to withdraw this declaration. Despite the CIT(A) applying the 'estoppel' principle against the assessee, the Tribunal accepted the alternative claim, emphasizing that the substantial legal question had been settled in favor of the assessee regarding the nature of the receipt.

2. Legal Interpretation: The Tribunal delved into the legal interpretation of the term 'derived' in section 80IA, emphasizing that profits eligible for deduction must be directly arising from the particular activity. Referring to the decision in CIT v. Sterling Foods, the Tribunal reiterated that the term 'derived' restricts qualifying profits to those directly stemming from the specific activity. Consequently, the Tribunal concluded that revenue from the sale of carbon credits cannot be considered eligible for deduction under section 80IA. The Tribunal further highlighted that the receipts from trading carbon credits are not derived from the power generation activity but are attributable to the business of generating electricity from non-conventional means.

3. Decision and Outcome: Based on the analysis and legal interpretation, the Tribunal ruled that the income from the sale of carbon credits is 'capital' in nature and therefore not eligible for deduction under section 80IA of the Act. The appeal of the assessee was partly allowed, aligning with the previous decision in the assessee's case for the assessment year 2010-11. The Tribunal left open the issue of excluding specific receipts from the sale of carbon credits pertaining to a previous assessment year for the Assessing Officer to address in accordance with the law. The final order was pronounced on 1st April 2016 in Chennai, marking the conclusion of the legal proceedings.