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2014 (5) TMI 553 - AT - Income TaxNature of receipt - capital receipt or revenue receipt - addition under carbon credits scheme Switching of Fossil Fuel from Naptha & Diesel to Biomass (agriculture produce) - Held that - Following My Home Power Ltd. Versus Deputy Commissioner of Income-tax, Central Circle 7 2012 (11) TMI 288 - ITAT HYDERABAD - 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 - 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 it is capital receipt and it cannot be business receipt or income - the receipt on sale of carbon credits is a capital receipt and deleted the addition made by the AO Decided against Revenue.
Issues involved:
1. Tax treatment of income from sale of Carbon Credits (CER Certificates) as revenue or capital receipt. Detailed Analysis: 1. The appeals were against the orders of CIT(A)-V, Hyderabad for the assessment years 2008-09 & 2009-10 regarding the tax treatment of income from Carbon Credits. The assessee sold 41,586 CERs and received Rs. 3.43 crores. The AO treated a portion of this amount as revenue receipt. However, the CIT(A) deleted the addition, considering it a capital receipt based on a previous ITAT decision for AY 2007-08. 2. The main contention was whether the income from the sale of Carbon Credits should be considered as a revenue or capital receipt. The ITAT, in the assessee's case for AY 2007-08, held that Carbon Credits are a capital receipt as they are an entitlement arising from environmental concerns, not business activities. The Tribunal emphasized that Carbon Credits are not a result of business but of international environmental agreements like the Kyoto Protocol, hence not taxable as business income. 3. The Hon'ble Jurisdictional High Court upheld the ITAT's decision, stating that Carbon Credits are not linked to the assessee's business activities, making the income from their sale a capital receipt. The Court agreed that Carbon Credits are generated due to environmental concerns, not business operations. Consequently, the Court dismissed the appeal, confirming the capital nature of the income from Carbon Credits. 4. Relying on the ITAT's previous decision for AY 2007-08 and the High Court's affirmation, the ITAT Hyderabad upheld the CIT(A)'s order, treating the income from Carbon Credits as a capital receipt and dismissing the revenue's appeals. The Tribunal concurred that the receipts from Carbon Credits were not business income but capital receipts, following the principles established in the previous decisions. In conclusion, the judgment clarified that income from the sale of Carbon Credits should be treated as a capital receipt, not subject to taxation as business income, based on environmental concerns and international agreements rather than business activities. The decision aligned with previous rulings and upheld the CIT(A)'s order, dismissing the revenue's appeals.
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