2015 (4) TMI 132 - AT - Income Tax

Capital receipt or Revenue receipt - carbon credit receipts or CDM receipts - Held that - The co-ordinate Bench of the Tribunal in the case of Ambika Cotton Mills Ltd. v. Deputy CIT 2014 (3) TMI 428 - ITAT CHENNAI while dealing with an identical issue followed the decision of the Hyderabad Bench of the Tribunal in the case of My Home Power Ltd. v. Deputy CIT reported as 2012 (11) TMI 288 - ITAT HYDERABAD . Respectfully following the decision of the co-ordinate Bench, we hold that the CDM receipts are capital receipts. - Impugned order set aside - Decided in favour of assessee.

Summary

Issues:
1. Nature of carbon credit receipts - whether capital or revenue in nature.

Analysis:
The appeal involved a dispute regarding the nature of carbon credit receipts, specifically whether they should be considered as capital or revenue in nature for tax purposes. The assessee, a company engaged in manufacturing and electricity generation, treated the receipts from the sale of carbon credits as capital receipts. However, the Assessing Officer disallowed a significant amount on account of clean development mechanism (CDM) as revenue receipts. The Commissioner of Income-tax (Appeals) upheld the Assessing Officer's view, leading to the assessee filing a second appeal before the Tribunal.

The assessee argued that carbon credit receipts are capital in nature, citing precedents from the Tribunal where similar receipts were deemed as capital. On the other hand, the Revenue contended that the receipts should be treated as revenue, presenting various arguments to support their position. These arguments included considering carbon credits as goods, akin to shares or stocks, and taxable under section 28(iv) as revenue receipts.

The Tribunal analyzed the arguments from both sides, along with relevant precedents, and found that the case of the assessee was squarely covered by a previous order of the Hyderabad Bench of the Tribunal. The Hyderabad Bench had held that carbon credits are in the nature of an entitlement received due to world concern for environmental improvement, making them capital receipts not subject to taxation as revenue. Additionally, the Tribunal referred to a guidance note by the Institute of Chartered Accountants of India (ICAI) stating that self-generated certified emission reductions (CERs) should be recognized as inventories and accounted for as capital receipts.

In conclusion, the Tribunal, following the decision of a co-ordinate Bench, held that the CDM receipts, including carbon credit receipts, should be treated as capital receipts. As a result, the order of the Commissioner of Income-tax (Appeals) was set aside, and the appeal of the assessee was allowed.