2015 (11) TMI 1055 - AT - Income Tax

Treatment of carbon credit receipts - assessee admitted receipts from trading of carbon credits as revenue nature and included the same for computation of deduction under section 80-IA - Held that - It is a credit given to the assessee under the Kyoto Protocol and because of international understanding. Thus, the assessees who have surplus carbon credits can sell them to other assessees under the Kyoto carbon credits to have capped emission commitment under the Kyoto Protocol. Transferable carbon credit is not a result or incidence of one s business and it is a credit for reducing emissions. The persons having carbon credits get benefit by selling the same to a person who needs carbon credits to overcome one s negative point carbon credit. The amount received is not received for producing and/or selling any product, by-product or for rendering any service for carrying on the business. The receipt from sale of carbon credits has to be considered as capital receipt and accordingly, it is not taxable. Thus, there is no question of considering the same for deduction under section 80-IA of the Act. - Decided in favour of assessee.

Summary

Issues:
Treatment of carbon credit receipts under section 80-IA of the Income-tax Act, 1961.

Analysis:
The appeal in this case revolves around the treatment of carbon credit receipts under section 80-IA of the Income-tax Act, 1961. The assessee initially included the receipts from trading of carbon credits for computation of deduction under section 80-IA. However, the Assessing Officer disagreed, stating that the receipts were not derived from an industrial undertaking and thus should not be considered for the deduction. The Commissioner of Income-tax (Appeals) also rejected the assessee's claim that if not considered as a trading receipt, the carbon credit receipts should be treated as capital receipts and excluded from the total income. The main contention was whether carbon credits should be taxed as revenue or capital receipts.

Upon hearing both parties and examining the material, the Tribunal opined that carbon credits are essentially an entitlement received to improve the environment and reduce emissions, not generated through business activities but due to global concern. The Tribunal emphasized that carbon credits cannot be taxed as revenue receipts as they lack elements of profit or gain, being an accretion of capital. The Tribunal highlighted that carbon credits are a result of international understanding and are not a by-product of business operations. Relying on various judicial precedents, the Tribunal concluded that income earned from the sale of carbon credits should be treated as a capital receipt, not subject to taxation, and hence not eligible for deduction under section 80-IA.

In light of the above analysis, the Tribunal allowed the appeal of the assessee, holding that the receipt from the sale of carbon credits is a capital receipt and therefore not taxable. Consequently, there is no basis for considering the same for deduction under section 80-IA of the Income-tax Act, 1961.