2017 (11) TMI 1967 - HC - Income Tax

Nature of income - income from sale of Carbon Emission Reduction Certificates (CERs) - ITAT held it as capital income - whether the same was specifically a revenue report and even the assessee has claim benefit u/s 80IA? - HELD THAT - As decided in M/S. SUBHASH KABINI POWER CORPORATION LIMITED 2016 (5) TMI 793 - KARNATAKA HIGH COURT When the carbon credit is generated out of environmental concerns, and it is not having the character of trading activity, the Tribunal has rightly held that it is capital receipt and it is not income out of business and hence, not liable to pay income tax. - Decided in favour of the assessee and against the department.

Summary

Issues:
1. Classification of income from sale of Carbon Emission Reduction Certificates (CERs) as capital or revenue.
2. Applicability of tax on carbon credit receipts under the Income Tax Act.
3. Interpretation of mercantile system of accounting in tax liability disputes.

Analysis:
1. Classification of Income from CERs: The appellant challenged the Tribunal's decision regarding the treatment of income from the sale of Carbon Emission Reduction Certificates (CERs) as capital income. The appellant contended that the income should be considered as revenue and not capital, especially since the assessee claimed benefits under section 80IA of the Act. However, the Tribunal, relying on various precedents including a decision by the Supreme Court in Vodafone International Holdings case, concluded that the receipts from Carbon credit are capital in nature. The Tribunal emphasized that such receipts are neither chargeable to tax under Business Income nor under Capital Gains. Consequently, the Tribunal allowed the appellant's ground, and the addition made by the Assessing Officer was deleted.

2. Tax on Carbon Credit Receipts: The issue of tax liability on carbon credit receipts was further clarified by the court through references to relevant case laws. In the case of Commissioner of Income Tax-III vs. Subhash Kabini Power Corporation Ltd, it was held that when carbon credit is generated out of environmental concerns and lacks the character of trading activity, it qualifies as a capital receipt and is not considered income from business, hence not subject to income tax. This interpretation was supported by the decision in Godrej & Boyce Manufacturing Company Ltd. vs. Deputy Commissioner of Income Tax, where it was stated that Section 14A of the Act would apply to dividend income on which tax is payable under Section 115-O of the Act. As a result, the issue was resolved in favor of the assessee and against the department.

3. Mercantile System of Accounting: The judgment also delved into the application of the mercantile system of accounting in determining tax liabilities. Citing the decision in Poonam Chand Trilok Chand vs. Commissioner of Income Tax, the court emphasized that under the mercantile system of accounting, the accrual of liability decides the question of deduction, regardless of the timing of actual payments. The court highlighted that contesting tax liabilities or failing to record them in books does not preclude claiming deductions under relevant sections of the Income Tax Act. This aspect further reinforced the appellant's position in the case.

In conclusion, the High Court upheld the Tribunal's decision, dismissing the appeal and affirming the treatment of income from CERs as capital in nature, not subject to income tax under the provisions of the Income Tax Act. The judgment provided clarity on the tax treatment of carbon credit receipts and underscored the significance of the mercantile system of accounting in tax disputes.