2019 (11) TMI 1682 - AT - Income Tax

Characterization of income - income on sale of Certified Emission Reduction / Carbon Credit - whether it is a benefit derived during the course of the business of the assessee and therefore, the same was taxable u/s 28(iv) r.w.s. 2(24)(vd) or capital receipt - HELD THAT - As relying on M/S. DODSON LINDBLOM HYDRO POWER PVT. LTD. 2019 (4) TMI 1034 - BOMBAY HIGH COURT we find the issue stands covered and decided in favour of the assessee. Following the parity of reasoning, we are of the opinion that the said carbon credits is outside the scope of the chargeability of tax as the same constitutes capital receipts . - Decided against revenue.

Summary

Issues involved:
Taxability of income on sale of Certified Emission Reduction / Carbon Credit as profits and gains, classification of the amount received as capital or taxable receipt, applicability of deductions under section 80IA, and the impact of relevant judicial precedents on the tax treatment of carbon credits.

Analysis:
The appeal concerns the taxability of income derived from the sale of Certified Emission Reduction / Carbon Credit for the assessment year 2014-15. The assessee contended that the amount received should be treated as a capital receipt and not taxable. The grounds raised by the assessee challenged the CIT(A)'s decision confirming the addition of the income in the hands of the assessee. The key arguments revolved around whether the receipts constituted capital or taxable income, considering the nature of the transaction and its relation to the business activities of the assessee.

The assessee's counsel relied on judicial precedents, particularly highlighting the decision of the Hon'ble Andhra Pradesh High Court in the case of CIT vs. My Home Power Ltd., which held that carbon credit receipts are capital in nature. Additionally, reference was made to the judgment of the Jurisdictional High Court in the case of Pr.CIT vs. M/s. Dodson Lindblom Hydro Power Pvt. Ltd., which further supported the capital nature of such receipts. The counsel emphasized that the revenue authorities erred in treating the receipts as taxable income, contrary to the established legal position.

Upon considering the binding judgment in the case of M/s. Dodson Lindblom Hydro Power Pvt. Ltd., which reiterated the capital nature of carbon credit receipts, the Tribunal concluded that the issue was settled in favor of the assessee. The Tribunal found no reason to deviate from the consistent view of various High Courts on the treatment of such receipts as capital in nature. Consequently, the grounds raised by the assessee challenging the taxability of carbon credits were allowed, and the income was deemed as capital receipts not subject to tax.

Given the relief granted based on the capital nature of the receipts, the adjudication of the issue related to the applicability of deduction under section 80IA became irrelevant and was dismissed as an academic exercise. The general nature of the sixth ground raised by the assessee was also dismissed accordingly. Ultimately, the appeal of the assessee was partly allowed based on the established legal position regarding the tax treatment of income from the sale of Certified Emission Reduction / Carbon Credit.

This comprehensive analysis of the judgment highlights the critical legal arguments, relevant judicial precedents, and the ultimate decision of the Tribunal regarding the tax treatment of carbon credit receipts.