2015 (12) TMI 1877 - AT - Income Tax

Nature of receipts - Income accrued on account of carbon credits - revenue or capital receipt - HELD THAT - The issue is covered in favour of the assessee by order of DCIT Vs Kotla Hydro Power Pvt. Ltd. 2015 (4) TMI 1346 - ITAT CHANDIGARH assessee was carrying on the business of power generation for the assessment year 2007-08. Carbon credit was not an offshoot of business of the assessee but an offshoot of environmental concerns. No asset was generated in the course of business but it was generated due to environmental concerns. There was no cost of acquisition or cost of production to get entitlement for the carbon credits. Therefore, the income from sale of carbon credits was to be considered as capital receipt and not liable to tax under any head of income under the Income-tax Act, 1961 - Decided against revenue.

Summary

Issues:
1. Whether the deletion of addition of income accrued on account of carbon credits entitlement was justified under section 2(24)(xii) of the Income Tax Act, 1961?

Analysis:
1. The appeal by the revenue challenged the deletion of an addition of Rs. 1,21,16,909/- as income accrued from carbon credits entitlement for the assessment year 2010-11. The Assessing Officer considered these receipts as revenue receipts, while the assessee claimed them to be capital receipts. The assessee argued that carbon credits are commodities traded on stock exchanges and represent compensation for unforeseen losses. The ITAT Hyderabad Bench and the High Court held that income from carbon credits is a capital receipt and not taxable under the Income Tax Act, 1961. The CIT(A) allowed the appeal based on similar precedents and the view that carbon credits are not revenue receipts but capital receipts.

2. The counsel for the assessee contended that the issue was already decided in favor of the assessee by the ITAT Chandigarh Bench in a similar case. The Tribunal held that carbon credits are not profits or income but an entitlement to reduce carbon emissions, generated due to environmental concerns. The decision was confirmed by the Andhra Pradesh High Court, and similar decisions were followed by other benches. The Tribunal, based on these precedents, dismissed the departmental appeal, stating that income from carbon credits is a capital receipt and not taxable under any head of income.

3. The judgment relied on the distinction between carbon credits as a result of environmental concerns, not business activities, leading to the conclusion that they are capital receipts. The decision highlighted that carbon credits do not increase profits, involve no expenses, and do not generate assets in the course of business. The consistent interpretation across different benches and the confirmation by the High Court supported the view that income from carbon credits is not taxable. Therefore, the departmental appeal was dismissed based on established legal principles and precedents.

In conclusion, the judgment upheld the assessee's position that income from carbon credits entitlement is a capital receipt and not taxable under the Income Tax Act, 1961, based on established legal precedents and interpretations.