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2021 (3) TMI 1130 - HC - Income TaxDeduction u/s 80IA - Treatment to carbon credit receipt - revenue or capital receipts - income from generation of electricity and the carbon credit earned by the assessee are totally separate and the source of the income is also separate - HELD THAT - As relying on S.P. SPINNING MILLS PVT . 2021 (1) TMI 1081 - MADRAS HIGH COURT i f the receipt from the sale of carbon credit is a capital receipt, then it will go out of the purview of the gross total income as defined under Section 80B(5) of the Act, which expression is found in Section 80IA of the Act. Thus, if the receipts by sale of carbon credit will not fall within the definition of total income, the same cannot be included under Section 80IA of the Act. Therefore, even if the assessee has made such a claim, that cannot be a reason for the Tribunal to non-suit the assessee. Section 115BBG of the Act was introduced by Finance Act, 2017 with effect from 01.04.2018, prior to which, there was no such provision and Mr.V.S.Jayakumar, learned counsel for the assessee would submit that the assessees were under utter confusion as to under which provision of the Act, they should make a claim for deduction and having left with no other option, had been making the claim under Section 80IA of the Act and merely because the assessee due to uncertainty in the legal position, had made a claim under Section 80IA of the Act that cannot be a reason to deny a benefit granted in favour of the assessee. The submission, made by Mr.V.S.Jayakumar, learned counsel for the appellant, in this regard, is well found and accepted. - Decided in favour of assessee.
Issues Involved:
1. Whether the sale of carbon emission reduction (CER) also known as carbon credits is to be considered as capital receipt and not liable to tax? Detailed Analysis: Issue 1: Whether the sale of carbon emission reduction (CER) also known as carbon credits is to be considered as capital receipt and not liable to tax? The Revenue filed an appeal under Section 260A of the Income Tax Act, 1961, challenging the order of the Income Tax Appellate Tribunal (ITAT) for the assessment year 2010-11. The substantial question of law raised was whether the sale of carbon credits should be considered a capital receipt and thus not liable to tax. The court noted that this question had already been answered against the Revenue in a prior decision involving S.P. Spinning Mills Pvt. Ltd. vs. ACIT, Salem. The court referenced several High Court decisions, including CIT vs. Subhash Kabini Power Corporation Ltd. and CIT vs. My Home Power Ltd., which held that the receipt from the sale of carbon credits should be treated as a capital receipt. The court cited the Karnataka High Court's approval of the ITAT Hyderabad Bench's decision, which was upheld by the Andhra Pradesh High Court. The court emphasized the principle that when a court interprets a provision, it declares what the law is and how it should be construed, impacting the tax liability of the assessee. The court also referenced the Supreme Court's decision in Commissioner of Income Tax v. Maheshwari Devi Jute Mills Ltd., which held that the amount received from the sale of loom-hours was a capital receipt and not income from business. Similarly, in M/s. Empire Jute Co. Ltd. v. Commissioner of Income Tax, the Supreme Court reiterated that the nature of the advantage in a commercial sense determines whether an expenditure is capital or revenue. The court concluded that the sale of carbon credits should be treated as a capital receipt, not taxable as business income. The court further supported its decision by referring to the Andhra Pradesh High Court's ruling in Commissioner of Income Tax-IV v. My Home Power Ltd., which stated that carbon credits are generated due to environmental concerns and not as an offshoot of business, thus qualifying as a capital receipt. The court dismissed the Revenue's appeal, holding that the Tribunal failed to exercise its power properly by not considering whether the receipt from the sale of carbon credits required adjustment in the assessee's tax liability. The court emphasized that even if the assessee claimed a deduction under Section 80IA of the Act, the nature of the receipt as a capital receipt would exclude it from the gross total income, making it non-taxable. Finally, the court noted that Section 115BBG of the Act, introduced by the Finance Act, 2017, clarified the tax treatment of carbon credits, but this provision was not applicable for the assessment year in question. The court accepted the assessee's argument that due to legal uncertainty, they had claimed a deduction under Section 80IA, which should not be a reason to deny the benefit. Conclusion: The court dismissed the appeal, holding that the sale of carbon credits is a capital receipt and not liable to tax, answering the substantial question of law in favor of the assessee.
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