2021 (5) TMI 92 - HC - Income Tax

Characterization of receipts - Revenue or capital receipt - proceeds realized by the assessee on sale of Certified Emission Reduction Credit earned on the Clean Development Mechanism in its wind energy operations - HELD THAT - As relying on S.P.Spinning Mills Pvt. Ltd 2021 (1) TMI 1081 - MADRAS HIGH COURT and Ambika Cotton Mills Ltd 2014 (3) TMI 428 - ITAT CHENNAI wherein held that carbon credit receipts cannot be considered as business income and it is a capital receipt. Hence, the assessee's claim under Section 80IA of the Act is untenable, as deduction under Section 80IA of the Act is allowable only on profits and gains derived by an undertaking. Thus the questions of law are decided against the Revenue and in favour of the assessee.

Issues Involved:
1. Whether proceeds from the sale of Certified Emission Reduction Credit (Carbon Credits) are capital receipts and not taxable.
2. Whether the sale of Carbon Credits should be considered as Capital Receipt and not liable for tax under any head of income under the Income Tax Act, 1961.
3. Whether there is no cost of acquisition or cost of production for Carbon Credits, and if their generation is linked to the machinery and processes employed in the production process by the assessee.

Issue-wise Detailed Analysis:

1. Proceeds from Sale of Certified Emission Reduction Credit as Capital Receipts:
The Tribunal held that proceeds realized by the assessee on the sale of Certified Emission Reduction Credit earned through the Clean Development Mechanism in its wind energy operations are capital receipts and not taxable. This decision was challenged by the Revenue. However, the Division Bench of the High Court, following the precedent set in the case of Commissioner of Income Tax, Chennai Vs. Ambika Cotton Mills Ltd., decided that such proceeds are indeed capital receipts. The judgment referenced the Karnataka High Court's decision in CIT vs. Subhash Kabini Power Corporation Ltd., which approved the ITAT Hyderabad Bench's view, upheld by the Andhra Pradesh High Court in CIT vs. My Home Power Ltd., that sale of carbon credits results in a capital receipt which is not taxable.

2. Sale of Carbon Credits as Capital Receipt and Non-Taxable:
The Tribunal's decision that the sale of Carbon Credits should be considered as a Capital Receipt and not liable for tax under any head of income under the Income Tax Act, 1961, was upheld. The High Court referenced the decision in CIT vs. Subhash Kabini Power Corporation Ltd., which supported the view that carbon credit receipts are capital in nature. The Andhra Pradesh High Court in CIT vs. My Home Power Ltd. also held that Carbon Credit is not an offshoot of business but of environmental concerns, and thus, the income from its sale is a capital receipt.

3. Cost of Acquisition or Production for Carbon Credits:
The Tribunal held that there is no cost of acquisition or cost of production to get entitlement for Carbon Credits, without appreciating that their generation is intricately linked to the machinery and processes employed in the production process by the assessee. The High Court noted that the Tribunal and other judicial precedents have consistently treated the sale of carbon credits as generating capital receipts. The argument that carbon credits are linked to the machinery and processes was not sufficient to change the nature of the receipts from capital to revenue.

Judgment Summary:
The High Court dismissed the Revenue's appeal, following the precedent set by previous judgments, particularly the Division Bench decision in T.C.A.No.451 of 2018 and the judgment reported in [2021] 125 taxmann.com 206 (Madras). The substantial questions of law were decided against the Revenue and in favor of the assessee, confirming that the proceeds from the sale of Carbon Credits are capital receipts and not taxable under the Income Tax Act, 1961. The court also noted that the issue of cost of acquisition or production of Carbon Credits does not alter their classification as capital receipts.

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