2021 (5) TMI 93 - 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.

Summary

Issues Involved:

1. Whether the proceeds realized on the sale of Certified Emission Reduction Credit (Carbon Credits) are capital receipts and not taxable.
2. Whether the sale of Carbon Credits is to be considered as capital receipts 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 to get entitlement for the Carbon Credits.
4. Whether the Technology Up-gradation Fund (TUF) subsidy and compensation receivable on non-performance of Energy Generation are capital receipts and not liable for tax under any head of income under the Income Tax Act, 1961.

Detailed Analysis:

1. Proceeds from Sale of Certified Emission Reduction Credit (Carbon Credits):
The primary issue is whether the proceeds realized by the assessee from the sale of Certified Emission Reduction Credits (Carbon Credits) are capital receipts and not taxable. The court referenced the decision in [2021] 125 taxmann.com 206 (Madras) [Commissioner of Income Tax, Chennai Vs. Ambika Cotton Mills Ltd.], which followed the judgment in T.C.A.No.451 of 2018 [S.P.Spinning Mills Pvt. Ltd. Vs. Assistant Commissioner of Income Tax]. It was held that the proceeds from the sale of Carbon Credits are capital receipts and not taxable. This was supported by the fact that the generation of Carbon Credits is linked to environmental concerns and not directly to the business operations.

2. Taxability of Sale of Carbon Credits:
The court examined whether the sale of Carbon Credits should be considered as capital receipts and not liable for tax under any head of income under the Income Tax Act, 1961. It was noted that several high courts, including the Karnataka High Court in CIT vs. Subhash Kabini Power Corporation Ltd., and the Andhra Pradesh High Court in CIT vs. My Home Power Ltd., have held that the income from the sale of Carbon Credits is a capital receipt. The court affirmed this view, stating that Carbon Credits are not an offshoot of business but of environmental concerns, thus not generating taxable business income.

3. Cost of Acquisition or Production for Carbon Credits:
The court addressed whether there is no cost of acquisition or production to get entitlement for the Carbon Credits. The argument that the generation of Carbon Credits is intricately linked to the machinery and processes employed in production was considered. However, it was concluded that there is no specific cost of acquisition or production for Carbon Credits, as they are generated due to environmental concerns and not directly from the business operations.

4. Technology Up-gradation Fund (TUF) Subsidy and Compensation Receivable:
The issue also extended to whether the Technology Up-gradation Fund (TUF) subsidy and compensation receivable on non-performance of Energy Generation are capital receipts and not liable for tax under any head of income under the Income Tax Act, 1961. The court held that such receipts are capital in nature, following the rationale that these subsidies and compensations are not directly linked to the business income but are received due to specific schemes and compensations.

Conclusion:
The court dismissed the appeals filed by the Revenue, deciding in favor of the assessee. The court reiterated that the proceeds from the sale of Carbon Credits are capital receipts and not taxable. Similarly, the TUF subsidy and compensation for non-performance of Energy Generation are also capital receipts. The court followed the judgments in T.C.A.No.451 of 2018 and [2021] 125 taxmann.com 206 (Madras), which had addressed similar issues and provided a consistent legal interpretation. The appeals were dismissed with no costs.