2021 (8) TMI 222 - HC - Income Tax

Sale of Certified Emission Reduction Credit - revenue or capital receipt - whether Tribunal was right in holding that the proceeds realized by the assessee on sale of Certified Emission Reduction Credit, which the assessee had earned on the Clean Development Mechanism in its wind energy operations, is a capital receipt and not taxable? - HELD THAT - Following the judgment made in S.P.Spinning Mills Pvt. Ltd., 2021 (1) TMI 1081 - MADRAS HIGH COURT and the judgment reported in Ambika Cotton Mills Ltd. 2014 (3) TMI 428 - ITAT CHENNAI the questions of law are decided against the Revenue and in favour of the assessee.

Issues Involved:
1. Whether the proceeds realized by the assessee on sale of Certified Emission Reduction Credit (Carbon Credits) are a capital receipt and not taxable.
2. Whether the sale of Carbon Credits is to be considered as a 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 to get entitlement for the Carbon Credits, without appreciating that generation of Carbon Credits is intricately linked to the machinery and processes employed in the production process by the assessee.

Detailed Analysis:

Issue 1: Capital Receipt and Taxability of Carbon Credits
The Tribunal held that the proceeds realized by the assessee on the sale of Certified Emission Reduction Credit (Carbon Credits) are a capital receipt and not taxable. The Revenue challenged this decision. However, the Division Bench of the High Court in the case of Commissioner of Income Tax, Chennai Vs. Ambika Cotton Mills Ltd. had previously decided a similar question of law against the Revenue, holding that carbon credit receipts are capital receipts and not business income. The High Court followed this precedent and dismissed the appeal, affirming that the proceeds from the sale of Carbon Credits are capital receipts and not taxable.

Issue 2: Liability of Carbon Credits under Income Tax Act, 1961
The Tribunal's decision that the sale of Carbon Credits is to 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 its earlier judgment in Commissioner of Income Tax, Chennai Vs. Ambika Cotton Mills Ltd., which followed the decision of the Division Bench in S.P. Spinning Mills Pvt. Ltd. Vs. Assistant Commissioner of Income Tax. The High Court noted that several High Courts, including the Karnataka High Court in CIT vs. Subhash Kabini Power Corporation Ltd., have held that receipts from the sale of Carbon Credits should be treated as capital receipts. Thus, the income from the sale of Carbon Credits is not taxable under any head of income under the Income Tax Act, 1961.

Issue 3: Cost of Acquisition or Production of Carbon Credits
The Tribunal held that there is no cost of acquisition or cost of production to get entitlement for the Carbon Credits. This view was supported by the High Court's reference to the Andhra Pradesh High Court's decision in Commissioner of Income Tax-IV v. My Home Power Ltd., which stated that Carbon Credits are not an offshoot of business but of environmental concerns. The High Court agreed with this analysis, noting that Carbon Credits are generated due to environmental concerns and not directly linked to the business operations. Therefore, the generation of Carbon Credits is not intricately linked to the machinery and processes employed in the production process by the assessee.

Conclusion:
The High Court dismissed the Revenue's appeal, deciding all substantial questions of law against the Revenue and in favor of the assessee. The proceeds from the sale of Carbon Credits were affirmed as capital receipts, not taxable under the Income Tax Act, 1961, and not linked to the cost of production or acquisition. The High Court's decision was consistent with its previous judgments and those of other High Courts on similar issues.

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