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2021 (12) TMI 713 - HC - Income TaxNature of receipts - sale of Carbon Emission Reduction (CER) also known as Carbon Credits - revenue or capital receipts - HELD THAT - As decided in S.P. SPINNING MILLS PVT. LTD. 2021 (1) TMI 1081 - MADRAS HIGH COURT such receipt should be treated as a capital receipt. As decided in MAHESHWARI DEVI JUTE MILLS LIMITED 1965 (4) TMI 10 - SUPREME COURT amount received out of sale of loom-hours can be termed as capital receipt and not income out of business. - Decided in favour of assessee.
Issues Involved:
1. Whether the sale of Carbon Emission Reduction (CER) or Carbon Credits is to be considered as a capital receipt and not liable to tax. Issue-wise Detailed Analysis: 1. Nature of Carbon Credit Receipts: Capital or Revenue The primary issue in this case was whether the income from the sale of Carbon Emission Reduction (CER) or Carbon Credits should be considered as a capital receipt and thus not liable to tax. The Tribunal had previously held that such income is a capital receipt, which the Revenue challenged. Precedent Cases and Legal Reasoning The court referred to several precedents, including: - S.P. Spinning Mills (P) Ltd. v. Assistant Commissioner of Income Tax: This case established that the income from the sale of carbon credits should be treated as a capital receipt. - CIT vs. Subhash Kabini Power Corporation Ltd.: The Karnataka High Court upheld the ITAT Hyderabad Bench’s decision, which was also supported by the Andhra Pradesh High Court in CIT vs. My Home Power Ltd. These decisions collectively concluded that the sale of carbon credits results in a capital receipt, not taxable income. Tribunal’s and Court’s Observations The Tribunal had noted that the sale of carbon credits is not an offshoot of business but environmental concerns, and no asset is generated in the course of business. This was supported by the Andhra Pradesh High Court, which confirmed that carbon credits are not directly linked with power generation and are thus capital receipts. Supreme Court References The court also referenced the Supreme Court decisions in: - Commissioner of Income Tax v. Maheshwari Devi Jute Mills Ltd.: This case determined that the amount received from the sale of loom-hours is a capital receipt. - M/s. Empire Jute Co. Ltd. v. Commissioner of Income Tax: This case distinguished between capital and revenue expenditures, emphasizing that not all enduring benefits are capital expenditures. Revenue’s Argument and Court’s Response The Revenue argued that if the receipts from the sale of carbon credits are treated as capital receipts, then the assessee could not claim deductions under Section 80IA of the Income Tax Act. The court, however, clarified that the Tribunal’s role is to adjust the taxpayer’s liability correctly according to the law, irrespective of the assessee’s claims. The Tribunal should have applied the law and considered the receipts as capital in nature, thus excluding them from taxable income. Section 115BBG Introduction The court noted that Section 115BBG, introduced by the Finance Act, 2017, effective from 01.04.2018, clarified the taxation of carbon credit receipts. Before this provision, there was confusion, leading assessees to claim deductions under Section 80IA. The court held that this confusion should not penalize the assessee. Conclusion: The court concluded that the income from the sale of carbon credits is a capital receipt and not taxable. The Tribunal’s decision to treat it otherwise was erroneous. The substantial question of law was answered in favor of the assessee, and the appeal was dismissed, confirming that the sale of carbon credits should be considered as a capital receipt and not liable to tax.
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