2022 (2) TMI 185 - HC - Income Tax

Nature of receipts - Sale of Carbon Emission Reduction (CER) - Whether Carbon Credits to be considered as capital receipt and not liable to tax? - HELD THAT - This appeal has already been decided in favour of the assessee, by a decision of this court in S.P. Spinning Mills (P) Ltd . 2021 (1) TMI 1081 - MADRAS HIGH COURT as held the receipt by way of sale of carbon credit has been held to be capital receipt. - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the sale of Carbon Emission Reduction (CER), also known as Carbon Credits, should be considered as a capital receipt and not liable to tax.

Detailed Analysis:

1. Nature of Carbon Credits as Capital Receipt:
The primary issue addressed in this judgment is whether the income generated from the sale of Carbon Emission Reduction (CER) or Carbon Credits should be treated as a capital receipt or taxable income. The Tribunal had previously ruled that the sale of Carbon Credits should be considered a capital receipt, not liable to tax. This position was supported by 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. These decisions were upheld by the ITAT Chennai and Jaipur Benches, indicating a consistent judicial stance that the sale of Carbon Credits results in a capital receipt, which is not taxable.

2. Comparison with Previous Judgments:
The judgment references the Supreme Court's decisions in Commissioner of Income Tax v. Maheshwari Devi Jute Mills Ltd. and M/s. Empire Jute Co. Ltd. v. Commissioner of Income Tax to draw parallels. In these cases, the Supreme Court had to determine whether the income from the sale of loom-hours was a capital receipt or business income. The Court concluded that the income from the sale of loom-hours was a capital receipt, thus supporting the argument that the sale of Carbon Credits should similarly be considered a capital receipt.

3. Tribunal's Jurisdiction and Powers:
The judgment highlights the Tribunal's authority to examine questions of law arising from the facts found by the Income Tax authorities and impacting the tax liability of the assessee. It references the Full Bench of the Punjab & Haryana High Court in Aruna Luthra, which held that the Tribunal could interpret statutory provisions and declare what the law was at the time of its promulgation. This reinforces that the Tribunal's interpretation of the sale of Carbon Credits as a capital receipt applies retrospectively.

4. Revenue's Argument and Tribunal's Response:
The Revenue argued that the assessee could not benefit from judicial decisions made after the assessment order. However, the Tribunal rejected this argument, stating that judicial interpretations clarify the law as it always was, rather than creating new law. The Tribunal also noted that the question of whether the receipt from the sale of Carbon Credits is capital or revenue in nature is a legal issue affecting the computation of income and tax liability.

5. Impact of Section 80IA and Section 115BBG:
The judgment discusses the implications of the assessee's claim for deduction under Section 80IA of the Income Tax Act. It clarifies that if the receipt from the sale of Carbon Credits is a capital receipt, it falls outside the definition of gross total income under Section 80B(5) and thus cannot be included under Section 80IA. The introduction of Section 115BBG by the Finance Act, 2017, which specifically addresses the taxability of Carbon Credits, is also noted. This provision was not in effect for the assessment year in question, contributing to the confusion among assessees regarding the appropriate section under which to claim deductions.

6. Final Decision:
The court concluded that the Tribunal had failed to properly exercise its power by not considering whether the receipt from the sale of Carbon Credits required adjustment in the assessee's tax liability. It emphasized that the Tribunal should have applied the law and recognized the receipt as a capital receipt, irrespective of the assessee's claim under Section 80IA. Consequently, the substantial question of law was answered in favor of the assessee, affirming that the income from the sale of Carbon Credits is a capital receipt and not subject to tax.

Conclusion:
The tax case appeal was dismissed, and the substantial question of law was answered against the Revenue, establishing that the sale of Carbon Credits is to be considered a capital receipt and not liable to tax. The judgment underscores the importance of judicial interpretation in clarifying the nature of receipts and the Tribunal's duty to apply the law correctly to ensure accurate tax liability computation.