2022 (2) TMI 758 - AT - Income Tax

Receipt from transfer of Carbon Emission Reduction ( CER ) - Whether revenue receipt and taxable under section 28(iv) ? - Whether such money received by the assessee on sale of CERs/carbon credits is taxable under Income-tax Act or not? - HELD THAT - We are of the view that carbon credits/CERs are in nature entitlement accrued to the assessee on account of its efforts to reduce the emission of harmful greenhouse gases. They have arisen due to environmental concerns and therefore cannot be said to be 'connected with' or 'incidental to' the business activities of assessee. The assessee is engaged in the business of refrigerants, engineering plastics and industrial yarns etc. and is not into the business of trading of carbon credits. All these findings of facts have been given by the coordinate bench in assessee's own case in subsequent years in AY 2007-08 and AY 2010-11 which have been placed before us. We, therefore, hold that carbon credits are not offshoot of business but offshoot of environmental concerns and hence not chargeable to tax. The receipts arising from transfer of carbon credits are in the nature of capital receipts not subjected to tax in terms of section 28(iv) read with section 2(24)(vd) of the Act. The claim of the assessee raised in grounds of appeal from 1 to 3 is hereby allowed. Exclusion of carbon credits from the book profits computed u/s 115JB - HELD THAT - Carbon credits being the capital receipts cannot be brought to tax as book profits and are, thus, liable to be excluded from the computation of book profits u/s. 115JB - See Ankit Metal Power Ltd. 2019 (7) TMI 878 - CALCUTTA HIGH COURT Allowability of education cess as deductible expenditure u/s. 37 (1) - HELD THAT - As it stands today (as the proposed amendment by Finance Bill, 2022 is yet to take effect) hold that education cess is not a disallowable expenditure u/s. 40(a)(ii) of the Act having been expressly excluded from section 40(a)(ii) of the Act by following the judgment of the Hon'ble Rajasthan High Court in the case of Chambal Fertilisers And Chemicals Ltd. 2018 (10) TMI 589 - RAJASTHAN HIGH COURT and the Hon'ble Bombay High Court in the case of Sesa Goa Limited 2020 (3) TMI 347 - BOMBAY HIGH COURT . We, therefore, allow the deduction of education cess u/s. 37 of the Act. Appeal of the assessee stands allowed.

Summary

Issues Involved:
1. Taxability of receipts from the transfer of Carbon Emission Reductions (CERs) under section 28(iv) of the Income Tax Act.
2. Classification of CER receipts as capital or revenue in nature.
3. Exclusion of CER receipts from the computation of 'book profits' under section 115JB of the Income Tax Act.
4. Allowability of 'Education Cess' as a deductible expenditure under section 37 of the Income Tax Act.

Detailed Analysis:

1. Taxability of Receipts from Transfer of CERs:
The primary issue was whether the receipt of ?93,85,40,499 from the transfer of CERs should be taxed as perquisites under section 28(iv) of the Income Tax Act. The assessee argued that CERs are capital receipts and not liable to income tax, relying on the ITAT Hyderabad Bench's decision in My Home Power Ltd., which was approved by the Andhra Pradesh High Court. The Tribunal previously remitted the issue to the Assessing Officer (AO) to decide on the merits. The AO and the CIT(A) held that the income from the sale of CERs is a benefit arising out of business and taxable under section 28(iv). However, the Tribunal, referencing various High Court judgments, including the Gujarat High Court in Gujarat Flourochemicals Ltd., concluded that CERs are not offshoots of business but of environmental concerns and hence not chargeable to tax.

2. Classification of CER Receipts:
The Tribunal examined whether CER receipts should be considered capital or revenue in nature. The assessee argued that CERs are awarded due to environmental efforts and not business activities. The Tribunal cited multiple judgments, including My Home Power Ltd. and Gujarat Flourochemicals Ltd., which held that CERs are capital receipts not arising from business activities. Consequently, the Tribunal agreed with the assessee, holding that the receipts from CERs are capital in nature and not taxable under section 28(iv).

3. Exclusion of CER Receipts from Book Profits:
The assessee raised an additional ground for excluding CER receipts from the computation of 'book profits' under section 115JB. The Tribunal admitted this additional ground as a legal issue and referred to several judicial precedents, including Malana Power Co. Ltd. and L.H. Sugar Factory Pvt. Ltd., which supported the exclusion of capital receipts from book profits. The Tribunal held that since CER receipts are capital receipts, they should not be included in the computation of book profits under section 115JB.

4. Allowability of Education Cess:
The assessee also raised an additional ground for the deduction of 'Education Cess' amounting to ?83,55,777 under section 37 of the Income Tax Act. The Tribunal admitted this ground as a legal issue and referred to judgments from various High Courts, including the Rajasthan High Court in Chambal Fertilisers And Chemicals Ltd. and the Bombay High Court in Sesa Goa Limited, which held that 'cess' is not part of 'tax' and thus allowable as a deduction. The Tribunal concluded that education cess is not disallowable under section 40(a)(ii) and allowed the deduction under section 37.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that receipts from the transfer of CERs are capital receipts not chargeable to tax, should be excluded from the computation of book profits under section 115JB, and the education cess is deductible under section 37. The order was pronounced on 07.02.2022.