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2022 (6) TMI 1250 - HC - Income TaxNature of receipts - Treatment to carbon credit receipt - Revenue or capital receipts - 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 - HELD THAT - As decided in S.P. SPINNING MILLS PVT. LTD. 2021 (1) TMI 1081 - MADRAS HIGH COURT the receipts from sale of carbon credit is a capital receipt and cannot be included in the taxable income Technology Upgradation Fund (TUF) subsidy and compensation receivable on non performance of the energy generation - revenue or capital receipt - HELD THAT - This substantial question of law is covered in favour of the assessee, by the decision of the Division Bench of the Punjab and Haryana High Court in the case of Commissioner of Income Tax v. Sham Lal Bansal 2011 (1) TMI 409 - PUNJAB AND HARYANA HIGH COURT the view taken in Sahney Steel Press Works Ltd.'s case ( 1997 (9) TMI 3 - SUPREME COURT ) could not be applied in the present case, as in said case the subsidy was given for running the business. For determining whether subsidy payment was 'revenue receipt' or 'capital receipt', character of receipt in the hands of the assessee had to be determined with respect to the purpose for which subsidy is given by applying the purpose test, as held in Sahney Steel Press Works Ltd.'s case (supra) itself and reiterated in later judgment in CIT v. Ponni Sugars Chemicals Ltd. 2008 (9) TMI 14 - SUPREME COURT referred to in the impugned order of the Tribunal. Assessee appeal allowed.
Issues Involved:
1. Taxability of proceeds from the sale of certified emission reduction credits. 2. Classification of sale of carbon credits as capital receipts or taxable income. 3. Determination of cost of acquisition or production for carbon credits. 4. Taxability of Technology Upgradation Fund (TUF) subsidy and compensation for non-performance of energy generation. Detailed Analysis: Issue 1: Taxability of Proceeds from Sale of Certified Emission Reduction Credits The Tribunal held that the proceeds realized by the assessee on the sale of certified emission reduction credits, earned through the clean development mechanism in its wind energy operations, are capital receipts and not taxable. This decision aligns with the precedent set by the Andhra Pradesh High Court in CIT vs. My Home Power Ltd., which was subsequently followed by various ITAT benches. The Tribunal's stance is that such receipts should be treated as capital receipts, as they are not directly linked to the business operations but are an offshoot of environmental concerns. Issue 2: Classification of Sale of Carbon Credits as Capital Receipts or Taxable Income The Tribunal and various High Courts, including the Karnataka High Court in CIT vs. Subhash Kabini Power Corporation Ltd., have consistently held that the sale of carbon credits results in capital receipts, not taxable income. This position was supported by the Andhra Pradesh High Court's finding that carbon credits are generated due to environmental concerns and not as a direct result of business operations. The Tribunal's decision also aligns with the Supreme Court's ruling in Commissioner of Income Tax v. Maheshwari Devi Jute Mills Ltd., which held that certain receipts could be considered capital in nature. Issue 3: Determination of Cost of Acquisition or Production for Carbon Credits The Tribunal concluded that there is no cost of acquisition or production directly associated with obtaining carbon credits. This conclusion was derived from the understanding that carbon credits are linked to environmental benefits rather than the machinery or processes employed in production. The Tribunal's reasoning was supported by the Supreme Court's observations in M/s. Empire Jute Co. Ltd. v. Commissioner of Income Tax, which distinguished between capital and revenue expenditures based on the nature and purpose of the expenditure. Issue 4: Taxability of Technology Upgradation Fund (TUF) Subsidy and Compensation for Non-Performance of Energy Generation The Tribunal held that the TUF subsidy and compensation for non-performance of energy generation are capital receipts and not taxable under any head of income. This decision is consistent with the Punjab and Haryana High Court's ruling in Commissioner of Income Tax v. Sham Lal Bansal, which applied the "purpose test" to determine the nature of the subsidy. The subsidy was intended for technology upgradation, making it a capital receipt rather than a revenue receipt. Conclusion: The High Court dismissed the tax case appeal filed by the Revenue, affirming that the proceeds from the sale of carbon credits and TUF subsidies are capital receipts and not taxable under the Income Tax Act, 1961. The Tribunal's decision was supported by consistent judicial precedents, including decisions from various High Courts and the Supreme Court. The judgment emphasized the importance of the purpose and nature of receipts in determining their taxability.
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