2023 (2) TMI 1027 - AT - Income Tax

Nature of receipt - receipts from the sale of Carbon Emission Reductions (CER) Certificates / Carbon Credits - revenue or capital receipt - HELD THAT - As the order of ld. CIT(A) for A.Y. 2006-07 has been set aside by Co-ordinate Bench 2017 (4) TMI 1577 - ITAT DELHI hold that the income from sale of carbon credits is capital in nature. Book Profits u/s 115JB - CIT(A) and Ld. AO while calculating Book Profit at Nil u/s 115JB not excluded the amount of receipt from transfer of CERs from the book profit - HELD THAT - As decided in assessee s own case 2022 (2) TMI 758 - ITAT DELHI 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. The additional ground of appeal no.4 of the assessee is thus allowed.

Summary

Issues Involved:
1. Taxability of receipts from the sale of Carbon Emission Reductions (CER) Certificates/Carbon Credits.
2. Calculation of Book Profits under Section 115JB of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Taxability of Receipts from the Sale of Carbon Emission Reductions (CER) Certificates/Carbon Credits:

The primary issue in this appeal was whether the receipts from the sale of Carbon Emission Reductions (CER) Certificates/Carbon Credits amounting to Rs. 2,67,71,10,198/- should be considered capital receipts not liable for tax. The Assessee contended that these receipts are capital in nature and should not be taxed as revenue receipts. The revenue authorities, however, had treated these receipts as trading receipts, thereby taxing them as business income.

The Tribunal referred to the judgment in the case of My Home Power Ltd. Vs. DCIT, which held that carbon credits are in the nature of "an entitlement" received for improving the world atmosphere and reducing carbon emissions. The Tribunal noted that such entitlements are capital receipts as they are not generated from business activities but due to global environmental concerns. The Tribunal also cited various judgments, including those from the Hon'ble High Courts of Andhra Pradesh and Gujarat, which supported the view that receipts from the sale of carbon credits are capital in nature and not taxable as business income.

The Tribunal concluded that the amount received from the sale of carbon credits does not have any element of profit or gain and cannot be subjected to tax under any head of income. Therefore, the Tribunal decided this issue in favor of the Assessee, holding that the receipts from the sale of CERs are capital receipts and not liable for tax.

2. Calculation of Book Profits under Section 115JB of the Income Tax Act, 1961:

The second issue was whether the amount received from the transfer of CERs should be excluded from the book profits while calculating the Minimum Alternate Tax (MAT) under Section 115JB of the Income Tax Act, 1961. The Assessee argued that since the receipts from the sale of carbon credits are capital receipts, they should not be included in the book profits for MAT purposes.

The Tribunal referred to the judgment of the Hon'ble High Court of Calcutta in the case of Ankit Metal & Power Ltd., which held that a capital receipt, not falling within the definition of 'income' under Section 2(24) of the Act, cannot form part of the book profit under Section 115JB. The Tribunal also cited the ITAT Lucknow Bench's decision in the case of L.H. Sugar Factory Ltd., which held that carbon credit receipts are capital in nature and cannot be included in book profits for MAT purposes.

The Tribunal concluded that since carbon credits are capital receipts, they cannot be brought to tax as book profits under Section 115JB. Therefore, the Tribunal decided this issue in favor of the Assessee, allowing the exclusion of the amount received from the transfer of CERs from the book profits calculation.

Conclusion:

The Tribunal allowed the appeal filed by the Assessee, holding that the receipts from the sale of Carbon Emission Reductions (CER) Certificates/Carbon Credits are capital receipts not liable for tax. Additionally, the Tribunal held that these receipts should be excluded from the book profits calculation under Section 115JB of the Income Tax Act, 1961. The appeal was thus decided in favor of the Assessee.