2014 (6) TMI 82 - HC - Income Tax

Sale of carbon credits Capital receipt or not No cost of acquisition of production Held that - The Tribunal was rightly of the view that Carbon Credit is not an offshoot of business but an offshoot of environmental concerns - No asset is generated in the course of business but it is generated due to environmental concerns - Carbon Credit is not even directly linked with power generation - on the sale of excess Carbon Credits the income was received it is capital receipt and it cannot be business receipt or income Decided against Revenue.

Summary

Issues:
1. Whether the sale of Carbon Credits should be considered as a Capital Receipt and not liable for tax under any head of income under the Income Tax Act, 1961?
2. Whether there is no cost of acquisition or production for the entitlement of Carbon Credits, and if the generation of Carbon Credits is linked to the machinery and processes employed in the production process by the assessee?

Analysis:
1. The first issue revolves around the classification of the sale of Carbon Credits for tax purposes. The appellant argued that the consideration received from the sale of Carbon Credits should be treated as business income since it was connected to the business. However, the Tribunal found that Carbon Credits are not a result of business activities but rather environmental concerns. The High Court concurred with this assessment, noting that Carbon Credits are not directly linked to the business of power generation, even though the income was received from their sale. Therefore, the High Court upheld the Tribunal's decision that the income from Carbon Credits is a capital receipt and not business income, making it not liable for tax under any head of income.

2. The second issue involves the determination of the cost of acquisition or production for obtaining Carbon Credits and whether their generation is intricately linked to the machinery and processes used in production by the assessee. The Tribunal had ruled that there is no cost associated with acquiring or producing Carbon Credits and that their generation is not directly linked to the machinery and processes of the production process. The High Court agreed with the Tribunal's findings, emphasizing that Carbon Credits are a product of environmental concerns rather than business operations. Therefore, the High Court dismissed the appeal, stating that there was no legal basis for challenging the Tribunal's decision on these grounds.

In conclusion, the High Court dismissed the appeal, upholding the Tribunal's decision that the income from the sale of Carbon Credits is a capital receipt not subject to tax under any head of income. The court found that Carbon Credits are a result of environmental concerns, not business activities, and that their generation is not directly linked to the machinery and processes of production by the assessee.