2015 (12) TMI 820 - AT - Income Tax

Amount received on account of Clean Development Mechanism (CDM) - capital or revenue receipt - Held that - The amount received by the assessee on account of CDM (carbon credits) is capital in nature. See case of M/s My Home Power Ltd. 2014 (6) TMI 82 - ANDHRA PRADESH HIGH COURT . The impugned order is set aside the appeal is allowed. Decided against Revenue.

Summary

Issues:
Whether the amount received on account of Clean Development Mechanism (CDM) is a capital or revenue receipt.

Analysis:
The appeal before the Tribunal was against the order of the Commissioner of Income Tax (Appeals) regarding the classification of the amount received by the assessee on account of CDM as either capital or revenue receipt for the assessment year 2009-10. The assessee, engaged in yarn manufacture and electricity generation through wind electrical generators, claimed CDM receipts as capital receipts in their income tax return. However, the Assessing Officer considered these receipts as revenue under "Income from business & profession." The CIT(Appeals) upheld the AO's decision, leading to the appeal before the Tribunal.

The assessee argued that a previous decision by the Hyderabad Bench of the Tribunal in the case of M/s My Home Power Ltd. v. DCIT supported the classification of CDM receipts as capital receipts. On the contrary, the Department, represented by Shri Guru Bhashyam, JCIT, supported the CIT(Appeals) decision. The Department also cited the decision of the Cochin Bench of the Tribunal in the case of Apollo Tyres Ltd. v. ACIT to strengthen their position.

After considering the arguments and reviewing the decisions cited by both parties, the Tribunal referred to the Hyderabad Bench's decision in M/s My Home Power Ltd. v. DCIT, which held that carbon credits, including those received through CDM, are capital receipts. The Tribunal highlighted that carbon credits are not a result of business activities but are earned due to environmental concerns and international agreements. They explained that carbon credits are an entitlement to reduce emissions, not generating profit or income. Citing the Supreme Court's judgment in CIT vs. Maheshwari Devi Jute Mills Ltd., the Tribunal concluded that the consideration received for carbon credits is akin to a capital receipt, not business income.

The Tribunal also noted that the Hon'ble Andhra Pradesh High Court had upheld the Hyderabad Bench's decision in the case of M/s My Home Power Ltd. Based on these considerations, the Tribunal ruled that the amount received by the assessee on account of CDM (carbon credits) is capital in nature, overturning the impugned order and allowing the appeal.

In conclusion, the Tribunal's decision clarified the nature of CDM receipts as capital, aligning with previous judicial interpretations and emphasizing the environmental and non-business origin of carbon credits.