2016 (9) TMI 394 - AT - Income Tax

Deduction allowable u/s-80IA - receipts arising from sale of carbon credits - Held that - The income from sale of carbon credits is capital in nature and the said income is not eligible for deduction u/s 80IA of the Act

Summary

Issues:
1. Nature of Clean Development Mechanism (CDM) receipts - Subsidies or trading receipts.
2. Classification of Certified Emission Reduction (CER) credits as goods and revenue nature.
3. Eligibility for deduction under section 80IA.
4. Treatment of carbon credit receipts as capital or revenue income.

Nature of CDM Receipts:
The Revenue contended that CDM receipts from windmill power generation are not subsidies but trading receipts, as Certified Emission Reductions (CERs) have economic value and are traded in the market. The Tribunal referred to a previous case where carbon credit receipts were treated as capital in nature, not revenue. The Tribunal held that CERs are intangible goods sold in the market, taxable as business income under Section 28(iv).

Classification of CER Credits:
The Tribunal analyzed the procedure of CER allotment, emphasizing that CERs are quantified based on actual power generation, making the income from selling CERs revenue in nature. It was argued that CERs are not subsidies or capital receipts but income from selling intangible goods. The Tribunal upheld that CER credits are considered goods with a ready market, traded on arm's-length basis, and fluctuating prices, falling under business income.

Eligibility for Deduction under Section 80IA:
The Commissioner of Income Tax (Appeals) erred in holding that the assessee was entitled to deduction under section 80IA. The Tribunal noted that the assessee could opt for deduction for ten consecutive years out of fifteen, starting from the year of power generation. The eligible undertaking should be the sole source of income for computing the deduction under section 80IA.

Treatment of Carbon Credit Receipts:
The Tribunal examined the nature of carbon credit receipts, referencing a case where such receipts were treated as capital in nature. It was established that carbon credit sale receipts are not directly linked to power generation but arise from environmental concerns, hence classified as capital income. The Tribunal dismissed the Revenue's appeal, following the precedent that income from the sale of carbon credits is capital in nature and not eligible for deduction under section 80IA.

This judgment clarifies the classification of CDM receipts, CER credits, and carbon credit receipts, emphasizing their treatment as trading receipts, goods with market value, and capital income, respectively. The decision provides insights into the eligibility criteria for deductions under section 80IA based on the nature of income generated from renewable energy sources.