2021 (3) TMI 442 - HC - Income Tax

Nature of receipt - proceeds realized by the assessee on sale of Certified Emission Reduction Credit earned on the Clean Development Mechanisam in its wind energy operations - whether capital receipt and not taxable? - HELD THAT - Question of law involved in the present appeal is covered by the decision of the Division Bench of this Court in S.P.Spinning Mills Pvt. Ltd. 2021 (1) TMI 1081 - MADRAS HIGH COURT wherein the Division Bench held that the receipt should be treated as a capital receipt - Decided in favour of assessee.

Issues Involved:
1. Whether the proceeds realized by the assessee on the sale of Certified Emission Reduction Credit (Carbon Credits) are a capital receipt and not taxable.

Issue-Wise Detailed Analysis:

1. Nature of Proceeds from Sale of Carbon Credits:
The primary issue in this case was whether the proceeds realized by the assessee from the sale of Certified Emission Reduction Credit (Carbon Credits) should be treated as a capital receipt and thus not taxable. The Tribunal had previously held that such proceeds are a capital receipt. This position was supported by several precedents, including decisions from the Karnataka High Court and Andhra Pradesh High Court, which held that income from the sale of carbon credits should be treated as a capital receipt and not as business income.

2. Reference to Previous Judgments:
The judgment heavily relied on previous decisions to support its conclusion. Notably, the Division Bench of the Madras High Court in T.C.A.No.451 of 2018, which in turn referenced the case of CIT vs. Subhash Kabini Power Corporation Ltd. and CIT vs. My Home Power Ltd. These cases established that carbon credit receipts are not business income but capital receipts. The Karnataka High Court and Andhra Pradesh High Court had upheld the view that the sale of carbon credits results in capital receipts, which are not taxable.

3. Legal Principles and Tests Applied:
The judgment discussed various legal principles and tests to determine whether a receipt is capital or revenue in nature. It referred to the Supreme Court's decisions in Commissioner of Income Tax v. Maheshwari Devi Jute Mills Ltd. and M/s. Empire Jute Co. Ltd. v. Commissioner of Income Tax. These cases provided that the nature of the transaction and the context in which the income is generated are crucial in determining whether it is a capital or revenue receipt. The principle that a capital receipt in the hands of the payee does not necessarily mean it is a capital expenditure for the payer was also reiterated.

4. Tribunal's Findings and High Court's Endorsement:
The Tribunal found that carbon credits are an offshoot of environmental concerns and not directly linked to the business operations of power generation. This view was endorsed by the Andhra Pradesh High Court, which held that the income from the sale of carbon credits is a capital receipt and not business income. The Madras High Court agreed with this analysis and concluded that the Tribunal's decision was correct.

5. Revenue Neutrality:
The judgment also touched upon the concept of revenue neutrality. It was argued that even if the receipt from the sale of carbon credits was included in the eligible profit for deduction under Section 80IA, it would ultimately be excluded from the total income as it is a capital receipt and not taxable. Thus, the assessment order was not prejudicial to the interests of the Revenue.

Conclusion:
The Madras High Court concluded that the question of law regarding the taxability of proceeds from the sale of carbon credits is covered by the previous decisions, particularly the judgment in T.C.A.No.451 of 2018. Therefore, the court held that the proceeds from the sale of carbon credits are a capital receipt and not taxable, thereby dismissing the Revenue's appeal. The court also remanded certain issues related to disallowance under Section 14A of the Act for fresh consideration by the Assessing Officer and noted that another issue was not pressed by the assessee as relief had already been granted.

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