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2021 (7) TMI 397 - HC - Income TaxNature of receipt - proceeds realized by the assessee on sale of Certified Emission Reduction Credit - assessee had earned it on the Clean Development Mechanisam in its wind energy operations - revenue or capital receipt - HELD THAT - As decided in S.P. SPINNING MILLS PVT. LTD. 2021 (1) TMI 1081 - MADRAS HIGH COURT 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. It was also found that the carbon credit is not even directly linked with the power generation and the income is received by sale of the excess carbon credits.Thus it is capital receipt and not business income. - Decided in favour of assessee.
Issues Involved:
1. Treatment of Clean Development Mechanism (CDM) receipts. 2. Applicability of Section 80IA of the Income Tax Act. 3. Determination of whether CDM receipts are capital receipts or revenue receipts. Issue-wise Detailed Analysis: 1. Treatment of Clean Development Mechanism (CDM) Receipts: The primary issue revolves around whether the CDM receipts received by the assessee, a company engaged in the manufacturing of yarn, should be treated as capital receipts or revenue receipts. The assessee included the CDM receipts in its Profit and Loss Account but excluded them from the total income for taxation, treating them as capital receipts. The Assessing Officer, however, treated the CDM receipts as revenue receipts and completed the assessment under Section 143(3). The Income Tax Appellate Tribunal (ITAT) later ruled in favor of the assessee, treating the CDM receipts as capital receipts, which the Revenue challenged in the present appeal. 2. Applicability of Section 80IA of the Income Tax Act: The Commissioner of Income Tax (Appeals) and the ITAT both considered the applicability of Section 80IA, which allows deductions on profits and gains derived by an undertaking. The ITAT cited the case of Ambica Cotton Mills Ltd. vs. DCIT, where it was held that carbon credit receipts cannot be considered as business income but as capital receipts. Consequently, the assessee's claim under Section 80IA was deemed untenable as the deduction is allowable only on profits and gains derived by an undertaking, not on capital receipts. 3. Determination of Whether CDM Receipts are Capital Receipts or Revenue Receipts: The appeal was admitted on the substantial question of law: "Whether the proceeds realized by the assessee on sale of Certified Emission Reduction Credit, earned on the Clean Development Mechanism in its wind energy operations, is a capital receipt and not taxable?" The court referenced a Division Bench decision in T.C.A.No.451 of 2018, which held that carbon credit receipts are capital receipts, not business or revenue receipts. This decision was supported by several High Court rulings, including the Karnataka High Court in CIT vs. Subhash Kabini Power Corporation Ltd. and the Andhra Pradesh High Court in CIT vs. My Home Power Ltd. The court also 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, which discussed the nature of receipts and expenditures, distinguishing between capital and revenue nature. The court concluded that the sale of carbon credits should be treated as capital receipts based on these precedents. Conclusion: Following the established legal precedents, the court decided that the CDM receipts should be treated as capital receipts and not taxable. The substantial question of law was resolved in favor of the assessee, and the appeal by the Revenue was dismissed. The court also remanded the issue of disallowance under Section 14A read with Rule 8D to the Assessing Officer for a fresh decision, left open questions of law 1 and 2, and noted that question of law 3 was not pressed by the assessee.
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