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TMI Blog2016 (4) TMI 916X X X X Extracts X X X X X X X X Extracts X X X X ..... e may add here that, while the ground of appeal raised by the Assessing Officer refers to “addition of 5,78,28,058 made on account of sale of carbon credits”, it is not even the case of the Assessing Officer that the sale was made in the relevant previous year. This aspect of the matter is clear from the observations made by the Assessing Officer, which have been reproduced earlier in this order after our paragraph 4, and this is what has been emphatically stated at the bar, in the course of hearing before us, by the learned counsel. Once both the parties are unanimous on the factual aspect that the sale is not effected in the relevant previous year, there cannot be any good reasons to bring the CER value to tax in this assessment year. In view of the above discussions, in our considered view, the gains on sale of CERs, though taxable in nature, could only have been taxed at the point of time when these CERs were actually transferred to the foreign entity. Accordingly, the value of CERs, even though quantifiable, cannot be brought to tax by the reason of accrual simplictor. That is precisely what has been done in this case. It is for this reason that we confirm the relief granted b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... take up these issues one by one, and in the same order. Issue I: Taxability of carbon credit 3. To adjudicate on this issue, a few material facts and some developments, leading to this litigation before us, will have to be taken note of. The assessee before us is mainly engaged in the business of manufacturing of transmission line towers and steel structures, commissioning of transmission line tower and supply of transmission and distribution line material. During the course of the scrutiny assessment proceedings, the Assessing Officer noticed that while the assessee has shown, in its profit and loss account, income from carbon credits (also referred to as CERs i.e. certified emission reductions) amounting to ₹ 5,78,28,058, it has not offered the same to tax on the ground of carbon credits being in the nature of capital receipts. It was also noted that these credits have been earned by the assessee from its bio-mass power plants situated at Tonk (Rs 4,73,00,773) and Padampur (Rs 1,05,27,285). The details with regard to the sale of the carbon credits, as furnished by the assessee during these proceedings, were examined by the Assessing Officer. It was in this backdrop that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om another business entity, in need of these credits, and not from an independent body to promote the public good. He was of the view that "the contention that since the underlying purpose is advancing public interest and has a benevolent objective, the receipt is not chargeable to tax, is without any (legally sustainable) basis in taxation". He also pointed out that all the precedents cited by the assessee with respect to subsidies etc were the cases in which monies were received from the public bodies. It was also noted that while there was no specific provision for taxation of carbon credits but connotations of 'income', under section 2(24) of the Act, were wide enough to cover the same. He was of the view that "it is settled that the word 'income' will take in its fold any monetary returns coming in unless specifically exempt". As regards the question whether carbon credits accrued during the relevant previous year or not, the findings of the Assessing Officer were as follows: 5.1 The contention of the assessee is that the CERs have not accrued as per the Income tax Act as the Padampur and Tonk Plants got UNFCC certificates and the registration for the said plants with regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the stand so taken by the Assessing Officer, assessee carried the matter in appeal before the CIT(A). Learned CIT(A) upheld the grievance of the assessee and deleted the addition of ₹ 5,72,38,569 by holding it to be capital receipt. His line of reasoning was as follows: 5. Facts of the case and arguments of the appellant have been carefully considered. At the outset it will be worthwhile to understand the nature of receipt in the case of appellant. The main business activity of appellant company is generation of power. Appellant has two Biomass based Power Generation Plant using agricultural waste as fuel at Padampur and Tonk in Rajasthan State. The CER (Carbon Emission Reduction) certificates are issued to the appellant for saving emission of carbon. The CERs are issued to every industry which saves emission of carbon and not.only limited to power projects. The receipt has no relationship with the process of production nor it is connected with sale of power. This amount is neither a compensation for loss suffered in the process of production nor any expenditure incurred in acquisition of capital asset. This amount also does not represent any subsidy for either establis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax for the assessment year under consideration in terms of sections 2(24), 28, 45 and 56 of the Income tax Act, 1961. Carbon credits are made available to the assessee on account of saving of energy consumption and not because of its business. Further, in our opinion, carbon credits cannot be considered as a bi-product. It is a credit given to the assessee under the Kyoto Protocol and because of international understanding. Thus, the assessee who have surplus carbon credits can sell them to other assesses to have capped emission commitment under the Kyoto Protocol. Transferable carbon credit is not a result or incidence of one's business and it is a credit for reducing emissions. The persons having carbon credits get benefit by selling the same to a person who needs carbon credits to overcome one's negative point carbon credit. The amount received is not received for producing and/or selling any product, bi-product or for rendering any service for carrying on the business. In our opinion, carbon credit is entitlement or accretion of capital and hence income earned on sale of these credits is capital receipt. For this proposition, we place reliance on the' judgement of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , sale of carbon credits is to be considered as capital receipt. This ground is allowed." 5.3. In view of above mentioned facts and decision of Hon'ble ITAT Hyderabad as mentioned above, I hold that amount received by appellant on sale of carbon credits are in the nature of capital receipts. AO is therefore not justified in making addition of ₹ 5,78,28,058/-. The addition is directed to be deleted. This ground of appeal is thus allowed 8. The Assessing Officer is aggrieved of the relief so granted by the CIT(A) and is in appeal before us. 9. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 10. We are alive to learned counsel's core contention that the issue about taxability of carbon credits is no longer res integra inasmuch as there are several decisions of this Tribunal, and one of which has been approved by Hon'ble Andhra Pradesh High Court, which have held that the carbon credit receipts are not taxable. However, for the reasons we will set out in a short while, we consider it appropriate to deal with the matter in a little detail and set out our underst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cur". The emission reduction units, which is what carbon credits or CERs (certified emission reductions) imply, can thus be acquired by the parties as well, as long as the project, in which these reductions are achieved, are approved by the parties to the protocol. Of course, this method of reduction of harmful gases is only supplemental method inasmuch as these countries cannot rely solely, or mainly, on so acquiring CERs from harmful emission reductions, but that is not really material in the present context because what we are dealing with is only acquiring the CERs from Indian entities. In effect, even if the emission for harmful gas is reduced in a developing country like India, as long as the project in which this reduction is achieved is approved by parties to the protocol and these emission reduction units are transferred by the Indian entity so reducing the emissions to the entities in the parties to the Kyoto protocol, such emission reductions can be taken into account in their committed reductions. The respective parties to the Kyoto protocol have in turn put the emission obligations on the business entities in their countries, and, to fulfil the emission obligations, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e carbon credits or CERs. For each carbon credit that a person in the developed world buys, he gets right to emit one more ton of CO2 (carbon dioxide) or CO2e (carbon dioxide equivalent gases). Nobody would normally buy these credits as a token of appreciation of the work done in the developing world. The purchase of these credits is driven by the business compulsions. The business compulsion is to meet the emission norms. These emission norms are met by reduction in emission on its own and also paying money to someone in the developing world to buy credit for what environmental friendly work has been done by that entity. All this is in no way reducing the emissions but merely redistributing the right to emit greenhouse gases. That is an act too unkind to the global concerns, and it ends up supporting the global warming rather than controlling it. There is no point in glorifying these transactions of carbon credits as an act of benevolence or by putting those buying and selling these carbon credits on a higher moral pedestal. As Prof Adam Smith said three centuries ago, "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from thei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceived to improve world atmosphere and environment reducing carbon, heat and gas emissions. The entitlement earned for carbon credits can, at best, be regarded as a capital receipt and cannot be taxed as a revenue receipt. It is not generated or created due to carrying on business but it is accrued due to "world concern". It has been made available assuming character of transferable right or entitlement only due to world concern. The source of carbon credit is world concern and environment. Due to that the assessee gets a privilege in the nature of transfer of carbon credits. Thus, the amount received for carbon credits has no element of profit or gain and it cannot be subjected to tax in any manner under any head of income. It is not liable for tax for the assessment year under consideration in terms of sections 2(24), 28, 45 and 56 of the Income-tax Act, 1961. Carbon credits are made available to the assessee on account of saving of energy consumption and not because of its business. Further, in our opinion, carbon credits cannot be considered as a biproduct. It is a credit given to the assessee under the Kyoto Protocol and because of international understanding. Thus, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the nature of income. 19. In all other decisions on the same lines, as cited before us, there is a reference to the aforesaid observations of the Tribunal and there is hardly any independent analysis of the factual situation. The same reasoning has been adopted by the coordinate benches. 20. With greatest respect to the coordinate benches, we have our serious reservations on this factual finding by the coordinate benches. As a matter of fact, the findings are given in only one decision, i.e. My Home Power (supra), and other decisions simply, and somewhat mechanically, follow the same. The factual findings in this case are not the same, as arrived by the coordinate bench in the case of My Home Power (supra), and we are, therefore, not inclined to be guided by this decision. However, for the reasons we will set out in a short while, it is not necessary to refer the matter to a special bench at this stage. Let us first set out our reasons of expressing this voice of dissent: i. As it was evident from the response to the questions posed by us during the course of hearing, the grant of CERs are inextricably linked to the actual functioning of the unit inasmuch as it was reduction o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nscious decisions are thus required to be taken by the assessee in order to get the CERs and the considerations of CERs essentially therefore have a role to play on the manner in which business is carried out. For example, when renewal energy is substituted for the fossil fuels, the expected gains of carbon credits are also factored. It is an integral part of the business activity, and an important consideration about the choice of courses available in carrying on the business, which results in CERs. The generation of CERs is thus on account of business activity. We, therefore, find ourselves in disagreement with the views of the coordinate bench to the effect 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." iv. This gain is not in terms of money, but it is a gain nevertheless. It is clearly a benefit in the sense it entitles the assessee to transfer a right to produce more emission- which is a valuable entitlement, and it arises from carrying on of business. This factual finding is important in the context of Section 28(iv) which provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that these judicial precedents are not relevant in the present context. The assessee has not received any monies, as a subsidy, from any government or public or multilateral forum. What he has received is an advantage incidental to carrying on business in an environmentally responsible manner. It is an offshoot of business. vii. As we have noted earlier in our order, sale of carbon credit does not do any good to the protection of environment or address global concerns about environment. Ironically, while these credits are generated by conducting business in an environmentally responsible manner, sale of these credits only result in higher emission of harmful gases in the countries signatory to the Kyoto Protocol. In a way, therefore, it is compensation for giving someone right to generate more harmful emissions than he is permitted to otherwise emit. It is inappropriate to glorify this income as offshoot of "environmental concerns". viii. The question of binding judicial precedents arises only in the context of what is actually decided and on the legal questions. The factual aspects which have not been considered or decided in the judicial precedents cannot be treated as cov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transferring resultant CERs to the foreign entity. The impact of this peculiarity on the nature of receipt is not at all examined. The coordinate benches have also proceeded on the basis that all carbon credits are to be given uniform treatment by treating them capital receipts which are not incidental to carrying on the business. This assumption cannot, in any case, hold good for carbon credits under the CDM since in these cases the unit generating these credits are set up for the predominant purpose of generating emission reductions through making modifications in the working mechanism. 24. As a co-ordinate bench of equal strength, and it is not open for us to disregard the views of the coordinate benches. While it is well settled in law that coordinate benches cannot disregard the view of another coordinate bench, it is, however, equally true that it is vital to the administration of justice that those exercising judicial power must have the necessary freedom to doubt the correctness of an earlier decision if and when subsequent proceedings bring to light what is perceived by them as an erroneous decision in the earlier case. In the case of Union of India Vs Paras Laminates Pvt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lready completed the formalities for getting the UNFCC certification, as itself stated by it in its submission" and since "only residual -formalities were required to be completed", the CER income, as shown in the profit and loss account, should be brought to tax. Learned CIT(A) has not dealt with this aspect of the matter as the addition was deleted on merits. 27. In our considered view, however, that is not the correct approach. 28. The event triggering the taxation in respect of carbon credits is the sale of carbon credits. It is only when the carbon credits are transferred, and transferred for a valuable consideration, that an income accrues. The grant of carbon credits is not the event triggering the taxation of income. These carbon credits are of no practical use, in Indian perspective, unless these are transferred by the assessee. The principles of conservatism, which is one of the most fundamental principle in determining of commercial profits, does not permit an anticipated income being accounted for, even though all anticipated losses, as soon as these can be quantified on a reasonable basis, are invariably taken into account in this process. Till the point of time thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kdrop and being aware of the fact that our views on whether or not the carbon credits, particularly under the CDM, are taxable will have limited and somewhat academic significance at this stage since the question of taxability will need to be finally adjudicated by us only in the year in which sale proceeds of the carbon credit are received by the assessee, we have not referred the matter for constitution of a special bench at this stage. That occasion will arise only in the year and in the case in which sale proceeds are received by the assessee. We are sure that as a final fact finding body, in an appropriate case, all these aspects of the nature and taxability of carbon credits, as have been briefly touched upon in this order, will be examined in a befitting manner by a special bench of this Tribunal in due course. In any case, the case before us, as we have noted above, is with respect to carbon credits under CDM mechanism, which has its own peculiarities and on which there are no judicial precedents as yet. The call on whether or not this is a case to be referred to special bench will have to be taken by the bench which is in seisin of the matter regarding taxability in the ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent in new areas. No facts have been brought on record by AO which indicate that there were lot of movements in the investment activity requiring involvement of senior management personnel. I therefore, hold that there is no justification for disallowance of ₹ 68,15,142/- and the same is directed to be deleted. Ground No.2 of the appeal is allowed. 35. The Assessing Officer is aggrieved and is in appeal before us. 36. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 37. The basic thrust of learned counsel's submission is that unless the assessee points out any specific expenditure for earning of tax exempt income, disallowance under rule 8D for 0.5% of average investments cannot be made. He also submits that the Assessing Officer has himself accepted that no direct expenses are incurred in earning the dividend income. It is also contended that the provisions of Section 14A(2) and 14A(3) are not satisfied on the facts of the present case, and, as such, rule 8D cannot be invoked. 38. Learned counsel's submissions, as also the basis on which the learned CIT(A) has granted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.[Emphasis supplied by us]". Here is a case in which the Assessing Officer has taken note of the huge expenditure, a part of which is also attributable to the tax exempt income, and finds that the small disallowance of ₹ 30,000 made by the assessee is not on any rational, logical or actual basis, and, it is for this reason that the Assessing Officer has invoked disallowance under rule 8D. We see no infirmity in the stand so taken by the Assessing Officer. The conditions of Section 14A (2) are clearly fulfilled. The CIT(A) has granted the impugned relief on the basis that the AO has not given any finding about incorrectness of the disallowance offered by the assessee, but this is, as we can see from the extracts from the assessment order, factually incorrect. As regards learned counsel's reliance on Priya Exhibitors Pvt Ltd vs DCIT [(2012) 54 SOT 356 (Del)], we find that the coordinate bench had specifically stated that "….. Their Lordships h ..... X X X X Extracts X X X X X X X X Extracts X X X X
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