Receipts from transfer of Carbon Credits capital in nature, not are chargeable to tax

Receipts from transfer of the Carbon Credits are capital in nature and not are chargeable to tax.

In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming in upholding that the receipt from transfer of Carbon Emission Reduction (“CER”) is perquisite under section 28(iv) of the Income Tax Act, 1961 (the Act).

ABCAUS Case Law Citation
ABCAUS 3577 (2022) (02) ITAT

Important case law relied referred:
Alembic Limited
L.H. Sugar Factory Pvt. Ltd
Ambika Cotton Mills Ltd.
LancoTanjore Power Co. Ltd. [[2021] 434 ITR 671 (Madras)]
Tamil Nadu Newsprint & Papers Ltd. [2021] 130 taxmann.com 213 (Madras)
Gujarat Flourochemicals Limited
Triveni  Engineering  and  Industries  Ltd.
Apollo Tyres Ltd. [2014] 47 taxmann.com 416
Kalpataru Power Transmission Ltd. [2016] 68 taxmann.com 237
Arun Textiles Pvt. Ltd.
Malana Power Co. Ltd.
Rajasthan State Mines and Minerals Ltd.
Shree Cement Ltd.
SubhashKabini Power Corporation Ltd. 
Dodson Lindblom Hydro Power Pvt. Ltd.

In the instant case, there was no legal/statutory obligation on the assessee for reduction in the emission of HFC 23 gas in the open air. However, the assessee chose to reduce the emission of green-house gas in the atmosphere which had no relationship with the business activity.

In reduction in emission of GHG, the assessee was allotted certain entitlement called CER/Carbon credits in terms of Kyoto Protocol. During the year under consideration, the assessee received carbon credits on transfer of units of such CERs.

The assessee had claimed said CREs as capital receipts. In the first round of litigations, the ITAT  set aside the issue to the Assessing Officer (AO).

The AO, however, did not accept the submission of the assessee and held that income on sale of carbon credits is a benefit arising out of the business of the assessee and would fall within the definition of income u/s 2(24)(vd) r.w.s.28(iv) of the Act by relying upon the order of the  Coordinate Bench of ITAT.

In the second round of litigation, the Tribunal observed that issue is settled by several Hon’ble High Courts viz. Gujarat High Court, Allahabad High Court, Madras High Court, Rajasthan High Court, Karnataka High Court, Bombay High Court and Andhra Pradesh High Court that receipts from transfer of the Carbon Credits are capital in nature and not are chargeable to tax.

The Tribunal noted that Ministry of Finance has inserted a specific provision in form of section 115BBG in the Act which is effective from 1st April, 2018 and will accordingly apply from assessment year  2018-19 and subsequent years. The rate of taxation provided in said section is 10% (in addition to applicable surcharge and education cess). This also corroborates the case of the assessee that CERs are not regular business receipts arising from business of the assessee and this fact has also been recognized by the Government.

The Tribunal opined that carbon credits/CERs had arisen due to environmental concerns and therefore cannot be said to be ‘connected with’ or ‘incidental to’ the business activities of assessee.

Accordingly, the Tribunal held that that carbon credits are not offshoot of business but offshoot of environmental concerns and hence not chargeable to tax. The receipts arising from transfer of carbon credits are in the nature of capital receipts not subjected to tax in terms of section 28(iv) read with section 2(24)(vd) of the Act.

The ground of appeal was allowed in favour of the assessee .

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