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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI B. R. BASKARAN
Per N. V. Vasudevan, Vice President :
This is an appeal by the Revenue against order dated 26.11.2019 of CIT(A), Bengaluru - 6, relating to Assessment Year 2011-12. The grounds of appeal raised by the Revenue reads as follows:
1. The order of the CIT (Appeals) is opposed to law and the facts and circumstances of the case.
2. On the facts and circumstances of the case, Whether the Ld. CIT(A) has erred in considering the fact that the Carbon Credit Receipts are Capital Receipts? On the facts and circumstances of the case, Whether the Ld. CIT(A) erred 3. in directing the AO to exclude the Carbon Credit receipts for the purpose of section 115JB?
4. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT(A), in so far as it relates to the above grounds may be reversed and that of the Assessing Officer be restored.
5. The appellant craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of the appeal.
The assessee is engaged in the business of generation of power. It filed its return for the assessment year under appeal declaring income of Rs.9,91,30,590/-, which was assessed at the sum of Rs.9,92,64,966/- vide assessment order dated 11.02.2014 u/s. 143(3) of the I.T. Act, 1961. As per the Profit & Loss Account as on 31.03.2011, Schedule-I, the total sales from operation was shown at Rs.24,39,91,943/-, which comprised of the following two heads :- Sale of Electricity Rs.15,56,29,390 Sale of Carbon Credit Rs. 8,83,62,553 Rs.24,39,91,943/- 3. During the course of assessment proceedings, the assessee vide its letter dated 16.12.2013 brought to the notice of the AO that owing to a bona fide mistake, it has inadvertently treated carbon credit as revenue receipt which was, in fact, capital in nature and hence not taxable. In the said letter, the assessee also explained in detail the nature of business and receipt against sale of carbon credit and it was clarified that the company excluded the income from sale of carbon credit while computing the deduction u/s. 80-IA of the Act and offered it to tax in spite of the admitted fact that the income of Rs.8,83,62,553/- from sale of carbon credit is totally non-taxable being capital receipt. 4. To explain the same further, the assessee-company's main activity is the business of power generation. During the previous year relevant to the assessment year under consideration, it received Carbon Emission Reduction Certificate (CER) popularly known as `carbon credit' for the project activity of switching off fossil fuel from naphtha and diesel to biomass. The receipt in question has no relationship with the process of production, nor is it connected with the sale of power or with the raw material consumed. It is not even the sale proceed of any by-product. The CER is issued to the assessee for its saving emission of carbon. The certificate issued by UNFCCC only indicates the achievement made by the assessee in emitting lesser quantity of gases than the assigned quantity. The certificate is not dependent on production. In fact, the UNFCCC does not provide any funds to the industry. It only certifies that the industry emitted a particular quantity of gases as against the permissible quantity. Therefore, carbon credit is in the nature of "an entitlement" received to improve world atmosphere and environment reducing carbon, heat and gas emissions.
The assessee contended that the amount shown as 'Sale of Carbon Credit' does not represent any income in the process or during the course of business, inasmuch as carbon credit is not an offshoot of business but an offshoot of environmental concerns and not generated or created due to carrying on of business but it had accrued due to improvement in world atmosphere and environment by reducing carbon, heat, gas emissions etc. Due to that, the assessee gets privilege in nature of transfer of carbon credits. Thus, 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. Carbon credit is entitlement or accretion of capital and hence income earned on sale of these credits is capital receipt.
6. The AO rejected the contention of the assessee and brought to tax the income from sale of carbon credits. The CIT(A) deleted the additions made by the AO by following the decision of the ITAT, Bengaluru Bench, in the assessee’s own case for Assessment Year 2009-10, in Subhash Kabini Power Corporation (2015) 37 ITR (Tribunal) 106 (Bengaluru), dated 28.11.2014 wherein it was held that income from sale of carbon credits is a capital receipt, not chargeable to tax. This decision of the Tribunal is also affirmed by the Hon’ble Karnataka High Court reported in 385 ITR 592 and the Court followed the decision of the ITAT, Hyderabad Bench, rendered in the case of My Home Power Ltd.
Aggrieved by the order of the CIT(A), Revenue has raised ground No.2. As far as ground No.2 is concerned, as we have already stated, the Hon’ble Karnataka High Court in the case of assessee (supra) has approved the decision of the ITAT, Hyderabad Bench, with the following observations: “The ITAT Hyderabad has decided this issue for the first time and the discussion made by the ITAT Hyderabad Bench worth to note, it read as under: “24. We have heard both the parties and perused the material on record. Carbon credit is in the nature of "an entitlement" received 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 of saving of energy consumption and not because of its business. Further. in our opinion, carbon credits cannot he considered as a bi-product. It is a credit given to the assessee under the Kyoto Protocol and because of international understanding. Thus. the assessees who have surplus carbon credits can sell them to other assessees 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. hi- 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 judgment of the Supreme Court in the case of CIT v. Maheshwari Devi Jute Mills Ltd. (57 ITR 36) wherein held that transfer of surplus loom hours to other mill out of those allotted to the assessee under an agreement for control of production was capital receipt and not income. Being so, the consideration received by the assessee is similar to consideration received by transferring of loom hours. Hie Supreme Court considered this fact and observed that taxability of payment received for sale of loom hours by the assessee is on account of exploitation of capital asset and it is capital receipt and not an income. Similarly, in the present case the assessee transferred the carbon credits like loom hours to some other concerns for certain consideration. Therefore, the receipt of such consideration cannot be considered as business income and it is a capital receipt. Accordingly, we are of the opinion that the consideration received on account of carbon credits cannot be considered as income as taxable in the assessment year under consideration. Carbon credit is not an offshoot business but an offshoot of environmental concerns, No asset is generated in the course of business but it is generated due to environmental concerns. Credit for reducing, carbon emission or greenhouse effect. can he transferred to ail other party in need of reduction of carbon emission. It does not increase profit in any manner and does not need any expenses. It is a nature of entitlement to reduce carbon emission, however, there is no cost of acquisition or cost of production to get this entitlement. Carbon credit is not in the nature of prat it or in the nature of income.
Further, as per guidance note on accounting for Self- generated Certified Emission Reductions (CERs) issued by the Institute of Chartered Accountants of India (ICAI) in June, 2009 0states that CFRs should he recognised in books when those are created by UNFCCC and/or unconditionally available to the generating entity. CERs are inventories of the generating entities as they are generated and held for the purpose of sale in ordinary course. Even though CERs are intangible assets those should he accounted as per AS-2 (Valuation of inventories) at a cost or market price, whichever is lower. Since CERs are recognized as inventories. the generating assessee should apply AS- 9 to recognize revenue in respect of sale of CERs.
Thus, sale of carbon credits is to be considered as capital receipt. This ground is allowed." …..
At this stage, we may also refer to the decision of the Andhra Pradesh High Court, which has been relied upon by the Tribunal in (he impugned order. More or less, identical question was raised and the Andhra Pradesh High Court in the case of CIT v. My Home Power Ltd. [2014] 46 taxmann.com 314/225 Taxman 8 (Mag.)/365 ITR 82, at paragraph No. 3 observed thus: "3. We have considered the aforesaid submission and we are unable to accept the same, as the learned Tribunal has factually found 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. We agree with this factual analysis as the assessee is carrying on the business of power generation. The Carbon Credit is not even directly linked with power generation. On the sale of excess Carbon Credits the income was received and hence as correctly held by the Tribunal it is capital receipt and it cannot be business receipt or income. In the circumstances, we do not find any element of law in this appeal." The aforesaid shows that the Andhra Pradesh High Court has confirmed the view of the Tribunal 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. 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. It was found that the Tribunal has held that it is capital receipt and not business income."
….. "12. Considering the above, we find that when the carbon credit is generated out of environmental concerns. and it is not having the character of trading activity, the Tribunal has rightly held that it is capital receipt and it is not income out of business and hence, not liable to pay income tax. Once it is found that the amount realized by sale of carbon credit is not taxable as I naturally it will have no adverse effect on the Revenue."
In view of the above binding decision of the jurisdictional High Court, grounds of appeal raised by the Revenue on this issue is dismissed.
9. The next issue is whether income in the form of carbon credits should be excluded for the purpose of computing books profits under section 115JB of the Act, also. On this issue, the CIT(A) agreed that the contention of the assessee that when an item of income is not chargeable to tax at all the same cannot be included for the purpose of computing book profits under section 115JB of the Act. The assessee relied on the decision of the ITAT, Delhi Bench, in the case of Malana Power Company and Others, order dated 27.04.2018. The Revenue has challenged the order of the CIT(A) in ground No.3.
Learned DR relied on the order of the ITAT, Hyderabad Bench in the case of Rain Commodities Ltd., Vs. DCIT (2010) 40 SOT 265 (Hyderabad – SB) wherein the question was whether long term capital gain which was exempted under section 47(i)(v) of the Act under the normal provisions can be excluded while computing book profits under section 115JB of the Act. The Tribunal held that it is only those items of income which are included in the P & L A/c and those that are excluded by the explanation to section 115JB of the Act than can be reduced for the purpose of computing book profits. Learned Counsel for the assessee on the other hand brought to our notice decision of the ITAT, Mumbai Bench, rendered in the case JSW Steel Ltd., Vs. ACIT ITA No.923/Bang/2009, order dated 13.01.2017. The Tribunal in this decision, after referring to several decisions including that of the Special Bench in the case of Rain Commodities Ltd., held as follows: “23. From the perusal of aforesaid decisions, at the outset, it may appear that on similar nature of issues there are divergent views of various benches of the Tribunal, however, one common point/ratio permeating through all the decisions, which can be deduced by us is that, if an assessee company is in receipt of a ‘capital receipt’ which is not chargeable to tax at all, that is, it does not fall within any of the charging section or can be classified under any heads of income under the Income Tax Act, then same cannot be treated as part of net profit as per Profit & Loss account or reckoned as ‘working result’ of the company of the relevant previous year and consequently, cannot be held to be taxable as ‘book profit’ under MAT in terms of section 115JB. Accordingly, our conclusion remains the same that the capital surplus on account of waiver of dues neither is neither taxable nor can be included in computation of book profit u/s 115JB.”
The Tribunal in holding as above referred to decision of ITAT, Lucknow Bench, in the case of ACIT Vs. L H Sugar Factory Ltd., order dated 09.02.2016 and CIT Vs. Benami Industries Ltd., ITA No.144/Kol/2013 dated 15.02.2016 wherein similar propositions as canvassed by the assessee was accepted after considering decision of Special Bench in the case of Raintree Commodities (supra). In view of the aforesaid decisions, we do not find any merits in ground No.3 raised by the Revenue.
In the result, the appeal filed by the Revenue is dismissed.