INCOME TAX ACT, 1961

Section 4

Income - Capital or revenue receipt - Receipts from sale of carbon credits/CERs -

Assessee engaged in manufacturing of refrigerants, engineering plastics and industrial years was having one of its refrigerant manufacturing facility at Village, Jhiwana, in District Alwar, Rajasthan. In carrying on the fluoro-chemicals business, assessee, at its refrigerant manufacturing facility at Jhiwana, produced HCFC-22. Production of HCFC-22 generated HFC-23, a Green House Gas (GHG). The assessee was having an option to emit such Green House Gas HFC-23 in the air without impacting its business of production of HCFC-22 as there is no legal/statutory obligation on the assessee for reduction in emission of HFC 23 gas in the open air. However, the assessee chose to reduce the emission of green-house gas namely HFC-23, in the atmosphere by a adopting a process called 'Thermal Oxidation' a process (thermal oxidation) which had no relationship with the business activity. By such thermal oxidation, the assessee reduces emission of GHG in the atmosphere. Consequent to such efforts of the assessee resulting in reduction in emission of GHG, assessee was allotted certain entitlement called CER/Carbon credits by the UNFCCC, in terms of Kyoto Protocol. During the year under consideration, the assessee received a sum of Rs. 93,85,40,499 on account of transfer of 14,00,000 units of such CERs which assessee claimed as capital receipts. However, AO taxed the same. Held: Carbon credits/CERs were in nature entitlement accrued to assessee on account of its efforts to reduce emission of harmful greenhouse gases. They had arisen due to environmental concerns and, therefore, could not be said to be 'connected with' or 'incidental to' the business activities of assessee. Assessee was engaged in the business of refrigerants, engineering plastics and industrial yarns, etc., and was not into the business of trading of carbon credits. Therefore, carbon credits were not offshoot of business but being offshoot of environmental concerns, receipt arising from transfer of carbon credits was in the nature of capital receipt not.

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