My Home Power Ltd. v. Dy. CIT

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The Tax Publishers2013 TaxPub(DT) 0442 (Hyd-Trib) : (2013) 050 (II) ITCL 0412 : (2013) 151 TTJ 0616 : (2013) 081 DTR 0173 : (2013) 021 ITR (Trib) 0186 INCOME TAX ACT, 1961 --Capital or revenue receipt--Carbon credit entitlement No element of profit or gain--Assessee was engaged in the business of power generation through biomass power generation unit. During the year under consideration, it has received 1,74,037 carbon emission reduction certificates (CERs) popularly known as 'carbon credits' for the project activity of switching off fossil fuel from naptha and diesel to biomass. Assessee had sold 1,70,556 CERs to a foreign company and had received an amount of Rs. 12.87 crores. The assessee had accounted this receipt as capital in nature and not offered the same for taxation. The assessing officer held the same being a revenue receipt since the CERs are a tradeable commodity and even quoted in stock exchange. *Held:* The CERs are issued to every industry which saves emission of carbons and not limited to power projects. Further, the certificates were issued keeping in view the product relating to periods earlier to previous year under consideration. The amount was not a compensation for the loss suffered in the process of production or expenditure incurred in acquisition of capital assets. The amount does not, therefore, represent any income in the process or during the course of business. 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. Carbon credits are made available to the assessee on account of saving of energy consumption and not because of its business. Further, carbon credits cannot be considered as a by-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, by-product or for rendering any service for carrying on the business. Carbon credit is entitlement or accretion of capital and hence income earned on sale of these credits is capital receipt. 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, 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 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. Credit for reducing carbon emission or greenhouse effect can be transferred to another 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 profit or in the nature of income. [Para 24] 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, CERs should be recognized in books when those are created by UNFCCC and/or unconditionally made 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 be 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. [Para 25] Thus, sale of carbon credits is to be considered as capital receipt. This ground is allowed. [Para 26] SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2013 TaxPub(DT) 0442 (Hyd-Trib) : (2013) 050 (II) ITCL 0412 : (2013) 151 TTJ 0616 : (2013) 081 DTR 0173 : (2013) 021 ITR (Trib) 0186

INCOME TAX ACT, 1961

--Capital or revenue receipt--Carbon credit entitlement No element of profit or gain--Assessee was engaged in the business of power generation through biomass power generation unit. During the year under consideration, it has received 1,74,037 carbon emission reduction certificates (CERs) popularly known as 'carbon credits' for the project activity of switching off fossil fuel from naptha and diesel to biomass. Assessee had sold 1,70,556 CERs to a foreign company and had received an amount of Rs. 12.87 crores. The assessee had accounted this receipt as capital in nature and not offered the same for taxation. The assessing officer held the same being a revenue receipt since the CERs are a tradeable commodity and even quoted in stock exchange. Held: The CERs are issued to every industry which saves emission of carbons and not limited to power projects. Further, the certificates were issued keeping in view the product relating to periods earlier to previous year under consideration. The amount was not a compensation for the loss suffered in the process of production or expenditure incurred in acquisition of capital assets. The amount does not, therefore, represent any income in the process or during the course of business.

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. Carbon credits are made available to the assessee on account of saving of energy consumption and not because of its business. Further, carbon credits cannot be considered as a by-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, by-product or for rendering any service for carrying on the business. Carbon credit is entitlement or accretion of capital and hence income earned on sale of these credits is capital receipt. 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, 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 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. Credit for reducing carbon emission or greenhouse effect can be transferred to another 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 profit or in the nature of income. [Para 24] 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, CERs should be recognized in books when those are created by UNFCCC and/or unconditionally made 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 be 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. [Para 25] Thus, sale of carbon credits is to be considered as capital receipt. This ground is allowed. [Para 26]