INCOME-TAX APPELLATE TRIBUNAL­CHENNAI "B" BENCH

I. T. A. No. 582/Mds/2013 (assessment year 2009-10).

DR. O. K. NARAYANAN (Vice-President) and VIKAS AWASTHY (Judicial Member)

T. Banusekar for the appellant.
Dr. S. Moharana for the respondent.

The order of the Bench was delivered by

VIKAS AWASTHY (Judicial Member).-The appeal has been filed by the assessee impugning the order of the Commissioner of Income-tax (Appeals)-II, Coimbatore, dated January 30, 2013.

The assessee is a company incorporated under the provisions of the Companies Act, 1956 and is engaged in the business of manufacturing of yarn and electricity generation through wind mills. The assessee filed its return of income for the assessment year 2009-10 on September 29, 2009 declaring total income as Rs. 6,72,89,330. The case of the assessee was selected for scrutiny and a notice under section 143(2) of the Income-tax Act, 1961 (Act) was issued to the assessee on August 30,2010. The Assessing Officer during the course of assessment made disallowance of Rs.2,72,28,374 on account of clean development mechanism (COM). The assessee treated COM receipts on account of sale of carbon credits as capital receipts, whereas the Assessing Officer held the same to be revenue receipts. Aggrieved against the assessment order March 9, 2011, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals)-Coimbatore. The Commissioner of Income tax (Appeals) upheld the view of the Assessing Officer and dismissed the appeal of the assessee. Aggrieved against the order of the Commissioner of Income tax (Appeals) the assessee has come in the second appeal before the Tribunal.

Shri T. Banusekar, appearing on behalf of the assessee submitted, that the carbon credit receipts or CDM receipts are capital in nature. In order to support, his contention the, learned authorised representative placed on record the copy of the order of the Hyderabad Bench of the Tribunal in the case of My Home Power Ltd. v. Deputy CIT reported' as [2013] 21 ITR  (Trib) 186 (Hyd) and the decision of the Chennai Bench in the case of Ambika Cotton Mills Ltd. v. Deputy CIT in I.T.A. No. 1836/Mds/2012 [2013] 27 ITR (Trib) 44 (Chennai) decided on April 16, 2013. The learned authorised representative submitted that the case of the assessee is squarely covered by the earlier orders of the Tribunal, wherein the Tribunal has. held .that the receipt of such consideration cannot be considered as business income and it is a capital receipt.

On the other hand, Dr. S. Moharana, representing the Revenue vehe­mently opposed the submission of the authorised representative. The lean:ed Departmental representative submitted that the case of the asses­see IS not covered by the order in the case of My Home Power Ltd. v. Deputy CIT reported as [2013] 21 ITR (Trib) 186 (Hyd). The learned Departmental representative supporting the order of the Commissioner of Income-tax (Appeals) made the following submissions:
(i) the different clauses in the clean development mechanism (CDM) agreement between the assessee-company indicated that the sale transaction of certified emission reduction (CER) was nothing but a transaction m "goods" ;

(ii) expenditure incurred for implementation of CDM project as a pollution reduction measure could be claimed in the profit and loss account.
(iii) the certificates issued by UNFCCC had intrinsic value and had ready market for their redemption/trading ;
(iv) the certificates (CERs) were akin to shares or stocks which could
De transacted in the stock exchange ;
(v) relying on the decisions of the hon'ble Supreme Court in the cases of Tata Consultancy Services v: State of Andhra Pradesh [2004] 271 ITR 401 (SC) and Bharat San char Nlgam 'Ltd. v. Union of India [2006] 282 ITR 273 (SC) it is contended that CERs were goods and capable of marketing;

(vi) the Departmental representative relied on the decision of the hon'ble Supreme Court of India in the case of V. S. S. V. Meenakshi Achi v. CIT [1966] 60 ITR 253 (SC). In the said case, the Supreme Court found that the amount from 'the' funds were earmarked by the assessee on the basis of the rubber produced by them and were paid against the expen­diture incurred by them for maintaining the labour and producing the rub­ber. The facts in the said case indicate that the subsidy was received by the assessee to compensate for the revenue expenditure incurred in the process of the trading activity.

(vii) the learned Departmental representative further submitted that the CERs ate akin to import· entitement, 'the incentives in the form of carbon credit are given by the Government to avoid use of fossil fuel in the industry. If saving in CERs is made, the industry can make money by sell­ing them. They have almost similar features as in an "important entitle­ment". Based on the quantum of exports, the exporters are given import entitlements, The exporter can either import the raw material/goods covered by the important entitlements or without importing the goods they can sell the important entitlements;

(viii) CERs should be taxable as revenue receipt under section 28(iv) ;
and
(ix) the CERs are received from the Government (out of the quota allotted to the Government as per Kyoto Protocol) permitting the assessee to use fossil fuel to the extent mentioned in the CERs. The Government of a sovereign State has a right to place a reasonable restriction on carrying on profession or business and, therefore, restrictions are placed to use fossil fuel. However, this restriction also has an in-built incentive. "If you do not consume fossil fuel, or consume less, you can sell and earn money". There­fore, sale proceeds of CERs are revenue receipts not only from the intrinsic nature of the entitlement but also because there are closely connected with carrying out business. The learned Departmental representative prayed for the dismissal of the appeal of the assessee in wake of the submissions made by him.

We have heard submissions made by the ,representatives of both sides and have gone through the orders of the 'authorities below. We have also examined the judgments/orders relied upon by the representatives of both sides. We find that the case of the assessee is squarely covered by the order of the Hyderabad Bench of the Tribunal in the case of My Home Power Ltd. v. Deputy CIT reported as [2013] 21 ITR (Trib) 186 (Hyd). The Hyderabad Bench while dealing with the similar issue has held as under (page 202) :

"We have heard both 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 in the nature of transfer of carbon credits. Thus, the amount reveived 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 bi-product. It is a credit given to the assessee under the Kyoto Protocol and because of international understand­ing. Thus, the asses sees 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, 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 judg­ment of the Suprenw Court in the case of CIT v. Maheshwari Devi Jute Mills Ltd. [1965J 57 ITR 36 (SC) wherein it is 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 100m hours. The 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 asseesee 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 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.

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 states that CERs should be 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 be accounted as per AS-2 (valuation of invento­ries) at a cost or market price, whichever is lower. Since CERs are recognised as inventories, the generating assessee should apply AS-9 to recognise revenue in respect of sale of CERs ...

Thus, sale of carbon credits is to be considered as capital receipt.

This ground is allowed."

The ratio laid down in the judgments relied upon by the learned Depart­mental representative are not applicable in the facts and circumstances of the present case, therefore, they do not support the case of the. Revenue.

The co-ordinate Bench of the Tribunal in me case of Ambika Cotton Mills Ltd. v. Deputy CIT [2013] 27 ITR (Trib) 44 (Chennar) while dealing with an identical issue followed the decision of the Hyderabad Bench of the Tribunal in the case of My Home Power Ltd. v. Deputy CIT reported as [2013] 21 ITR (Trib) 186 (Hyd). Respectfully following the decision of the co-ordinate Bench, we hold that the CDM receipts are capital receipts. Accordingly, the order of the Commissioner of Income-tax (Appeals) is set aside and the appeal of the assessee is allowed ..