Sale value of carbon credit is capital receipt and cannot be considered ‘income’ under any head of income, and as per Constitution of India also point of view of author fortified by recent order of Andhra Pradesh High Court.

[CA DEV KUMAR KOTHARI]

Articles and judgments on ‘carbon credit’ in chronological order:

SALE VALUE OF CARBON CREDIT IS CAPITAL RECEIPT- a point of view supported by judicial rulings.  (18.06.2012)

My Home Power Ltd. Versus Deputy Commissioner of Income-tax, Central Circle – 7  2012 (11) TMI 288 - ITAT HYDERABAD No. - IT APPEAL NO. 1114 (HYD.) OF 2009  Dated - 02 November 2012

SALE VALUE OF CARBON CREDIT IS CAPITAL RECEIPT- a point of view earlier expressed by the author, now find acceptance in judgment of the Tribunal. (03.01.2013)

The Commissioner of Income-tax Versus M/s. My Home Power Ltd. 2014 (6) TMI 82 - ANDHRA PRADESH HIGH COURT

Dy. Commissioner of Income-tax Versus M/s. My Home Power Ltd. 2014 (5) TMI 553 - ITAT HYDERABAD  ITA Nos. 80 & 81/Hyd/2014  Dated - 07 May 2014

The Constitution of India List I - Union List  entry 82. Taxes on income other than agricultural income.

Section 2(24), 28, 41, 45, 55, and 56 of Income-tax Act, 1961.

Earlier  articles by the author:

In two  article written by the author and  webhosted on this website the author had expressed views that  sale value of “carbon credit” is a capital receipt and it cannot be considered as ‘income’ within the meaning  under the Constitution of India and cannot be considered as income under any heads of income as provided under the Income-tax Act,1961.

In the  judgments  of the Tribunal many of contentions as raised by the author were considered and the view that  sale value of ‘carbon credit’, is capital receipt found acceptance.

Readers are requested to refer to articles and judgments of Tribunal for detailed discussion on the matter.

Judgment of Andhra Pradesh High Court:

Revenue preferred appeal against judgment of Tribunal dated 02.11.2012. The appeal was sought to be preferred and admitted against the judgment and order of the learned Tribunal, dt.2.11.2012, on the following substantial questions of law:

1.     “Whether, in the facts and circumstances of the case and in law, ITAT is correct in holding that sale of Carbon Credits is to be considered as Capital Receipt and not liable for tax under any head of income under Income Tax Act, 1961?

2.     Whether, in the facts and circumstances of the case and in law, ITAT is correct in holding that there is no cost of acquisition or cost of production to get entitlement for the Carbon Credits, without appreciating that generation of Carbon Credits is intricately linked to the machinery and processes employed in the production process by the assessee?” 

In view of these questions, the counsels of revenue before the High Court, raised contentions as analyzed below:

The consideration is received on account of sale of Carbon Credits

It  should be treated to be business income

 the sale has been made in connection with the business. 

Views of the High Court:

On consideration of questions and the contentions of revenue the honorable High Court made observations and ordered to dismiss the appeal. An analysis is made as follows:

1. The honorable court considered submissions of counsels on the questions submitted for admittance,
2.  The honorable Court expressed that “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.” 
3.  The honorable Court also expressed agreement of factual aspects that  the assessee is carrying on the business of power generation but the Carbon Credit is not even directly linked with power generation.
4.  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. 
5. In the circumstances, the honorable Court held that “ we do not find any element of law in this appeal”.
6. The honorable Court dismissed the appeal without any order as to costs.  

Authors point of view:

Though the honorable High Court has dismissed the appeal, without admitting and answering the questions , yet it can be said that the facts found by the Tribunal have been confirmed and the legal issue that the salve value of carbon credit is capital receipt has been confirmed.

Any connection of a receipt with business will not make a capital receipt as income of business or income from any other source and cannot fall under any heads of income. Many  of capital receipts are received in connection with business or profession or while carrying a business, profession or vocation. Merely because there is a direct or indirect connection with business will not make a capital receipt an item of revenue or income.  

Any receipt connected with business or received in connection with business is not necessarily income. The nature of any receipt is firstly to be examined as to whether it is a capital receipt or a revenue receipt.

If a receipt is of capital nature, then it cannot be considered as income under any of heads of income, as may be in force from time to time under law. Under the Constitution of India, the central Government is empowered to levy tax on income, other than agricultural income. So the Central Government is not empowered to levy a tax on any capital receipt. If any specific provision is made to treat a capital receipt, then such provision will be ultra virse the Constitution of India.

Readers may refer to various judgments on the issue of capital receipt as referred to in earlier articles.  Particularly the following judgments are directly related with a receipt connected with business, profession or vocation which were held to be ‘capital receipt’:

 Decisions about capital receipts:

Commissioner Of Income-Tax, Uttar Pradesh Versus Maheshwari Devi Jute Mills Limited 1965 (4) TMI 10 (SC) – loom hours were entitlements received in course of business of jute mill yet sale value of loom hours  was held to be capital receipt.

Sri Krishna Dairy And Agricultural Farm Versus Commissioner Of Income-Tax 1987 (4) TMI 39 (HC)   -calves were received in course of business of dairy farm, yet sale value of calves was held to be capital receipt.

The decisions in case of My Home power are  also based on principal laid down by the Supreme Court about loom hours. The same principal is applicable in case of other capital receipts or capital accretion in business or profession in case of many such assets, advantages and privileges which accrue and accumulate as capital over period of time and are realized in some circumstances.  Therefore, let us hope that revenue will not challenge the judgments about ‘carbon credit’. 

There should not also be any attempt to extend meaning of income, by including capital receipts in the definition of income. Such inclusions are ultra virse the Constitution of India, as has been discussed by author in some other articles web hosted on this website.