TMI Blog2012 (11) TMI 288X X X X Extracts X X X X X X X X Extracts X X X X ..... understanding. Thus, the assessees who have surplus carbon credits can sell them to other assessees to have capped emission commitment not as a result or incidence of one's business, as 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. Relying CIT v. Maheshwari Devi Jute Mills Ltd. [1965 (4) TMI 10 - SUPREME COURT] 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. 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 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 - in favour of assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble commodity and even quoted in stock exchange. Accordingly, added the net receipt of Rs. 11,75,00,000 to the returned income. After `giving effect to set off of brought forward losses the total income was determined at Rs. 8,99,61,870 and tax demand of Rs. 3,60,80,529 was raised. Being aggrieved, the assessee went in appeal before the CIT(A). The CIT(A) confirmed the order of the also and also given a finding that the amount which was considered as income of the assessee cannot be considered as income from business and as such the same is not entitled for deduction u/s. 80IA of the Act. Against this the assessee is in appeal before us. 4. The learned AR submitted that for arriving at the conclusions, the first attempt is to know the nature of the receipt. The company's main business activity is generation of biomass based power. The receipt in question has no relationship with the process of production nor it is connected with the sale of power or with the raw material consumed. It is not even the sale proceed of any bye product. The CERCs are issued to every industry which saves emission of carbon and not limited to power projects. Further, the certificates were issued keeping ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he amount is not falling within any of the clauses of Sec. 2(24) of the I.T. Act. The amount also would not represent an incentive granted in the process of business activity as the amount is not received under any scheme framed by the Government or anybody to benefit the industry or to reimburse either the cost of the raw material or the cost of capital asset. The amount also cannot be considered as an award for the revenue loss suffered by the company as the amount is granted without relevance to the financial gains or losses. The payment is made absolutely without any relevance to the financial transactions of the assessee. There is no consideration for paying this amount. The amount is paid in the interest of international community and not either in the interest of Industry as such or in the interest of the assessee company or as a compensation for the loss/ expenditure during the course of business. Therefore, the amount is a sort of a gift given by the UNFCCC for the distinction achieved by the assessee company in achieving emission of lesser amount of gases than the "assigned amount". It cannot, therefore, be an income within the meaning of Sec. 2(24) or Sec. 28 of the LT. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reason as to why the same is not included in Sec. 2(24) or Sec. 28. 10. The AR submitted that in the past, industries received grants, subsidies and incentives. The treatment for such amount, may also be relevant. They are discussed hereunder w.r.t. the circulars issued by the CBDT 1. The CBDT in circular No. 142 dated 1-8-1974 reported in 95 ITR page 131(ST) observed that the subsidy received under this scheme for helping the growth of industries which is not meant for supplementing the profits is considered as not taxable. In the present case there is no question of supplementing the profits. 2. Circular No. 447 dated 22.1.1986 wherein the Board advised that award received by an amateur Sportsman is not taxable in his hands as it is a capital receipt. 11. The AR submitted that the assessee's case is far better than the above two situations. There is some relevant to the activities. But in the case of the assessee there is no relevance. In the above mentioned circulars, the CBDT expressed a view that if the amount is paid by way of subsidy to the industries established in the backward and remote areas would not represent the income. According to the CBDT if the amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the purpose of income. The Karnataka High Court in the case of CIT v. Gogte Minerals reported in 222 ITR page 245 observed that development grant received by an assessee for acquiring machinery and replacing the old machinery is capital in nature. The Kerala High Court in the case of CIT v. Rajagiri Rubber and Projects Company Ltd., reported in 182 ITR 393 held that subsidy received by a Rubber Plantation for replanting rubber trees under the re- plantation subsidy scheme is not taxable income. The Kerala High Court in the case of CIT v. Rubi Rubber Works Ltd., 178 ITR 181 observed that subsidy given for beneficial purposes of promoting public interest is capital receipt and not a revenue receipt. 13. The AR further relied on the decision of the Punjab and Haryana High Court in the case of Baghapurana Cooperative Marketing Society Ltd., v. CIT 44 Taxman 92 held that subsidy received by the Cooperative Marketing Society from Markfed is capital receipt and is exempt from tax. The decision of the Calcutta Bench-B in the case of Magnum Exports Pvt. Ltd. v ACIT reported in 54 ITD 425 wherein it is held that income on sale of export licence is a capital receipt. The Kerala High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... frequencies are the goods or not. The Hon'ble Supreme Court held that the radio frequencies are not goods. There is absolutely no relevance of the said decision to the facts of the assessee's case. (c) The Assessing Officer relied upon the decision of the House of Lords in the case of Pontypride and Rhondda Joint' Water Board v. Ostime (H.M. Inspector of Tax), [1946] 14 ITR 45. In the said case, the House of Lords are dealing with a situation where subsidies from public funds were provided in carrying on the business are in the nature of profits and gains. It was found by the House of Lords that the subsidy received were to meet an estimated deficiency in the operation loss/trading activity and observed that the amounts were admittedly paid during the trading activity. The said case has no application to the facts of the assessee's case. The House of Lords are dealing with a situation where the subsidy was granted to reimburse the loss suffered by the Water Board. The amount received by the assessee is not such a receipt. Therefore, the decision of the House of Lords has no application to the facts of the assessee's case. Similar is the view taken in the case of Smart v. Lincol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not to compensation either revenue type of expenditure nor the capital expenditure incurred by the assessee. Therefore, the said amount can neither be reduced from the cost of the assets nor added to the income of the assessee. Therefore, the assessee requests the Honourable Income-tax Appellate Tribunal to kindly consider the above explanations and allow the appeal holding that the amount received from CERs does not represent the revenue income. 19. Alternatively, the AR submitted that the amount received is not related to the business activity and that it does not represent a revenue receipt. The assessee explained as to how the amount cannot be considered as a revenue receipt. Without prejudice to any of the submissions, the assessee requests the Tribunal to kindly consider the following claims: (a) If as held by the Assessing Officer (as per the extract at para 8 (c) above the amount represents a revenue receipt connected with the business activity, the same cannot be held as relating to the year of account as the certificate related to the emission of carbon during the earlier years. It is submitted in the earlier paragraphs that the CERs do not relate to the year of acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T reported in 293 ITR 520 and Shakti Foot Wear v. JCIT reported in 13 DTR 157 were also relied upon by the Assessing Officer. (f) In this regard, the AR submitted that there is difference between the decision of the Apex Court and the facts of the assessee's case. In the case of the appellant, the Assessing Officer already held that the CERs are directly linked with the production of power and in the cases decided by various courts the same was in dispute. (g) It is further submitted that firstly, the sale of import licenses is held as business receipt as the same is included in Sec. 28 of the IT Act. In so far as the grant of CERs is concerned, the same does not represent income within the meaning of Sec. 28 of the IT Act. Further, the Assessing Officer at page No. 5 of the assessment order extracted in the above mentioned paragraphs observed that the amount is directly attributable to the business of production of power. When the Assessing Officer after holding that the receipt is attributable to the business activity, cannot now say that the income is not derived from the industrial activity for the purposes of sec. 80IA of the IT Act. The observations of the Assessing Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out of emission of harmful gases into atmosphere, more precisely the emission of carbon dioxide has given rise to this concept of carbon trading. The famous Kyoto protocol tried to solve this global concern of high degree of emission of harmful gases. The idea was to divide the entire world into two, one which can make changes in the existing infrastructure and one who cannot. The idea behind this was that each country will have to cut down their emission by some percentage or else have to pay heavy fine by way of measuring how much they are polluting the air. This has given rise to the concept of "clean development mechanism'(CDM) which is a project executed in a country where they cannot on their own afford to bring that technological change in the existing industry, which can result in less carbon emission. For example, a company in a developed world would lend money to a company in a developing world to buy the necessary technology and in turn own units generated by bringing the technology change and thus meet the target set. This will help the developing countries to get much needed financial help and in turn help the developed countries to meet the emission cut targets set by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee would have got the benefit of the expenditure incurred by claiming it in its profit and loss account. Since there is something more to this and since it is known that the certificates issued by UNFCCC have intrinsic value and has a ready market for its redemption/ trading, that the assessee obviously pursued to obtain the said certificates. He submitted that 'carbon credits' has a ready market worldwide and it is understood that these are also quoted in the international market. For Example there is regular trading in Carbon credit in European Climate Exchange based at London where the trading is apparently web-based. Similar trading also takes place through the website of Nordpool.com a Norway based website, Bluenext.com a Paris based website and Chicago Climate Exchange, Chicago USA. Of late, the trading has apparently commenced in India through MCX (Multi Commodity Exchange) and NCDEX (National commodity and derivative Exchange). Thus the certificates (CERs) are akin to shares or stock which are transacted in the stock exchange. Hence, the sale proceeds arising out of sale of the CERs by the assessee is a revenue receipt and rightly brought to tax by the Assessing Office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction u/s. 80IA by virtue of the fact that the power generation business of the assessee is entitled for deduction u/s. 80IA. Thus the argument of the assessee is not acceptable and hence deserves to be rejected. The judicial decisions relied upon by the assessee in its submission relate to taxability of subsidy. Accordingly, the sale proceeds of the CERs cannot be equated with subsidy and hence the applicability of the case-law relied on by the assessee does not arise. Thus, considering the totality of the facts, the DR was of the view that the Assessing Officer has rightly rejected the claim of deduction u/s. 80IA of the Act. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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. 25. 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 ordinar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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