Sale of carbon credits is capital receipt and hence not taxable

Fact and Issue of the case

This appeal filed by the Revenue under Section 260A of the Income Tax Act, 1961 (for short, the Act) is directed against the order dated 12.4.2021 passed in ITA.No.509/Chny/2017 on the file of the Income Tax Appellate Tribunal, Chennai ‘A’ Bench (for brevity, the Tribunal) for the assessment year 2009-10.

The Revenue is on appeal before us challenging the correctness of the order by raising the following substantial question of law :

“Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the proceeds realized by the assessee on sale of certified emission reduction credit, which the assessee had earned on the clean development mechanism in its wind energy operations, is a capital receipt and not taxable ?”

Observation of the court

The Court has considered the aforesaid submission and 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.

“Court also agree with this factual analysis as the assessee is carrying on the business of power generation. The Carbon Credit is not even directly linked with power generation. 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. In the circumstances, we do not find any element of law in this appeal.”

The aforesaid shows that the Andhra Pradesh High Court has confirmed the view of the Tribunal 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. It was also found that the carbon credit is not even directly linked with the power generation and the income is received by sale of the excess carbon credits. It was found that the Tribunal has rightly held that it is capital receipt and not business income.

As such, in our view, when the issue is already covered by the decision of the Andhra Pradesh High Court, wherein the view taken by the Tribunal of Hyderabad Bench has been followed in the present case, one may say that no substantial question of law would arise for consideration.”

The Hon’ble Division Bench of this Court in the case of PCIT vs. Arun Textiles Pvt. Ltd., [T.C.A.No.606 of 2016, dated 29.08.2016], after referring to the decision in My Home Power Ltd., (supra), dismissed the appeal filed by the Revenue and confirmed the order passed by the ITAT holding that sale of carbon credits has to be considered as capital receipt and accordingly, it is not taxable.

The argument of Ms.V.Pushpa, learned Senior Standing Counsel is by referring to the substantial questions of law framed by the assessee and it is submitted that if the receipts from sale of carbon credit has to be treated as a capital receipt, then the assessee could not have claimed it as a deduction under Section 80IA of the Act and if the substantial question of law as framed by the assessee is to be answered, it should be answered against the assessee.

Thus, following the said decision, the above tax case appeal is dismissed and the substantial question of law raised is answered against the Revenue. No costs.