Citation Codes

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Case Number

Income Tax 582/CHNY-2013

Attorney(S)

T. Banusekar

Judges

Dr. O.K. NarayananVikas Awasthy

Acts

u/s. 143(2) of the Income Tax Act, I.T.A. No. 582/Mds/2013 2 1961 (Act)
sections 2(24), 28, 45 and 56 of the Income-tax Act, 1961.
COMPANIES ACT 1956

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Smart Summary

Structured Summary of Tribunal Opinion — ITA No. 582/Mds/2013

Factual and Procedural Background

The appeal was filed by the assessee against the order of CIT(A)-II, Coimbatore dated 30-01-2013. The assessee is a company incorporated under the Companies Act, 1956, engaged in manufacturing of yarn and electricity generation through wind mills. For the Assessment Year 2009-10 the assessee filed its return of income on 29-09-2009 declaring total income of Rs. 6,72,89,330/-. The case was selected for scrutiny and a notice under section 143(2) of the Income-tax Act, 1961 was issued on 30-08-2010.

During assessment the Assessing Officer made a disallowance of Rs. 2,72,28,374/- in respect of Clean Development Mechanism (CDM) receipts (sale of Carbon Credits), treating those receipts as revenue. The assessee contended that the CDM/carbon credit receipts were capital in nature. Aggrieved by the assessment order dated 09-03-2011, the assessee appealed to the CIT(A), which upheld the Assessing Officer's view and dismissed the appeal. The assessee then brought the matter to the Tribunal in ITA No. 582/Mds/2013.

At the Tribunal hearing, Shri T. Banusekar appeared for the assessee and Dr. S. Moharana represented the Revenue. The Tribunal pronounced its order on 12th June, 2013 at Chennai. The bench comprised Dr. O.K. Narayanan (Vice President) and Vikas Awasthy (Judicial Member), with the opinion authored per Vikas Awasthy, J.M.

Legal Issues Presented

Whether the receipts on account of sale of Certified Emission Reductions (CERs) / Carbon Credits (CDM receipts) are capital receipts or revenue receipts for income-tax purposes?

Arguments of the Parties

Appellant's Arguments (Assessee)

The Carbon Credit (CDM) receipts are capital in nature and not business income.
The assessee relied on earlier Tribunal orders, notably My Home Power Limited Vs. DCIT (reported as 21 ITR (Trib) 186) and the Chennai Bench decision in Ambika Cotton Mills Ltd., Vs. DCIT (ITA No. 1836/Mds/2012 decided on 16-04-2013), contending that those decisions hold that such receipts are capital receipts.
Submitted that the present case is squarely covered by those earlier Tribunal decisions and so the CDM receipts should be treated as capital receipts.

Respondent's Arguments (Revenue)

The case is not covered by My Home Power Limited Vs. DCIT (supra) and that decision should not apply.
Provisions/clauses in the CDM agreement indicate that the sale of CERs is effectively a transaction in goods.
Expenditure for implementation of the CDM project as a pollution reduction measure could be claimed in the profit & loss account (implying a revenue connection).
The certificates issued by the UNFCCC have intrinsic value and a ready market for redemption/trading.
The certificates (CERs) were likened to shares or stocks, which could be transacted (analogy to marketable items).
Relied upon Supreme Court decisions — Tata Consultancy Services Vs. State of Andhra Pradesh [2004] 141 Taxman 132 and Bharat Sanchar Nigam Ltd. Vs. Union of India [2006] 282 ITR 273 (SC) — to argue that CERs were goods capable of marketing.
Relied on V.S.S.V. Meenakshi Achi Vs. CIT [1966] 60 ITR 253 to argue by analogy that certain receipts given to compensate for expenditure may be revenue in nature.
CUstom/incentive nature argument: CERs are akin to import entitlements or incentives given by government for reducing fossil fuel use; such entitlements can be sold and therefore have revenue-characteristics similar to important entitlements provided to exporters.
Submitted that CERs should be taxable as revenue receipt under section 28(iv).
Argued that CERs are received from the Government (as per Kyoto Protocol allocations) and thus represent an entitlement closely connected with carrying on business, supporting revenue taxation.
Prayed for dismissal of the assessee’s appeal and for upholding the CIT(A) and Assessing Officer’s determinations.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
My Home Power Limited Vs. DCIT (21 ITR (Trib) 186)	Held that carbon credits are an "entitlement" arising from environmental concerns and, at best, are capital receipts not taxable as revenue receipts under the heads considered; compared to transfer of loom hours as a capital transaction.	The Tribunal found the present case to be squarely covered by this decision, adopted its reasoning that carbon credits are capital receipts and applied it to allow the assessee's appeal.
Ambika Cotton Mills Ltd. Vs. DCIT (ITA No. 1836/Mds/2012 decided 16-04-2013)	A co-ordinate Tribunal Bench dealing with an identical issue followed the Hyderabad Bench decision in My Home Power, treating CDM receipts as capital receipts.	The present Tribunal respectfully followed this co-ordinate-bench decision and relied upon its consistency with My Home Power in holding CDM receipts to be capital.
Tata Consultancy Services Vs. State of Andhra Pradesh [2004] 141 Taxman 132 (SC)	Relied upon by Revenue to support the submission that certain items may be treated as goods capable of marketing.	Referenced by the Revenue in support of the contention that CERs are marketable goods; the Tribunal noted reliance by the Revenue but held that the ratios cited by the Revenue were not applicable in the facts of the present case.
Bharat Sanchar Nigam Ltd. Vs. Union of India [2006] 282 ITR 273 (SC)	Relied upon by Revenue to support the proposition that certain entitlements or items could be treated as goods for market purposes.	Referenced by the Revenue; the Tribunal noted the reliance but found those decisions' ratios inapplicable to the facts concerning carbon credits in this case.
V.S.S.V. Meenakshi Achi Vs. CIT [1966] 60 ITR 253 (SC)	Revenue relied on the case for the proposition that amounts received to compensate for expenditure (subsidy tied to production/trading activity) constituted revenue receipts.	The Revenue relied on this case by analogy; the Tribunal recorded the reliance but distinguished the factual matrix of that case from the present case concerning carbon credits.
CIT vs. Maheshwari Devi Jute Mills Ltd. (57 ITR 36)	Supreme Court held that transfer of surplus loom hours under an agreement for control of production was a capital receipt and not income.	The My Home Power decision (relied upon by the present Tribunal) placed reliance on this case by analogy; the Tribunal accepted the analogy and applied the principle to carbon credits (comparing transfer of carbon credits to transfer of loom hours).

Court's Reasoning and Analysis

The Tribunal heard submissions from both sides, examined the orders below and the judgments/orders relied upon by the parties. The Tribunal concluded that the assessee's case was "squarely covered" by the Hyderabad Bench decision in My Home Power Limited Vs. DCIT.

The Tribunal reproduced key reasoning from the My Home Power decision: carbon credits are an "entitlement" granted to encourage reduction of emissions and improve the environment; the entitlement accrues due to an international/world concern (Kyoto Protocol/UNFCCC framework) and is not generated by the carrying on of the assessee's business. As such, the amount received for carbon credits lacks the element of profit or gain connected to the assessee's business and is akin to a capital accretion rather than business income.

The Hyderabad Bench had analogized carbon credits to the transfer of surplus loom hours (as considered in Maheshwari Devi Jute Mills Ltd.) and held that transfer of such entitlements is a capital transaction. The Tribunal accepted that analogy and reasoning.

The Tribunal also noted and cited the ICAI guidance note (June 2009) on accounting for self-generated CERs, which discussed recognition and accounting treatment (AS-2/AS-9). That guidance was mentioned in the reproduced reasoning of the Hyderabad Bench but did not alter the ultimate conclusion that the receipts are capital in nature.

Regarding the authorities and Supreme Court cases relied upon by the Revenue (including TCS and BSNL), the Tribunal found that the ratios laid down in those judgments were not applicable to the facts and circumstances of the present case and therefore did not support the Revenue's contention that CER receipts are revenue in nature. The Tribunal thus rejected the Revenue's submissions and followed the co-ordinate Tribunal decisions favoring the assessee.

Holding and Implications

APPEAL ALLOWED — CDM/carbon credit receipts held to be capital receipts.

Direct effect on the parties: The Tribunal set aside the order of the CIT(A) and allowed the assessee's appeal, thereby holding that the CDM receipts (sale proceeds of CERs/carbon credits) are capital receipts and are not taxable as business income for the Assessment Year under consideration.

Broader implications: The Tribunal expressly followed the earlier decisions of the Hyderabad Bench in My Home Power Limited Vs. DCIT and the coordinate Bench decision in Ambika Cotton Mills Ltd. Vs. DCIT, thereby aligning this decision with those Tribunal precedents on the question of taxability of carbon credit receipts. The Tribunal also noted that the ratios relied upon by the Revenue were not applicable on the facts of this case.

Disposition and Administrative Details

The order was pronounced on Wednesday, 12th June, 2013 at Chennai. The bench signatures appear as:

Dr. O.K. Narayanan (Vice President)
Vikas Awasthy (Judicial Member) — opinion per Vikas Awasthy, J.M.

Copy distributed to: Appellant / Respondent / CIT(A) / CIT / DR.

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Sri Velayudhaswamy Spinning Mills (P) Ltd., Tiruppur v. DCIT, Tiruppur

PER VIKAS AWASTHY, J.M. The appeal has been filed by the assessee impugning the order of CIT(A)-II, Coimbatore dated 30-01-2013.

2. 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 29-09-2009 declaring total income as Rs. 6,72,89,330/-. The case of the assessee was selected for scrutiny and a notice u/s. 143(2) of the Income Tax Act,

I.T.A. No. 582/Mds/2013 1961 (Act) was issued to the assessee on 30-08-2010. The Assessing Officer during the course of assessment made dis-allowance of Rs. 2,72,28,374/- on account of Clean Development Mechanism (CDM). The assessee treated the CDM receipts on account of sale of Carbon Credits as capital receipts, where as the Assessing Officer held the same to be revenue receipts. Aggrieved against the Assessment Order dated 09-03- 2011, the assessee preferred an appeal before the CIT(A)-Coimbatore. The CIT(A) upheld the view of the Assessing Officer and dismissed the appeal of the assessee. Aggrieved against the order of the CIT(A) the assessee has come in second appeal before the Tribunal.

3. 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 ld. Authorised Representative placed on record the copy of order of the Hyderabad Bench of the Tribunal in the case of My Home Power Limited Vs. DCIT reported as 21 ITR (Trib) 186 and the decision of the Chennai Bench in the case of Ambika Cotton Mills Ltd., Vs. DCIT in ITA No. 1836/Mds/2012 decided on 16-04-2013. The ld. AR 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.

4. On the other hand, Dr. S. Moharana, representing the Revenue vehemently opposed the submission of the AR. The ld. Departmental

I.T.A. No. 582/Mds/2013 Representative submitted that the case of the assessee is not covered by the order in the case of My Home Power Limited Vs. DCIT (supra). The ld. DR supporting the order of CIT(A) made the following submissions:

(i) the different clauses in the Clean Development Mechanism (CDM) agreement between he assessee-company indicated that the sale transaction of Certified Emission Reduction (CER) was nothing but a transaction in 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 a ready market for their redemption/trading,

(iv) the certificates (CERs) were akin to shares or stocks which could be transacted in the Stock Exchange.

(v) Relying on the decisions of the Honble Supreme Court in the cases of Tata Consultancy Services Vs. State of Andhra Pradesh [2004] 141 Taxman 132 and Bharat Sanchar Nigam Ltd., Vs. Union of India [2006] 282 ITR 273 (SC) it is contended that CERs were goods and capable of marketing.

(vi) The DR relied on the decision of the Honble Supreme Court of India in the case of V.S.S.V. Meenakshi Achi Vs. CIT [1966] 60 ITR 253. In the said case, the Supreme Court found that the amount from the funds were earmarked for the assessee on the basis of the rubber produced by them and were paid against the

I.T.A. No. 582/Mds/2013 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 ld. DR further submitted that the CERs are akin to import entitlement, 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 IEs or without importing the goods they can sell the IEs.

(viii) CERs should be taxable as revenue receipt u/s. 28(iv).

(ix) The CERs are received from the Govt. (out of the quota allotted to the Govt. as per KYOTO PROTOCOL) permitting the assessee to use fossil fuel to the extent mentioned in the CERs. The Govt. 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 inbuilt 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

I.T.A. No. 582/Mds/2013 from the intrinsic nature of the entitlement but also because there are closely connected with carrying out business. The ld. DR prayed for the dismissal of the appeal of the assessee in wake of the submissions made by him.

5. We have heard submissions made by the representatives of both the 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 the 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 M/s. My Home Power Limited Vs. DCIT (supra). The Hyderabad Bench while dealing with the similar issue has held as under:

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 source of carbon credit is world concern and environment. Due to 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 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 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

I.T.A. No. 582/Mds/2013 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 judgement of the Supreme Court in the case of CIT vs. Maheshwari Devi Jute Mills Ltd. (57 ITR 36) wherein held that transfer of surplus loom hours to other mill out of those allotted to the assessee under anagreement 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 loom 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 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, 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.

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 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.

I.T.A. No. 582/Mds/2013

26. Thus, sale of carbon credits is to be considered as capital receipt. This ground is allowed. The ratio laid down in judgments relied upon by the ld. DR are not applicable in the facts and circumstances of the present case, therefore, they do not support the case of the Revenue.

6. The co-ordinate Bench of the Tribunal in the case of M/s. Ambika Cotton Mills Limited Vs. DCIT (supra) while dealing with an identical issue followed the decision of the Hyderabad Bench of the Tribunal in the case of My Home Power Limited Vs. DCIT (supra). Respectfully following the decision of the co-ordinate Bench, we hold that the CDM receipts are capital receipts. Accordingly, the order of the CIT(A) is set aside and the appeal of the assessee is allowed. Order pronounced on Wednesday, the 12th June, 2013 at Chennai. Sd/- Sd/- (Dr. O.K. NARAYANAN) (VIKAS AWASTHY) VICE PRESIDENT JUDICIAL MEMBER Dated: 12th June, 2013 TNMM Copy to: Appellant/Respondent/CIT(A)/CIT/DR

Sri Velayudhaswamy Spinning Mills (P) Ltd., Tiruppur v. DCIT, Tiruppur

Structured Summary of Tribunal Opinion — ITA No. 582/Mds/2013

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant's Arguments (Assessee)

Respondent's Arguments (Revenue)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Disposition and Administrative Details

Sri Velayudhaswamy Spinning Mills (P) Ltd., Tiruppur v. DCIT, Tiruppur

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