My Home Power Ltd v  DCIT [ITA NO. 1114 (HYD.) OF 2009 dtd 2.11.2012] Hyderabad ITAT

Background:

Assessee had filed return of income for the assessment year under consideration on 28.2.2008 showing a loss of Rs. 86,54,970. The company is engaged in the business of power generation through biomass power generation unit. During the year under consideration it has received 1,74,037 Carbon Emission Reduction Certificates (CERs) popularly known as ‘carbon credits’ for the project activity of switching off fossil fuel from naphtha and diesel to biomass. It has sold 1,70,556 CERs to a foreign company M/s. Noble Carbon Credits Ltd., Ireland and had received an amount of Rs. 12.87 crores. The assessee had accounted this receipt as capital in nature and had not offered the same for taxation. The AO dealt in detail the taxability of sale proceeds arising out of the sale of CERs and held the same to be a revenue receipt since the CERs are a tradable commodity and even quoted in stock exchange.

The CIT(A) confirmed the order of the AO and also gave a finding that the said income of the assessee cannot be considered as income from business for the purpose of entitlement for deduction u/s. 80IA of the Act. 

Assessee’s contentions:

• 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.
• The certificate issued by the UNFCCC, Kyoto Protocol only indicates the achievement made by the assessee in emitting lesser quantity of gases than the assigned quantity. It does not mention about either revenue or capital expenditure incurred by the assessee.
• Therefore, the amount is not falling within any of the clauses of Sec. 2(24) of the I.T. Act.
• An attempt is made to include the same in DTC in the year 2010 itself and DTC is not introduced as Act so far. Though the DTC included the certificates as income, the Parliament in its wisdom did not amend the IT Act.
• With regard to the claim of deduction u/s 80-IA on a without prejudice basis, the AO in the assessment order observed that the amount is directly attributable to the business of production of power. When the AO 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.
• Without prejudice to the contentions, if CIT(A) views are accepted, there will be no cost of acquisition of such capital asset and hence the gain cannot be subject to capital gains in view of the decision of the Supreme Court in the case of CIT v. RC Srinivasa Setty [128 ITR 294]. The amount spent for registration of the claim cannot be considered as the cost of acquisition. It only represents the process Cost for making applications etc.

Tax Authority’s arguments:

• The CER credits can be considered as ‘goods’ as they have all the attributes of goods as laid down in the decision of Hon’ble Supreme Court in the case of TATA Consultancy Services v. State of Andhra Pradesh.
• Had there been no other benefit attached to it, in the normal situation, the assessee would not have bothered for obtaining the CERs. It is because whatever expenditure is incurred for implementation of the project as a pollution reduction measure, the assessee would have got the benefit of the expenditure incurred by claiming it in its profit and loss account.
• Since it is known that the certificates issued by UNFCCC have intrinsic value and has a ready market for its redemption/ trading, the assessee obviously pursued to obtain the said certificates.
• The trading has apparently commenced in India through MCX and NCDEX. Thus the 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 AO.
• With regard to claim of deduction u/s 80-IA, though the CERs are accrued in course of the business operations of the assessee but are not directly connected to the business of the industrial undertaking. It is only incidental to the business.
• The AO has relied on the decision of Hon’ble Punjab and Haryana High Court in the case of Liberty Shoe Ltd v. CIT and Liberty India v. CIT  293 ITR. The AO has also relied on the decision of Supreme Court in the case of Sterling Food Ltd and the decision of Madras High Court in the case of Pandian Chemicals.

HELD:

• 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”.
• 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.
• 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.
• Reliance is placed on the judgement of the Supreme Court in the case of CIT v. Maheshwari Devi Jute Mills Ltd. (57 ITR 36) wherein it was 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 loom hours.
• 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.