The order of the Bench was delivered by
Chandra Poojari, A. M.-Both these appeals preferred by the Revenue are directed against separate orders of CIT(A)-V, Hyderabad, dated 30/09/2013, for the assessment years 2008-09 & 2009- 10. As identical issue involved in these appeals, they were clubbed and heard together and, therefore, a common order is passed for the sake of convenience.
2. The Effective Grounds raised are common in both the appeals, which are as under:
“2. The learned CIT(A) erred in directing to delete the addition made towards Carbon Credits (CER Certificates) Scheme are recurring in nature and hence Revenue expenditure.
3. The learned CIT(A) ought to have confirmed the addition made towards Carbon Credits (CER Certificates) Scheme.”
3. To dispose of both these appeals, we refer to the facts from AY 2008-09 in ITA No. 80/Hyd/2014.
4. Briefly the facts are relating to raise the said grounds are that the assessee received 41,586 CERs for the project activity of ‘Switching of Fossil Fuel from Naptha & Diesel to Biomass (agriculture produce)”. Accordingly, 41586 CERs were sold to another foreign company Noble Corporation Ltd., Germany and received an amount of Rs. 3.43 crores through sale of CERs (Carbon Emission Reduction Certificate) during the year ended 31/03/2008. The assessee had accounted the amount realized from sale of these CERCs as capital receipts in its books of account and not offered the same for taxation. But the AO did not accept the contentions of the assessee for the detailed reasons mentioned in the assessment order and after apportioning of expenditure incurred of Rs. 1.40 crores, he held the net amount of Rs. 2.03 crores as revenue receipts and treated the same as income of the assessee.
5. On appeal, before the CIT(A) the assessee submitted that the Hon’ble ITAT in its own case for AY 2007-08 in ITA No. 1114/Hyd/2009 dated 02/11/2012 (27 Taxman.com) held that the income received on sale of carbon credits is capital in nature and, therefore, pleaded the income from sale of carbon credits is not taxable as it represents capital receipt. The CIT(A) after considering the submissions of the assessee followed the decision of the ITAT in assessee’s own case for AY 2007-08 (supra) and held that the receipt on sale of carbon credits is a capital receipt, and hence, deleted the addition of Rs. 2,03,00,000/-.
6. Aggrieved, the revenue is in appeal before us.
7. We have heard both the parties, perused the record and gone through the orders of the authorities below. We find that similar issue came up for consideration before this Tribunal in assessee’s own case for AY 2007-08 in ITA No. 1114/Hyd/2009 and vide its order dated 02/11/2012 the coordinate bench held as follows:
“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 that 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 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 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. 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 Selfgenerated 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.
26. Thus, sale of carbon credits is to be considered as capital receipt. This ground is allowed.”
8. When the revenue took up the matter to the Hon’ble AP High Court against the order of the Tribunal, the Hon’ble Jurisdictional High Court in ITAT Appeal No. 60 of 2014, vide judgment dated19/02/2014 confirmed the order of the Tribunal by holding as follows:
“We have 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.” We 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 appeal is accordingly dismissed. There will be no order as to costs.”
9. In view of the decision of the Tribunal in assessee’s own case for AY 2007-08(supra), which was upheld by the Hon’ble Jurisdictional High Court (supra), we uphold the order of the CIT(A), who following the said decision of the Tribunal, held that the receipt on sale of carbon credits is a capital receipt and deleted the addition of Rs. 2,03,00,000/- made by the AO on this count. The grounds raised by the revenue in both the appeals under consideration are dismissed.
10. In the result, both the appeals of the Revenue are dismissed.
The order pronounced in the open court on 07/05/2014.